Economic Interests

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Archive for the tag “Brazil”

Democracy struggles in the global recovery


Democracy has never been so popular. The Arab summer saw dictatorships overthrown and replaced with democratic intentions while in Africa the percentage of democratic countries has increased from 7% in 1990 to nearly 40% last year. The two giants in South America; Brazil and Argentina, have even managed to elect female leaders, something the USA has still yet to achieve. In the world as a whole, democracies roughly account for 60% of the world’s 196 countries, nearly doubling in the last two decades.

So the public should be happy right?

Wrong. The definition of a democracy is vague and the differences between elections in one continent to the next can be staggering. Some “democratic” countries are rather misleading as well; for example Hugo Chavez won consecutive elections, but was an autocratic dictator in all but name, widely considered to have rigged elections and bought votes. Russia as well holds elections, but the chances of President Putin losing an election are slim to none, with the Kremlin wielding a tight fist over the polling system.  That lowers the level of truly democratic countries to a less impressive 25% according to some statistics.

The Financial Times graph shows the election results that awarded the presidency to Vladimir Putin were controversial to say the least. 

Even those countries are now facing troubles. The global recession sprouted protest movements like “Occupy Wall Street” and started a trend that has culminated in the widespread trouble many countries are now experiencing. Brazil angered their people by overspending on the world cup, which has vastly trumped the costs for the South African World Cup, while neglecting the public services that will be so key to the a successful tournament. Turkey’s suppressive leader, Prime Minister Erdogan, has pushed his people too far, putting into law tight rules on alcohol and arresting journalists at a higher rate than that of China. Egypt meanwhile democratically elected the Muslim Brotherhoods front man Mohammed Morsi, who promptly handed himself dictator like powers and refused to listen to the secular opposition.

The world cup stadiums have come at too high a cost for most Brazilians, when the quality of living is nowhere near to that of the stadiums.

In the last two examples there can be seen a link, with both the Turkish and Egyptian leaders exploiting the lack of important institutions and constitutions to grant themselves greater control of the country. Winning majorities in the elections seemed to suggest a remit to do as they liked, without consulting the public, especially the percentage that didn’t vote for them. It’s not a coincidence that Brazil has seen the least hostile protests, with President Dilma Rousseff agreeing with the public’s right to peaceful protests (while quite rightly criticizing the small minority that turned violent).

Yet even the Western countries with stable democracies have seen unrest. Southern Europeans have become frustrated with the levels of austerity being enforced upon them by Brussels and Berlin. Greece has been the main recipient, but even the likes of France are starting to feel the tension, with the approval rating of President Hollande diving to a lowly 24%. Britain suffered more in 2011, when riots in London spread across the country and caused national panic. Though the origin was most likely the austerity the coalition was embracing to cut Britain’s large budget deficit, racial tensions were a common thread, with the London Met still dominated by the white British (around 80%) in a city where that is now considered a minority.

The British riots caused major panic, as some feared the country was spiraling out of control.

The USA however managed to largely bypass these protests, mainly by keeping up their spending levels and kicking the austerity can down the road. Only this year has Barack Obama actually looked to cut down the trillion dollar deficit he had been running consecutively in his first term, with the automatic sequester cutting budgets by $85 billion in 2013. Yet democracy hasn’t looked too rosy for the USA either. The deadlock between the president and congress has become a serious problem, with a polarised government failing to put policies through. A small tightening of the gun laws this year was rejected by the republican dominated congress mostly out of spite, while a recent farming bill (consisting of subsidies for farmers and food stamps) was rejected for the second year running despite holding policies both sides have traditionally liked. Even worse, both sides nearly forced each other to walk off the fiscal cliff at the start of the year, with the president reluctant to cut spending and the congress incessant on not raising taxes. Luckily both sides managed to reach a bipartisan agreement, though if anything this has emboldened both parties beliefs that their way is the only way.

The inability to agree with the more popular President Obama has seen Congress’s approval rating fall sharply to record lows. 

