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Saturday, September 28, 2013

"Custo Brasil" or the Absurdly High Cost of Living in Brazil

How The Economist magazine
saw Brazil's prospects in 2009...
I have been visiting Brazil for ten years now, spending half of the three years between 2010-2012 in this city, and I am constantly flabbergasted at how ridiculously high the prices have become.

For my daily pleasure of reading O Globo I used to pay just R$1.00; I have now to fork out R$2.50, that is a 150% increase. In the same period of time its Paris equivalent Le Monde has only known a 50% increase. A Rio Metrô ticket costs now R$3.10 the exact equivalent of €1.00 whereas in Paris it costs...almost the same price: €1.10, and a subsidized price (for workers, students, senior citizens, unemployed) costs just half that. Yes, you have read right: a basic good such urban transportation costs 50% more in Rio (which knows of no subsidies or daily/monthly passes)  where average income is one-third that of Paris. This is complete madness and explains that riots broke out last June because of the bus fare hike.

In January 2003 when I arrived for the first time in the Marvelous City taxi rides were so cheap that it never crossed my mind to use buses. A taxi ride to Galeão international airport would cost as low as R$35. Now you'll be lucky if you can get it for less than R$100. A restaurant meal was so affordable that I rarely bothered to go to per-weight joints, a Brazilian institution. Now, a single dish at a buffet restaurant would cost you easily a  whopping R$15. Eating in New York is much cheaper, and what makes it even more scandalous is that Brazil is blessed with an efficient agriculture and a land where everything grows and is raised effortlessly. 

Currency exchange rate fluctuations are to blame in only a tiny proportion: when I arrived in Brazil in 2013 US$1 bought close to R$4, by last year it was down to R$1.6, now it has inched back to a more reasonable R$2.2. The euro has followed a similar pattern (the euro is now worth around R$3), making the country extremely expensive for foreigners. But even with a stable real, inflation and price levels are outrageously high for the locals as well (if not more so, since their income levels are much lower than foreigners'). This can be seen from the below table on the price increases I have witnessed over the years.

The only thing growing at double-digit figures in Brazil are prices

There are several reasons why prices are so high: poor infrastructure, red tape, high taxes, low productivity. I would single out two of these: high taxes and low worker productivity. High taxes are not in and of themselves a bad thing. If Brazilians were getting Scandinavian-level public services, that would be fine. But the sad truth is that Brazilians suffer the highest tax burden of any emerging economy and are rewarded with pitiful health care, education and infrastructure. Where does the money go, then? Ask the politicians, among the most corrupt in the world. Compounding the situation is the low productivity of the Brazilian worker. Now, I never expected a Protestant work ethic in Brazil the way we know it in Northern Europe or in the United States, but still, I  am flummoxed by how poorly educated, trained and motivated Brazilian employees tend to be. Of course, there are pockets of excellence here and there, but overall the average Brazilian employee has to wake up at 5 am every morning, spend an average of two hours to get to work, fearing to be mugged on the way. By the time the poorly educated Brazilian arrives at their poorly paid job, they are exhausted, and have only one thing on their mind: get through the day and head back home where a host of problems (violence, not enough money to make ends meet etc.) await them Are you surprised then that discharging their duties efficiently, optimally and with respect for the customer (a notion alien to most Brazilian companies) is not exactly their top priority?

But let me continue with my whining about insane prices. A broadband internet connection at one of the four major operators (Oi, Vivo, Tim, Claro) will cost you on average the equivalent of US$40. And that is for just the connection which, in many parts of the country, and even in Rio, is a haphazard affair. For the same price in the US and Europe you get true broadband connection, unlimited phone calls to fixed lines all over the world,  high-definition TV channels, a cell phone number with a monthly credit for calls and text messages. It is mind-boggling to see how much Brazilians are paying for so little. And still putting up with it. 

If you are an expatriate settling in Brazil, one of the first things you will do is make sure you have a decent health plan. And, here, you will have the shock of your life, especially if you hail from Europe. Sure, you can always rely on the Brazilian government's health service knows as SUS (probably short for SUCKS) but it is so dreadful that anybody with some discretionary income buys a private health plan. Brazil has world-class hospitals (such as the Sirio-Libanês in São Paulo or the Samaritano in Rio de Janeiro) but they don't come in cheap. And to ensure you get developed-world standards you'll need to pay premiums in  the range of hundreds of dollars per month. The best healthcare can even cost you north of US$1,000 per month! And health plans in Brazil do not cover medication which you have to pay out of your own pocket. 

