In 2011, measured in US dollars, the cost of living in Brazil surpassed the one in the USA according to the International Monetary Fund (IMF). This fact is extremely unusual for an emerging economy. In a list of the IMF of 150 developing countries, Brazil is practically the only one whose cost of living exceeds the USA, which means that it is the most expensive country of the world’s emerging economies.
Considering diversified economies such as Brazil, there are, since 1980, only a few out of more than one hundred developing countries listed in any year, where the cost of living (converted to US dollars) was higher than in the USA.
There is no reasonable explanation for it. The prices of most industrial products tend to converge across countries, apart from the import tariffs. This is because they can be traded in the international market, and if they are too expensive in a country, there is the possibility to import. But most services, hair cutting, restaurants, public transport, accounting, legal and other advice, education and health, are not part of foreign trade. Thus, they differ greatly in price levels between countries.
In rich nations, with relatively high salaries, services are generally more expensive than they are in emerging countries. This is explained both by the fact that higher income tends to pull them up, as labour employed in the service sector earn more and consequently represent a higher cost. Thus, it is mainly the service sector that makes the cost of living higher in the advanced world. In comparison with the United States, emerging markets are almost always cheaper.
It is therefore surprising that Brazil appears to be more expensive than the USA, according to the 2011 GDP projections of the IMF.
Note: The relative cost of living of countries is derived from the comparison between the IMF estimates for GDP in current dollars and the GDP adjusted by parity of purchasing power (PPP). This second method seeks to neutralize the variety of prices, converted to US dollars, of the same products in different countries.
But for Brazil there is much more going on. Although the high tariffs of health products, the high prices of public transport in relation to the poor quality level, the extremely high level of energy prices, telephone and mobile tariffs, there is more than that. The absolute lack of a general country-wide pricing policy, allows the Brazilian companies, leaded by the multinational consumer goods companies, to set price levels with frequent increases and without any competition problems and in no relation to the quality of the goods they deliver.
In an interview with the Brazilian financial paper “Estado de São Paulo”, Jorge Miguel, former Minister of Development, Industry and Foreign Trade, states that the Brazilian industry suffers mainly from a structural problem as a result of decades of strong protectionism. “We’re just not used to competition”, he says. He reinforces that excessive taxes and red tape and a poor infrastructure in the country, the items that make up the costs in Brazil, are important barriers to the sector, but refutes claims that the exchange rate of the Brazilian Real, as always blamed for by the industry, is the today’s villain.
In his opinion, the high exchange rate of the Brazilian Real (over-valorisation) is not in fact responsible for the poor performance of the industry. It is a structural problem in the industry, as first of all, the industry was protected from foreign competition for a long time. From the 1970s until 1990, it was forbidden to import anything. Consequently Brazil created an industry that did not need to modernise in the same way as the industry elsewhere in the world, which were and still are always in a perpetual competition with each other. With the opening of the economy in the 1990s, some sectors modernized a bit, but much of the Brazilian economy has become less and less competitive for several reasons. After that first comfort zone and excessive protectionism, we see now the influence of low-productivity and high costs (taxes, excessive bureaucracy and a poor infrastructure), which makes that Brazilian production is more expensive than in other countries. But the main reason is the blunt fact that the Brazilian industry isn’t used to competition, which results in high consumer prices and low quality of the products.
Consequently the consumer goods companies are focussed on the national market, they don’t stand a chance in the international market.
Only 12% of Brazil’s GDP is from exports and that includes agricultural and mineral commodities. This represents just a little over 1% of the total world trade, which emphasises the poor export performance of manufactured goods of the world’s sixth economy. Brazil’s industry stands no chance against other countries which are very capable of exporting.
And basically the situation doesn’t change. The market still is very much protected. Ex-Minister Jorge Miguel gives an example. In 2004, the Brazilian auto industry got a government deadline to supply Brazilian cars with an air bag … in 2014. It’s amazing that the industry needs 10 years to put air bags in. But this is because the Brazilian automotive industry still builds vehicles of various makes, based on very, very old (sometimes 30 years old) designs, in which an air bag doesn’t fit. By the way the air bag was introduced by Ford in the USA some 20 years ago.
So Brazil is protecting its car industry until 2014 at a minimum. When similar cars manufactured in other countries wanted to enter the Brazilian market, with air bags and ABS, alas Brazil did ban them via a special tax increase. Read also my article: “Brazilians cars fail basic safety tests”.
And what is the result? Brazilian protectionism, low productivity, low quality, no investments in research, innovations and modernisations, result in ridiculously, out-of-balance consumer prices.