“Yes, but there’s a real problem: the United States sets the interest rate. Banks establish an interest rate which is the rate of return on capital. Once that’s turned into risk capital, it’s Brazil — not the banks — that sets the profit remittance rate.”
“How much profit remittance does Brazil allow at present?”
“Fiat of Italy made a $680 million investment in Brazil, not as a direct investment but rather as a loan from the main Italian office to the Brazilian branch through a bank. It was a triangular operation. On that debt, Fiat sends the branch’s interest to the main office and pays Brazil only 12.6 percent tax on the income.”
“It pays 12.6 percent on the remittance of interest?” the Cuban leader asked.
“Yes. If Fiat remitted profits instead of interest, it would have to pay a 35.7 percent tax to Brazil. For remittance of profits and direct risk capital, a 35.7 percent tax has to be paid. Only 12 percent is paid on debt interest. Therefore, Fiat will turn debt into capital only if Brazil changes its fiscal laws so as to favor capital rather than debt.”
“It’s trying to pay the lowest possible taxes,” Fidel said.
“That’s right. There won’t be interest capitalization unless there’s a reduction in the taxes on direct capital, because returns on direct investment are taxed at 35 percent, while the tax on returns on loans is 12 percent.”
“Brazil doesn’t limit return capital? It taxes it?”
“That’s right.”
“How much profit would there be on $680 million?”
“From five to eight percent a year.”
“That’s low,” Fidel Castro observed. “It won’t stimulate investment.”
“It’s low because it costs the main office a lot to finance the branch. Fiat has to pay interest to the main office, and it transfers that cost to the Brazilian economy.”
“Under present conditions how much profit is there? On an investment of almost $600 million, what return does the main office get if there’s been a direct investment without the presence of the bank?”
“In the case of Fiat, it amounts to eight percent of total sales.”
“Of total sales!” our host exclaimed. “What does that amount to in terms of the $680 million? Less than 10 percent?”
“Less than 10 percent; eight percent, liquid.”
“With such low returns on capital invested, what incentive can the transnationals have for investing in Brazil?”
“They want to take over the market in the first stage. There’s idle capacity at the world level, and Brazil is an important market in Latin America which can be a springboard for the rest of the region. Brazil has very liberal laws on foreign capital. Financial costs are a camouflaged, clandestine profit, because returns on capital take the form of debt payments. For the main office it’s the same capital coming back. The main office is the branch’s creditor. It’s a recent invention that international capitalism came up with in Brazil. In Brazil the transnationals owe their main offices $18 billion, all told, through the banks.”
“Isn’t that included in the foreign debt?” Fidel asked, lighting a small cigar.
“Yes. It amounts to a fifth of the debt.”
“Because supposedly that money was lent?”
“Yes, it was lent by the main office to the branch, through the banks.”
“What would be the profit on $600 million in South Korea?”
“Three times as much.”
“Why did they invest so much over there? For that reason? Why did the transnationals invest so much in Taiwan and South Korea?”
“Because they’re some sort of tax-free zone.”
“They must be making more than 20 percent on what they invested.”
“More,” Joelmir Beting affirmed.
“More than 20 percent?”
“Yes, after a maturity period.”
“And in Brazil it’s a lot less?”
“A lot less.”
“Then why have they invested so much in Brazil in the last few years? What motivated them?”
“They did it for the market potential. It’s the scale of the market. Brazil is some kind of Belindia: Belgium plus India. It’s an island of contrasts. In Brazil we have 32 million consumers with the per capita income of Belgium. It’s a big market. Every year a million cars are manufactured. It’s the seventh largest automobile market in the world.”
“Luxury cars,” I stressed.
“Television sets and household appliances are manufactured, too. There are 32 million consumers in a population of 133 million.”
“The consumers don’t amount to 25 percent of the total population,” the comandante remarked. “I’ve been told that 10 percent of the population gets more than 50 percent of the national income. That is, a quarter of all Brazilians constitute an important mass market. How many are out of that market?”
“All the rest.”
“One hundred million?”
“Yes, 100 million people are literally out.”
“Of those 100 million people, how many live in extreme poverty?”
“Thirty million live in a state of absolute poverty and 40 million in relative poverty; that makes 70 million. The 32 million who are on the borderline constitute a market following the international pattern. Between the 70 million poor and the 32 million consumers there’s a working class that basically survives. The 70 million poor are really 70 million political prisoners of the system. This state of absolute poverty is equal to the worst there is in India in terms of hunger, disease, and permanent unemployment. There are 18 million children under 10 years old who have no home or relatives. They’re abandoned like street dogs and may be found all over Brazil.”
“Sixty-four million Brazilians are under 19 years old,” I added.
“Do those homeless children come from the 30 million workers’ families?” Fidel asked, puzzled.
“No. They come from the 70 million people,” the economics journalist explained.
“So that’s where the 18 million abandoned children come from?”
“Yes, from ‘India.’ But the 32 million ‘Belgians’ constitute a larger mass market than there is in Argentina, Uruguay, or Mexico. It’s the biggest market in Latin America.”
“Where are the Brazilian doctors and engineers?”
“In the 32 million.”
“And the teachers?”
“In the 32 million, too.”
“How much does an elementary schoolteacher earn?”
“About $80.”
“It may be that there are elementary schoolteachers among the 40 million living in relative poverty,” the Cuban president commented.
“During the last five years of the great foreign debt crisis, there was a 27 percent drop in the 32 million Brazilians’ purchasing power.”
“For the 32 million? What about the 30 million workers?”
“A drop of 12 percent.”
I gave another statistic: “12 million people are unemployed in Brazil right now.”
Fidel concluded, “It can’t be said that there are great incentives