Brazil Leading the BRICs Case Solution

4. Will “Brazilian capitalism” sustain current GDP growth levels? Is Brazil the country of the future?

Brazil is the country with potential and scope for not only the locals but also for international investors. There are a lot of resources and opportunities where we find Brazil to be in a better position than an average world developing economy. It is regarded as an emerging market by lots of experts. For example, Goldman Sachs studies forecasted that it will be ranked among top 5 economies of the world by 2030. While looking at the macroeconomic variables, we observe that Brazil has shown extremely optimistic result in recent future. Except for 2009, the growth rate has been quite impressive in the past year showing a peak of 7.5% in year 2010. The trend in the stock market has also been impressive. As shown in exhibit 2, the stock index has increased from 4299 in 2009 to 69,301 in 2010. If we look at industry variables, there has increase in both industrial and petroleum production. The industrial figures have shown an increase of 15% from 2005 to 2010. The government has focused on private- public partnership and provided subsidized loan to firms representing different sectors such as Oil, bio fuel and food processing industry etc. through the government agency, BNDES. The government also helped firms in doing research in the agricultural industry resulting in higher yields and hence, a huge production in different products such as sugarcane etc. Export to different countries, especially china and US, has also shown an increase in recent years. The petroleum production has also increased 3 times in 2010 since 2000 (exhibit 2). Oil is one of most significant energy resource and surely, an important source of income for any country rich in resources. There has been a significant increase in discovered oil reserve in past few years. Estimated oil reserves in 2001 were 6,223 which increased to an estimated oil reserve of 13,200 in 2010.

The trends on developmental aspects have also been seen improving. The minimum wage was increased from less than $80 in 2003 to about $300 in 2010. Various non contributed pension programs were also initiated for elderly and retired people. Various programs were started to help people who were living their lives in extreme poverty. People living their lives under a certain level were given monthly compensations between $40 and $120 monthly. The aid depended on different factors such as the number of children etc in order to promote education and health. The grants they received were conditional on sending their children to schools and keeping their medical needs in check. People friendly policies like some of them mentioned above helped Brazil to move 30 million people from the lowest strata to middle class in the past decade. There has been a considerable amount of improvement in inequality index too. The Gini co-efficient has improved from 0.634 in 1990 to 0.539 in 2009 (EXHIBIT 6). Similarly, people living under the poverty line have decreased from 35% in 1992 to about 14% in 2008 (EXHIBIT 5).

While discussing Brazil, it will be necessary to highlight its role in multilateral negotiations regarding different cases for developing countries. It can be said that in case of ‘cotton dispute’, Brazil fought it case extremely well with US and WTO gave judgment in its favor. Similarly, Brazil has also taken the leading position in ‘Doha negotiations’ which were started to fight the case of developing countries with US and Europe. So, if it continues in this way, we may observe Brazil to emerge as one of new power in the international arena in coming years.

Though, we discuss lots of positive aspects of Brazilian economy there are several issues that need serious attention from government and, may harm Brazil’s growth prospects if not addressed in time. There are several factors that make Brazil not a very conducive place to do business. The interest rates normally are kept extremely high to contain inflation, but it makes its difficult for a potential investor to borrow money at preferable rates from any financial institution. Though, the government agency, BNDES, lends money to investors, it prefers firms that are already successful and established. Moreover, the public debt of 60% is also high, and government may find itself into a difficult situation to repay its interest payment at such a high rates. The road infrastructure crucial to transport agricultural products across the country and ports is not highly developed. The World Economic forum ranking put Brazil on 105^th number out of 139 countries at ‘quality of road index’. Though, government is trying to pay attention to this problem by announcing packages such as PAC to improve infrastructure, the work done has been unsatisfactory so far. Moreover, analysts assert that it is quite difficult to maintain Brazil’s growth at levels greater than 5% due to low saving rate and its cultural factors, and government need to push hard to achieve the target. However, as the growth figures shows, Brazil has been quite successful to maintain its growth rates above 4-5% level in the last decade. The education level in Brazil has also not been particularly convincing so far. Though, government has tried to improve the quality of elementary school system, the result has not been quite optimistic.

It can be calculated that, despite some of the shortcomings, Brazil has a full scope to transition to a developed country in coming years. The latest macroeconomic variables are giving optimistic picture. The current political leadership also seems to be serious in Brazil’s economic progress. Moreover, coming international events of summer Olympics in 2016 and Football World Cup in 2014 would be a golden opportunity to introduce foreign tourists to Brazil. By this, foreign investors can be encouraged to consider Brazil as one of the potential investment option. However, full commitment from the side of government and the continuity of sound policies is mandatory to road of success.

5. SWOT ANAYSIS

i. Strength

Brazil is the large country with the population of 193.5 million and, quite optimistic macroeconomic variables. Moreover, it is full of natural resources especially oil. In recent years, growth rates have been high with above 7% in 2010 (Exhibit 1 and 7). Export growth has been satisfactory too in the recent years mainly catering to large markets like China and US. As shown in exhibit 8, china is main importer of five out of twelve listed commodities. Political leadership looks serious in dealing with economic issues of the country. The country is democratic and economic views of leadership for some years have been consistent, encouraging private-public investment in different sectors. Brazil has recently risen as an important player at international level in recent years, involving itself in some of the core issues relating to developing countries. For example, it was among leading players in Doha round, urging developed countries to review its policies, which hurt an average developing country especially in the agricultural sector. Brazil has also proved to be a strong player by winning ‘cotton dispute’ against US firms, forcing them to negotiate on policies which were hurting Brazil cotton industry. Brazil is also actively trying to communicate with regional countries of South America through the organization Union of South American Nations (UNASUN). It is planning on regional co-operation in the future by forming a common parliament and/or common currency.