Successful businessman Jorge Gerdau loves numbers, so much that you might get lost in a conversation with him, said Miriam Leitao. In a debate about whether Brazil is losing its industry or not, he is in the first group. He proves it with numbers: the trade deficit of the manufacturing sector last year was US$92 billion, whether only five years ago it was US$20 billion. And he does not blame the exchange rate, but the complex system of embedded taxes.
Gerdau is the owner of a steel manufacturer which has 49 plants in 14 countries, and he is also a member of the “Board of Competitiveness”, a governmental group trying to implement more efficiency in public management and a more competitive model for the Brazilian economy.
“The Brazilian industrial sector is very productive and has low competitiveness,” he says.
His phrase seems somewhat contradictory, but what he is saying is that, at least in steel manufacturing, Brazil is the world’s third most productive in terms of cost and production efficiency, but is the second most expensive in the world when it comes to the final price. And it gets more expensive because of taxes and energy costs.
In terms of energy costs, he compares Gerdau’s various production plants. For instance, in Canada and the US, he states that prices per MWh vary from US$31-33 in Cambridge and Midlothian up to US$ 76 in Jacksonville. On the other hand, in Brazil, prices vary from US$76 at Siderurgica Riograndense (the cheapest) to US$126 in Divinopolis. The differences are even greater when comparing the cost of natural gas.
Again, the Brazilian steel has the third lowest cost of production in the world. When we add taxes, including taxes on investment, the product in Brazil gets more expensive than those of China, Russia, Turkey, the United States and Germany.
Everyone complains about taxes in Brazil. The Brazilian government competitiveness advisor thinks it is unfair that the exporter needs to pay so much in hidden taxes on the product and compete with other countries that give so much incentives and stimulus to production and investment. His passion about the subject is such that he sponsored a study to compare how much is being taxed on foreign cars against a locally-produced one.
“We have to decide if we want the industry or not. For many people, this process is not as visible because what happens is that the entrepreneur closes his factory, imports the same part, adapts it and sell it locally.”
Transparency of what is being paid in taxes is extremely important to businesses. Gerdau said it was important to have transparency of all the exemptions that some industries receive while others don’t, such as different energy tariffs and subsidy loans from the BNDES. In Brazil, there is no transparency in Brazil: neither in what the State charges us nor in how much it gives away. Instead of a tax reform, the government has distributed favors and exemptions for selected sectors. And that is exactly what has created more distortions.
Gerdau admits that an industrial policy would need to look at all the factors of competitiveness.
“Education, for example, is fundamental. What makes a company or a country competitive is its people’s minds. I’ll give you an example. Do you know how long the employees at Siderurgica Rio Grandense take to turn off, discharge, and turn on again the oven? Eight minutes. How long in Colombia? Twenty minutes. The process is complex, but with method, processes and skilled labor we can reduce this time further. We can not have in Brazil an educated population that meets worldwide standards if we offer only 2.7 hours of effective classroom time. Brazilians have to study more because I want to compete with Asia.”
After education, the second most important factor of competitiveness is, according to Gerdau, logistics. According to his accounts, the cost of logistics in Brazil is 14% to 15% of GDP. In the United States it is 6.5%.
In the case of labor costs, he notes that it is necessary to differentiate the money that goes to the worker’s fund (FGTS) from the tax levied on the payroll.
“It makes no sense for Brazil to tax financial transactions. The spread, 27%, is the IOF tax. Think of the tax built into the loans for the working capital needed by businesses.”
Gerdau thinks that all these taxation details must be clearer for all taxpayers. And we all, of course, agree.