Transition Economy of Brazil - Research Paper Example

 Creating and Sustaining Growth In the Transition Economy of Brazil I. Predicting, Creating and Sustaining Growth Once the centrally planned economies embarked on the road to the open market, they logically look up to the western economies of the US, UK and other European citadels of capitalism as models. The problem is that the criteria for predicting growth, as well the factors that create and sustain development, are inherently different in the economies that were held in the grips of socialism and militarism for nearly a lifetime. As a result, there is a great variance in the performance of today’s transition economies. Some flounder and others succeed, and some make good at the initial burst only to stumble before adverse external factors. This only shows that growth is harder to predict, create and sustain in the once centrally planned economies. In 2005, for example, the Goldman Sachs consulting group developed the Growth Environment Scores based on an assessment of companies in 170 countries as regards macroeconomic conditions, social and environmental issues, governance, corruption and other issues. The transition BRIC countries (Brazil, Russia, India and China) placed high on the list. China was on top followed by Russia, Brazil and India, in that order (Rybinski, 2006). This means that these previously planned economies are making big strides in their democratic transition to match the growth of the countries that have a developed market in place for a long time. In other cases, the transition economy of South Africa was caught flat-footed when its rand stumbled in 2005, Hungarian bonds were sold out, and the Turkish stock market crashed 41 percent in dollar terms in seven weeks (IFC, 2006). Their policy makers failed to predict these events so as to create the necessary safety nets. South Africa is moving to a market economy after years of the contentious apartheid, Hungary was once a member of the communist bloc, and Turkey is shaking off monarchial rule. II. Foreign Direct Investment: Data and Trends The progress of any economy is measured by the amount of the foreign direct investment (FDI) that it both receives and places abroad. Of the current transition economies, Brazil comes second only to China as the world’s largest holder of foreign direct investment with a stockpile of $30.8 billion as of 2000. This represents an increase of 273.6 percent from the 1996 figures when Brazil was taking the road to market reform. The UNCTAD World Investment Report 2000 thus listed Brazil among 20 countries all over the world that received the highest amounts of FDI then (Seabra & Flach, L, 2004). The report attributed this achievement to the improved macroeconomic environment in Brazil brought about by the structural changes undertaken by the government on the economy, primarily the trade liberalization program, privatization and a more flexible policy on the inflow and outflow of foreign capital. Such large holdings of FDI, however, may be eroded by any negative performance of the American and European economies. If a prolonged recession occurs in the US and Europe, the FDI in Brazil and other emerging markets will collapse and trigger a worldwide crisis. To avoid this scenario, the emerging economies need to sustain their economic growth by strengthening domestic demand instead of relying on exports. This would stimulate imports and help balance international trade. Aware of this risk, Brazil has positioned its services sector as the largest recipient of FDI, such that 78.6 percent of foreign investment goes to this economic sector, with only 19.4 percent channeled to the industrial sector. The reason is that most of the country’s industrial output is intended for export, while services cater to domestic needs. In 2000 following 9/11, the amount of FDI dropped considerably around the world but the reduction was minimal in BRIC (Rorenstein, 1993). Brazil for its part maintained the level of its FDI after it liberalized the entry and operation of foreign firms in information technology and lifted the restrictions on the outflow of capital. To attract FDI, the Brazilian central bank also simplified the registration process and reduced the administrative costs of investing in the country. III. Post-Communist Transition The success story of Hungary, Russia, Poland and China shows that former communist countries can create growth from the ruins and limitations of socialism. In Poland, a decentralized and comprehensive approach to the twin problems of bank and enterprise restructuring proved effective in transforming its economy and establishing the foundations for sustained economic growth. During the 1991-97 period, non-performing loans declined and the number of creditworthy enterprises rose substantially (Rorenstein, 1993). As for Russia, the largest post-communist transition economy of them all, it endeavored to establish strong fiscal and monetary controls as its bedrock of macroeconomic stability. These served as levers to check imbalances in public sector financing. Russia learned its