Canadas investment in the BRIC nations - Essay Example

Canada’s investment in the BRIC nations Introduction BRIC is an acronym for the combined economies of Brazil, Russia, India and China. A report by Wilson (1) in October 2003 cogitated that in the next fifty years, the four countries would be wealthier than most of the current dominating economic powers. The reason behind Wilson’s (1) speculation is that the Golden BRICs continually maintain policies and develop institutions that are supportive to economic growth (Wilson 2). Every good thing must experience major setbacks and the BRICs are no exception. The BRICs countries faces noticeable challenges on their efforts to keep development on track implying that the speculations on the report on BRICs countries might be met or not. However, if the BRICs countries near the set projections in the same report, then the pattern of economic growth could be quite immense. According to Wilson (2-3), in the next twenty five years, the BRICs economies combined could make up over half of the size of G6 in US dollar thus dominating the list of the six largest economies in the world, leaving only two slots for the United States and Japan and displacing the United Kingdom, Germany, France and Italy (Holly 1-6). Notably, the BRIC countries are not political alliances as many might think, but have the potential to form a powerful economic bloc (Wilson 2-5) The global competitive advantage is likely to shift from the west to east (Mpoyi 1-12), that is from Canada and other European countries to Latin America and Eastern Europe. This is due to the projections in Sach’s reports that the BRICs real exchange rate could appreciate annually by an average of 2.5%. For Canada to be on a safer economic side, it needs to consider expanding her investment and increasing its business operations in the BRIC nations. Additionally, if Canada doesn’t act on time it might be swept by the shift of global competitiveness from the west to the east, which is fast approaching. However, before Canada considers expanding its business and increasing her investment in any of the Golden BRICs nations, both the strengths and weaknesses of each of these countries need to be considered and evaluated as below. Brazil There have been a lot of controversy whether Brazil deserves to be seen as an economic powerhouse as portrayed in the BRIC with its weak economic growth in question. According to Pereira (1), it is evident that Brazil’s weaknesses surpass its strengths by far. However, it would be premature to disqualify it from the BRICs nations due to her potential in growth in the near future. Weaknesses Pereira(1) notes that the rate of growth in Brazil was only 3% in 2013, which is quite low, compared to that of China and India which was approximately 8% and 6% respectively. Additionally, in the year 2011 and 2012, Brazil grew by 2.7% and less than 1% respectively (Pereira 1). Such a scenario has made people to constantly wonder if Brazil really deserves to be part of the “BRIC” nations. The truth of the matter is that Brazil saves less than it invests and almost 70% of her economic growth is contributed by her active consumption (Pereira, 1). Needless to say, the rise of credit over the last ten years has greatly moderated Brazil’s growth as families are heavily indebted (Pereira 1). For the past ten years, Brazil has boned from a commodity boom, which is currently slowing down rendering her an expensive country with strong currency in the long run thus destroying the competitiveness of her industry (Pereira 1). Furthermore, for the past decade, 50% of Brazil’s exports consisted of manufactured goods. However, the situation currently is pathetic with only 35% of her exports being manufactured. Additionally, the tax burden is heavy at 35% of GDP (Pereira 1) and the government spending is rising faster than the GDP. Furthermore, inflation has become a major problem in Brazil with an increase of 6.5% per year. Such an economic situation has gone a long way to cause major economic problems such as deficit in balance of payment and poor infrastructure development (Pereira 1). In reference to Pereira (1), attempts to modernize these infrastructures have borne less fruits. Expensive electricity, inadequately funded public sector pension system and high interest rates also depict Brazil’s poor economic performance. According to analyst as per Pereira (2), Brazil’s political systems inability to respond and rectify these challenges is eroding the fundamental pillars of Brazilian economy. Corruption is widespread among the Brazilian politicians and oppositions to debate and ensure implementation of current beneficial policies is almost absent. Strengths Regardless of the many setbacks associated with this country, her future potential towards economic growth and ability