Brazil as an Emerging Market Economy - Case Study Example

A STUDY OF BRAZIL AS AN EMERGING MARKET ECONOMY By Location Study of Brazil as an emerging market economy Introduction Emerging markets refer to underdeveloped countries which are going through the development process. They are mostly faced with various challenges including insufficient resources to spearhead development such as infrastructure. With the unpredictable political environment of these countries, investing in them is mostly a gamble due to unstable political environment. Various laws and policies governing these countries also determine the investments taking place since some laws restrict foreign investments in favour of local investors with the hope of helping develop local industries. However, such practices may work against the country itself since most of these emerging markets only have the labour, but lack technology and skilled labour required for development. Therefore, foreign investment is necessary to boost development in these economies. Moreover, the religious beliefs of the majority of the population may also affect the development of the economy as it will affect and to some extend dictate the goods and services acceptable in that particular market. Therefore, emerging markets have much deterrent and advantageous factors that need to be considered before undertaking any investment in them. For any emerging market to develop, it has to overcome the various challenges it faces as an underdeveloped country. Industrial structure of Brazil Brazil is a South American nation that regained independence from the Portugal in 1822 after three centuries of colonial rule. The country is the most populated nation in South America with a population of 192 million people in the year 2011 (Brazil 2014, p. 1). The country is endowed with variety of natural resources which has aided in the country’s effort to develop through economic activities. Among the major challenges faced by Brazil is an income disparity. The country has a large population living under the country’s per capita income thus implying that there is a small proportion of the population that controls a large amount of income. Brazil engages in trade with other countries through imports and exports trade to facilitate growth of the economy. To emerge as a developing economy, Brazil has had to deal with inflation, high population and income disparity among other challenges. With liberalization came the adjustment in production and technology, which was reflected in many economies, but Brazil’s capital goods survived the revolution. In the year 2005, capital goods accounted for 12% of all value added in the manufacturing industry thus showing some stability of the capital goods compared to the 14% of 1996 ( Nassif 2008, p. 248). This shows a slight decline over a long period of time; nine years to be specific. Labour productivity is the indicator used to measure domestic performance of capital goods arrived at as the ratio between the value added and the number of workers. The increasing demand for Brazilian made goods has promoted exports from the country, thereby leading to, general economic growth of the country (Economy watch 2014, p. 1). The membership of the country in various economic organizations aided the country in recovering from the global crisis of 2008. Brazil is engaged in farming and manufacturing of various goods. It is the world’s largest producer of sugarcane, coffee, tropical fruits and frozen concentrated orange juice. To top it all, it has the largest herd of cattle in the world. Therefore the contribution of agriculture in the Brazilian economy cannot be disputed. Among other production activities the country is known for as being among the top list of world producers is the production of hydroelectric power. The abundance of oil in the country has also contributed to the emergence of the economy of Brazil. The banking industry in Brazil is also very strong as a result, it has attracted foreign investment in the industry. Without a doubt, Brazil is a rich country with many resources that are being and can be further exploited to help grow the economy of the country. Data from macro-economic indicators for Brazil One of the macro-economic indicators of economic growth is the balance of payment. This is the difference between the imports and the exports. A positive BOP implies that the country exports more than it imports while a negative BOP shows more imports than exports. The country has been recording increasing GDP over the past years with an 8.48% growth in 2004, 6.02% in 2005, 7.34% in 2006, 9.21% in 2007 and 7.46% in 2008 (Economy watch 2010, p.1). The reduction in percentage growth in 2008 can be attributed to the global economic recession experienced that time. However, this growth has come with increased dependence on imports by the country resulting to negative BOP. With growth in GDP come the technological challenge to sustain the economic growth in the economy. This is where the increased imports come in to facilitate the development process especially with the building of infrastructure including modern transport and communication facilities. Being a developing nation, brazil does not have all the necessary technology to develop thus the need to import; furthermore, impoertation of other necessary commodities is necessary. With increased importations come the decreasing balance of payment. The country has had a decline in the bop for the past ten years with the last figure in 2012 being a Bop of -2.41. This shows that the country has been importing more than it exports. Brazil BOP from