lesson well from an earlier financial crisis when the unwieldy growth of soft loans skewed its market (Dunn, 2006). The non-collateralized loans had been liberally granted to state-owned enterprises that could not afford to pay them back. All the transition economies realized early the importance of privatization to dismantle the state monopolies that characterized the former communist countries. In Brazil, vital industries and services like oil, gas, telecommunications and postal service used to be under state monopolies. A series of constitutional amendments were taken up in 1995 and 1996 to do away with the distinctions in nationalized and foreign companies, thus effectively lifting the government stranglehold on these industries. Once the state was relieved of the burdensome monopolies, the gas, oil and telecommunications industries became competitive and engendered such giant firms as oil driller Petrobras, beer makers Skol and Brahma, telecom firms Embratil and Intelig, and beauty products maker Natura. IV. Role of Culture in Transition An interesting facet of the transition economies is the rise of globally oriented companies in their midst. This means that these previously regulated economies can engender multinationals of their own that are as competitive as the western-style MNCs. Their competitiveness is demonstrated by the profitable activities of several firms from the emerging economies in the mature markets of the US and Europe. Even Brazil, Poland and Russia have managed to create companies that are asserting their presence in the global market. The firms include the Polish petrochemical giant PKN Orlen and Telekomunikacja Polska. In Brazil, the automotive industry is now the 10th largest in the world after the transnational car markers saw the market potential and asserted their presence there (Doctor, 2001). It helped that the Brazilian government put up the Federal Auto Regime in 2002, which provided a financial incentive package to attract the automotive firms. The big car manufacturers now operating profitably in Brazil include GM, Ford, Volkswagen, Daimler Chrysler and Fiat. In 2000, over 1.68 million vehicles were sold in Brazil, with car production going up by an impressive 65 percent yearly. Internationalization has thus spurred an interest in academic research on the relationships between management systems and the social sciences. It is believed that personality traits, relationships, knowledge, gender, ethnocentrism, social and cultural factors and other psychological concepts influence business. In the Societal Effect (SE) approach, business processes like training, people at work, manufacturing, industrial relations and remuneration are considered as phenomena within a society (Burt, 2000). Thus, a strong culture can positively affect a firm’s economic performance, although there is no guarantee that such performance will be high. The difficult task of economic transition can be short-circuited by people’s resistance to change, which may result from such cultural factors as ideologies, values, ethnocentrism, group conformity, social and organizational norms (Kotter, 2002). People with certain types of beliefs and culture may find change very unsettling. They are those described as reliable, dependable, steady, habitual and process-oriented types. Under the “uncertainty avoidance” theory of Hofstede (1980), people resist change to avoid the uncertainties and risks that it could bring. Brazil overcame its people’s resistance to change by bringing about a culture that embraced foreign investment as a source of employment and as an instrument for modernizing the economy (Da Motta, 2004). V. South American Emergence Like most of the world’s transition economies, the South American countries led by Brazil had suffered a series of financial setbacks since the mid-1990s, which were mostly caused by external factors. Among these factors was the Russian financial crisis, which caused shock waves in both Europe and South America. In response, Brazil abandoned its peg on the real in 1999 and at the same time adopted an IT framework to implement its monetary policy. Brazil thus became the first country for which the IMF tailored monetary conditions to IT. This policy made an auspicious debut in Brazil when its exchange rate depreciated by only 48 percent, as compared to 79 percent previously. Inflation also settled down to 8.9 percent, far from the double-digit figure feared earlier. By 2000, the target inflation rate of 6 percent was reached although oil prices increased two years in a row. Based on its earlier achievements, Brazil is expected to pare down its debt-to-GDP ratio further because of timely adjustments in the exchange rate and the continuing policy of generating fiscal surpluses. The fiscal discipline now obtaining in Brazil is brought about by successful agreements forged among federal, state and local governments. These include the Fiscal Responsibility Law, which set limits on borrowing, increase flexibility in monetary policy and reduce social security spending. VI. Transnational Corporations: A Case Study MNCs