to be an outstanding global economic player cannot go unnoticed. One of her strengths that is rather ignored by short-term investors is her higher per capita income GDP than both China and India (Pereira 2). More significantly, Brazil is less vulnerable to external attacks. It also has few threats to its security, thus can afford to spend relatively little on national defense (Pereira 2). On a closer look of the BRICs nations, Brazil is the only member with no possession of nuclear weapons rendering her more secure than the rest of its peers in the BRIC (Pereira 2). To add on that, Brazil has been working to reduce her public debts from 2002-2012, which has successfully reduced from 60% to 35%. Furthermore, in the year 2012, Brazil attracted around $62 billion foreign direct investment making it the largest recipient of FDI in the world after China and United States (Pereira 2). Brazil is adorned with a large basket of natural resources. Her huge land together with the small population makes Brazil boast of a world class agricultural sector whose potential has not yet been reached (Pereira 2). Currently, Brazil is the largest world producer of soy and beef. Her capacity to adapt more crops to its tropical soil and generous land is simply amazing (Pereira 2). Moreover, the Brazilian management of the Amazon rainforest has rendered it an environmental leader. Recently, Brazil has had the largest rate in reduction in deforestation, which is very encouraging. Needless to say, it has the largest reserves of fresh water in the world and almost half of all energy generated from renewable sources are mainly hydroelectric and biofuels (Pereira 2). Lastly, together with Russia, Brazil has reduced inequality in the recent years (Pereira 2). Pereira (3) acknowledges that about 30million Brazilians joined middle class and could access formal employment. Reduction in equality had a racial component as 75% of those joining the middle class were non-white and female employment had increased by 136% in the formal employment sector. Regardless of the rather slow economic growth in Brazil, her resources and the extraordinary social progress advanced by the country simply qualifies her as an economic powerhouse. Any country should consider investing in Brazil because of her yet slow-growth but a promising economic future. Russia Russia’s economic indicators are among the most favorable among the BRIC nations despite her poor reputation (Gazeta 1). According to Gazeta (1), the economic crisis that had hit Russia in 2009 raised a lot of questions on whether Russia deserves to be part of the “BRIC”. The truth of the matter is, yes because Russia’s economy bounced back leading the economic bench almost immediately (Gazeta 1). It’s true that Russia has its weaknesses but most of her strengths are ignored. Strengths Russian people constitute one of her best advantage. Being the most populous country in Europe with a population of 142 million, her consumer goods are extremely in high demand (Gazeta 1). Additionally, Russia’s per capita income is currently the best among the BRIC nations. In reference to Gazeta (1), Russia has a high number of rich individuals when compared to Brazil, India and China. Russia is a sophisticated, industrialized society with well-educated and cultured population and it would take quite some time for other countries to outdo her in this (Gazeta, 1). Russia has the largest percentage of her population growing their wealth towards the automotive sectors. This implies that the automotive owners will soon replace existing cars in the near future. Notably, as disposable income grows, Russia will have a great potential to increase car ownership (Gazeta 1). Russia’s stock market is currently the cheapest major market worldwide thus increasing the appeal to invest in Russia to portfolio investors (Gazeta 1). Furthermore, Russia is open to investors unlike, other BRIC nations, which encourages heavy investment in the country (Gazeta 1). Arguably, Russia is the most equitable country. The gini coefficient measures income inequality. After the collapse of the Soviet Union, everyone was given an apartment and perhaps this is the primary reason why Russia does well in gini coefficient (Aris 1). Finally, Russia is abounding in natural resources, primarily mineral resources which make her an economic powerhouse (Mau 2). Weaknesses The imminent dangers that threaten Russia’s economy arise from its strength. With the advance in exploitation of natural resources, demand for quality education drops as mineral resource sectors typically set forth lower qualification for the workforce (Mau 2). This situation may produce a dangerous enduring situation in the near future. No single country has been able to break-through economically by solely depending on exploitation of oil, gas or