Brazil may now be in its second year of a recession, but entrepreneurship is booming in Latin America’s biggest country. Cutting red tape could now help mop up the growing number of unemployed there.
The economy shrunk by 3.8% last year, and is expected to shrink by at least a further 3.5% this year. By some estimates the economy will only return to pre-crisis level in 2019.
Unemployment is slowly edging up. It reached 9% in the quarter ending October last year, up from an average of 7.1% in 2013 (In the six major metros the rate stood at 7.6% in January, up from 4.3% in December 2013). Indications are that it will hit 12% early this year.
Yet if anything entrepreneurship is booming. It hit a 14-year high in Brazil last year.
One in five Brazilians (up from 11.7% in 2006) were involved in starting or running a business less than three and a half years old, reveals Brazil’s Global Entrepreneurship Monitor (GEM) report for 2015.
Supporting this is that in the first 10 months of 2015 the number of new company registrations was up 4.6% over the same period in 2014.
The increase is mostly made up of the growing number of registrations of the government’s micro empreendedor individual category, which allows one or two-man traders to register and receive access to social welfare and business support. They made up 76% of new company registration up from 46% in the same period in 2010.
It means most of those now starting out, will likely not create many if any jobs at all.
Indicative of this is that the percentage of those starting a business out of opportunity has fallen to 56%, from 71% in 2014, reveals Gem. And most Brazilian entrepreneurs aren’t too optimistic about hiring (Brazil is ranked 55 out of 60 countries on this measure by Gem).
Jobs are being fast cut. Small firms shed about 224,000 jobs last year, dumping most of them in December, as up to November a balance of 60,000 jobs had been added in the year. In 2014 the sector added a net 526,000 jobs, show labour statistics for January 2015.
Too few gazelles
Perhaps if Brazil had more smaller fast-growing companies it could mop up the extra jobs now available.
Yet there are too many larger-sized fast-growing firms (Brazil's statistics agency defines these as firms with at least 10 people that add an average of at least 20% of new jobs a year over three years),
It says the country had just 33,374 of such firms in 2013 employing about five million people. Of these 9% of high-growth firms in Brazil employ over 250 employees. In the US the corresponding figure was just 2.3% in 2012.
Just as concerning is that the average age of high-growth firms in Brazil is 14 years.
The report’s authors say this points to certain barriers to growth as to why the participation of smaller firms among high-growth firms is not bigger.
To help create more fast-growing small firms that can create the jobs it now needs, Brazil should tackle its usual problems of under-investment in education and infrastructure. It could also do away with more of its arduous bureaucracy.
The government has already begun cutting some bureaucratic rules (through its programme Bem Mais Simples Brasil launched in February last year).
Recently it did away with the condition that firms that win contracts with the state have to register these and pay the 2,000 reals fee to do so at the public notary. And accountancy statements no longer have to be authenticated when sent to the tax authority by email, for those firms that belong to a new online system. It will save about 480 million reals a year.
Further measures to cut red tape around judicial translators, tenders and warehousing will be hastily brought to Brazil’s congress.
To combat the recession Guilherme Afif Domingos (pictured above), the president of Brazil's SME agency Sebrae, is pushing for more tax breaks (an amendment to its special small business tax Simples is stuck in the Senate) and more credit (he wants the government to allow banks to use their reserve requirement to lend to small firms).
Exterminators of the future
He's also declared war on red tape. In January he bemoaned that Brazil doesn’t have the equivalent of a Steve Jobs or Bill Gates, adding “our exterminators of the future are ready to liquidate them” with unnecessary bureaucracy or taxes.
He said Brazil has never before had a moment so promising for entrepreneurship, but that many professionals are fighting to open their businesses without having to depend on so many rules and regulations. “That there is my fight. I am fighting not against people, but against that hostile system that impedes the advance of small businesses.”
Afif also hit out at those politicians that benefit from the system. “There are those that criminally want to stop this process (of removing red tape) so that the situation worsens and so that a certain group is able to benefit politically. They are not looking out for Brazil.”
The problem is that red tape has become very much part of doing business in Brazil. To get around this you just need some money and a few friends in the right places. This fuels corruption and stunts entrepreneurship. Brazil deserves better.
Timm is a South African who writes on small business. He was last in Brazil in January. Follow him on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a