In the last 5 years democracy has taken a bashing, that much is easy to see. For every success like Myanmar, there is a monumental failure like Syria to counter balance it. Yet, many countries still strive for the democracy that the west has enfamed. Giving the public the ability to choose its leaders is a right many in the west take for granted, but something many societies go without. The protests are simply another form of democracy, giving a voice to a cause that the government might be ignoring or missing. In the three biggest protests right now, you can rank Brazil as the most democratic and Egypt as the least. Egypt could have stopped the protests that started last year by listening to the public and engaging them, rather than trying to stamp them down. Turkey started off in a similar vein, but has now tried negotiating with the protesters, especially with the Kurds, who threatened to take the protests to another scale. Brazil however, have largely allowed the protests to take place, and allowing for some violent episodes have seen the least chaos. The government is also opening up a dialogue with the protesters, agreeing to some of their demands for increased funding to the public services. The country still has a long way to go, and could have foreseen the public out roar that was building, but have so far acted in the most democratic fashion.

The protests might be shocking to see, but they are easily trumped by the actions of say the Chinese government in Tiananmen Square, or the conditions of the North Korean people who are denied any access to the outside world. Such dictatorship allows for such short term protests to be stamped down on quickly, but encourages longer term distrust and anger toward the controlling governments. The answer for the countries facing public unrest is for more democracy not less. Allowing the public to voice its frustrations can let off steam and negate anger building up and people acting out in frustration.  In the USA’s situation, more democratic bipartisan talks between the two parties would result in much higher success rate for important policies. The immigration reform coming through shows signs of this much needed bipartisan agreement, but party politics could still derail negotiations.

It must be remembered that there are much worse scenario’s than the current protests hitting democracy.

As Winston Churchill famously said “It has been said that democracy is the worst form of government except all the others that have been tried”.

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Just another BRIC in the wall?


The term BRIC’s represents four countries that have the potential to become the world’s next global powers: Brazil, Russia, India and China. Yet these nations are struggling to live up to their promise as they each face different problems with their economies.

Brazil is South America’s largest country and economy, as well as the 6th largest economy in the world. The nation has huge potential, with two future international events set to be staged in the country in the next 4 years, a thriving industrial sector, low unemployment and lots of FDI still pouring into Brazil. Above all they can boast a reliable democracy and good institutions that instil the rule of law, none of the other BRIC nations can match this. Yet Brazil is still on a worrying path. In 2010 Brazil grew by 7.5% to great applause from the rest of the world, but in the following year slumped to just 2.7%, well below the rest of the BRIC nations and Brazils high expectations of themselves. This year Brazil have forecasted growth of 4.5%, but external sources are much more pessimistic predicting just 3.5% a figure that is too low for a country like Brazil that needs high growth to keep up with the social costs of modernising its economy. So what are the reasons behind this slump in growth? For that there are many answers; the euro crisis and a strong currency slowing down demand for Brazilian exports, falling commodity prices (which help fuel Brazil’s economy), a complex tax system (that takes a higher percentage than any other middle income country) and their government. The last factor is a big reason for their slowdown in growth as the government continues to badly manage the country’s economy. Brazil remains a nation full of inequality, this is a problem the government has failed to solve for years now, as spending has been focused on financing government projects and an over generous pension system rather than reallocating funds to the poorer regions of the country. The government has also failed to invest in infrastructure with the transport system truly a mess, though the impending World Cup could help push the government into action. This leads on the next point that the government desperately needs to reform the economy to keep boosting growth, yet seems unwilling to make any big changes while the going is still good. The main reform that is needed is to free up their economy, protectionism is still a key policy of the government (especially in the oil industry) and it keeps inefficient Brazilian firms in business that should have gone under years ago. The best option could be to sign a free trade agreement with the rest of South America, which could in turn help boost Brazilian exports like the eurozone did for Germany. Without these reforms Brazil could face low growth for the next few years yet, undermining their status as one of the BRIC nations.

Brazil showed the lowest growth last year out of the BRIC nations. 

