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Q1) Map the proposed sequence of evolution of the economy of the BRICS. What indicators might companies monitor to guide their investment and organize their local market operations?
In 2001 the Goldman Sachs global economic team in their paper ‘Dreaming with BRICs: The Path to 2050’ developed the BRIC theory that groups together the economies of Brazil, Russia, India and China (BRICs). These countries look set to become the dominant economies by 2050.
The BRICS have experienced a lot of changes in their economies. Around the middle of the 20th century China witnessed its communist revolution, India became independent, Brazil was controlled by the military for 21 years and Russia came out of the Second World War as a major rival to the US. This was just the starting point for the BRIC economies.
During the financial crisis, Brazil remained very strong and its early recovery, including 2010 growth of 7.5%, has contributed to the country’s transition from a regional to a global power. (www.traveldocs.com) The economy is the world’s eighth-largest and is expected to rise to fifth within the next several years.
Brazil is classified as an upper-middle-income country with a GDP (Gross Domestic Product) of â‚¬973 billion. During the administration of former President Lula, surging exports, economic growth and social programs helped lift tens of millions of Brazilians out of poverty.
For the first time, a majority of Brazilians are now middle-class, and domestic consumption has become an important driver of Brazilian growth. The economy of Brazil is characterised by large well developed agricultural, mining, manufacturing sectors and service sectors. The services sector takes the biggest share of their economy (66% of GDP), supplying services for the domestic economy mainly.
Brazil has enjoyed sustained economic growth since the year 2004, which has increased the rate of employment and real wages. After an economic growth in 2007 and 2008, the global financial crisis finally hit Brazil however Brazil was one of the first emerging markets to stage a recovery, with GDP growth returning to positive levels.
Brazil is becoming a global power like the other BRIC nations. There are a number of reasons for this. Brazil is involved in major manufacturing industries such as aerospace, bio-ethanol and auto-motives. Since 2004, a more outward look policy has been implemented by the government, promoting exports and fostering technological development to increase international competitiveness.
In 2008, additional tax incentives for investment, R&D and exports were introduced. Since 2003, Brazil has made progress towards putting in place the foundations for growth, with particular emphasis on achieving economic stability. Stabilisation has paid off: inflation has fallen and some progress has been made on reducing the public debt.
However, stabilisation has come at a high price. Real GDP growth has averaged only 2.7% since 2003, with the adjustment explaining in part why actual growth rates were lower than the rate of 3.7% used in our BRICs studies.
The future for Brazil will be very interesting to see. According to Goldman Sachs, over the next 50 years, Brazil’s GDP growth rate averages 3.6%. The size of Brazil’s economy overtakes Italy by 2025, France by 2031 and the UK and Germany by 2036.
According to Sachs, Brazil will remain an important destination for fixed income, equities and direct foreign investment inflows, because of the high carry trade, the value of the embedded option on growth, and its sound macroeconomic policies and external credit fundamentals.
Brazil is generally open to and encourages foreign investment. It is the largest recipient of foreign direct investment (FDI) in Latin America, and the United States is traditionally the top foreign investor in Brazil.
Since domestic savings are not sufficient to sustain long-term high growth rates, Brazil must continue to attract FDI, especially as the government plans to invest billions of dollars in off-shore oil, nuclear power, and other infrastructure sectors over the next few years.
The major international athletic competitions that Brazil will host every year until the 2016 Rio Olympics are also leading the government to invest in roads, airports, sports facilities, and other areas.
Russia is currently the 6th largest economy in the world in terms of purchasing power. They are the world’s 2nd largest oil producing country with up to 14% of world proved oil in reserves and 36% of world gas reserves. A lot has happened in Russia in the last 10 to 20 years. The Russian economy underwent tremendous stress in the 1990s as it moved from a centrally planned economy to a free market system.
Difficulties in implementing fiscal reforms aimed at raising government revenues and a dependence on short-term borrowing to finance budget deficits led to a serious financial crisis in 1998. Lower prices for Russia’s major export earners (oil and minerals) and a loss of investor confidence due to the Asian financial crisis exacerbated financial problems.
The result was a rapid and steep decline (60%) in the value of the ruble, flight of foreign investment, delayed payments on sovereign and private debts, a breakdown of commercial transactions through the banking system, and the threat of runaway inflation.
With oil prices low and the economy in a deep recession, the government was unable to collect taxes to cover its large expenditure commitments. The government embarked on a rapid privatisation of state-owned assets, in a struggle for control of the most valuable assets. After the collapse of the USSR in 1991, the world community supported a plan of economic reform.
However in 1992 Russia became plagued with serious poverty and political conflict. This hampered their efforts for global reform. Despite all the pitfalls, there has been significant growth in their economy in recent years.
