Free BRIC Sovereign Debt Crisis Essay Sample
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The BRIC consists of four nations; these are Brazil, Russia, India, and China. The four countries combined together form the BRIC nations. The combined economic wealth of these four nations would be more than the wealth of the richest nations by year 2050. As of today these four countries taken together would account for around 40% of world population and around 25% of global land (O'Neill J., 2001). The BRIC nations are without doubt the fastest growing in terms of nominal GDP. China for instance has overtaken Japan as the second largest economy in the world. Given the rate at which the economy of china is growing, it is only a matter of time before it overtakes the United States economy. These BRIC nations are well endowed with immense resources, ranging from human resources to natural resources. First the population of all these countries is high. For instance, Brazil, India, and China have high populations and as a result low labor costs, which in turn lead to low production costs. This has been the most influential factor in the growth of these nations. Between 2002 and 2007, annual GDP growth averaged 3.7 percent in Brazil, 6.9 percent in Russia, 7.9 percent in India and 10.4 percent in China. Popular predictions have the combined economies of the four BRIC countries outstripping that of the G7 countries (Canada, France, Germany, Italy, Japan, UK and the U.S) within the next couple of decades (Hult T., 2009). The coming together of the BRIC nations was prompted by the dominance of the economic and political platforms by the United States and other allies from the west. The BRIC nations not only offer sustainable rate of economic activity but also economic growth of the highest level. This has the effect of appealing to investors, due to the expected appreciation of capital.
BRIC Sovereign debt crisis
All nations in the world depend on each other in many aspects. There is no nation that can stand on its own without associating with other nations. At some point, at least each nation has been indebted to another. Debt is not a new thing in this world, especially when nations are constantly competing with each other. Even the nations with big economies are heavily indebted. For instance the United States owes China billions of dollars. This simply means that no matter what, debts will always be there. As a result a debt crisis arises. Whilst debts assist in countries in development, if not well managed, they could result to a real crisis that can serious bring down the economy of a given nation. It is worth noting that, debts can completely hamper the human development in a given nation. The third world nations have debts which have affected their economies to a large degree. This is due to the large amounts paid in term of interest. The BRIC nations are no exception to debt crisis. Most nations borrow money at high interest rates, however this money is not invested in profit generating activities, but rather it is pumped into the economy, for instance, development of infrastructure, provision of public utilities and social amenities such as hospitals. Note that all this undertakings do not generate returns, that can adequately cater for the debt plus the interest charged. Most nations find themselves in a situation that is hard to maneuver from. As a result the debt keeps increasing with the interest on the debt on the rise and thus the nation finds itself in a debt crisis. However some countries are in this kind of situation, because their leaders borrowed money which they misappropriated, and hence living the country indebted with no means of paying off the debt plus the outstanding interest. This results to a debt crisis.
All the four BRIC nations are faced with a sovereign debt crisis. Russia's debt is an all time high. The debt of is in excess of its gross domestic product. Russia's debt may surge to 585% of gross domestic product by 2050 as the population declines and the government ramps up spending, pushing the credit rating below investment grade, standard and poor's said (Abelsky, p 2011). However the reducing work force of Russia means that the labor costs will rise and as a result the income per person is expected to rise. This will put Russia at the top of the other BRIC nations in terms of riches. Given the huge nature of debt held by Russia, the government in the future will be expected to change its spending habits completely. Rather, it is a simulation that highlights the importance of age-related spending trends as a factor in the evolution of sovereign creditworthiness, according to the report. Historically, once governments are confronted with unsustainably rising debt burdens, they usually react by tightening their fiscal stances or reforming their expenditure programs (Abelsky, p 2011). Brazil on the other hand unlike other BRIC nations seems to be accumulating foreign liabilities. Also there are reports of appreciation of its currency. Just like other BRIC nations, Brazil is struggling with its external surpluses. However China and Russia experience slightly lower external surpluses compared to Brazil and India. The great headache for these nations is the currency appreciation, which each nation is determined to maintain at the minimum; however Brazil tops among the BRIC nations in relation to the issue of currency appreciation.
There are a number of issues that are experienced by all the BRIC nations. These common issues range from those relating to human resources to economic resources. The nations may be from different continents, but fact is they do have a lot in common. Most of the issues especially economic related that affect one of the BRIC nations, more often than not is experienced by the other. This economic success comes partly from a trend toward good corporate governance, a concept virtually unheard of in these four nations just a decade ago. Still, the BRICs have a long way to go. Corruption, double dealings, and other conflicts of interest are regular business practices for far too many companies. Although investing in BRIC nations can be wildly profitable, you must familiarize yourself with the realities of their corporate governance to avoid catastrophe (Borodina. S and Shvyrkov. O, 25 January 2010).In spite of this the BRIC nations have very attractive markets which are open to all and hence tempting to potential investors. Most of the investors who have succeeded have used all tricks in the book to find their way through the economic corridors of these nations. However streamlining and cleansing their houses is the sure way of making the nations appealing to the investors. This is one of the ways countries like India would like to go about in order to achieve the ultimate goal of navigating from this financial crisis. First on top of the list is the big population of these nations. China is the most populous country in the world, India follows suit with both Brazil and Russia having significantly high populations. The high populations in this country are the key drivers of the economy of these nations. The big population especially in China, India and Brazil has been the key attraction of foreign investors to the countries. This is partly due to the low cost of labor in these nations. Russia is no exception, compared to other countries in the European Union, the population is relatively higher and cost of labor is thus lower. The economies of these nations are growing at a first rate. Notable among this is the massive expansion of the companies from these countries. The companies belonging to the BRIC nations have been able to greatly spread their wings and tap into investments in many different parts in the world. The major areas invested by these nations is the mining and metal which mainly dominated by China and Brazil.
