Key Growth Markets: Opportunities and Challenges in Brazil, Russia, India and China

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Key Growth Markets: Opportunities and Challenges in Brazil, Russia, India and China
Market Report, February 2007, 3596 €

Description

IntroductionThe BRIC economies have to varying degrees shown rapid economic growth, increasing market size across all sectors and a burgeoning middle class in recent years.
However, they have also been criticized by investors for their poor infrastructure and high rates of corruption.
This report provides an in-depth analysis of the challenges and opportunities in these economiesScopeThe report looks at the economies of Brazil Russia, India and China, identifying key opportunities for growth for different industry sectors It analyses key economic indicators as well as soft factors such as the level of law and order to give a complete picture of each countryHighlightsChina and India have had phases of good economic performance through the 1990s and later.
At the same time, though not as remarkable, the Russian Federation, after the collapse of communist regime, has also shown potential for rapid economic growth.
The BRIC economies face challenges to improve the functioning of their state, improving the current ineffective law and order systems, reduce rampant corruption and managing the current high levels of inequality and poverty.
Economic growth in Brazil seems to have recovered from the slowdown in 1990s and is now looking steady.
However, the economy shows significantly low growth, when compared to its BRIC partners and Brazil continues to face high levels of debt in the international marketReasons to PurchaseThe aim of this report is to provide analysis that will add value when making business decisions with regards to investment in these markets Provides an in-depth and detailed analysis of the economic situations in the BRIC countries and identifies key opportunities

Sommaire

CATALYST 1
SUMMARY 1
METHODOLOGY 1
TABLE OF CONTENTS 2
OVERVIEW ANALYSIS 4
Introduction 4
Emerging Economic Powers 4
Increasing share of global GDP 4
Higher growth rate of GDP per capita 5
Large urban populations 5
Burgeoning energy consumption 6
Growing Foreign Direct Investment 7
Challenges facing BRIC economies 8
Problems of state functioning 9
Ineffective law and order 10
Rampant corruption 11
High levels of inequality and poverty 11
Key Conclusions from PESTLE Analysis 12
The BRIC economies have seen significant changes in the recent past in their socio-political-economic spheres. However, as discussed above they do suffer from various inadequacies to be able to reach the development levels of many advanced nations. These problems are complicated by the growing international competition as well the shrinking of global distances. Today, these economies must continue to outperform their competitors, as investors have an easy access to different alternatives. Below are the key insights of the report highlighting the advantages and challenges that these economies have for foreign investors and their own policy makers. 12
Brazil: After the slowdown of the 90's focus now shifts to stability 12
Russia: political recentralization and economic revival driven by natural resources 13
India: rising internal issues may de-stabilize the well-placed reforms 14
China: emerging challenges shift focus away from economic growth 14

BRAZIL: AFTER THE SLOWDOWN OF THE 90'S THE FOCUS SHIFTS TO STABILITY 16
Catalyst 16
Summary 17
The current government's sustainability rests on its ability to widen the benefits of reforms 18
After a fragile victory the current coalition looks stable 18
The general focus of the government to be more pro-poor 18
Brazil continues to strive for a global recognition 18
Brazil wants to be recognized as an international political force and is therefore pushing for permanent membership of the UN Security Council. Brazil was the driving force behind the creation of MERCOSUR and is its dominant member. The country has been especially active in recent WTO discussions, leading a contingent of developing nations against the suggested policy changes of the G8. 18
Lula's government needs to balance social objectives with economic reforms 19
Though hindered by certain structural problems, economic growth now looks steady 19
Brazil's economic performance has a strong base 19
Brazil seems to have left its turbulent economic past behind though a number of basic issues still remain 19
A strict taxation policy is regarded as a burden amongst all social classes with inadequate social returns 20
Despite government intervention, income disparities, poverty and regional imbalances remain high 21
While the overall situation remains far from ideal, the government has tried to address this head on 21
Despite attempts to develop a solid social infrastructure base, facilities remain inadequate 21
Income inequality and landlessness are severe issues that still affect an overwhelming part of the population 21
Investment in technological infrastructure in key industries is being used as the main driver of industrial production 21
Investment in harnessing new technologies, especially from the US, has contributed largely to the development of technology intensive industries 21
The development of media and communications related infrastructure and a skilled labor force to maintain this has taken place rapidly over the past two decades 22
President Lula has promised to bring the issues of rampant red tape, corruption and organized crime under control 22
Corruption scandals involving members of the legal, executive and judiciary systems are commonplace 22
Red tape is holding back opportunities for business in Brazil 22
The existence of organized crime and prison gangs is rampant 22
The absence of strong laws protecting intellectual property is a growing issue 22
The Lula government has identified key issues to tackle 23
New policies in place to control depletion of the rainforest and over-exploitation of natural resources 23
The government is taking action to control the environmental degradation that has occurred over the past few years 23
Industrial progress had also had significant environmental cost 23