In fact the Russian economy has been booming in the past decade Russian GDP growth exceeded 8% in 2007; even in 2008, when the global financial turmoil started to bite, GDP growth still reached 5.6%. During the past five years, real GDP increased by more than 40%. 2010 saw Russia’s economy return to growth with a 3.8% increase in GDP.
Russia’s Economic Development Ministry predicts that the nation’s GDP will grow 4.2% in 2011. In 2007, a new long-term development programme and a new industrial policy, respectively, was launched, aiming at the diversification of the production structure towards (high-tech) manufacturing by improving the investment climate, promoting ‘public private partnership’ and investing more in infrastructure.
From essentially a government led and government controlled economy to something of a more free market base and international trading economy was the starting point towards the Russian economy which we see today. Russia is now an emerging market worthy of the same breath as the other BRIC nations.
The success in Russia can be seen through companies investing here. Examples of Russian investments include Novartis who have committed $500 million to be invested over a 5 year period. The centrepiece of this agreement is the creation of a manufacturing plant in St. Petersburg.
Foreign direct investment (FDI) in 2009 fell to less than $40 billion after reaching an all-time high of $75 billion in 2008. Much of the FDI in recent years was Russian capital. Moreover, although the annual flow of FDI into Russia was in line with those of China, India, and Brazil, Russia’s per capita cumulative FDI lagged far behind such countries as Hungary, Poland, and the Czech Republic.
Most foreign mergers and acquisitions in 2009 were in the politically sensitive energy sector, largely because of the huge capital requirements required relative to other sectors. By the end of 2010, analysts predicted that the total FDI for the year would again top $40 billion, but not reach the levels seen in 2008. (Bureau of European and Eurasian Affairs, 2011)
India has fared the global financial crisis remarkably well. Despite the 2008-2009 downturn, the government expects the annual GDP growth to return to around 9%. India’s population is estimated at more than 1.1 billion and is growing at 1.55% a year. It has the world’s 12th largest economy–and the third largest in Asia behind Japan and China–with total GDP in 2008 of around $1.21 trillion ($1,210 billion). Services, industry, and agriculture account for 54%, 29%, and 18% of GDP.
Since 2003, India has been one of the fastest major growing economies in the world. Its economic development is essentially service-led, supported by exports of services (especially IT-enabled services); manufacturing exports are relatively small and are concentrated on a few sectors only.
India is capitalizing on its large numbers of well-educated people skilled in the English language to become a major exporter of software services and software workers, but more than half of the population depends on agriculture for its livelihood. India continues to move forward with economic reforms that began in 1991.
Reforms include foreign investment and exchange regimes, industrial decontrol, reductions in tariffs and other trade barriers, opening and modernization of the financial sector, significant adjustments in government monetary and fiscal policies, and more safeguards for intellectual property rights.
The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percent. India achieved 9.6% GDP growth in 2006, 9.0% in 2007, and 6.6% in 2008, significantly expanding manufactures through late 2008.
Growth for the fiscal year ending March 31, 2009 was initially expected to be between 8.5-9.0%, but has been revised downward by a number of economists to 7.0% or less because of the financial crisis and resulting global economic slowdown. However economic growth is hampered by inadequate infrastructure, bureaucracy, corruption, low wages, regulatory and foreign investment controls.
India could become the world’s third largest economy by purchasing power parity (PPP), overtaking Japan in 2012. This would be almost 20 years ahead of Goldman Sachs’ projection of 2032 in its BRIC (Brazil, Russia, India, China) report.
India is also expected to grow faster than China after 2020. China, which was projected to become the world’s largest economy by 2041, now looks set to achieve the distinction sometime around 2020.
Foreign investment is particularly sought after in power generation, telecommunications, ports, roads, petroleum exploration/processing, and mining. India’s external debt was nearly $230 billion by the end of 2008, up from $126 billion in 2005-2006.
Foreign assistance was approximately $3 billion in 2006-2007, with the United States providing about $126 million in development assistance. The World Bank plans to double aid to India to almost $3 billion a year, with focus on infrastructure, education, health, and rural livelihoods.
China is seen as the most continuous civilisation in history, not just in terms of politics but also in terms of cultural continuity. The country has a tragic history marked by economic decline, political instability, military humiliation and social regression. China was seen as an economic disaster.
This is not only due to the Civil War and Japanese invasion but also due to the plans of the Cultural Revolution. Between the end of the 18th century and the 1960s, China’s GDP fell from nearly one third of the world’s GDP to less than 5% and only managed to recover in the 2000’s.
