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How corruption continues to hinder investment in Brazil

Former Brazilian President Michel Temer’s arrest on bribery charges last week is yet another reminder of the challenging investment climate in Brazil. The Car Wash scandal, which is still shaking out rotten fruit, is just one of many issues plaguing Brazil’s economy. Along with corruption, complex regulations and an antiquated tax code have made the former darling of economists a difficult market to navigate.

In a 2010 “60 Minutes” piece, a Brazilian billionaire called his country’s economic turnaround “unbelievable.” Too good to be true was more like it. The same CBS report even foreshadowed Brazil’s bust, recalling economic fits and starts that resulted in the development of Brasilia… and an IMF financial rescue.

While history reveals why Brazil’s current bust is no shock, the current political culture and regulatory environment is much more instructive to those navigating the market in real time.

The 2016 Car Wash scandal saw numerous political casualties, of which Temer is only the latest. Former President Luiz Inácio Lula da Silva is serving a 12-year imprisonment for corruption, and many of the politicians who impeached former President Dilma Rousseff in 2016 are now in jail.

The corruption scandal has commanded the attention of Brazilian politicians who worry that their names could surface next, and it has wreaked havoc on the Brazilian market.

If corruption weren’t enough, there are other challenges for potential investors. Archaic and complex regulatory regimes continue to hamper the economic outlook in Brazil.

The World Economic Forum ranked Brazil 136 out of 137 countries for burden of government regulation in 2018, and for a number of reasons: Brazil’s regulatory framework is still highly favorable to unions and overly protective of labor. The country’s pension system currently allows many to retire with full benefits at 50—an incredibly pricey and politically fraught problem. While many expected pension reform to occur in the coming months, the news of Temer’s arrest have reduced significantly any optimism on that front.

Beyond protectionism, Brazil’s system is also expensive: employers must pay $17,000 in taxes and benefits for every $30,000 of salary. And the high rates are just part of the problem: the burden of Brazil’s tax system is a cost factor for many.

According to the World Bank, it takes corporate tax preparers 1,958 hours to prepare filings each year, compared to the global average of 236. It is no surprise the World Economic Forum named tax rates and restrictive labor regulations as the largest barriers to doing business in Brazil.

Pension, tax, and regulatory reforms are all conditions to wooing companies, and these are hard nuts to crack when politicians are in the throes of corruption scandals. The turmoil of the last week does not only discourage foreign investment in the short-term, it highlights the long-term problem plaguing many Latin American markets.

Unfortunately, no matter how good the country’s reforms are, the culture of corruption is a deeper problem that will continue to inhibit Brazil’s true potential.

Lindsay Singleton is senior vice president at ROKK Solutions, where she leads policy consulting and communications strategy efforts. She lived and worked in Latin America for over a decade on behalf of the U.S. government and private sector, and served as a Foreign Service officer in Venezuela from 2010-2013.