Brazil's IT Law showed underwhelming results

In their 2003 book “Saving Capitalism From Capitalists,” Raghuram Rajan and Luigi Zingales wrote that “relationship” capitalism would have to eventually make way for arms-length capitalism as economies matured. In Brazil, that turning point has yet to arrive. In economics, the expression “Brazil-like capitalism” denotes cronyism and distortions. Dealing with a confusing tax system and a fairly ineffective state, organized lobbies battle to protect their own—mostly at the government’s expense.

One such drain—Brazil’s enormous range of subsidies—could be closed, however. Economy Minister Paulo Guedes has defended time and time again that businesses learn how to stand up on their own two feet, without knocking at the government’s door for handouts. The first step is by exposing how simply handing money to specific sectors of the economy and creating market reserves for national companies is by no means an effective way of fostering innovation.

The Ministry of the Economy has published a study scrutinizing Brazil’s 1991 IT Law, which established subsidies to the IT and automation sector to last until 2029. Tax breaks reach 80 percent for computing goods and services, 95 percent for hardware (such as notebooks with a maximum value of BRL 11,000) and complete exemptions for goods developed in the country. The goal was to create jobs and promote investments in research and development.


Economy Ministry set to go after IT subsidies


Ineffective subsidies

The government’s report shows, however, that the results were underwhelming—to say the very least. As a direct result of the IT Law, Brazil’s tax authority gives up over BRL 5 billion in taxes—the cost per job created by the initiative is somewhere in the range of BRL 18,000 to 45,000. Meanwhile, the average salary in companies which benefit from the program reached a peak of BRL 3,221 in 2016.

It would literally be less expensive for the state to give each worker affected by the IT Law an allowance (in the molds of cash-transfer program Bolsa Família) of BRL 15,000—almost eight times the national average for employed workers.

On the research and development front, spending increased 221 percent from 2006 to 2016—while subsidies grew 132 percent in the same period.

Economy Ministry set to go after IT subsidies

The invisible hand?

Besides draining resources, the IT Law has also created heat for Brazil in the World Trade Organization (WTO), after challenges from Japan and the European Union. In 2017, a WTO panel decided that the law needed changes. But even before that, Brazil’s Institute for Applied Economic Research (Ipea) had pointed out that industries benefiting from the IT Law have not become more competitive—and that Brazil continues to rely on foreign products for top-notch technology.

For the ministry, the numbers prove the policy “does not gather necessary or sufficient elements to generate competitive gains” while “recent questioning in the WTO and its decision about connecting a subsidy to an indirect tax suggest the need to review the law.”

In other words, the government is not seeing returns for its billion-dollar spending, and it is time to change it.

The report also claims that “if there is a decision to review the law, [the government] suggests reinforcing monitoring and continuous evaluation mechanisms (…) and establishing progressive performance targets.” The suggestions meet the new trend for the public sector to give incentives in exchange for specific returns, as Antonio Jorge Martins, a professor at think tank Fundação Getulio Vargas, explained recently to The Brazilian Report.

This is not the first move that minister Paulo Guedes has made toward ending subsidies—or at least using them more rationally. Earlier this year, he said, during a meeting with businessmen, that “everyone asks for subsidies, money here and there. I say: what can you do for Brazil? You’ve bankrupted Brazil.”

Considering that Brazil spent BRL 173 billion in 16 years on subsidies that did not bring proper returns, according to another Ipea report, the IT Law may not be the only one to be examined. Whether the Bolsonaro administration will move against the interests of big business while the pension reform remains on the table, however, remains to be seen.

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MoneyApr 03, 2019

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BY The Brazilian Report

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