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Creating and Sustaining Growth In the Transition Economy of Brazil - Essay Example

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Once the centrally planned economies embarked on the road to the open market, they logically look up to the western economies of the US, UK and other European citadels of capitalism as models. The problem is that the criteria for predicting growth, as well the factors that create and sustain development, are inherently different in the economies that were held in the grips of socialism and militarism for nearly a lifetime…
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Creating and Sustaining Growth In the Transition Economy of Brazil
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Creating and Sustaining Growth In the Transition Economy of Brazil

In 2005, for example, the Goldman Sachs consulting group developed the Growth Environment Scores based on an assessment of companies in 170 countries as regards macroeconomic conditions, social and environmental issues, governance, corruption and other issues. The transition BRIC countries (Brazil, Russia, India and China) placed high on the list. China was on top followed by Russia, Brazil and India, in that order (Rybinski, 2006). This means that these previously planned economies are making big strides in their democratic transition to match the growth of the countries that have a developed market in place for a long time.
In other cases, the transition economy of South Africa was caught flat-footed when its rand stumbled in 2005, Hungarian bonds were sold out, and the Turkish stock market crashed 41 percent in dollar terms in seven weeks (IFC, 2006). Their policy makers failed to predict these events so as to create the necessary safety nets. South Africa is moving to a market economy after years of the contentious apartheid, Hungary was once a member of the communist bloc, and Turkey is shaking off monarchial rule.
The progress of any economy is measured by the amount of the foreign direct investment (FDI) that it both receives and places abroad. Of the current transition economies, Brazil comes second only to China as the world's largest holder of foreign direct investment with a stockpile of $30.8 billion as of 2000. This represents an increase of 273.6 percent from the 1996 figures when Brazil was taking the road to market reform. The UNCTAD World Investment Report 2000 thus listed Brazil among 20 countries all over the world that received the highest amounts of FDI then (Seabra & Flach, L, 2004). The report attributed this achievement to the improved macroeconomic environment in Brazil brought about by the structural changes undertaken by the government on the economy, primarily the trade liberalization program, privatization and a more flexible policy on the inflow and outflow of foreign capital.

Such large holdings of FDI, however, may be eroded by any negative performance of the American and European economies. If a prolonged recession occurs in the US and Europe, the FDI in Brazil and other emerging markets will collapse and trigger a worldwide crisis. To avoid this scenario, the emerging economies need to sustain their economic growth by strengthening domestic demand instead of relying on exports. This would stimulate imports and help balance international trade. Aware of this risk, Brazil has positioned its services sector as the largest recipient of FDI, such that 78.6 percent of foreign investment goes to this economic sector, with only 19.4 percent channeled to the industrial sector. The reason is that most of the country's industrial output is intended for export, while services cater to domestic needs.

In 2000 following 9/11, the amount of FDI dropped considerably around the world but the reduction was minimal in BRIC (Rorenstein, 1993). Brazil for its part maintained the level of its FDI ... Read More
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