Next is Russia, whose political corruption remains their biggest problem. Vladimir Putin recently swapped jobs with Dmitry Medvedev to once again become Russia’s president, allowing Medvedev to take up his old position of prime minister. This was greeted by mass protests on the streets, but to little effect as the Kremlin kept their control over Russia. The problem is Putin seems unwilling to reform the economy, while the corruption that is rife in Russia makes it an unlikely destination for businesses to conduct deals (ranking 143rd in the world for transparency and 120th for “ease of doing business”). Its BRIC standing creates the perception that Russia is still an emerging economy with lots of potential, but instead it has become an oil dependant nation that seems stuck in its ways. Inequality is also a big problem, where the country is split into the very rich and the very poor, with only recently a middle class looking to emerge. Still the ultra rich have too much of a say in how the country is run, with government policy dictated by how it can profit the monopolies in Russia’s markets. The city of Moscow has the largest proportion of Billionaires in the world, where conveniently power is heavily centralised, while 20% of GDP is supplied by the ultra rich in the country (again the highest percentage in the world). Putin has made some promises in changing the economy (like improving investment) but has failed to implement promised policies in the past and there are no signs that he has changed his ways. Despite this Russia still enjoyed 4.3% growth in 2011 and are projected to grow again this year by 3.6%, this will keep the market wolves at bay and as long as there aren’t any big oil crises then Russia should continue to improve. But if Russia is to really become a global power then they will need to diversify their economy away from oil and make their country more attractive to outside investment.

Russia with the second highest amount of Billionaires, beating the other BRIC members. 

Then there is India, a country with huge resources at their disposal (huge population, lots of natural resources) yet one that is not quite achieving their potential. The economy of India is still growing at levels that Europeans could only dream of, with the average growth level since 2000 being 7.4%, but this is mainly down to the radical economic reforms that India made in the 1990’s, which freed up its economy. Similar reforms are now needed again to keep up growth, but the current government seems reluctant to act. The problem is that India now has a worse current account deficit and worse debt level than they did back then, meaning if anything reforms are even more vital. The country needs to attract investment into its country first and foremost, with a recent controversial “retroactive tax” policy causing more harm than good with a damaging fight with Vodafone over the tax that the firm is suggested to owe the Indian government from the acquisition of Hutchinson’s Indian business in 2007. The tax bill came in total to $3.75 billion and has only deepened the worry that foreigners have in investing in the country, though Vodafone have confirmed they will continue an $18.6 billion investment into the country. The country relies on good FDI (foreign direct investment) to finances its current account deficit at around 4% of GDP (the country exports more than it imports), so good relations with investors are a must. There is also too much regulation over foreign investment and too much intervention into the countries markets by the government. The power production industry is still largely state run, while the telecoms, insurance and retail markets are made extremely hard to enter for foreign firms (through a mix of corruption and regulation). Add to this the fact that Western investors are now much more reluctant to throw money around and India is facing a big problem attracting investment, on which its economy is run on. For a country with one of the best manufacturing sectors and a big potential service market (with over a billion people in the country), attracting FDI should not be a problem, yet the government’s antics have made companies question such decisions. The expensive subsidies that India pays to help its local companies cost them around 2.4% of GDP, increasing an already high budget deficit of near 6% and high inflation at near 7% which show the country’s economy is potentially overheating, as it relies too heavily on foreign capital. That isn’t to say progress hasn’t been made, with 52 million people being lifted out of poverty in the last 5 years, but the fact that half of all Indians still have to defecate in the open shows there are still major problems with the country. For India high growth of at least 6% is necessary to support their burgeoning population (of which a third still live below the poverty line) and pay off their high debts, while only a rise in wages and a major improvement in the country’s infrastructure will allow India to finally achieve their status as a new world power.

