Economy of Brazil and Russia - Essay Example

10 November 2006 Economy of Brazil and Russia Introduction The economic situation in different nations is directly shaped by the macroeconomic policies instituted by their governments. It should be noted that even though some economists strongly prescribe the laissez-faire market which leaves no room for government intervention, the state still plays a huge role in manipulating the entire economy through the creation of policies. In fact, governments become primary economic actors which regulates the whole economy by policies geared in attracting more investments, facilitating the inflow and outflow of products and services, determining the value of local currency and others. This paper will focus on the economic performance of Russia and Brazil in the past three years. This paper is divided into two sections which look at Russia and Brazil individually. The main goal of this report is to answer two questions. First, whether the Russian and Brazilian governments have been successful in running their economies from 2003-2005. Secondly, it will conduct an identification and evaluation of the different policies implemented by both governments within the time frame and their effects on the overall economic performance. Brazil According to the United State's Center Intelligence Agency World Factbook, Brazil is the ninth largest economy in the world based on purchasing power parity. Recovering from its inflationary problem in the early 1990s, Brazil has now emerged as a stable economy owing from the Real Plan implemented since 1994 (Economy of Brazil 2006). In order to fully assess the economic performance of Brazil during the past three years, this paper will look at various economic indicators which include nominal GDP (Gross Domestic Product), GDP growth rate, per capita GDP, and inflation growth from 2003-2005. This paper will utilize the data provided by the International Monetary Fund (IMF). Figure 1. GDP (in billion Real) and GDP Growth (%) in Brazil (2003-2005) Figure 1 shows the GDP and GDP growth rate in Brazil from 2003-2005. During 2003, the country reports nominal GDP of 998.37 billion real. The following years further saw the improvement in production as GDP mount by 4.9% and 2.3 % in 2004 and 2005, respectively. All in all, the Brazilian economy recorded a 7.32% increase in GDP during the three year period. It should be noted that nominal GDP is in an upward trend, albeit at a decreasing rate. Figure 2. GDP per capita (Real) and Inflation (%) in Brazil (2003-2005) Figure 2 shows the GDPO per capita and inflation rate of Brazil in from 2003-2005. Consistent with the upward trend in nominal GDP, per capita GDP is also increasing at a decreasing rate. There is a huge drop in the growth of inflation rate from 2004-2005. However, the economy was not able to sustain the 2004 level. Inflation slightly mounted by 0.3% in 2005 relative to what is recorded in the previous year. Compared to the previous years, the Brazilian government has been highly successful in fostering economic growth. World Bank reports that the country "has succeeded in reducing poverty to some extent and stepping towards attaining the millennium goals" and "for the first time in three decades, Brazil is experiencing an internal and fiscal equilibrium and low inflation." These improvements has been directly attributed to the government's active role in alleviating the economic situation. The Organization for Economic Co-operation and Development (OECD) stresses that the development of the Brazilian economy in the past three years is a result of its notable macroeconomic policies including the inflation targeting model and the Fiscal Policy legislation. Economists refer to these policies as the "main institutional pillars for macroeconomic management and consolidation" (Economic Summary of Brazil 2005) in Brazil. The inflation targeting framework has been adopted by Brazil in 1999 after putting in place a floating exchange rate regime. This requires the Brazilian Central Bank to announce an inflation target and ensuring to absorb the shocks which can adversely affect the targeted rate (Bogdanski n.d.). The growth posted from 2003-2005 is partly attributed to this tight monetary policy. It should also be noted that the government's effort to curtail the effects of shocks in the economy in order to control inflation has been instrumental in making the inflation targeting framework efficient. The OECD notes that the Brazilian government has been swift in responding to inflationary pressures: "In a volatile macroeconomic environment, the monetary authorities have been successful in communicating to markets their policy response to adverse shocks, consisting of accommodating the first-round effects of these shocks, while acting to mitigate their secondary effects on prices and economic activity" (Economic Summary of Brazil 2005). The Fiscal Responsibility Law (FRL) is implemented in the Brazilian economy in the early 2000s. On the revenue side, the FRL mandates "the withholding of discretionary federal transfers to the states and municipalities that do not collect effectively their own taxes" (Mello 2005) as well as "the publication of the impact of the tax exemptions on the budget, when the