Comparative analysis of economic growth and development of Brazil and Russian Federation. 
Period 2000-2010

Comparative analysis of economic growth and development of Brazil and Russian Federation Period 2000;2010.

Content

Introduction

1. The level of development, indicators

2. Dynamics of growth and development

3. Characteristics of growth and development

3.1 Gross value added by economical activity

3.2 Growth accounting

3.3 Consumption side of GDP structure (expenditures)

3.4 Export structure

4. Concluding comparison

References

Introduction

In my case study I will compare economic growth and development of Brazil and Russian Federation in period 2000;2010. First part is devoted to level of development, second to dynamics of growth and third to characteristics of growth and development of Brazil and Russian Federation.

The chosen period (2000;2010) coincide with time when new players in global society emerged. Goldman Sachs first identified Brazil, Russia, India and China as BRIC in 2001. Before that Brazil and Russian Federation and their economic performance were not role models for the rest of developing countries due to huge economical problems. Brazil called for IMF help in 1982 due to second oil crises (1977) and poor leadership. Roett, R. (2010).New Brazil. Washington D.C.: The brookings institution. Russian Federation experienced economical brake down in 1998 and also called for IMF help. But they managed to overcome problems and gained interest of global society. In both countries new leaders started their mandates. In Brazil everything started with election of Fernando Henrique Cardoso in 1994 and successful presidency of Luiz Inacio (Lula) da Silva in period 2002;2010. Vladimir Putin is Russian’s choice from 2000 till now. This leaders started internal institutional reforms. Brazil and Russia started to think about competitiveness, fiscal discipline and showed economic growth.

Brazil and Russian Federation can not be more different countries, both lying on different continents, having their own interesting history, dealing with their own country specific problems, but there are some similarities which brought Brazil and Russian Federation under BRIC countries and their increased role in the world economy and politics.

Some similarities and differences between Brazil and Russian Federation from the point of view of economic growth and development will be presented in this case study.

1. The level of development, indicators

Table 1: Level of development indicators for Brazil and Russia in 2000 and 2010

In 2000 both analysed countries according to World Bank ranking of GNI were lower middle income countries. In 2010 Russia stayed in the same group, Brazil moved forward into upper middle income group. In 2000 both countries had medium human development index, but in 2010 high HDI. Global competitiveness index orders both countries into efficiency driven economies in 2010. According to WEF competitiveness Report 2010;11 Brazil was above average developed in area of innovation, business sophistication, financial market development, technological readiness and market size, but underdeveloped in macroeconomic environment and goods market efficiency between efficiency driven economies. On the other hand the largest problems are tax regulations, tax rates and inadequate supply of infrastructure. Russia is above average in market size, infrastructure, higher education and training and labour market efficiency, but below average in institutions, goods market efficiency, financial market development. The largest problems in Russia are: corruption, access to financing, tax regulations, crime and theft.

Brazil is fifth largest country by area and population in the world, Russia is first largest country by area and in 2000 she was sixth in 2010 already ninth country by population. Russia has lost 4,55 million of hers population in ten years period in the same time Brazil gained 20,52 million of additional population. Percentage of people living below countries poverty line is 40% (1999) and 13,1% (2009) in Russia and 22% (1998) and 26% (2008) in Brazil. IndexMundi found in May 2012 on website: http://www.indexmundi.com

2. Dynamics of growth and development

Graph 1: GDP per capita, PPP (constant 2005 international $) dynamics (1997;2010)

Brazil’s GDP per capita was quite stable in observed time period. The difference between the highest value (2009) and the lowest (1999) is 2363 international $. In whole period it was in growing trend, except of brief period of world financial crises in 2009. On the other hand Russian’s GDP per capita dynamics was more intensive. The lowest point was hit in 1998, the highest in 2008, both peak and bottom coincide with peak and bottom of oil prices.

Graph 2: GDP growth (1997;2010)

