Analysis of BRIC Countries - Essay Example

Analysis of BRIC countries Brazil, Russia, India and China are some of the fastest growing economies in the world. The rapid change in these economies is attributed to the adoption of strategic policies by the respective governments to stimulate growth. Liberalisation of rules for trade, export and investment are some of the major reason for the success of these nations that continue to sustain growth and overthrow the rankings of reigning economic superpowers. It may be noted that the realisation that the economy lags behind has paved way for massive restructuring. Analysis of Brazilian economy The economy of Brazil is growing despite being the most populated country in South America. The availability of abundant natural resources and growing mining, agriculture, manufacturing and service industries has taken the economy of Brazil to highest ranks among South American nations and has gained a commendable position in world economy. The fall in real wages during the period 2001 to 2003 slowed the economic growth of Brazil to 2.2 percent per year. Subsequently, it was affected by several internal and global economic crises. But the economy did not collapse because Brazilian economy has a strong foundation built by the economic programs and policies instituted by President Cardosa and taken forward by President Lula Da Silva. The Brazilian economy is undergoing a steady growth and development since 2004 that has given rise to the rate of employment and real wages. The economic system operates using floating exchange rate, adopts compressed fiscal policy and keeps the inflation rate on check. The Brazilian currency underwent a sharp depreciation which in turn resulted in extreme adjustment in current account during the period 2003 to 2006. Following this situation there was trade surpluses and the surplus agricultural production lead to increase in the rate of exports. However, Brazilian economy has certain weaknesses. The economy is mostly associated to debts. The rate of debts has increased during the period 1994 to 2003. The rise in debt was controlled in 2006 with the introduction of economic programs to increase public investment and control taxes. The current GDP of Brazil is 1.6 trillion with a real growth rate of GDP at 3.7 percent. The inflation is 3 percent and the rate of unemployment is 9.6 percent. Agricultural products that contribute to the economy are wheat, coffee, rice and sugarcane. Major industries include aircraft, textiles, chemicals, steel, shoes, motor vehicles, etc. (Brazil Economy) Official figures indicate that the GDP of Brazil has undergone a rapid growth in the first three months of 2010 compared to its economic performance in the past 14 years. The GDP increased to 9 percent compared to its GDP in the same period, the previous year. Brazil is the eighth biggest economy in the world. According to the government, specific growth sectors are industry and agriculture. Domestic consumer demand is the driving force for Brazil’s economy than its exports. This is due to the debt crisis in Europe and the slow recovery of economy in the United States (Brazil sees economy surge by 9% 2010). The success of Brazilian economy is evident in the betterment of the standard of living of its people. Small time entrepreneurs have had enormous successes and have moved up the social ladder to the increasingly affluent Brazilian middle class. The reason behind the success is the availability of government loans and the booming economy. The economy of Brazil was once hobbled due to its susceptibility to worldwide crises and high inflation. However, the vibrant consumer market, vast foreign reserves, a growing agricultural sector that is set to surpass the United States as the most productive nation around the world and the sovereign debt receiving an investment grade status has changed the economy. The 1.3 trillion economy of Brazil is bigger than the economy of Russia and India and the per capita income is twice than that of China. Latest discoveries by the state owned oil companies is set to make the nation one of the biggest crude oil producers in the world. An unwieldy red tape and bureaucracy has not deteriorated the foreign investment which in 2008 stood at $45 billion which is three times more than what it was ten years ago. Social scientists and economists opine that the booking trade based economy and new government programs are changing the lives of poor people and changing the old Brazilian perception that a person born poor would definitely die poor. The Chief Economist of Brazil, Marcelo Neri claims that the country generates inclusive growth at a rate at which no other nation can because of the scale of the country and extend of inequality. The reason behind the upliftment of the poor is attributed to a middle path strategy followed by the government wherein the norms of the market is closely adhered while maintaining a very active social policy. A commodity boom that started in 2002 has stimulated a strong economic growth and reduced poverty in Latin American nations. Mr.Neri also claims that the economy has had a solid progress since 2003 because the government created more than 8.5 million jobs by instituting programs and policies like low interest credit for new home buyers, food support for poor families and small business owners. The change is tangible to most of the people in Brazil: people who lived in poor circumstance all their life now own objects like computer and car and are optimistic about passing on a better life to their children (Forero, J. 2010). Analysis of Russian economy The economy of Russia has undergone extensive changes after the break up of the Soviet Union: a transition from a socialist structure that was state controlled