exemptions take effect and in to subsequent budgets" (Mello 2005). On expenditure side, the FRL bans "the creation of new spending mandates without a corresponding increase in permanent revenue or reduction in other permanent spending commitments" (Mello 2005). The fiscal policy is seen to be instrumental in creating a more developed economy through the reduction in public debt ratio. The past three years also saw the Brazilian government's effort to boost the economy and to transform it from being state-dominated to market-controlled. The Congress has approved several amendments to open the economy to the private sector and attract foreign investors. Thus, Brazil launched a privatization program which included the sale of state-owned steel and communication firms (Economy of Brazil 2006). Russia Currently, the Russian economy is still in the transition phase from a communist to a more open economy (Economy of Russia 2006). Through these efforts, the Russian government has taken an active role in managing the transition by its implementation of various macroeconomic policies. Like Brazil, this paper will asses the economic performance of Russia by looking at its economic indicators like GDP, GDP growth, GDP per capita, and inflation growth rate. Figure 3. GDP (in billion Ruble) and GDP Growth (%) in Russia (2003-2005) Figure 3 shows the GDP and GDP growth rate in Russia during the three-year period. Nominally, the GDP has increased from the 2003 level of 15,826.87 billion ruble to 18,052.25 billion ruble in 2005. Looking at the growth rate, it becomes apparent that GDP has been growing at a slow pace. Figure 2. GDP per capita (Real) and Inflation (%) in Brazil (2003-2005) Despite the slower growth in nominal GDP, per capita GDP shows significant increase from 2003-2005. It should be noted that the growth in per capita GDP is faster than the recorded growth in nominal GDP. In the case of inflation, the country is still posting double digit growth. It can be seen that the country has impressively curtailed inflation in 2004 but has increased again in 2005. Overall, the World Bank reports that Russia's economy has been in an upturn since 2003 because of the stabilization in the prices of major commodities like oil and gas. This is coupled by the strengthening of exports which further boosts the economic performance of Russia. It should be noted that the recent economic expansion is also facilitated by the modernization and productivity growth of other sectors aside from oil in gas. The World Bank (2006) documents the improvement in Russia: "The positive recent trends in GDP growth, investment, budgetary surpluses, and poverty reduction have continued in 2004. According to official estimates, GDP, fixed capital investment, and disposable income grew by 7.1, 10.9 and 7.8 percent in 2004, respectively, while the estimated poverty headcount fell for the first time below 20%." The economic development in Russia can be traced to the successful implementation of macroeconomic policies. The country has been pushing for a stabilization policy which focuses on controlling nominal exchange rates. It should be noted that in contrast with Brazil, Russian Central Bank maintains a high degree of exchange rate stability, "while still allowing the ruble to move gradually against the dollar or Euro based market pressures" (Russian Economic Report 2005). In the fiscal side, Russia is seen to have a budget surplus. This is brought about by the higher than expected level of revenue from the hike in oil prices. However, it should be noted that the significant mount revenue did not motivate the country to prop up its spending. Government expenditures for the past three years were still 16-18% of the country's total GDP (Russian Economic Report 2005). Instead, the Russian government seeks to put in place a reduction in value-added tax. This is seen as the state's attempt to channel the government surplus to the private sector and business. This is expected to further increase the disposable income of household while encouraging operation in the business sector. References Bogdanski, J 2006, Implementing Inflation Targeting in Brazil, Retrieved 10 November 2006, from http://www.brasilemb.org/profile_brazil/bogdanski.pdf Economy of Brazil, 2006, Retrieved 10 November 2006, from http://en.wikipedia.org/wiki/Economy_of_Brazil Economy of Russia, 2006, Retrieved 10 November 2006, from http://en.wikipedia.org/wiki/Economy_of_Russia Mello, L 2006, Fiscal Adjustment and Fiscal Responsibility Legislation: The Case of Brazil, Retrieved 10 November 2006, from http://siteresources.worldbank.org/INTMF/Resources/339747- 1105651852282/deMello.pdf Organisation for Economic Cooperation and Development, 2005, Economic Survey of Brazil, Retrieved 10 November 2006, from http://www.oecd.org/document/52/0,2340,en_2649_201185_34415156_1_1_1_1, 00.html Russian Economic Report, 2006, Retrieved 10 November 2006, from http://siteresources.worldbank.org/INTRUSSIANFEDERATION/Resources/RER 1_eng.pdf World Bank 2006, Russian Federation: Country Brief 2006, Retrieved 10 November 2006, from http://web.worldbank.org/WBSITE/EXTERNAL/ COUNTRIES/ECAEXT/RUSSIANFEDERATIONEXTN/0,,contentMDK:20565 202menuPK:517666pagePK:1497618piPK:217854theSitePK:305600,00.ht ml Read More