Just like the G8 nations, the BRIC nations, though emerging economies are extremely influential in all aspects, ranging from finance to politics. Last year, nearly a quarter of the global deals, valued at $2.23 trillion, involved companies in the BRIC countries, data compiled by Bloomberg showed (The Economic Times, 27 January 2011). Besides this the BRIC companies are increasingly becoming influential in the global market. With several large companies from these countries now turning acquirers in the global arena, it is not surprising that over 350 executives from BRIC nations are participating in Davos. The list includes OAO Lukoil CEO Vagit Alekpero, China Mobile chairman Wang Jianzhou and China Cosco president & CEO Wei Jaifu, who along with ICICI Bank MD & CEO Chanda Kochhar is one of the six co-chairs for this year's event. High growth in these countries is the big draw (The Economic Times, 27 January 2011). This illustrates the influence the BRIC nations have in the world arena. Besides the BRIC nations always meet and take a common stands and are able to agree on many things. This is what has made them to advance their stature in the world arena. With time there is no doubt what so ever that we are yet to see the BRIC nations take over, especially now that South Africa has decided to join. This goes to show that the club is doing well. However good the prospects of this BRIC nations, they are all faced with great debts to contend with. Russia with a debt through the roof, Brazil too is very much in debt. According to financial times, "in spite of the current optimism about the performance of the Brazilian economy, the country could be heading to a sub-prime crisis similar to that of the United States (Marshall. P, 2011). Brazil is not the only nation affected, Russia too has sank into a deep well of debt that could take it a long time to recover from. China and India are no exception on the issue of heavy debts accumulated. The BRIC nations are also faced with domestic problems of their own that are unique. But most of the problems cut across especially governance issues. For instance Russia and Brazil have to keep in check the escalating crime rate in their countries. China has to contend with alleged violation of civil liberties and human rights. India too has a share of its own problems, with the Kashmir issue topping the list. Even with the numerous problems faced by the BRIC nations, coupled with international criticism on many aspects as regards to their stands on major issues, still remain the nations to beat as adequate destinations for investments.
Brazil is the largest economy in Latin America. Brazil has an open and extremely free market. This makes Brazil one of the fastest growing economies of the world. By GDP, Brazil is ranked eighth in the world, however at the rate of 5% which the economy is growing; Brazil will most likely be among the top five in terms of nominal GDP. With a labor force in excess of 100 million, the key drivers of the Brazilian economy are agriculture, industrial sector, and service sector. The service sector is the largest contributor to the economy with more than 65% of the GDP. The industrial sector follows with about 27% and the agriculture sector a distant third with only 3% of GDP. However it should be noted that agriculture in Brazil is doing extremely well, given the fact that Brazil is one the leading producers of soy alongside the United States. Brazil also does exceptionally well in the cash crop sector. The industrial sector being the second largest after the United States in the Americas, is extremely diversified, that is it involves a lot such as aircrafts, steel, computers and automobiles. Brazil has more than ten assembly plants. This means the industrial sector is well established. However this is set to increase even further given the resources the country is endowed with, especially the population. The service sector is the most important to the economy of Brazil, with a contribution of 66.8% to the GDP of the country. For a long time the service sector has continued to drive the economy, mostly the banking sector which at one point accounted for more than 15% of the GDP. In the past Brazil used to export raw products, however that is now a thing of the past as more than 80% of its exports are manufactured. This has gone a long way to ensure more revenue to the country, and also creating employment for the people. That is why the industrial sector is doing well and is set to get better with time.
Brazil has undergone a lot reforms ranging from law reforms to economic reforms. This has ensured that efficiency has been maintained in all its sectors. Brazil has by a large extent reduced its dependence on imported oil. Initially, more than 70% of oil was imported, however now Brazil is one of the biggest producers of hydroelectric power. This is part of the strategy to pursue green energy that is environmental friendly. The human development index in Brazil has been on a steady rise. This is due to policies adopted in the country. For instance, a minimum wage has been introduced to ensure the well being of the people. The favorable rankings received by transparency international, shows that the country is adequately managed, and that it has independent institutions that ensure the nation is well governed. Notable is the fact that Brazilian companies top the charts among the biggest and the best in the world. However, as good as the prospects of Brazil look, just like other countries, it has its share of challenges, which will not be overcome overnight. Being an emerging economy, Brazil faces a lot of obstacles that threaten its journey to transforming itself to a fully developed country. Compared to other countries of same economy, Brazil lags behind in the human development index. However that should be the least of its problems as there are other challenges that it has to grapple with.