to a market based target with an internationally integrated economy. The success of the economy is attributed to the privatization of most of the industries and some of the defense and energy related sectors as a part of the economic reforms of the 1990’s. The reliance of Russian economy on commodity exports affected the country badly during the 2008 global economic crisis. The emergence of the Russian middle class is attributed to the 7% growth of its economy after the 1998 crisis. Eventhough the economy was worst hit during the crisis, signs of recovery was clear during the second half of 2009. The recovery is mainly due to rising commodity and oil prices and the rescue package of the government worth $200 billion that increased liquidity in the financial institutions and banks. In 2009, the official GDP rate of Russia was $1.255 trillion. The unemployment rate increased from 6.5% in 2008 to 8.9 % in 2009 (Russia Economy). In 2008, Prime Minister, Vladimir Putin announced an economic stimulus package to guide the economy to revamp successfully from the global economic meltdown to a better economic future. Russia’s economic stimulus package was announced by Prime Minister Vladimir Putin in November 2008. Prime Minister Putin had assured that the stimulus package would be successful in guiding the nation through global economic crisis to a better economic future.  Other than the $200 billion stimulus package several other fiscal measures were undertaken to increase disposable income for business houses and consumers that would increase consumer spending. The economic stimulus package reduced the profit tax to 20 percent from 24 percent that permitted funds for investments. Foreign exchange earnings of Russia are mainly from gold and oil reserves that are extensive enough to tide over the global economic meltdown. Alexei Kudrin, the finance minister points out that the national budget is expected to be 1 % of GDP. However, it may be noted that the stimulus package would be handy to revamp the economy. The economic records of Russia during November 2008 indicated that the economy grew at a rate of 7.5 percent annually but was projected to fall by one percent (to reach 6.5 percent) and further fall to 3.5 percent. Job losses, production cutbacks and pay cuts loomed large in the various sections of the economy. It is not unusual to see a 50% reduction in production during financial crisis that also had a say on employee payment that were reduced at a rate of 1.5 percent to 10 percent. The economic crisis further worsened with the reduction in lending rates of banks and the lack of liquidity that diminished the rate of consumer spending. Export revenue earners for Russia are metals and oil. Mineral contributes 80% of export earnings. A change in international demands for these products can affect the foreign revenues to a great extent. The fall in global oil prices has negatively affected Russia. Rise in social security expenses together with a decrease in export revenue has reduced the Russian foreign exchange reserves to $460 billion from $590 billion. The money market behaviour is now controlled by various rubles trading measures by the Russian Central Bank which is an important step towards strengthening the economic stimulus package (Russia Economic Stimulus Package). Russia was bankrupt when Vladimir Putin took over as the President and the nation owed huge amounts to the IMF an amount more than the nation’s foreign currency reserves. Under the leadership of President Putin, the economy has attained a macroeconomic revolution to an extent that Russia is one among the largest creditors of the United States debt. The nominal dollar GDP improved more than one sixth and there is a prospective to reach above $2 trillion by 2010. This extensive growth is also likely to equate to a ten fold rise in GDP in the following decade. The ambitious economy revival plan of 2009 undertaken by the Ministry of Economic Trade and Development has outlined the goals till the year 2020. In case Russia achieves these goals it would emerge as the largest European economy and the fifth largest around the globe following the U.S., China, India and Japan. Factors that matter the sustainability of the present growth trend Some of the factors that may constraint the growth of the Russian government policies: the extent of corruption is likely to tax economic expansion, the leadership’s analysis of trade-off regarding investment in infrastructure modernization, military modernization and expanding social welfare demands and the question whether the distribution and development of the extensive energy resources is stimulated by commercial or political factors (Economic Change in Russia). Analysis of Indian economy India has registered unprecedented levels of growth and expansion due to the labour intensive economy and cost effectiveness. India has benefited extensively from work outsourcing from developed nations and also with the strong export oriented industrial and manufacturing framework. The momentum in the economy after the crisis has revived the international commodity prices after hitting very low levels and has boosted global trade with a healthy and steady growth. Problems in the economy due to global economic meltdown The global economic crisis hit India in the latter part of the meltdown and resulted in a sharp fall in the real economic growth due to the reduction in export, corporate restructuring and lower capital outflow. Slow economic growth is expected to continue in the short term because the outcome of stimulus package is not evident and tax cuts are continuing to improve the situation through the year 2010. The availability of adequate liquidity in the market offers capital to corporate credit markets that suffice