Between 1976 and 2004, China achieved an average GDP growth rate of 9.6%. No other country has experienced such a rapid increase in living standards and working conditions. (Overholt, 2005) Now we have a China that supports economic reform and a China that joins the IMF (International Monetary Fund), World Bank and WTO (World Trade Organisation). But more importantly we have a China that believes in political stability, free trade and free investment.
The success of China can be associated with liberalisation and globalisation. In 2004 international trade accounted for 70 percent of China’s GDP, as compared with 24 percent for Japan. China’s economic development is driven by manufacturing exports and by investments. (Including infrastructure) Foreign Direct Investment plays an important role, especially for exports. Recently outward FDI, mainly to secure raw materials, has been increasing.
Although generating fast growth for over 30 years, the Chinese economic system has come under criticism recently because of rising income inequalities, rapidly increasing energy demands and external imbalances. (O Regan & Herciu, 2010) China has also established competition as a very important economic practice. (Failoa, 2009) By incorporating local brands into Chinese local culture it has given China a competitive advantage over countries that are less educated.
Education is very important in a nation’s competitive advantage. It is easier to start operations in a nation with a trained workforce, than in nations where time-consuming and costly training is necessary. China has had great success in promoting first, second and third level education. In fact it is the success of China that is influencing its neighbors like India.
India has learned from China the advantages of a more economy open economy. Chinese growth has brought American companies new markets. Their booming economy has attracted firms from Europe, North America, and Asia that are eager to sell their products to the country’s 1.2 billion resident. (Griffin and Pustay, 2005)
Like the other BRIC nations, China also faces challenges for the future. In order for China to continue to be recognized internationally as a global power it must reform its areas on human rights. It must also continue to reform state run enterprises. Currently China’s banking system is the worst in the world. Other than that the future of globalization for China is looking very bright. As Napoleon Bonaparte once said 200 years ago “let China sleep, for when she wakes, she will shake the world.” (Wolf, 2006).
These large emerging economies are playing a huge role in the world economy. The BRICS economies are on the verge of the rapid growth of their consumer markets. (Experience indicates that consumer demand takes off when GNI per capita reaches levels between $3,000 and $10,000 per year.) In Russia there is already significant evidence of the growth of consumerism during the past decade.
There are also early signs of similar trends in China and India, where the growth of their middle classes is very rapid. It is expected that within a decade or so, each of the BRICs will show higher returns, increased demand for capital, and stronger national currencies. Rising incomes in the BRICs nations will create a new middle consumer class.
Growth in the middle class will be led by China, where number of people entering the middle class is accepted to peak during this decade. Meanwhile, middle class growth in India will accelerate throughout this decade. As China and India are the world’s two most populous countries, rising incomes there will have much greater impact on global demand than any other countries could.
Other BRICs (and other emerging markets) will also see a rising middle class in the next decade, and should also see a rising upper class. With the explosion of the middle classes, spending patterns are likely to change.
Thus, foreign firms will want to monitor major economic indicators such as GNI (Gross National Income), PPP (Purchasing Power Parity), and the Human Development Index, as well as developments in the cultural, political, and legal environments of those nations in order to guide their investments and organise their local market operations.
Q2) What are the implications of the emergence of the BRICs to careers and companies in your country?
The implications of the emergence of the BRICs to careers and companies can be analysed by looking at the opportunities and threats for Ireland. In the last year, Ireland like many other countries has been affected by the global economic crisis.
The emergence of the BRIC countries can offer huge benefits for Ireland and the BRIC countries can gain a lot by interacting with Ireland. Research shows that the BRIC countries struggle with innovation due to shortages of human capital, limited access to the latest technology, and limited access to capital.
These disadvantages can be overcome by the BRICs interacting with countries that do have access to an innovative and highly skilled work-force, lime Ireland. During this time of global financial turmoil, emerging markets will be the main driver of economic growth in future years. Currently the BRIC nations offer some of the most exciting investment opportunities in the world.
However, according to figures from the Central Statistics Office, from January 2008 to Oct 2010, the share of Irish trade with the BRICs constituted less that 4% of our overall external trade. (Central Statistics Office) Yet, in terms of potential growth and income, the BRICs represent an opportunity for Ireland.
Ireland has a solid reputation for being ‘business friendly’ to foreign investors as it seeks to attract investment to create jobs.
Ireland has the potential to further grow our existing key markets in high-growth and high-potential markets, such as Brazil, Russia, India and China.
Key strengths for Ireland include our strong entrepreneurial culture, an educated and highly skilled workforce, a favourable taxation regime, EU membership, our track record in attracting FDI, our strong indigenous sector, and our reputation as a premium tourist destination. Key challenges are in the areas of cost competitiveness, access, transport links, telecommunications infrastructure and banking links.