RUSSIA: RE-CENTRALIZATION AND A REVIVAL DRIVEN BY NATURAL RESOURCES 24
Catalyst 24
Summary 25
Political stability is being achieved at the expense of democratic fundamentals 26
President Vladimir Putin has emerged as a dominant force in Russian politics and this is likely to continue 26
New Russia's foreign policy stance is driven more by economic factors rather than political and military factors 26
Despite Russia's forceful intervention, the Chechnya issue continues to pose a threat to internal security 27
Natural resources based growth is being diversified by encouraging foreign investment on a selective basis 27
The Russian economy's strong growth is driven by continuous expansion in internal demand, growing capital investment, high oil prices and a relatively cheap ruble 27
Though there is a movement towards greater economic control, the government recognizes foreign investment as an important driver of economic development 28
A declining and ageing population along with the growth of urban agglomerations are increasingly important issues 28
Russia's population is steadily declining and ageing rapidly 28
Expanding urban agglomerations are characterized by rising affluence and growing business opportunities but income inequality and a rising crime rate are the key challenges 29
Active government involvement to support the growth of the ICT sector, though software piracy is still rampant 29
The Russian government is actively encouraging research and development in the technology sector 29
Software Piracy continues to be a major inhibitor to the growth of the ICT industry 30
Development of an investor-friendly climate faces obstacles of corruption and organized crime 30
Russia has created flexible and investor friendly laws which are helping in realizing high economic growth rates 30
Centralization of power in the presidency has adversely affected judicial independence and legal function 30
The Russian political leadership has been accused of not fully subordinating itself to the law and the executive branch exercises considerable influence over judicial decisions. Executive and legal functions are marked by a lack of transparency and accountability and there are rising concerns that prosecutors have selectively targeted individuals for political reasons. In several high profile cases, for instance, Mikhail Khodorkovsky, the erstwhile owner of oil firm Yukos, was arrested and later sentenced to nine years imprisonment due to alleged involvement in tax evasion and fraud. There were serious allegations by his lawyers and other commentators that the government had conspired against him and had denied him a fair trial by interfering in it extensively. It has also been alleged that Khodorkovsky was targeted for opposing the Putin administration and secretly nurturing political ambitions. He had funded several political parties ahead of State Duma elections to be held in late 2003. Thus, he was looking to use his wealth to seize control of the Russian parliament. Moreover, he had also opposed the government's oil pipeline industry policies. 30
The government must make a concerted effort to eliminate rampant criminal activity 31
Economic progress is taking priority over environmental concerns 31
Economic development has taken a priority over environmental sustenance 31
Russia's vast network of oil pipelines and nuclear waste disposal system need urgent upgrading and maintenance 31
Global warming is becoming an important issue 32

