World Economy

Brazil Woes Multiply as Manufactures Move to Paraguay

A Brazilian toy factory in Paraguay.A Brazilian toy factory in Paraguay.

This remote South American country, long known for contraband traffickers and a 35-year dictatorship, is now becoming something else: a manufacturing hub.

Paraguay has attracted scores of foreign factories since 2013, as predominantly Brazilian companies respond to new incentives by flocking to this gritty border city to make everything from toys to motor scooters for export, Dow Jones reported.

Koumei SA, a family-run Brazilian light-fixtures company, is typical. Its owners moved the plant and about 150 jobs here last year, saying they were fed up with Brazil’s high taxes and complicated labor rules. “It’s just easier here,” Seijii Abe, who directs the company with his father, said.

The shift from Brazil comes as Latin America’s biggest country is trying to stabilize an economy that has contracted 7.2% in the past three years. A series of corruption scandals has also roiled the political class, leaving Brazilian President Michel Temer in a tenuous position as he tries to revamp the economy.

Brazil ranked 123rd out of 190 in the World Bank’s 2017 survey on ease of doing business, right behind Uganda and Egypt. Companies there say they are bedeviled by rules that smother entrepreneurial impetus. They point to labor regulations that make hiring and firing difficult, high energy bills, a legal system that encourages employee lawsuits and taxes of up to 35% on imported goods.

“The regulations are absurd,” said Joao Carlos Komuchena, owner of Kompar SA, a company which makes small plastic bottles used for packing soy sauce and other products that moved to Paraguay from Brazil last year. “We need to wake up in Brazil; there is a lot of prejudice against business.”

Paraguay’s sales pitch to manufacturers: cheap electricity, less onerous labor rules, zero import taxes and only a 1% levy on the value of finished exported products. So far, 115 factories have opened up in Paraguay under the so-called Maquila program, 89 of them since 2013, with another 20 preparing to start operations, the government says.

“Paraguay is the least developed country in Mercosur, we need to industrialize if we want to catch up,” said Industry Minister Gustavo Leite, speaking of the trade union in South America of which Paraguay is a member. “Our obsession is jobs.”

To be sure, Brazil, with thousands of factories and 65 times the economic power of tiny Paraguay, still dwarfs its neighbor. But for a small, landlocked country of nearly seven million people the shift is significant, not least for the 13,000 people employed directly by the factories.

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