the year 2000 to 2012 Available from: http://www.tradingeconomics.com/brazil/current-account-balance-percent-of-gdp-wb-data.html In the past, Brazil has managed to attract foreign investors with few direct investments in other countries. The trend is however changing with more Brazilian firms venturing into foreign investment with a preference in green field investment. Between the year 2002 and 2004, the country had 84 Greenfield investments with only 19 cross border mergers and acquisition deals. Brazil dominates the Latin America and Caribbean region in foreign direct investment, attracting up to 491 projects in the year 2011 alone (FDI 2014, p.1). This is more than a third of the FDI in the two regions combined and is the highest growth in FDI ever experienced in any developing nation. This is a 38% growth within that period alone. Moreover, outward FDI is also noticeable from Brazil though not as much as the inward FDI. The country was able to invest in 81 projects in 2011which is an 11% growth in outward FDI, making it at the top of increased outwards investments in the region. The average rate of unemployment in Brazil between the year 2001 and 2014 is 8.5% (trading economics 2014, p. 1). This is an indication that the country has a low rate of unemployment, thus there is improvement in the living standards of the people brought about by having a source of income. The unemployment rate in Brazil has been decreasing steadily for the past 10 years as reflected in the line graph below. Available from: http://www.tradingeconomics.com/brazil/unemployment-rate This is an indication of a reduction in the number of those actively seeking a job as a percentage of the labour force. The rate of inflation and the interest rates of Brazil also affect the economic growth of Brazil. The two are directly related with the rise of inflation causing a rise in interest rates while decline of inflation leads to decline of interest rates. Available from: http://www.bbc.co.uk/news/business-11819681 The graph above shows a fluctuating rate of inflation in Brazil with a subsequent fluctuation in interest rates. The country uses interest rates to control inflation in that when there is rise of inflation, the country’s central bank raises rates of interest to discourage borrowing thereby decreasing rate of inflation in the country. With deflation, the interest rates are decreased to increase borrowing from commercial banks thereby reversing the deflation. Benefits and costs of various political and legal structures in emerging markets Most of the developing nations practice the theocratic form of government with the head of government having the final say in all affairs of the state. With this form of government, the freedom of the people is reduced significantly so that even economic activities of the country are affected. With this form of government, barely any foreign investment is experienced as investors are afraid of the possible sudden change of policies by the head of state thereby affecting the investors directly. Moreover, with this form of government, there are little steps made in the formulation of fiscal policies due to political interference by the head of state. Another form of government is the democratic government. The people participate directly in the management of state affairs through their elected representatives who work in the interest of their electorates. With the democratic government, the people can also take part major decision making through the popular vote. Through electing leaders democratically, the people are able to choose leaders who portray interest in policies that are beneficial to the country. The major interest of the electorates in emerging economies is to increase investment, decrease unemployment and inflation, while increasing the BOP of the country. Therefore, any candidate addressing these issues in their campaign strategies has high chances of winning. A good example of elected leaders who have moved the country to greater political heights is the Brazilian president Lulu. Politics plays a major role in the development of the Brazilian economy with government policies affecting the rate of investment in the country. It is during the reign of Lula as the president of Brazil when Brazil joined the rank of developing nation (Williams & Carrasco 2012 p. 103). During his campaign, Lulu managed to attract foreign investors through promising to honour contracts, protect private property, assert fiscal discipline as well as pay off debts. Giving the central bank more autonomy saw the development of financial policies by the central bank that focused on the economy of the country and soon interest rates were down to 6% after he took over as the president. Through his political influence, the president created ties with other developing countries, thereby accessing new markets for the Brazilian products, thus decreasing dependence on the developed countries for consumers of its goods. Thus, it is quite evident that the president has the best interest of the nation in mind and followed closely the footsteps of his predecessor, who also worked towards economic betterment of the country especially through reduction of interest rates. Moreover, the political climate of any given nation affects the growth of the economy. In most developing countries, elections are accompanied by a wave of violence that leads to mass destruction of property. This discourages investment in the country; however, if the outcome of the elections sees that focused on leaders are elected, the country will be ready for greater economic growth through good