INDIA: RISING INTERNAL ISSUES MAY DE-STABILIZE THE WELL PLACED REFORMS 33
Catalyst 33
Summary 34
Polluting industries and agents yet to be checked 34
Declining in influence, Indian National Congress still holds the key to political stability 35
Gaining the support of national and regional parties makes it difficult for a single-party government to be formed at the center 35
Political stability in India is threatened by the Kashmir dispute and other internal issues 36
India's current position in the global arena is reflective of its political and economic development over the past two decades 37
Doubts over sustainability of the current rapid economic growth continues to plague the sub-continent 37
India has registered robust economic growth over the recent past which has put it in a relatively strong economic position 37
However, doubts over the sustainability of this growth continue to plague the economy 38
Infrastructure holds the key to sustain current levels of economic growth 38
The government has adopted a liberal approach towards foreign investment in most sectors 39
Recent economic development raises new social issues 39
Changing social and demographic make-up of the economy is presenting new opportunities as well as challenges 39
Social dimensions of poverty and inequality need to be tackled along side economic development 39
The social infrastructure in place is not sufficient to meet the needs of a burgeoning population 40
India registers an increasing technological presence globally 40
Large talent pools, the development of required infrastructure and incentives provided by state governments are attracting investment in the ICT sector 40
There is evidence of increasing technological capability and learning among Indian firms 40
A growing number of MNC's have been setting up offshore development centers and R&D facilities in India since the 1990s 41
Despite the impressive performance, there is a huge scope for improvement in the software sector 41
Steps have been taken to improve the legal system though lot still remains 42
Initiatives have been taken to strengthen the judicial system 42
Other indicators of legal health see only marginal improvement 42
Environmental concerns remain buried under economic and social problems 43
Polluting industries and agents yet to be checked 43
The supply of water for direct consumption, irrigation purposes and commercial purposes still remains an issue 43
Demographic and economic changes bring new dimensions to environmental concerns 43

CHINA: EMERGING CHALLENGES SHIFT FOCUS AWAY FROM ECONOMIC GROWTH 44
Catalyst 44
Summary 45
China's authoritarian political regime faces challenges with the emergence of its new economic order 46
China continues to be ruled in a strong, authoritarian manner 46
However, concessions have been made where protests have been deemed not to be a direct threat to the CCP or to state policy. Largely, this has been in the form of monetary compensation to villagers who have had land or housing compulsorily acquired by the state to make way for new industrial investment. 46
However, in order to adapt itself to the changing economic and social environment, the CCP has created a variety of new political institutions to provide a bridge between state and society 46
With rapid privatization of the economy, a variety of business and trade associations have been created, largely in the coastal regions, and are having an increased influence of those outside the formal party structure. 47
In the international arena, China is emerging as an active player. This aspiration is evident in its less confrontational and more constructive approach towards regional and global affairs. 47
After two decades of rapid economic growth, China takes conscious measures to stabilize and sustain future growth 48
China has been the fastest growing economy in East Asia and the world for the last two decades 48
However, there are growing concerns about the sustainability of the continuous high growth rates 48
Steps to cool the economy might prove ineffective 49
China still continues to protect its economy 49
Although China has embarked on the free market policy, it still continues to protect its economy and many sectors are still not open to competition. For example, China still follows a controlled exchange rate system. On one hand, this has been responsible for low value of Yuan in spite of a burgeoning trade and current account surplus. On the other, this has had impacts on the trade deficit of countries like US. The US trade deficit (not seasonally adjusted) with China which stood at USD 162 billion in 2004 has increased to USD 202 billion in 2005. In order to prevent Yuan from rising, Chinese authorities had been investing huge trade surplus and capital inflows earnings in US Treasury securities. However, burgeoning trade surpluses with China and China's demand for US Treasury bills has forced US Federal Bank to keep interest rates at low level (despite record levels of indebtedness in the US). The global economy in general and Chinese economy faces the threat of any rapid upward correction in the US interest rates, as it would lead to massive asset revaluation, inflationary spikes and recessionary tendencies etc. It was only in July 2005 that China revalued its currency by 2.1% against the US dollar and moved to an exchange rate system that refers to a basket of currencies. However, it is alleged that Chinese authorities have not allowed the Yuan to appreciate to the appropriate level. 49
China's demographic transition to an ageing population and growing inequality poses serious economic challenges 50
A major demographic issue facing China is its ageing population 50
Increasing inequality is emerging as an issue in China 50
The Chinese economy is witnessing a technological shift 51
Historically China focused on low cost bulk manufacturing and placed little emphasis on branding but recently there has been a growing shift towards use of high-end technologies and brand creation 51
China is attempting to create its own technological standards 51
The legal and judicial systems still remain subservient to political priorities 52
There is strong political control of the judiciary 52
Judges are generally nominated by a party committee and party policy dictates that those selected as judges at different levels should have reached a corresponding rank within the party system. 52
Local institutions continue to be plagued by high levels of corruption and its eradication has been one of the most important challenges for the communist regime. In order to tackle this problem extreme measures have also been taken. For example Hu Changqing, former deputy governor of South China's Jiangxi Province, was sentenced to death with immediate execution for embezzlement of 5.44 million yuan (US$ 672,028) in 2003, marking the death of the highest ranking official sentenced to death since the establishment of the country. 52
Freedom of the press and religion has been severely restricted 52
The Government tries to control and regulate religion to prevent the rise of groups that could constitute sources of authority outside of the control of the Government and the Chinese Communist Party (CCP). For example, despite objections from the Vatican, the Chinese Catholic Patriotic Association supported by the Chinese leadership arranged for the consecration of its senior officials as the bishops of Kunming in southwestern China and Wuhu in Anhui Province in eastern China. The Government has also detained some citizens for providing religious information to foreigners and prevented some religious figures from traveling abroad. For example, Henan Province Christian pastor Zhang Rongliang was arrested on 1st December 2004, and was put in prison on the charges of obtaining a passport through fraud and illegal border crossing later in June 2006; he was sentenced for 7-1/2 years of imprisonment. 52
Although Intellectual Property Laws have been strengthened, significant progress needs to be made in the implementation of these laws 53
The Increasing environmental cost of expansion has forced the government to become more environment friendly 53
Centralized policy making combined with a high degree of emphasis on economic growth has resulted in China becoming one of the largest global polluter 53
Worsening air pollution has also put Hong Kong's tourism industry at risk. Pollution from the mainland's heavily industrialized Pearl River delta region has been most important factor contributing to the deteriorating air quality in Hong Kong. 53
However, China has started introducing bold initiatives to solve its environmental challenges 53

