Way back in 2001 head of global economic research at Goldman Sachs, Jim O'Neill, came up with the acronym BRICs. It referred to Brazil; Russia, India, and China, nations which were new markets that he believed would lead the way for commercial development over the following 50 years. Since that point BRIC's has developed a extremely common acronym amongst news reporters teachers and economic experts when talking about emerging market economies (EMEs). Alot of investors love the BRICS as the growth opportunity is high and great for fund managers looking for diversyfying their portfolios for investment vehices such as QROPS and SIPPS.
Brazil, the 1st letter of Brick is still not yet an absolutely developed country but there is not one thing that is an explanation why, the general problems Brazil face are policy screw ups, excessive inequality and external factors.
The Brazilian government's largest policy fail is overspending which contributes to high IRs and expensive borrowing joined with currency increases that raises the cost of products produced domestically hurting exports. Brazil's dependency on commodity exports, principally oil and food, to drive growth is also a main policy fail as it creates inflationary pressure and Foreign Exchange appreciation. This appreciated currency has a follow-on effect on other sectors of the economy generally the producing sector pushing their costs too high and making them uncompetitive in the worldwide market. This in turn creates more reliance on commodity exports and makes the nation exposed to external market shocks.
Corruption is rife in Brazil with Transparency International ranking them as the 69th least corrupt country out of 178 measured in 2012. The root of the corruption is a complicated subject but in short it begins with a political system which allows more than 20 political parties. All parties are in a constant fight to secure money from the governing body for roles, payrolls, welfare benefits and contracts which would help to influence the voting populace during elections. Their system almost promotes corruption as this is often the easiest way to secure funds for your constituents when you have no voting power. Public officers must be stopped from moving cash away from the legitimate people or projects, something which should doubtless become even more tricky with huge oil wealth approaching.
It is riskier and more expensive for foreign backers to conduct business in Brazil due to its regulatory and legal model. The tax system in Brazil hopelessly needs reform. Re simplicity of paying tax they were ranked 152nd in the world by the World Bank due to their complex tax code and 128th in the world for ease of starting a new company. The test World Bank used took 2600 man hours to comply with Brazilian tax law, a massive cost for any company wanting to carry on business in the nation. Rigorous labour laws which make it almost impossible to dismiss an employee also adds to the cost of conducting business here, even company insolvency or worker laziness aren't seen as an acceptable reason to dismiss a worker.
The Brazilian legal system allows an inordinate number of appeals on all cases, which grants the administration to obstruct the payment on any judgement indefinitely. It is estimated that 90% of the cases being handled by the supreme court are cases which have recently been decided but are being appealed, infrequently several thousand times.
One of the most generally known issues holding Brazil back is inequality. Poverty is widespread in Brazil and it is believed that commercial growth is reduced by 1% with every 10% increase in poverty. This is nothing new with the inequality usually blamed on unfair land distribution and a bad education system. Dating back to colonial times the government saw scarcely any need for education in areas populated by slaves and a light population of Continentals. When slavery ended in 1889 there was no education in those areas and this has not changed much since that time as the richer, whiter Brazilians have dominated politics and selected to invest more in the South of the nation typically ignoring the native populations of the north, something which is also reflected in cities across the country.
There are outside factors which also have an effect on Brazil's capabilities to progress in world markets. Subsidies by other governments, generally the US and Chinese allow their farmers to challenge better Brazilian farmers by lowering production costs and so reducing requirement for produce from Brazil. China is Brazil's biggest trading partner and its biggest competitor. Heavy demand by China for Iron ore and Soy beans has pushed prices high worldwide. If this demand should ever fall Brazil would be left having to sell at less than profit-making prices. In addition the Chinese executives practice of limiting its currency from appreciating keeps its' value, artificially low. This makes Chinese products cheaper to buy than Brazilian made products. Brazil looses customers due to this both domestically and overseas. By placing an import duty on Chinese goods the Brazilian govt. has attempted to ease the issues on the domestic market but they can't affect the competition on the global market.