In observed period average Brazilian growth was 3,14%. The fundaments for Brazilian growth were set with Real Plan introduced by Cardoso. He undertook important reforms, but Brazil was the Latin American country most affected by the Asian crisis (1997;98), her economic growth was modest (0,0378%), but still positive. They introduced new currency which was initially pegged to US $ in 1999 and experienced good results very quickly (inflation dropped fast). Economy was slowly growing after that. The turning point came with the election of Lula in 2002. He started orthodox fiscal program with inflation targeting, responsible fiscal federalism, export diversification, progress in reducing poverty with program Bolsa FamiliaFamily Basket (income Gini index decreased by — 5,09 from 2000 until 2010). Roett, R. (2010).New Brazil. Washington D.C.: The brookings institution. All this success is visible on Graph 1 and Graph 2. Brazil was also affected by global financial crisis in 2009 and she experience slightly negative growth (-0,644%), but in 2010 the crisis for Brazil ended (4,03%), mostly due to conservative bank lending policies (high required reserves) before crisis (Brazil's home mortgage debt amounts to just 1.7% of its GDP) and good state and private owned banks. A pathifinder report found in May 2012 on http://www.pathfinderinternational.net/images/uploads/Brazil2.pdf The influence of discovery of Tupi oil field in October 2006 by state owned oil company Petrobras — the largest oil field found in Western Hemisphere in 30 yearsBrazil oil discoveries brings new challenges, found on May 2012 on http://www.frbatlanta.org/documents/pubs/econsouth/11q1_brazil_oil.pdf and some other discoveries also helped Brazil to recover from the crises. Brazil is also relative closed economy not so much connected with world’s financial system, but this doesn’t decrease importance of their good pre crisis economy state, which helped Brazil to overcome crisis very fast.

On the other hand Russia was painfully hit in 1998 when she experienced -5,3% economic «growth» due to failure Shock Therapy transition after breakup of Soviet Union in 1991, fixed overvalued ruble, chronic fiscal deficit, declining productivity, low prices of oil and Asian crisis (1997;98). The 1999;2000 elections marked a turning point. A post-Washington consensus had emerged — Moscow consensus. They focused on fiscal and monetary discipline, currency convertibility, price and trade liberalisation and privatisation. Putin started his mandate as Russian president in 2000 after Yeltsin’s resignation. And soon got a lot of help of Russian’s best economist: oil. The impact of oil prices on Russian economy can be overvalued. A study by the Rand Corporation suggested that increased energy rents accounted for between one-third and two-fifths of economic growth between 1993 and 2005. To avoid Dutch disease, the Stabilisation fund was established in 2004. Windfall energy revenues were used to pay back creditors, which had the additional advantage of being non-inflationary. Russian economy experienced budged surpluses and remarkable drop in inflation. The increase in real wage and pensions were remarkable, total convertibility of ruble opened doors for loans and new era of Russian economy began. In 2004 US declared Russia market economy. Sakwa, R. (2008).Putin, Russia’s choice (2.th edition). New York.: Routledge. Russia was strongly hit by financial crisis in 2009 (-7,8%) due to its resource based growth, which caused high vulnerability on external shocks. Ahrend, R. (2006). How to sustain growth in a resource based economy? The main concepts and their application to the Russian case, Economic department working papers No. 478, OECD. Active economics policy, public spending, sale of state owned investments and low public debt have brought Russia out of crisis after two quarters of negative growth in 2009 back to 4% growth in 2010. http://www.brookings.edu/~/media/Files/rc/articles/2010/05_russia_financial_crisis_gaddy/05_russia_financial_crisis_gaddy.pdf

3. Characteristics of growth and development

3.1 Gross value added by economical activity

Table 2: Gross value added by economical activity, 2008, Russia and Brazil (% of total GDP)

Majority of gross value added by economical activity in 2008 was added by mining, manufacturing and utilities in Russia (28%), in Brazil this category added 23,4% when in US 16,7%. In this category the difference between countries is the greatest. In all three countries around 5% of GVA (gross value added) was created by construction UN data. GVA in agriculture in US is just 1% in Brazil 5,8% and in Russia 4,5%. What is not surprising, because Brazil’s agricultural sector operates on a grand scale. Brazil is responsible for 80% production of the world’s orange juice, 25% of the worlds exported sugar and has the world’s highest sales figures per country for chicken and beef, and is the world leader in soybean export A pathifinder report found in May 2012 on http://www.pathfinderinternational.net/images/uploads/Brazil2.pdf. When we look data for industrial value added in Russia in year 2000 (WB adjusted weights), we can see that 49% of total industrial value added in Russia is dedicated to fuelAhrend, R. (2006). How to sustain growth in a resource based economy? The main concepts and their application to the Russian case, Economic department working papers No. 478, OECD. What shows on resource based growth of Russia. Brazil and Russia have very similar GVA, this is due to their similar economical development (low/high middle income countries).

3.2 Growth accounting

Q=F (A, K, L) Q=A· K^бL^(1-б) 0? б?1 g_Y=g_A+ бg_K+(1- б) g_L Jones, C. (1998).Introduction to economic growth. New York.: W.W.Norton & Company, Inc.

б (capital share) for Russian Federation and Brazil is 0,35 and labor share is 0,65

For calculations I will use time period from 2002 till 2008 due to lack in data. (data in appendix)

Table 3: Growth accounting (average 2002;2008)

The largest contribution to growth in both countries had capital growth. 50,3% of all economic growth in Brazil is dedicated to growth of capital, only 0,6% to growth of labour and 49,1% to total factor productivity. In Russia 62,5% of total economic growth is dedicated to growth of capital, 0,1% to labour growth and 38% to total factor productivity (technology). The Brazilian growth is more technology driven than Russians, but they both still grow on capital accumulation.