One of the biggest challenges faced by Brazil is the sovereign debt, and the fact that the banks still charge high interest rates compared to other countries. These exorbitant interest rates fuel inflation which is not good for the economy. The debt of Brazil is about 2.4 times its GDP, this is low compared to other BRIC nations, but still given that the GDP of Brazil is more than 3 trillion, this is a huge debt. This kind of debt burden significantly slows down the economic growth of the nation. Instead of concentrating on one thing, the nation has to balance its resources between development and repaying the accrued debts. Another challenge for Brazil is the crime rate in the country, ranging from human trafficking, drugs and black markets involved with selling of body organs. This kind of environment scares away potential investors and more so the tourists. For Brazil to reach its destination that is become fully developed, then retention of investors is key. In the informal settlements especially in Rio de Janeiro, militia and drug cartels are dominant with the full knowledge of the police. The government is either unable to act on this or it is simply reluctant. Either way this is not good for the nation, especially one which would like to attract investors.
Other challenges faced by Brazil, are unemployment, low wage rate especially for workers in the industrial sector, poverty, and high population growth rate. Top among this is the issue of poverty. Brazil may be one of the biggest economies in the world; however this does not translate directly to all the people of Brazil. Brazil hosts some of the poorest people in the world. Poverty has seen many Brazilians live in informal settlements even in the heart of Rio de Janeiro. This is no doubt a big challenge to Brazil and many countries in the world. However it is notable in Brazil given the immense wealth of the country. Another challenge is the low wage rate especially for those people who work in the industries. This is the reason most of these people opt for the informal settlements as they cannot afford proper housing facilities. However this is not set to change in the near future as there are no indications that the government intends to tackle the housing issue for good. Also lurking in the dark with the ultimate potential to escalate is unemployment. Given the high population which is expected to increase in the future, unemployment could become rampant. According to global financial newswires, the unemployment rate increased from 5.3% in December to 6.1% in January. Lastly the biggest concern for Brazilian companies is the fierce competition they face from other multinational companies especially from the United States and China. Not only that, the agricultural sector also faces an uphill task as completion for export market tightens. Will Brazil hold on and keep up with the big boys? Or will the Brazilian companies be knocked out of the platform; only time can tell. However most of these challenges faced by Brazil are not unique, they have been experienced in many parts of the world. If they put their house in order may they can overcome all these challenge and emerge as the envy of the world.
To overcome the problems mentioned above, the government, the people of Brazil and all stake holders must work hand in hand. The process to solve the problems must be all inclusive. However three are some problems for which the government must take the first initiative. For instance the issue of crime rate, for a government to sit tight and let criminal gangs operate under their noses is condoning impunity, this should not be allowed. The government through its security organs should uphold the law and clear criminal gangs from the streets. However the government should do more than clear the streets, this is because many are in the business of crime due to lack of jobs. Thus the government should strive to create employment or at least create a kitty for the unemployed so that they receive an allowance every month to enable them buy food other needs. As it is, the housing issue is not a problem just in Brazil, but in many countries in the world, including the United States. To solve this government should come up with low cost houses for the people especially in the urban areas. Sure it is an expensive venture, but it's worth it, besides it's the responsibility of the government to ensure the well being of its own people. On the issue of population growth, the government should be able to plan ahead so as not to experience problems in the future due to poor planning. Another challenge is the issue of interest, charged by banks. Brazilian banks charge real interest rates of 20/25% on consumer loans (Marshall. P, 2011). The central bank should consider lowering its interest rate. This may encourage the commercial banks to lower the interest rate. Lastly the sovereign debt, as heavy as the debt burden stands, there is little the nation can do about, rather than strive to ensure it is reduced. In the future the country should try to rely less on borrowings or try to spend within its limit to avoid sliding deeper into debt.
With the world fresh from a financial crisis, focus has shifted to the untapped yet potential areas in the globe. The BRIC nations are without doubt, the best placed to exploit any ventures that come their way. However it is not easy as other nations compete for the limited resources and the untapped markets. In the recent past the BRIC nations have increasingly become dominant, with china taking the lead. For instance china has completely eclipsed the United States in Africa and also overtaken Japan to become the second largest economy in the world. With the rate at which it is growing by the year 2020, it will have taken the number one slot as the biggest economy in the world. Brazil on the other hand is projected to take the number five slot in terms of nominal GDP. India and Russia too are no exception. However the BRIC nations will have to contend with the sovereign debt crisis they face. The world will be watching keenly how they go about to greater heights with massive debts hanging above their heads. As emerging economies the BRIC nations are in the right track to economic growth and away from the debt crisis.