precious metal. Russia’s dependence on these natural resources for her economic prosperity exposes herself to the risk that faced the Soviet Union and eventually led to her collapse (Mau 2). Russia would be vulnerable in case the prices of oil and other mineral resources dropped in the world market. According to Mau (2), corruption is practically inevitable especially when the government is involved in the exploitation of these natural resources. Corruption tends to slow down economic growth in the society and Russia is by no means an exception. Inappropriate use of natural resources has rendered Russia to solely depend on the fluctuation of prices for its exports items. China China has been titled to be driving the BRICs according to Mishra (1). This is because the country represents 70% of BRICs GDP. Generally, Chinas information technology sector is the most competitive (Feng 1). China is the 2nd largest economy in the world (economy watch team 1). Strengths According to Feng (1), the Chinese government has been offering its complete support towards stressing the importance of IT in China’s economic development. Additionally, the government has enacted a nationwide policy to attract foreign investment in the long-run and flexible and elastic investor’s policies have been enacted to attract more investors to Chinas economy (Feng 1). In reference to Feng (1), the high market demand created by China’s large population poses as its greatest asset. A large population implies that there will be potential customers stimulating a huge demand and, therefore, in order to keep up with this demand, domestic consumption will need to be given the highest priority by encouraging investments (Feng 1). One of the major things that attract heavy investment in China is the low labor cost (Feng 1). China high population which is relatively well educated provides the cheap workforce yet very reliable. In addition, China has a high trade surplus and domestic products. The country has invested heavily in technology and scientific innovation placing it in the forefront when it comes to economic competition. In reference to Mishra (1), China is continually moving from investment-led growth towards domestic consumption. The country ranks top 5 in banking, insurance, construction, real estate, telecommunication, trading companies and transportation (Mishra 1). Weaknesses Regardless of the much strength manifested by the Chinese potential economy, its weaknesses if not curbed can be the sole reason for her economic downfall. According to Center for American Progress, China lacks true technological innovation. This is because, the competitive technological products made by China are from imports, assimilate or they have been re-innovated, thus lacking a sense of originality. With the growing economy, the China workforce is becoming more assertive and demands for higher wages thus threatening the large pool of low workforce (Center for American Progress 1). Weak legal systems and the ever rising corruption threaten the economic standing of China (Center for American Progress). The fact that individual properties can be seized arbitrarily does not portray quite a good picture of this alleged BRICs leader. Much as China has a strong decentralized government, the communist party still retains the control of most of the state owned companies in strategic industries, i.e. telecom, energy, transportation and steel production. That situation has limited the growth of China for the past two decades (Center for American Progress 1). India Junor (1) brands India as the odd one out among the BRICs. India is however uniquely positioned in a way that it can work to maintain its position in the BRIC as well as building friendly relationships with the west. This is anticipated to improve its economic growth to a larger extent in the future (Junor1). Though India has experience sluggish economic growth in the past decades, currently it is among the fastest growing economies in the world (Pettinger 1). Strengths According to Pettinger (1), India has the most favorable demography with a positive birth rate implying that the size of the workforce will continue to grow steadily. The fact that India has very poor infrastructures means that even moderate improvements could lead to significant improvements in the productive capacity of the economy (Pettinger 1). India is well positioned to benefit from globalization and outsourcing. By having the largest percentage of its population speaking English for labor intensive industries like call centers, India is an obvious target for outsourcing (Pettinger 1). According to Wilson (1-3), India has the greatest potential to growth. Sachs report projects India’s growth at a sustainable rate of 8% until 2020. However, according to Pettinger (1), the projection would only