APPENDIX 55
Definitions 55
PESTLE Analysis 55
MERCOSUR 55
CDM 55
Certified Emissions Reductions 55
Gini Index 55
CPI 56
UST 56
VAT 56
ISO 56
Methodology 56
Further reading 56
Ask the analyst 57
Disclaimer 57

List of Tables
Table 1: BRIC and US share in Global GDP 2000 to 2005 4
Table 2: Income Inequality and Poverty in 2006 12
Table 9: Productivity of the manufacturing and software industries in India 41
Table 10: Cases pending with the Crime Branch of India (CBI) 42

List of Figures
Figure 1: Per capita GDP growth is higher in BRIC compared to G7, although Brazil is an exception 5
Figure 2: In 2005, Urban population concentration was highest in the BRIC nations 6
Figure 3: Increasing share of global energy demand is coming from the BRIC economies 7
Figure 4: China and Brazil attracts the maximum FDI among the BRIC economies 8
Figure 5: Citizens of Brazil and India enjoy greater voice and accountability among the BRIC nations 9
Figure 6: India is high on law-enforcement among BRIC countries, although it is much lower than the G7 10
Figure 7: Significant gap remains between BRIC and G7 nations over "Control on Corruption " 11
Table 3: Key Statistics for Brazil, 2006 16
Table 4: PESTLE Highlights of Brazil 17
Figure 8: Inflation Rates in Brazil has come-off its turbulent times in the past 20
Table 5: Key Statistics for Russia, 2006 24
Table 6: PESTLE Highlights of Russia 25
Table 7: Key Statistics for India, 2006 33
Table 8: PESTLE Highlights of India 34
Figure 9: Indian National Congress still holds the legacy of political dominance in India 35
Figure 10: Subsequent election results have shown declining share of votes for the Indian National Congress 36
Table 11: Key Statistics for China, 2006 44
Table 12: PESTLE Highlights of China 45
Figure 11: Year 2006 has seen the Chinese Yuan appreciate against the US Dollars 50
Figure 12: Representation of Gini Index on Lorenz Curve 56