India has the highest budget deficit and highest public debt to GDP ratio compared to the other BRIC members

China completes the list, with the world’s second largest economy and is widely predicted to overtake the USA in the near future to take the top spot. Yet China faces similar issue to India, with its economy slowing down and its people reliant on high growth. China’s predicted growth this year is 8.2%, a world high still but actually China’s weakest expansion in 13 years. Like India, China needs high growth to support its huge population and keep the economy running, with 8% probably the minimum requirement. The country experienced a fast decline in industrial production, construction and electricity output in the last year which has lead many critics to suggest the economy is overheating. But China’s economy is surprisingly unreliant on foreign capital and is actually financed heavily by the state, which has the nasty habit of creating barriers to entry for foreign firms but does help make China more resilient than India and less dependent on private confidence. This investment by the state into the country’s infrastructure and factories is what boosts growth more than its exports, as it counted for 48% of GDP last year. China also the capital to re-finance any banks that might go under (a serious problem in Europe) and is one of the few countries not facing a liquidity problem. China’s general population is also much older than India’s, meaning the high growth needed to supply such a hefty workforce may no longer be needed in the future. Out of all the BRIC countries China is undoubtedly the strongest and can already call itself a world power, but the country does face some issues in the future.  China will have to free up its economy sooner or later to foreign investment or risk inefficient national firms wasting the countries resources, while inequality between the countries inner and outer regions is high, something the government will have to try and fix in the long term. China also has competitors in its industrial sector; as once the cheapest option for foreign firms, countries like Vietnam can now boast cheaper costs, making China less attractive. This could be a factor in China’s current account surplus, once as high as 10% in 2007, dropping to 2.8% of GDP this year, though the main reason is probably the increased investment by the state as mentioned earlier. This is still a good surplus and in fact many countries felt China wasn’t spending enough anyway and was manipulating their currency to keep it low, but it could prove a problem if investment isn’t sustainable as many economists believe.  China’s big problem is that their population is still incredibly poor for such a big economy (China ranks 90th in the world for income per person) and the investment that causes such high growth is not a long term option, meaning China will have to free up its services and financial markets if it to continue high growth and increase the income of its population to the standing that its economy now holds.

China’s current account surplus drops from 10% to 2.6% in the last 5 years.

Are Brazil Ready for a World Cup


Are Brazil Ready for a World Cup.

An article I have written on whether Brazil will be ready in two years time for a World Cup.

Brazil – A Tough Nut to Crack


Brazil recently overtook the UK to become the 6th largest economy in the world; growing by 2.7% last year while the UK economy contracted by 0.8%. Brazil is part of the well known group of countries known as the BRIC countries (Brazil, Russia, India and China) which are expected to become the future super powers of the world (it is predicted they will overtake the G7 countries by 2027). Brazil is also currently the largest economy in the South American region which is finally starting to sort their economies out. It also surprisingly had the 8th largest number of billionaires in the world last year, far more than any of its neighbours could boast.

brazil uk

Brazil overtaking the UK in GDP. 

Brazil weathered the financial storms of the world recession and was one of the first emerging economies to spark a recovery in 2010. In fact, when investors were unsure of where to place their money after the crisis, Brazil’s economy became the in vogue choice, with millions of capital poured into the country.  An economy supported by ever rising commodity prices and generating a new emerging middle class can also boast the hosting of two big international events in the near future – The World Cup in 2014 and The Olympics in 2016. Brazil is in fact starting to look like a present world power rather than the “could-be nation” tag that still hangs around its neck.

Brazil logo for the world cup they are hosting in 2014

This is a big step forward from Brazil’s recent past, where dictatorships ruled, inflation remained at a constant high and poverty was widespread. Now a period of political stability with democratically elected governments has seen the country realise its true potential and emerge as a true global power.  A decade ago, Brazil was wrapped up in Argentina’s default and the widespread debt of South America, leading to its credit status to be labelled at “junk” level. But ten years on and Brazils bonds have now been upgraded and are attracting investors. This has been boosted if anything by the Euro crisis, as investors scared of a Greek default are looking to find safer markets for their money. Where would be safer than a top rated emerging economy, as the average debt of an emerging country is now lower than that of a developed country.