leadership. However, the election process may see popular leaders with no development agenda take office on the demise of development as electorates do not focus on the merits and competencies of their leaders. This may lead to the formation of policies that discourage both inward and outward foreign direct investment, thus causing a major challenge in the growth of the economy. With politics comes the private property protection and default on debt payment. Some governments have declined to recognize the debt obligations of its predecessors, leading to greater losses to investors. This relieves the public from financing the debts of the former government through the revenues collected, which tends to inflict a financial strain on the citizens. Such practices, however make investors lose trust in the government and shy away from investing in such countries, thereby decreasing investments in the country and as a result the effect of the government action has more negative effects than positive. Thus, this is not a preferred stand in an emerging economy as the negatives tend to over ride the positives. Some legal structures in the emerging markets also affect the economy of the market either directly or indirectly. Policies that require that firms in the country employ locals only affect the operation of both local and foreign investors. With most of the emerging markets having a large labour force, the majority of them do not have skills, thus the scope of operations they can undertake is limited. The requirement will help in decreasing unemployment in the country and raise the living standards of the country because these are some of the aspects that influence poverty levels. Though such policy benefits the people, it inhibits growth and development in the country, meaning that having inhibitions can serve as a barrier. Lack of technology transfer will see the country remain in technological darkness, thus blinding development in the country. Allowing the importation of skilled labour will enable transfer of technology, thus sparking a wave of economic growth with the foreign countries gaining more due to transfer of profits to the mother country by investors. Therefore, importation of skilled labour should be allowed, but only in cases where such expertise is not available locally. Protection of private property increases investment in a country thus increasing the GDP of the country. The down side of it is that it encourages disparity in income and ownership of property through the majority of the factors of production being owned by a few individuals who control these factors to generate income for themselves. This may lead to increased unemployment over the years due to increasing population while the factors of production are still under the control of a few wealthy individuals or their predecessors. To encourage equal distribution of income, the government can set the maximum factors of production to be controlled by a single individual. This will stimulate opening up of firms to new investors to avoid holding wealth beyond the stipulated limited by law and at the same time spreading the country’s income to the maximum population possible. The interference of religion in politics is also a factor in the development of the economies of emerging markets. The functioning of religious leaders as political leaders affect the running of a country with the religious beliefs imposed in the form of government. This serves to preserve the culture and religious beliefs of the majority of the people as there will be no clash of interest between the religious leaders and political leaders. The government is also able to help in conserving cultural practices of the people through policies that foster cultural preservation in the country. However, these practices affect the investment decisions of the country because this influences leaders to make more informed decisions. Investors with a different religious believe get a few chances in penetrating such markets, thereby limiting the investments possible in that country. There is also a barrier in the form of language that prevents investors from marketing their products in the specific market. The dominance of the religion and culture of the people in government will also lead to limiting the type of investments that can take place in the economy. For example a booming pork trade may be acceptable in an American economy, but in a Muslim country such trade is totally forbidden due to religious beliefs. Bibliography Brazil 2014, country profile. Available from: http://www.nationsonline.org/oneworld/brazil.htm [19 November 2014] Carascco E. R, Williams S 2012, emerging economies after global financial crisis: the case of brazil. Northwestern journal of international law and business, volume 33, issue 1. Economy watch 2010, Brazil economic structure. Available from : http://www.economywatch.com/world_economy/brazil/structure-of-economy.html [19 November 2014] FDI intelligence 2014, Brazil continues to dominate FDI in Latin America and Caribbean. Available from: http://www.fdiintelligence.com/index.php/Info/What-s-New/Press-releases/Brazil-continues-to-dominate-FDI-in-Latin-America-and-Caribbean [19 November 2014] Nassif A 2008, the structure and competitiveness of Brazilian capital goods industry. Cepal review 96. Plummer R, 2010, Brazils inflation hawk Henrique Meirelles bows out. BBC News. Available from: http://www.bbc.co.uk/news/business-11819681 [19 November 2014] Trading economics 2014, Brazil unemployment rate. Available from: http://www.tradingeconomics.com/brazil/unemployment-rate [19 November 2014] Read More