Informal Brazil

By Glauco José Côrte - Fiesc Director - O Estado (Florianópolis) - 12/06/04

At the request of the Brazilian Institute of Ethics in Competition (Etco), the consulting firm McKinsey carried out a study (June/2004) on the level of informality in the Brazilian economy. For McKinsey, the effects of barriers to the formal economy and the level of informality in Brazil are particularly serious, as they make it difficult to realize the country's growth potential. A little earlier, the World Bank (Doing Business 2004) had already indicated that the informal economy is responsible for 40% of
of the Brazilian gross national income, against 20% in Chile or 25% in Argentina. And for 50% of the Brazilian workforce (except the rural one, where, due to its peculiarities, informality approaches 90%, according to PNAD data), against 30% in Portugal or 38% in Chile.

According to the study, two are the causes that, in Brazil, stand out in this matter: (i) the costs associated with the formalization of activities, mainly regulatory and tax costs, and (ii) the low capacity of public institutions to inhibit and crack down on informality.

In the end, it boils down to the disproportionately high burden that formal businesses have to bear to operate. The regulatory bureaucracy in Brazil, complex and centralized, which continues to advance insatiably, forcing a good part of the leaders to divert their focus away from the objectives that determined the creation of the companies, has,
also, a fundraising nature. Rules, regulations, ordinances, instructions, decrees, are downloaded all the time, with the aim of transferring more resources from the private sector to the public sector. Since this is the environment, institutions take the opportunity to charge formal taxpayers with typically public administrative functions, continually increasing their burdens with the fulfillment of ancillary obligations.

Now, the name of this game is tax burden, which in developing countries, like Brazil, is usually up to 26% of GDP. In Russia, for example, it is 26%, but in Argentina it is 21%, in Mexico it is 17% and in China it is 15%, while in Brazil it is 34% (data from 2001;
currently, the Brazilian tax burden is already over 36%), which is equivalent to a developed country rate. In the United States and Ireland it is 29%, in Australia 32%, in Canada 35% and in Germany 36% (source: IMD Competitiveness Yearbook 2003, included in the McKinsey study).

Informality in Brazil is directly related to the exaggeration of the tax burden (excessive rates and bureaucracy). The high costs of formal activity push taxpayers to
informality, which undermines the economy and competitive conditions
formal companies. Let us not forget that a preponderant portion of those
working in the informal sector is forced to do so, due to the lack of opportunities in the market
formal, this one increasingly suffocated by the regulatory and tax burden
ascending. It's time to turn that game around. We are already too


See also:

 Studies and Research: McKinsey Study