But dangers lie ahead for Brazil. Growth last year of 2.7% when compared to previous rates of around 4-8% showed an economy slowing down, with projections for 2012 at a disappointing 3.5%. There have many excuses put forward; the euro crisis has slowed down demand for Brazilian exports, falling commodity prices (which fuel Brazil’s economy) and a strong currency that doesn’t help an export lead country. But despite these factors damaging their economy, Brazil has still got to share the blame for slow growth.


Economic Growth for Brazil between 2000 and 2015

Brazil remains an uncompetitive country, ranking 53rd in the World Economic Forum index (behind Malta) and heavily losing out in its own back yard to China (despite themselves experiencing increased labour costs).  A current account deficit at 3% of GDP means Brazil might also have to rely on foreign finance to pay for future projects (like the World Cup and Olympics) and with a euro default still possible and the USA looking to tighten its budget, these funds may become harder to attain. Real interest rates also remain the highest of all emerging nations at around 4%, which deters investors and makes loans for smaller firms near impossible. An article on the economist http://www.economist.com/blogs/freeexchange/2012/01/emerging-economies found that by looking at the monetary and fiscal policies of emerging countries, Brazil had little room to improve growth through stimulus.  One main factor for this is a debt to GDP ratio of 65% and budget deficits of 3% of GDP, meaning Brazil has a lot of debt for a developing nation and are currently just adding to it when growth should be helping to cut the debt

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Shows how Brazil doesn’t have much room in its fiscal or monetary policy to induce growth

Brazil’s biggest problem however is their benefits system. Brazil has a younger population than any of the G7 member countries, yet spends an incredible 13% of GDP on pensions, more than any of those countries barring Italy (whose share of old people is three times that of Brazil). It has an unenviable ratio of 35 pensioners to every 100 workers (a worse ratio than that of the USA). Looking into the pension schemes, Brazil is incredibly generous as well, replacing 75% of average income. There are even options of early retirement with lower yet still bountiful pensions, leading to Brazils retirement age to be on average 54 for men and 52 for women and a tenth of 45 year olds already on their pension. This compares very unfavourably with child benefit schemes, where every family with a child receives 115 reais, whereas a family with a member over 65 would receive almost five times as much. This leads to almost a third of children living under the poverty line in Brazil but rarely any over-65 year olds. The Brazilian government is already trying to push through a bill to cap benefits at private sector levels, but this is only the start and Brazil will need radical changes if it doesn’t want to bankrupt the future of the nation.

Shows Brazil’s spending on GDP compared to amount of old people in the country

If Brazil could free up this money, then maybe it could increase investment in the infrastructure and education from its poultry 20% of GDP. New airports and roads are needed as well as more high paying jobs, not a nation of pensioners collecting unaffordable benefits. The inequality rife in Brazil will also needed to be fixed, as even though progress has been made, Brazil still had a Gini rating of 0.6  in 2009 (where 0= Total equality and 1=total inequality). New progressive taxes and better methods at stopping tax evasion (predicted to cost the government 2.5% of GDP) could help improve equality and lead to a nation that can truly call itself a developed country. A free-trade agreement with the rest of South America would also benefit Brazil massively, as their biggest customers remain in this region and could create the sort of benefits that German exports achieved when joining the EU. But that would require tearing down the barriers of trade that have been a part of the Brazilian economy for years and keep inefficient companies afloat through subsidies.

The map shows Brazil to have a Gini rating of between 0.55 and 0.59

Brazil have achieved much in the last decade, where a stable government and strong growth have lead its economy up the rankings to 6th in the world (with aspirations for 5th place) but without strong reforms we could see the country’s economy slow down, with growth last year already well behind the rest of the BRIC countries. The problem is Brazil tends to only make the big reforms when times are tight and the need for change is urgent. Brazil will need to buck the trend and push through reforms now while they can still take effect, otherwise the economy could slow down when growth is urgently needed to become a true world power.

Looking at constant growth for 2012 and 2012, Brazil has lagged behind its fellow BRIC members – Russia, India and China

Brazilian reforms like Brazilian nuts are tough to crack, but they are a must if Brazil is to realise their potential.

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