For Americans and Europeans used to reasonable airfares, especially by low-cost companies, flying from Rio to São Paulo (roughly a 350-mile distance) will easily set you back between US$300 and US$1,000. A Paris-London airfare (covering a similar distance between the two most important European capital cities) can be found at a fraction of the Brazilian fare. And Europeans are way wealthier than Brazilians! There are times when it is cheaper to fly to Paris from Rio than to São Paulo.

One key difference between subway transport in Rio de Janeiro or São Paulo and their equivalent in New York, London or Paris is the number of people who use the ride to read newpapers, magazines or books in the northern hemisphere. In Brazil, a book-reading subway rider is a rare occurrence. That is due to the overall population's high illiteracy rate and the high cost of books. Go to any bookstore chain, such as Saraiva or Livraria da Travessa, and you'll be hard pressed to find a book costing less than R$30-40, if not more, which makes it way too expensive for a majority of Brazilians. (On the other hand, you can find true bargains in second-hand bookstores, or sebos as they are called in Brazil. Mere stalls on the sidewalk will offer you even better deals, another reflection of the law of supply and demand: with so few Brazilians used to reading, the only way book peddlers can sell their wares is by offering low prices - probably the only low prices you will ever find in Brazil!)  

You will purchase domestic appliance (pots and pans, irons, blenders, etc.) in Brazil only under duress. You will then grab the item and leave the store screaming at what can only be called highway robbery. And when you realize that the coffee maker you bought a few months ago suddenly stopped working and is good for the scrap heap, you will understand the pain of most Brazilians who can afford these high-ticket items only through credit which, in addition, they have to repay at punishingly high rates. (Another Brazilian oddity is that most people who buy on credit repay it through monthly installments - I was bewildered when at a McDonald's restaurant I was asked in how many months I wanted to pay my hamburger. Yes, prices are so high in Brazil and people's incomes so low, that the only way for some to afford a hamburger is to pay a few cents per month for the period of a year!) 

Rio's 5-star hotel rates are higher than in Paris, London or New York. And as for residential real estate, prices have skyrocketed to reach the surreal. Prices in the city's South Side (Zona Sul) have been going up by 30-40% per year for the past four years. For instance,a small one-bedroom apartment in Copacabana, shoddily built, with wires hanging out, hot because buildings are all built next to one another with no ventilation - and we are in a beach district!) will easily make you poorer by an astounding $8,000-10,000 a sq meter! And maintenance charges have gone through the roof: for a similar apartment expect to pay hundreds of dollars per month! (Property tax, though, is still affordable.) One of the reasons housing maintenance costs are high is due to another Brazilian oddity: the need for every residential building to have several doormen working different shifts to ensure 24 x 7 availability. And with wages shooting up (if only to offset inflation) homeowners have only one option: cough up ever more. (Add to that yet another Brazilian oddity: coop board presidents are exempt from paying maintenance so their share is picked up by the other homeowners pushing their home maintenance bill further up.)

The latter is clearly the result of a bubble in the making similar to what we saw in Spain and in the US. Those who are selling now are those who bought cheap several years ago and are cashing in now quietly before moving their money away. Real estate buyers are fools, paying today before weeping tomorrow.

...and how it sees Brazil now

In general one can summarize the absurd prices in Brazil the following way: first-world prices for third-world quality. I am afraid that when that statue of Christ the Redeemer  falls back to Earth, it will not be on its pedestal on top of Corcovado but further down, trodden and trampled. The day after the hangover will be painful for some.

(The blogger has shared many aspects of his Brazilian experience in several blog posts: on Brazil's colonial towns, Lula's "third" victory at the polls,  and his thoughts on the country, HR and technology.
He has also published in Portuguese a blog on HR systems in Brazil.)

(The blogger has a second home in Rio de Janeiro where he spends part of the year. When he is not in residence, his penthouse can be rented. Check out the Airbnb listing, also available on TripAdvisor/Flipkey and Homeaway. You can also rent it straight from the blogger)