the credit requirements of large corporations (Indian Economy Overview). Stimulus package was introduced into the Indian economy in December 2008 to relieve the negative impact of financial crisis. A stimulus package worth $4 billion to revive the economy from recession also had a major positive impact. Reductions in interest rates by the Reserve Bank of India coupled with increase in government expenditure were promoted to increase aggregate demand. Other programs to boost the economy were the provision of incentives to infuse optimism among industrialists and investors. Incentive schemes included a $70 million economic stimulus package to increase exports. Specific measures were taken to increase the export of labour intensive products like handicrafts and textiles to speed up the retrieval process. The government also reduced home loan lending rates for middle and low income segments. Small and medium businesses were given tax holidays and tax exemptions. Value added tax was cut at varying levels for a range of products to increase the rate of spending. A 6.5% reduction was made by the Reserve Bank of India on all its lending and the borrowing rate was decreased to 5 %. The government also provided a 4% reduction to CENVAT (Central Value added tax) that reduced the price of textiles, cars and cement. Petroleum products received a 10 percent reduction resulting in a significant recovery of the Indian economy. Customs duty on naphtha a product required by the power industry was completely revoked. Duty on iron ore export was removed and tax on iron lump export was cut to 5% from 15%. A ten point stimulus package policies designed by Prime Minister Manmohan Singh is aimed to revive badly hit sectors like automobiles, housing, medium and small industries and power. It is noted by Deputy Chairman of Planning Commission, Mr.Montek Singh Ahluwalila that the ten point policy would force manufacturers to function in a competitive circumstance and transfer the advantages to end users (Indian economic stimulus package). Analysis of Chinese economy The economy has China has surpassed the economy of Japan which was the second largest in the world. This is an anticipated milestone from a nation that started market reform thirty years ago. Though China’s economy underwent a slow growth due to several expansion programs, economists expect that the nation will maintain high growth rate due to continuous urbanization. Chinese economy embraced reforms since 1978 by gradually setting apart state control and by adopting a manufacturing and export policy. Presently, the demand of China for raw materials and energy dictates the international supply and demand. Another reason for economic success is China’s massive holdings of debt and foreign reserves; its international clout has advanced to new heights and the Chinese currency is maintained at a cheap rate to stimulate the trade sector. The ascendance of the Chinese economy is largely influenced due to the size of the nation. The population that stands around 1.3 billion has contributed to build the number one automobile market and large scale export. However, there is a paradox that a good percent of the Chinese population is still poor when compared to standard of living of people from other economies. The future requires China to reform economic policies and encourage more domestic consumption than foreign demand. Another drawback is the threat of environmental catastrophe which can derail its development spree. The emergence of China to number two position in the world in terms of economy is likely to shift attention from the intricate work ahead to continue its GDP growth rate (Pierson & Hall 2010). The economic success is mainly due to the liberalisation of economy. China adopted gradual liberalisation of prices, increased autonomy of state owned firms, allowed fiscal decentralisation and laid the foundation for a diversified banking system, opened up foreign trade and investment resulting in the advancement of stock market and a growth in the non-state sector. China revalued its currency by 2.1 percent against the American dollar in 2005 and adopted an exchange rate system with reference to a number of currencies. Economic restructuring and the resulting efficiency has increased the GDP by tenfold since 1978. Some of the challenges facing the development of Chinese economy are (i) reduction in high domestic savings rate due to less domestic demand as a resulted of increase in corporate transfers and increased social safety, (ii) continue employment rate for millions of migrants and new additions in the work force (iii) decrease the rate of corruption and related economic crimes and (iv) avoid environmental damage (Central Intelligence Agency). It may be concluded that the success of BRIC nations is due to strategic economic policies and programs from the respective governments to boost the economy through the provision of liquidity, liberalisation of policies, promotion of export, and liberalisation of norms for foreign investment and maintain the enthusiasm levels of corporates even during times of financial crisis. The change in these nations is of importance because it dictates changes in the global market, currency, demand and supply of raw materials and revenue. 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Pierson, D. & Hall, K. 2010 Chinas economy passes Japans as worlds second-largest Available: http://articles.latimes.com/2010/aug/17/business/la-fi-china-econ-20100817/2. Retrieved on October 3, 2010. Russia Economy Available: http://www.economywatch.com/world_economy/russia/. Retrieved on October 3, 2010. Russia Economic Stimulus Package Available : http://www.economywatch.com/economic-stimulus-package/russia.html. Retrieved on October 3, 2010. Read More