Brazil still has lots of work to do by reducing the inhibitors it faces, fighting poorness with social spending and diversifying its economy before they become a totally developed economy although they do warrant their place in the BRIC EME states.
Brazil, the 1st letter of Brick is still not yet an absolutely developed country but there is not one thing that is an explanation why, the general problems Brazil face are policy screw ups, excessive inequality and external factors.
The Brazilian government's largest policy fail is overspending which contributes to high IRs and expensive borrowing joined with currency increases that raises the cost of products produced domestically hurting exports. Brazil's dependency on commodity exports, principally oil and food, to drive growth is also a main policy fail as it creates inflationary pressure and Foreign Exchange appreciation. This appreciated currency has a follow-on effect on other sectors of the economy generally the producing sector pushing their costs too high and making them uncompetitive in the worldwide market. This in turn creates more reliance on commodity exports and makes the nation exposed to external market shocks.
Corruption is rife in Brazil with Transparency International ranking them as the 69th least corrupt country out of 178 measured in 2012. The root of the corruption is a complicated subject but in short it begins with a political system which allows more than 20 political parties. All parties are in a constant fight to secure money from the governing body for roles, payrolls, welfare benefits and contracts which would help to influence the voting populace during elections. Their system almost promotes corruption as this is often the easiest way to secure funds for your constituents when you have no voting power. Public officers must be stopped from moving cash away from the legitimate people or projects, something which should doubtless become even more tricky with huge oil wealth approaching.
It is riskier and more expensive for foreign backers to conduct business in Brazil due to its regulatory and legal model. The tax system in Brazil hopelessly needs reform. Re simplicity of paying tax they were ranked 152nd in the world by the World Bank due to their complex tax code and 128th in the world for ease of starting a new company. The test World Bank used took 2600 man hours to comply with Brazilian tax law, a massive cost for any company wanting to carry on business in the nation. Rigorous labour laws which make it almost impossible to dismiss an employee also adds to the cost of conducting business here, even company insolvency or worker laziness aren't seen as an acceptable reason to dismiss a worker.
The Brazilian legal system allows an inordinate number of appeals on all cases, which grants the administration to obstruct the payment on any judgement indefinitely. It is estimated that 90% of the cases being handled by the supreme court are cases which have recently been decided but are being appealed, infrequently several thousand times.
One of the most generally known issues holding Brazil back is inequality. Poverty is widespread in Brazil and it is believed that commercial growth is reduced by 1% with every 10% increase in poverty. This is nothing new with the inequality usually blamed on unfair land distribution and a bad education system. Dating back to colonial times the government saw scarcely any need for education in areas populated by slaves and a light population of Continentals. When slavery ended in 1889 there was no education in those areas and this has not changed much since that time as the richer, whiter Brazilians have dominated politics and selected to invest more in the South of the nation typically ignoring the native populations of the north, something which is also reflected in cities across the country.
There are outside factors which also have an effect on Brazil's capabilities to progress in world markets. Subsidies by other governments, generally the US and Chinese allow their farmers to challenge better Brazilian farmers by lowering production costs and so reducing requirement for produce from Brazil. China is Brazil's biggest trading partner and its biggest competitor. Heavy demand by China for Iron ore and Soy beans has pushed prices high worldwide. If this demand should ever fall Brazil would be left having to sell at less than profit-making prices. In addition the Chinese executives practice of limiting its currency from appreciating keeps its' value, artificially low. This makes Chinese products cheaper to buy than Brazilian made products. Brazil looses customers due to this both domestically and overseas. By placing an import duty on Chinese goods the Brazilian govt. has attempted to ease the issues on the domestic market but they can't affect the competition on the global market.
Brazil still has lots of work to do by reducing the inhibitors it faces, fighting poorness with social spending and diversifying its economy before they become a totally developed economy although they do warrant their place in the BRIC EME states.
About the Author:
Maybet you are a fund manager or simply interested in the finacial markets, Joe W Davis offers his opinion of the broader markets and economic news from a technical and fundamental view. Other posts that may be of interest - discussing pensions, investing, financial planning and more.
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