Brazil’s Thriving Underground Economy Is the Fruit of One Belief: All Politicians Are Corrupt

Brazil's informal economyAs an American living in Brazil, I’m more attuned to the surprises of daily life here than most Brazilians. Some of my observations are ridiculous, as it’s common for foreigners to make inaccurate assessments based on limited information. On the other hand, some things I’ve noticed are so routine that they create no greater response from Brazilians than, “Why does that seem strange to you?”

Here’s an example: Brazilians are so cynical about their government that they consider Americans to be highly patriotic. One Brazilian told me, “Other than once every four years during World Cup, when have you seen a Brazilian flag flying in front of someone’s house?”

From my experience, I don’t think Americans are any more patriotic than Brazilians. If you think Brazilians are not patriotic, try watching a foreigner criticize Brazil.

On the English-language website Brazil Business in São Paulo, an article entitled “How to Negotiate with a Brazilian” offered this advice: “Brazilians can be critical of their country for such problems as corruption, poor quality education, violence, etc. However, never criticize Brazil in front of other Brazilians even if they are, or if they’re saying positive things about other countries and how it should be like that in Brazil.”

Another observation: Why is the train system here so inadequate? Despite Brazil being the world’s largest sugar and coffee and soybean producer, only 30 percent of Brazil’s freight moves by train. The airport system, desperately inadequate, is finally now getting upgraded thanks to the World Cup and Olympics.

Yet, while the Brazilian economy struggles (7.5% GDP growth in 2010 but less than 1% in 2012), and infrastructure is a surefire way to stimulate the economy, politicians insist the  government lacks the resources for a massive investment in infrastructure improvement.

Ignoring the amount of funds lost to poor planning, bureaucratic red tape, particularly in the tax codes, and endemic corruption among politicians, the response from Brasília is that too many tax dollars are being lost to Brazil’s underground economy. Underground or unofficial economies are common in developing nations, but estimates range from one third to one half of Brazil’s economy (GDP) is underground and hence nontaxable.

It is common for Brazilians to make regular trips to the US solely for the purpose of shopping. They leave with one suitcase and return with four, stuffed with everything from Levis jeans to Victoria Secret’s body lotion. They sell these items in Brazil for more than they paid for them in the US, but less than they cost in stores here. Some Brazilians are so successful at this that their illegal transactions become their main income source.

Additionally, the underground economy isn’t fueled only by individuals. While cash businesses in the US – such as bars and restaurants – are known for hiding income from the government, not to mention hiring illegal aliens to work and paying them in cash, in Brazil respectable professionals like doctors and dentists participate in the underground economy as well.

Doctors hide some of their income from the government by offering patients discounts on their bills if the patient declines a receipt for the doctor’s services. The difference in the fee between a surgery with a receipt and one without is significant. Without a receipt, the services go unreported and thus enter the unofficial economy.

Private schools in Brazil cheat on their taxable income by under-reporting what they earn and what they pay their employees. Because these activities are common and conducted by professionals and large companies, they are never questioned. It’s the way of doing business in a developing country, and no one is surprised about it.

The unofficial or shadow economy has gotten so endemic here that when a Brazilian writes a check to pay for the services of a carpenter or a party caterer or a private English school, they enter the amount of the check, but the line where the name of the recipient goes is left blank.

Banks are not permitted to accept checks without a recipient’s name, but there are unofficial places to cash checks. Also, if the recipient brings the check for deposit to a bank, the blank line allows the recipient to fill-in someone else’s name as another way of supporting the underground economy and keeping his income hidden.

More evidence of the shadow economy in Brazil surfaces when middle and upper-class Brazilians approach banks for large loans, such as a mortgage to buy an apartment or build a new home. Banks require loan recipients to provide official documentation to prove their income is sufficient to cover the bank loan monthly payments.

Such documentation can include copies of their employment paychecks or a copy of their previous year’s income tax. It’s not unusual for a Brazilian to have problems with this documentation process because his income is mostly unofficial.

When asked for receipts of his paychecks, his response is, “I work for myself.” When asked for income tax forms, he can’t locate them. To show he can afford a bank loan, he will bring in his bank statements, proving that in fact he has a great deal of money in his bank account.

What Brazil faces today might be called “economic schizophrenia”. Brazil has a split personality. On the one side, the government points to the tax dollars being lost to the underground economy as the reason for the failing infrastructure. Large construction projects like new roads and bridges require large financial investments, but the government revenue from tax collection isn’t high enough.

On the other side, Brazilians blame politicians for stealing their tax dollars in kickback schemes, or wasting it on expenditures like taxpayer-supported helicopter transport. In state capitals like Curitiba, three or four helicopters fly in and out of the governor’s office buildings every business day.

Thus, when Brazilians are asked why so many people here support the underground economy, the response is always: “The politicians are only going to steal our money. They’re not going to spend it on health care or education. The less I give them, the better.”

Needless to say, the ‘system’ in Brazil is desperately damaged. Many politicians are corrupt and the tax system needs to be drastically reformed. When the laws and tax codes for opening a new business are grindingly complex, naturally an underground economy is going to flourish. Given the current situation where all Brazilian people believe all politicians are corrupt, citizens do not feel guilty cheating on their taxes.

Let me be clear that I don’t consider Brazilians to be a dishonest people, certainly no more dishonest than any other country, including the US. What goes on in Brazil is a logical extension of an overriding distrust for the government.

Given that the world’s sixth largest economy can’t find the revenue to fund a train system or a full day of school for its children, it’s not a mystery people have lost faith in their government. When Brazilians observe every day the damaging effects of misleading leaders who are more interested in growing their own personal wealth than in an educated country, the proliferation of a deceptive economy is not surprising.

Michael Rubin is an American living in Curitiba. He’s the editor of the Internet magazine, Curitiba in English. (www.curitibainenglish.com.br)

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