Illegal Computers

The age of illegal computers in Brazil is about to come to an end. In 2004, the South American nation was on its way to becoming world leader in the trade of illegal computers, as 74% of the machines sold collected no taxes and came loaded with illegal programs or irregular and smuggled software.
Brazil was on the verge of eclipsing China as global leader of forged products, when the situation changed. This is a phenomenon worthy of celebration and reflection.

What served as the turning point for Brazil in moving away from the illegal, functioning instead within a legal framework for computing?
Could it have been a greater effectiveness of penal law? Was it the result of a more efficient legal system, with stricter judges? Was it due to harsher customs controls by inspectors and police, reducing the economic incentives of illegal activity? Or maybe even greater consumer consciousness, aware of anti-piracy campaigns that the developing world used to flood both Brazil and the rest of the world?

I don’t think so. Even if these can be considered real reasons, I believe their effect has been minimal to the point that we should only consider them secondary variables.

Although it may sound paradoxical, illegality is not a legal matter, as a few highly influential public and private sectors would have us to believe. So, what is the decisive issue that led Brazil to veer down the path of illegality in the first place?
For this question, we can use the same response that former U.S. president Bill Clinton offered, as legend has it, when asked by an assessor about the decisive factor in winning elections: it’s “the economy, stupid!”

In the past few years, the technology industry has been able to sell legal computers for far less than in the past. On average, a legal computer costs R$ 1999,00 (roughly US$ 910) while an illegal unit sells for R$ 1.719,00 (roughly US$ 780) – just a 14% difference.[1] In addition, the drop in interest charged for the financing of a legal computer (1,9% per month), the reduction of taxes, as well as warranty guarantees and repair support, are all reasons for the increase in legal computer trade, according to Veja Magazine.

In other words: illegality used to result mainly from the inability of companies to produce affordable computers for the majority of consumers given existing tributary and financial policy. It was not the result of inefficiencies in police or tax collection operations, or incapable judges, or even unethical behaviour on the part of Brazilians. This is a problem that cannot be resolved by the federal police or Justice systems; only the introduction of substantial changes to economic policy and an increase in the efficiency of entrepreneurship will solve the issue of illegality.

Take, for example, the market for music today in Brazil. Major foreign record companies want an “economic miracle.” In the name of legality, they try to pin down consumers to buy CDs for an average price comparable to that of the American market – US$ 10 to US$ 15 (about R$ 22 to R$ 33).

This amount is not compatible with the average salary of Brazilians. They also wish to combat the development of alternative production systems that allow for the sale of CDs at far lower prices (R$ 5, a price more in line with the purchasing power of Brazilians). From a capitalist standpoint, this is a very simple issue: record companies are not efficient and innovative enough to organize their production in a manner that is compatible with the demand that exists in the Brazil’s domestic market.

As you can see, it is not a regulation issue. Even with efficient repression or restrictions, consumers still cannot afford CDs at that price. It is a matter of inadequate supply for existing demand. Rather than correct the economic dilemma on the supply side, the industry instead represses demand in the local market.

For Brazilians to even consider purchasing a CD at the average price found in the U.S. (US$ 15 to US$ 20), his or her monthly income would need to be comparable to that of an American (US$ 2,000), and not the current reality in Brazil (R$ 350,00, or about US$ 140). Thus, major record companies limit access to their music in Brazil to the small cultured elite that can pay for it. They do not produce for Brazil.

They produce for Brazil’s elite. What these companies are doing is manufacturing social exclusion. Meanwhile, they try to stop new business models that function well and offer sustainable production for Brazil’s popular market by making concerted efforts to impose outdated, normative legislation, applying it to informal production and trade systems.

These record companies – which pay virtually nothing for copyright protection – want even more: they want Brazil’s government to allocate public resources to police and tax collection operations, as well as for court actions, thereby saving them undue expenses. The result is a true transfer of expenses from the private to the public sector: the government is strongly pressed to make use of public resources to protect production within the private music industry, an industry which has contributed mightily to the deepening of social exclusion and greater inequality in Brazil.

Moreover, due to mounting industry pressure along with the support of the U.S. Trade Representative (USTR), the Brazilian government created the “National Council for Combating Piracy” (Conselho Nacional de Combate � Pirataria), thus dedicating public resources to the protection of private sector inefficiencies – and foreign ones at that. Suddenly, the defence of legality shows its other face: the law intends to impose a business model which is unsustainable from a legal point of view, since it’s unfeasible from a trade standpoint.

In a recent conference at Yale University, it was made clear that, rather than promote expensive marketing campaigns, police action, court actions, and constant moral repression against consumers, the industry should instead dedicate resources to the reduction of costs, gains in productivity, and a more accurate adaptation of business models to the reality of developing countries. Therefore, the example of legal computers is significant. There are solutions, and they involve neither legal repression, nor aggressive marketing campaigns.

It’s time to reframe the debate on illegality and piracy within a more realistic point of view that caters to Brazil’s national interests. To what extent are industry inefficiencies and production methods based on technology imports (culturally inappropriate to the Brazilian consumer market) decisive factors in the issue illegality? To what extent is current legislation just a mere attempt at protecting the market in favor of outdated business models? Are we supposed to believe that illegality and piracy can only be combated with more marketing campaigns, police repression, court actions and tax collection policies?

The example of computers demonstrates the exact opposite: that successful action against piracy involves more efficient industries that produce goods for Brazil’s entire market while improving and updating outdated legal code.

*This article was written by JOAQUIM FALCÃO, the Director of Fundação Getúlio Vargas School of Law in Rio de Janeiro and serves as member of the National Council for Justice.

[1] Calculation of these figures in U.S. dollars is based upon an average exchange rate for the Brazilian real throughout 2006 of roughly US$1 = R$2.20. This article was published at Folha de S.Paulo newspaper in July/2006