internationalize in different ways, which may lead to faster or slower rates of market penetration. This internationalization process leads to a network of international market activities through foreign direct investment and other international business involvement. For this reason, MNCs play an important role in creating and stabilizing global growth. The experience of transnational firms shows that breaking into a transition market can be a slow and painstaking process. The giant retail multinational Wal-Mart, for example, had to sweat it out before making it in the Brazilian market. When Wal-Mart entered Brazil in 1995, sales turnover was lackluster as it found the same problem it encountered in Germany regarding the culture of local employees. It hardly opened a new branch until March 2004 when it acquired the Brazilian-owned Bompresco store chain for $300 million. With the Wal-Mart and Bompresco cultures combined, the retail chain grew by leaps and bounds to rise to third place among the top retail earners in the transition market. Now, the top five retail chains in Brazil are the locally owned Pao de Acucar with a yearly revenue of $12 billion, the French-run Carrefour ($10 billion), Wal-Mart ($5.2 billion), the Portuguese owned Sonae ($3.3 billion) and the Brazilian owned Sendas ($2.5 billion). Other studies of successful transnational firms reveal that when locating in a foreign market, they must consider the distinctive political, socio-economic, cultural and institutional systems of their target markets. The firm can achieve competitiveness by continuously improving its financial structure and profitability, reducing production costs and maintaining its image abroad. In its operation, it should embrace the values of the host country, and exert efforts to project good corporate citizenship. The most successful MNcs are those noted for their generosity in their host markets (Athanasiou & Nigh, 2000). VII. The Rise of BRIC In the 1980s, the surging tide was Japan. Now it’s Brazil, Russia, India and China or BRIC. They are turning out to be the new major contributors to global prosperity and stability. Altogether these four countries produce more goods and services than either North America or EU and also attract an enormous amount of FDI (Dunn, 2006). China’s manufacturing effort was given the big push by its low-cost labor advantage and homegrown national champions. China’s growth of over 9 percent for a decade has already surpassed Japan’s and is expected to overtake the US by 2040. Its voracious appetite for energy has fueled production and its cheap manufactured goods powered consumer spending around the globe. As for India, its growth into an economic powerhouse attracted less curiosity because it has always been a democracy from the start, such that it saw no need to cope with the challenges posed by economic transition. In Brazil, the improved performance of its exchange rate was brought about by the Real Plan, which was launched in 2004. This program was adopted in response to the three waves of depreciation cause by domestic and external factors, the Russian financial crisis, and the 2002 presidential elections. Unlike Argentina and most of Asia, however, the effects of these sudden waves of currency upheavals were less benign on Brazil’s households, corporations and financial institutions. Currency depreciation was contained because of foreign exchange hedging instruments provided by government in the form of dollar-denominated public debt and debt swaps, which were originally intended to stem speculative activities on the real (Bevilaqua & Loyo, 2003). The 2001 Report on the Observance of Standards and Code of the IMF affirmed that Brazil has attained high standards of fiscal management and transparency, with a “commendably broad” coverage of fiscal measures. It also found the mechanisms of internal and external controls well developed, putting Brazil at the forefront of countries using electronic means for the dissemination of fiscal statistics, legislations and administrative regulations on tax and budgetary matters, and for the delivery of government services. The result of all these were a reduction in public sector borrowing from 7 percent of GDP in 1995 to only 4.6 percent of GDP in 2002, an increase in surpluses from only 0.4 percent of GDP in 1995 to 3.9 percent in 2002, and the reduction of public debt from 567 billion reales in 1995 to 561 billion reales in 2002. Brazil achieved this feat by putting tax reforms high on the political agenda. It reduced the tax burden of citizens and corporations and set up one-stop shops for business registration that reduced business taxes and simplified paper work. The market reforms in Brazil were patterned after the UK model, which is popular in all OECD countries. Its main features are decentralization, privatization of state-owned industries, empowerment of the private sector, more autonomy, more public accountability, and the separation of policy making from execution (Pereira, 2003). Bibliography: Athanassiou, N. & Nigh, D. 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