Opinion: 5 years of the Economic Freedom Act: what still needs to be done

On September 20, 2019, the Economic Freedom Provisional Measure (MP) was converted into law (Law no. 13,874), marking a new chapter in Brazil’s economic history. As the rapporteur and co-author of this law, we have closely followed the progress and results achieved over these five years.

When the law was sanctioned, the unemployment rate in Brazil was 11.8%, or 12.8 million people, according to IBGE. According to a study by the Economic Policy Secretariat (SPE) of the Ministry of Economy at the time, the Economic Freedom MP, when fully implemented, could generate 3.7 million jobs in 10 years.

Today, we see a significant reduction in the unemployment rate to 6.9% (IBGE), equivalent to 7.5 million people, a direct reflection of the measures adopted to streamline and stimulate entrepreneurship. The result achieved was much higher than projected. Instead of generating 3.7 million jobs in 10 years, 5.3 million jobs were created in 5 years.

By nature, Brazilians are natural entrepreneurs who enjoy working, are creative, and know how to cope with the challenges of a developing country. When some barriers were removed, using intelligent regulation based on the risk of economic activities, the country unlocked a large pent-up demand. A large part of the jobs created in recent years were precisely hired by micro and small businesses, the most benefited by the Economic Freedom Law (EFL).

The time required to open a company in Brazil in 2018 was, on average, 5 days, according to the Federal Revenue Service. Today, thanks to simplification and digitalization measures in business processes and commercial registries, this time has been reduced to 18 hours according to the National Company and Small Business Secretariat’s Business Map, of the Federal Government. The facilitation for opening and operating businesses reduced significant entry barriers.

With economic freedom and ease of opening businesses, the entrepreneurial spirit of Brazilians blossomed, and several new businesses emerged. In 2018, there were about 18 million active companies in Brazil. Currently, this number has increased to over 22.4 million. We are talking about 4.4 million new companies and entrepreneurs, creating jobs and paying taxes.

The law also promoted greater legal certainty, with the provision that private agreements must be respected and state interference must be minimal. This encouraged investor confidence and the development of new ventures.

Another key point of the EFL was the incorporation of the concept of “regulatory abuse of power.” It is known that, under the guise of regulating a law, the Executive Branch often exceeds legal limits and ends up creating obligations or requirements not foreseen by the legislator. In addition to violating the principle that no one shall be compelled to do or refrain from doing something except by virtue of law, this practice encroaches on an attribution that should be exclusively legislative, generating legal uncertainty.

From 2019 onwards, several judicial decisions recognized cases of regulatory abuse, strengthening free enterprise and limiting abuses by governments and agencies. The premise of citizen good faith should always be the rule, not the exception.

Ah, but it is not enough to have economic freedom in such an unequal country! We agree! In 2019, the percentage of people living in extreme poverty in Brazil was 6.5%, according to the World Bank. Today, this number has decreased to 4.4%, according to a study by the Instituto Jones dos Santos Neves (IJSN) of Espírito Santo, showing that economic freedom has a strong correlation with poverty reduction and the promotion of social inclusion.

By simplifying the lives of entrepreneurs, especially in low-risk activities that were exempt from any permits or authorizations, we have created a machine for social inclusion. This confirms that job creation and income generation continue to be the best social program in existence.

There are still challenges to be faced: about 70% of Brazilian cities have not yet approved their municipal laws on economic freedom, a great opportunity for new mayors and councilors. In addition, regulatory agencies also need to strengthen risk-based regulation, stopping spending time on low-risk activities to concentrate efforts and resources on medium and, especially, high-risk activities. The Regulatory Impact Analysis (AIR), provided for in the EFL, is still underutilized in Brazil and should be a rule.

But the results achieved so far are cause for celebration.

The Economic Freedom Law has proven to be an effective instrument to stimulate entrepreneurship, create jobs, increase legal certainty, reduce poverty, and promote economic growth. However, it is necessary to continue working to improve and implement more measures that contribute to an increasingly free and favorable business environment for entrepreneurs in Brazil. We have a good path ahead.