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DAVID KRUSE

By Staff | Dec 25, 2009

When in Brazil recently it took an hour to fly from Sao Paulo to Rio and two hours to travel in a taxi cab from the international airport across town to the meeting we’d scheduled.

It was mid-day and the traffic jam resembled the beltway. The concept of how they will ever pull off the 2016 Olympics in Rio is beyond me. The infrastructure they have now is overwhelmed and when they begin new construction, it will be a nightmare. Maybe if all the people in Rio left for a few years while they modernized the infrastructure, they could build it.

I also see the Brazilian bureaucracy as a formidable problem. They have to have a permit to turn around in Brazil and those giving permits will milk the Olympics for all it’s worth.

Beijing was not in as bad of condition before the city hosted the Olympics and in China, the party rulers are like God, decreeing the things to be done and the Chinese couldn’t build them fast enough.

Brazil is not like that. They don’t think God requires them to work six days with just one off. Brazilians like to make believe things are better than they are. They will have to work hard to produce a successful Olympics even in their imagination.

Rio is not an Olympic City. What Brazilians have going in their favor is that they are excellent at partying, so if they can equate the Olympics as the Grande Sports Carnival, the party will happen.

Brazil’s legal system is still undeveloped. An American married a Brazilian woman and they had a child in the U.S. They divorced and she returned to Brazil and remarried. She passed away and the U.S. father attempted to regain custody of his child.

The Brazilian step-father was a lawyer and fought for custody arguing that it should be decided in Brazilian courts. The controversy made it all the way to Washington into a Congressional resolution demanding return of the child to his father.

The Brazilian lawyer knew that if jurisdiction was kept in the Brazilian legal system, the child could be old enough to vote before any decision was rendered making the custody issue mute.

Unscrupulous Brazilians exploit the inefficiency of their legal system. Rulings can still be bought depending on the level of the court and region. The unwillingness to make those payments is a detriment to U.S. companies. Judges fail to perform even rudimentary duties.

This disrupts the normal course of business where things as simple as title transfers can be delayed with or without technicalities by judicial inaction.

A significant element of Brazilian business appears to like the corruption in the legal system having learned to exploit it. As it can be easy to stop legal processes, it is therefore worth a payment from the needy party to facilitate it.

Fraud is difficult to prosecute which means that the audacity to commit fraud is unbridled. The legal system protects those committing fraudulent acts to the further detriment of the victim.

Employees will steal from you and then they will sue you for being fired.

The dysfunctional Brazilian legal system is its primary last major obstacle to becoming a first-tier developed nation.

I see progress in Brazil on many fronts. The roads get better, technology advances, labor becomes more skilled, but I have not seen any progress reforming their dysfunctional legal system.

It’s the single greatest obstacle depressing asset values in Brazil. If creditors could effectively recover collateral on defaulted loans, the availability of credit in Brazil would expand exponentially and the cost of money, still a multiple of global interest rates, would decline significantly.

Assets values now compressed by a restricted supply of credit would be unleashed if legal reform occurred allowing a credit system comparable to the one in the U.S. to function.

I had an interesting conversation in Rio with a couple U.S. oil company technical advisors who worked the drilling rigs in the new fields off Brazil’s coast.

They said U.S. companies were angry that Brazil pulled bidding rights from foreign oil companies in promising areas off the coast after they had invested large sums into seismic exploration.

They were advising Petrobras drillers whom they said did a second class job of drilling wells. They were careful when making suggestions because Petrobras held their companies liable for damages if something went wrong.

There is a right way to drill an oil well and they knew how to do it, but there is always risk that even when using best practices, sometimes things go wrong anyway.

They would see Brazilian drillers not use best practices and make huge costly mistakes, but couldn’t correct them because of the liability risk, so would have to watch the Brazilians screw up.

One time one of the American advisors stepped in and prevented a major mistake saving the Brazilians a couple million dollars and instead of being thanked, was ordered off the rig as his interjection had insulted their pride.

These Americans worked 28 days on, 28 days off. They laughed at the Brazilian technicians who worked 2 weeks on, 4 weeks off plus more holidays than you can imagine.

If Brazil limited itself to the same number of holidays as celebrated in the U.S., Brazilian GDP would rise another 1 percent. That’s the Brazil that we know and love.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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