A Reuters article reports some good news for Brazil: Foxconn, a Taiwanese company, the world’s largest maker of electronic components and printed circuit boards, is opening a plant at Jundiai, about 30 miles northwest of São Paulo. The plant will assemble iPads and iPhones for the Brazilian market. However, the article mainly discusses the difficulties businesses encounter in Brazil, which it calls the “Brazil Cost.” In this case, they include high taxes, bureaucracy, and the lack of a comprehensive “ecosystem” of supporting industries and services. See a previous posting on this site, “Brazilian economy constrained by bottlenecks.”
These economic frictions are readily apparent to anyone who does business in Brazil. One of my friends in Rio used to operate a company specializing in helping foreigners navigate the Brazilian scene. I encountered some of these difficulties myself when I attempted to sue a Brazilian company. It soon became evident that the Brazilian legal system lends itself to endless delay and obstruction. Eventually, my Brazilian lawyer gave up.
On page 215 of the novel Farewell Rio, Kate illustrates the phenomenon:
John was so busy he had to leave the details of renting the apartment to me. It wasn’t simply a matter of signing a lease, as it would have been in New York. I had to obtain letters of reference and gather all sorts of notarized documents.
In the 1990s following Glasnost, many U.S. accounting firms and law firms opened offices in Moscow with the intention of helping the Russians learn how to run a modern capitalist economy. Their efforts were largely a bust, and they should have known better. A smoothly functioning modern economy can’t just be thrown together over night. It depends on an immense network of laws, customs, shared assumptions and institutions. The lawyers who hurried to Moscow were better positioned than most people to appreciate this because they earned their livings in the U.S. by helping their clients deal with this complex network.
For example, all fifty states in the U.S. have adopted a uniform set of state laws, the Uniform Commercial Code. Suppose, for example, an appliance store sells a refrigerator for a series of installment payments. If the customer defaults on the payments, the appliance store can repossess the refrigerator. However, the store has a legitimate concern that the customer might use the refrigerator to secure another loan, and that the second lender might repossess it first. The Uniform Commercial Code specifies how the appliance store can protect itself against such double dealing. The Uniform Commercial Code is hundreds of pages long, it is continuously updated, and it was originally the result of decades of work by committees of legal scholars and practicing lawyers. Without such complex laws and institutions, a modern economy cannot function efficiently.
Brazil has a long way to go.