Hardly Working

Brazil's informal economy, which has boomed in the past decade, is likely to reach new heights as Brazilians brace themselves for the growing threat of unemployment. According to Fundação Seade/Dieese (a labor union statistics institute) the unemployment rate in the Greater São Paulo metropolitan area hit a record high of 16.5% in October of 1997. With the announcement of the fiscal package and the hefty increase in interest rates imposed by the government in November, chances are that more layoffs in industry, commerce, and other sectors will follow as a result.

The informality phenomenon is not restricted to Brazil or to developing nations. The International Labor Organization estimates that there are close to 300 million informal workers spread all over the world under different economic regimes. In Brazil the extent of the informal economy has yet to be determined, mainly due to the complexities in defining what is and what is not an informal market activity. Depending on the methodology used, there may be anything between 16.5 million and 30 million Brazilians working in this sector. In other words, between 15% and 50% of the gross domestic product (GDP) may be generated by the informal work force.

In general terms, informal activities in Brazil are performed by mostly self-employed workers and unregistered micro enterprises, involving the production or commerce of a wide variety of goods and services: from street vending to household repairs; from sewing to independent carpool operation; from domestic workers to home-based web designers. Also included in the category are the unregistered workers employed by formal sector companies that do not require them to have the carteira de trabalho (an official workers' type of card that must be signed by employers). By doing so, they avoid paying a series of taxes, while depriving their workers of the employment and welfare benefits guaranteed by the Brazilian labor legislation.

However, the most visible face of Brazil's informal sector are the hordes of vendors (also called camelôs) found on the streets of all major Brazilian capitals. Dieese estimates that in the city of São Paulo alone there are approximately 270 thousand people who have resorted to street vending as a direct result of the rise in unemployment. Avenida Paulista, the city's major thoroughfare, has become a huge open-air mall, although it is not by any means the only area occupied by the growing number of street vendors. Camelôs can be found in many other areas of downtown São Paulo, selling a wide range of merchandise from bugingangas (trinkets) to quite sophisticated articles. Sunglasses, food, flowers, imitations of well-known perfumes, such as Chanel and Givenchy, CDs, assorted electronic equipment, all of which are sold at much lower prices than the goods offered by conventional shops.

It is only natural that traditional storeowners in areas with a high concentration of camelôs complain about what they see as an unfair competition by the street vendors. While the former have high operating costs, such as rent and salaries, the latter have little expenditures, and are accused of systematically evading payment of taxes, specially the ICM (tax on sales and services). However true the argument, one must point out that tax evasion is not a privilege of the informal sector, as many would like to believe. It is a well-known fact that the same practice is rampant among numerous legally-registered Brazilian businesses.

Meanwhile, local governments try to accommodate the demands and needs of shopkeepers and vendors alike. Authorities realize that the informal economy will keep growing in proportion to the unemployment rate and to the uneven income distribution. The way they see it, the informal market serves as an escape valve in times of an economic slowdown, therefore they have attempted to come up with solutions that might appease both sides.

Restricting the number of stalls allowed in a given area and defining specific areas where vendors would be allowed to work have been measures adopted by several city officials around the country, although not always successfully. In the 80s, Leonel Brizola, then governor of the state of Rio de Janeiro, ordered the relocation of the city's camelôs to an open-air area in downtown Rio built for the sole purpose of clearing major streets of the mobs of vendors and their stalls. Dubbed the camelódromo by city folks, Brizola's enterprise was a complete failure, as Rio's camelôs rebelled against the decision and were soon back to their spots of choice.

Faced with the same dilemma, cities have also tried to control the chaotic growth of street vending by issuing licenses
and by enforcing other local ordinances. Usually, the non-compliance with the orders can cause the vendors to be either fined, have their merchandise confiscated or both. However, it's no secret that corruption is widespread among the very same governmental inspectors in charge of enforcing the law, and vendors are constantly harassed and forced to pay the agents weekly bribes in order to guarantee a good spot. Moreover, authorities themselves tend to relax their own rules whenever election season is coming along.

A study conducted by the Applied Economics Research Institute (IPEA), an entity linked to the Ministry of Planning,, estimates that 60% of the informal commerce's work force have less than eight years of formal education, while 150 thousand workers have not finished high school. The research also shows that there are approximately 300 thousand informal vendors who have completed high school, and at least six thousand of them have a college degree. According to the institute's analysis, that's a sure indication of the lack of job opportunities in the formal market.

As far as wages are concerned, the informal vendors earn from six to 20 minimum salaries (currently at $110) depending on the region, although the vast majority earns between two and six minimum salaries. Only a minority—approximately 1.5 thousand workers—are able to reach the top 20 minimum-salary range. In many cases, workers who have turned to this type of activity after losing their jobs are said to be earning more than they did while employed.

The research also notes that the female presence in the informal commerce is still very small. Nevertheless, their participation in the direct, or door-to-door, sales of cosmetics, clothing, jewelry, and even food has increased , especially in the country's southern region. The rise of this type of activity is a good example of the thin line that sometimes separates the formal economy from informality. While the production of those goods are legally registered by the multilevel marketing giants, the sales force's income—mostly commissions—is not.

So far, policy makers have yet to find adequate mechanisms to deal with the Brazilian informal economy as a whole. However, economists and labor experts agree that the government must act swiftly and invest a great deal in the education and technical skills training of the country's economically active population. The irreversible globalization process will require a significant increase in productivity and efficiency levels if a country is to remain competitive in the global market. Many of the job vacancies caused by present and future layoffs may never be recovered if the Brazilian working class is not prepared to deal with the shifting of new industrial technologies.

Secondly, the government must take a serious look into its wage policies and into the country's obsolete labor legislation. Entitled Consolidação das Leis do Trabalho (CLT), this ample body of laws was a landmark for Brazil's labor movement when it was implemented by Getúlio Vargas in 1943. The legislation, which established the 8-hour day, the right to vacation and to strikes, and a guaranteed minimum salary, among other measures, was without a doubt a major and just victory for Brazilian workers. However, many of its nearly one thousand articles and paragraphs have become outdated in face of the changes in the economy, which in turn have led to a different employer/employee relationship. Analysts believe that employers are overwhelmed by the payment of taxes and of social welfare contributions imposed upon them not only by CLT but also by the numerous constitutional amendments. It is estimated that those contributions represent an additional cost of 102% over the salaries, which only gives incentive to the exploitation of workers and their migration to the informal economy.

Another IPEA research revealed that Brazil's minimum wage should be 120% above the current salary in order to conform to the international standard, which is around 40% of the average industrial wage. Critics contend that if the government could guarantee minimum living standards by means of adequate wages, much of the onerous payroll taxes could be removed.

To be fair, Brazilian authorities have developed a few well-intentioned programs to help informal workers make a smoother transition into the formal market. The Brazilian Center for Assistance to Small and Medium-Sized Businesses (CEBRAE), an entity linked to the Ministry of Industry and Commerce, has assisted thousands of micro-entrepreneurs by helping them obtain credit and by offering administration and management training during the transitional phase to the formal sector. The National Bank of Economic and Social Development (BNDES) also has a special line of credit aimed at financing small productive enterprises.

The success of governmental programs will depend largely on the policy makers' abilities to envision and understand the different regional economic realities. Furthermore, the Brazilian government must take speedy action to eliminate the discouraging factors—bureaucracy and corruption included—that prevent most of this huge mass of informal workers from being absorbed by the mainstream economy.