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Brazil More Expensive Than Europe

Brazil More Expensive Than Europe

Posted by Juan Gavasa on July 28, 2014

Brazil’s economy might be growing near zero, and it’s currency isn’t as strong as it was in the heyday of the U.S. housing bubble of 2008, but that hasn’t stopped the country from becoming more expensive than the entire euro zone. In fact, according to The Economist magazine’s latest edition of the Big Mac index, Brazil’s currency is overvalued, and is third behind mega rich nations like Norway and Switzerland.

Brazil is the most expensive emerging market nation, and the locals are feeling it.

According to the magazine’s Big Mac index, the Brazilian real is overvalued by 5.86% as of July 23, more so than it was in 2009.  The Brazilian real is worth R$2.23. But it used to be a lot stronger. In July of 2008, it hit a strong R$1.55.  Despite a weaker currency, Brazil’s cost of living is on the rise.  For those living there, it’s a cause of frustration.  This is still very much a country where roads flood in the rain in major cities like São Paulo, and World Cup and Olympic quality cities like Rio de Janeiro have a whopping 500,000+ living in squalor in hillside slums.  The views are nice, but the poverty, the crime, the violence and the lackluster government services to those stuck there remain a national embarrassment.

Brazil is a complete paradox. But one reason for the high cost of living is supply constraints. Lots of demand, with very little on offer. There is also the continual and pesky logistics bottlenecks that make the simple delivery and storage of food more costly in agriculturally rich Brazil than it is in the U.S.  Sure Brazil is crawling with cattle. But milk and beef are about the same price, or cheaper, in the U.S.  where incomes are nearly three times higher.

Since a Big Mac costs 48 kroner ($7.76) in Norway and only $4.80 in the U.S., the kroner is overvalued by 62% according to The Economist, making it the most “puffed-up currency” in the index. The same burger costs just $1.63 in Ukraine, making the war torn hryvnia the weakest currency on the list.  The Brazilian real ranks close to Norway.  But Brazilian workers aren’t bringing home Norwegian incomes.

Norway’s per capita GDP as measured by purchase parity is around $56,000.  Brazil’s is closer to $12,000.

Some first person narrative here for a moment. Over the weekend, I was speaking with a hotel manager from the Brazil Hospitality Group, one of the private equity portfolio properties of GP Investments in São Paulo. We were not speaking on the record, but were rather chit chatting at the Reef bar at the New England Aquarium.  The sun was warm. The Sam Summer was cold. And he told me about his bonus, being very American in his casualness about his personal income. I told him he made double my salary.  But when he compared my life to his, it was clear that my salary went much farther than his.

Moreover, my federal and state government provided me with ample, low cost resources than his government provided for him. My health insurance was cheaper. My roads were better.  While my children went to good public schools, he spent the equivalent of my mortgage on private schools for his two children.

My property in rich Massachusetts was twice the size of his in rich Parana state, and I had better sources of entertainment and a cleaner environment at no extra cost. He had one car, as do I, but he paid over $5 a gallon to fill it up even when most of the gasoline in Brazil is mixed with sugarcane ethanol and cane grows like weeds in that country. I pay $3.65 a gallon by comparison.  I can leave my patio furniture out on my deck all night and no one will steal it. If he left a beach chair on his patio, some Brazilian would figure out a “jeitinho” to steal it and sell it, even if they had to climb five stories to get it.

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