be true if India made policies such as labor market deregulation and improvement in education and training. India has benefited from liberalization of free trade in the recent years and this has eventually turned into a comparative advantage in labor intensive industries thus stimulation of economic growth. Weaknesses Inflation is a major setback in India’s economy. Pettinger (1) notes that this inflation is fuelled by rising wages. Currently, inflation in India is caused by cost-push inflationary factors and ranges from 8-10%. The central bank of India has made reducing inflation a major priority (Pettinger 1). There is an extremely high level of illiteracy among the Indian population. According to Pettinger (1), the situation is worse in rural areas and among women with over 50% of Indian women being illiterate. This limits economic development as there is less skilled manpower. There is poor infrastructure in the country with many Indians lacking basic amenities such as water, proper roads, schools and hospitals (Pettinger 1). Over 40% of Indian fruits rot before reaching the market causing a constraint in supply therefore inefficiency in the growth of the economy (Pettinger 1). Notably, India’s balance of payment is constantly deteriorating. The imports are constantly growing than the exports. With this situation, the worst fear is the devaluation of the Rupee, which calls the attention of the country at large on the need to improve the competitiveness of exports in the economy (Pettinger 1). Conclusion After a close evaluation of individual BRICs nations, I think Canada should expand their businesses and increase their investment into the BRICs nations as they offer market diversification potential, which would boost Canada’s economy (Tapp &.Meridith 1). Although all the BRICs nations offer the entire favorable climate for Canada to invest, India is the most appealing in the list. Canada needs to be innovative and venture into investments that will favor the reality in India. Unsatisfied niche in India is as many as one could think of. For instance, the gap of infrastructure such as poor public amenities like roads, schools and hospitals can provide the most fruitful sector for Canada to invest in India. India’s large population is also set to provide a high demand for a wide range of commodities in the years to come. Also India’s prowess in information technology and its commitment to innovation makes it the perfect technology partner for Canada. Additionally, India’s shift towards knowledge based economy and its status as a low-cost manufacturing locale makes it the best opportunity for Canada’s investment in the country. However, before Canada starts reaping the fruits of investing in India, it needs to be patient and very flexible. Marie-Michele Poulin, a trade commissioner in Mumbai, says that Indian people are sensitive and may want to see the product work. They might even ask for it trial at a factory or in-store. Patience and continual innovativeness must be key rules in the venture of Canadians investment and business expansion in India. Works Cited Wilson, Dominic. Dreaming with BRICs. London: Goldman, Sachs & Co., 2003. Print. Bell, Holly A. Status of the ‘BRICs’: An Analysis of Growth Factor S. © EuroJournals Publishing, Inc. 2011, n.d. Web. 24 Mar. 2015. . Mpoyi, Richard T. N.p., n.d. Web. 24 Mar. 2015. . Pereira, Special To CNN By Anthony. "Does Brazil Deserve Its 'B' for BRIC?." Does Brazil Deserve Its 'B' in BRIC? - CNN.com. N.p., 3 June 2013. Web. 24 Mar. 2015. . Gosling, Business New Europe Tim. "Russia Tops Bric Country List Economically." Russia Tops Bric Country List Economically - Telegraph. Rossiyskaya Gazeta, 6 Oct. 2010. Web. 24 Mar. 2015. . Ben Aris, Russia Now. "Gini Coefficient Makes Russia Look More Equitable." Gini Coefficient Makes Russia Look More Equitable - Telegraph. Ben Aris, Russia Now, 6 Oct. 2010. Web. 24 Mar. 2015. . Mishra, Pankaj. "Bloomberg the Company & Products." China Is Driving the BRICS Train - Bloomberg View. Pankaj Mishra, 20 July 2014. Web. 25 Mar. 2015. . Feng, Home. n.d. Web. 25 Mar. 2015. . EW World Economy Team. "China Economy." China Economy | Economy Watch. N.p., n.d. Web. 25 Mar. 2015. . Center for American Progress, n.d. Web. 25 Mar. 2015. . Junor, Stephen. "India: The Odd BRIC Out." India: The Odd BRIC Out | The Diplomat. The Diplomat, 2 Sept. 2014. Web. 25 Mar. 2015. . Pettinger, Tejvan R. "Strengths of Indian Economy." Strengths of Indian Economy | Economics Help. N.p., n.d. Web. 25 Mar. 2015. . Pettinger, Tejvan R. "Problems Facing Indian Economy." Problems Facing Indian Economy | Economics Help. N.p., n.d. Web. 25 Mar. 2015. . Tapp, Stephen, and Tyler Meredith. "Economy Lab Has Moved." Three Key Challenges for Canada’s Economy in 2014 - The Globe and Mail. N.p., n.d. Web. 25 Mar. 2015. . Read More