The BRIC group of countries will play an important role in Ireland’s trade, investment and tourism strategy for the years ahead, reflecting changes in the global economy. In order to create jobs in Ireland, it may be necessary to engage in ventures with, and in the other BRIC nations, firstly, Brazil. (www.labour.ie)
Despite Brazil’s economic success, it is fair to say that the level of trade and investment between Brazil and Ireland does not match the potential of both countries. In fact, while total trade reached US$ 202 billion between January and October 2009, bilateral trade was only US$ 670 million (US$ 265 million exports from Brazil and US$ 404 million imports from Ireland).
As export-led growth is the only sustainable route for Ireland, the growing Brazilian demand and the valuation of the “Real” (Brazil’s national currency) will certainly ensure high levels of imports in the coming years. On the other hand, Brazil is an important and competitive world supplier of both manufactured and primary goods, as well as a significant service provider. Therefore, more could enter the Irish market. (The Embassy of Brazil in Ireland, 2011)
Enterprise Ireland’s trade mission to Brazil back in November 2010 is an example of the successful relationship between the two countries. The trade mission had brought 34 Irish companies to Brazil with an aim to increase export sales to this vast market. Enterprise Ireland said the country holds huge business opportunities for Irish firms as Brazil is in the middle of major modernisation, infrastructure and development projects.
Some examples of Irish companies setting up in Brazil include, Louth Company, Suretank. This company won a contract worth â‚¬900,000 to supply its cargo carrying units to ISEW, a major supplier of tanks and containers to the oil and gas exploration industry.
Also Monaghan’s Combilift has secured a deal valued at â‚¬800,000 with Brazilian steel giant Gerdau. Not only are Brazil gaining foreign investment but they are also gaining valuable expertise from Ireland. It’s important that Ireland keep up this relationship with Brazil and if there are more opportunities for companies to open new markets, they should.
Russia is Europe’s largest emerging market and the 11th largest economy in the world and continues to offer opportunities to Irish companies. It is a key export market for Irish businesses in sectors such as ICT, engineering, aviation and aerospace, education and training, the life sciences, construction and building services and food and beverages.
With the rapid emergence of Russia as one of the BRICs, Ireland continues to benefit from this with more companies both Russian and Irish locating here and in Russia, providing many jobs in different sectors of Industry. Irish companies are responding to the worldwide economic slowdown by actively developing opportunities in new markets.
While Russia has not been immune to the current economic difficulties, the continued economic development of Russia has resulted in a much wider range of business and commercial opportunities for Irish companies. Irish exports to Russia continue to grow year-on-year and combined exports of goods and service are now over â‚¬1.3bn. Irish-owned SMEs export more to Russia than any of the other BRIC countries.
According to Enterprise Ireland’s Head of International Sales and Partnering Gerry Murphy, there are particular opportunities for R&D collaboration between the two countries, “Ireland and Russia have a very similar national research and development goals, with a strong focus on funding research in nanotechnology, life sciences and ICT. There is considerable scope for Irish educational institutions to build linkages with Russian universities in joint programmes and the commercialisation of Russian R&D. Such linkages could benefit both Ireland and Russia, as both countries continue to build knowledge-based economies.” (Enterprise Ireland, 2009)
It is vital, Ireland continue its trade links with Russia. This relationship will offer huge employment opportunities for people in Ireland and Russia. The political relationship between both countries also contributes to the deepening of the trade-economic cooperation. (Russia IC, 2008)
Like the other BRIC countries, India also offers some opportunities to Irish companies and careers. India is a land of opportunity for Irish software and IT companies. Significant potential exists for increasing trade between Ireland and India particularly through software, information technology and e-Business partnerships.
India is not only a major market in itself for Irish business but it is also seen by Irish companies as offering an excellent opportunity for developing business, products and markets internationally. Many Irish companies are taking a greater interest in India and Indian companies are also looking towards Ireland. India could provide a safety valve for the Irish Software industry which is currently experiencing a skills shortage in certain disciplines.
However Ireland has to compete with the United States and other countries for this talent. The government of Ireland has identified India as a country in Ireland’s Asia Strategy, and this new thrust could be utilised to increase economic and commercial relations. Indian businesses could exploit the opportunities of investment in Ireland provided by its membership of the European Union, its low corporate tax and its tax incentives for investment in innovation, research and new technologies.
Not only that but Ireland is becoming a significant destination in Europe for Indian students for higher education, particularly for post-graduate, doctoral and post-doctoral studies in the areas of engineering/technology and management studies. About 1200 Indian students are currently studying in Ireland. Because of the high quality of higher education institutions in Ireland, there is considerable promise for bilateral linkages between higher education institutions, particularly in science and engineering. Concerted efforts are under way to promote and intensify such linkages. The emergence of India will benefit Ireland hugely in both employment opportunities and investment opportunities for Irish businesses.
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