3.3 Consumption side of GDP structure (expenditures)

GDP = Household consumption + Gross investments + Government consumption + Net export (Export — Import)

Y = C + I + G + NX

development economic export consumption

Graph 3: GDP structure in % by type of expenditures Russia (constant prices 2008)

Russian economy is mostly driven by household consumption (average 44,5%), which is growing form year 2004, when total convertibility of rule was introduced and Russia was declared as market economy and there was increase in wages and pensions too. The second most important growth driver is export (average 32,5% of GDP). Export importance in Russian’s GDP is stable over time. With large share of export in GDP Russian economy is exposed to international aggregate demand shocks, what caused also — 7,8% growth in year 2009. Average value of government consumption is 19,8%. The movement of Gross investments mimics the GDP movement. High economic growth increases expected revenues and optimistic investment environment. At time of the crisis the share of investments dropped by 9,2 percentage points. Investment share was on average 20,5%, what is tuned with economic theory suggestion. Import is moving similarly to gross investments, because higher domestic income increases import and it’s share in GDP, the opposite effect is visible in the time of economic crisis 2009, when import importance fall. Russia constantly experiences positive net export (current account surplus). Average share of import in GDP is 16,9%.

For poor economic performance in year 2009 was responsible negative «growth» of investment, which was the third most important part of GDP in year 2008, for 41%. Drop in import was 30,4%. It is interesting that Russia hasn’t increased government spending, it was decreased by — 0,6%. Own calculations Russian Federatrion Federal State Statistics Service (ROSSTAT) The 2009 Anti-Crisis Programme amounted to approximately 2 trillion rubles (62.5 billion $) ILO G-20 Country briefs The russian federation’s Response to the Crisis, http://www.ilo.org/public/libdoc/jobcrisis/download/g20_russia_countrybrief.pdf, april 2010, found in May 2012, but overall G compared to 2008 has decreased.

Graph 4: GDP structure in % by type of expenditures Brazil (constant prices 2005)

The most important component of GDP in Brazil is Household consumption, with an average value 61,5%. Export on the other hand on average contributes 14,32% to GDP. Both indicators show that Brazil is mostly closed economy, larger share of Brazil’s production is consumed at home and they are using their huge domestic market to sell their products. Net export was positive till 2008, than it became negative and it is getting larger (current account deficit). Before the crisis global economic forces have served Brazil well. As a leading exporter of raw materials (soya and iron ore), Brazil has benefited from Chinese boom. Export served for massive inflow of dollars and made real more expensive, what undermines competitiveness of manufacturing. Imported machinery has increased its market share from 15% to 50% since 2006. Chetwynd, G. (2011, August). Brazil’s strong currency bnefits consumers but punishes business. The Gaurdian, Rio de Janeiro, found in May 2012 on website: guardian.co.uk. This movement is showed in negative net export.

The second most important component of GDP are gross investments (on average 19,72%). Investment’s share reaches maximum value in 2008 (20,8%). Investments are going to increase due to Olympic Games in Rio de Janeiro in 2016. Government consumption share is on average 19,2% and is relative stable over time.

In period form 2008 and 2009 Brazil experienced negative economic growth — 0,6%. This was mostly due to decrease in gross investments (-16,2%) and drop in export (- 10,2%). Public consumption has increased by 4,2%. Stimulus package amounted to a 20,4 billion $ injection into the economy (1,2% GDP in 2009) was part of contra cyclical policy. It impacted economic activity through additional government spending (3,9% increase), tax cuts and subsidies. They created nominal deficit estimated at 3.2 per cent of GDP in 2009. Cunha, A., Prates, D., & Filho, F. (2011). Brazil Responses to the International Financial Crisis: A Successful Example of Keynesian Policies? PANOECONOMICUS, 2011, 5, Special Issue, pp. 693−714.

3.4 Export structure

Graph 5 Export Brazil by category in US $ (2000, 2009)

Note: Selected classification: SITC Rev.3: 0 (Food and live animals), 1 Beverages and tobacco, 2 (Crude materials, inedible, except fuels), 3 (Mineral fuels, lubricants and related materials), 4 Animal and vegetable oils, fats and waxes, 5 (Chemicals and related products), 6 (Manufactured goods), 7 (Machinery and transport equipment), 8 (Miscellaneous manufactured articles), 9 (Other)

Brazil export represents 14,32% of GDP on average in years 2003;2010. The total export more than doubled in 9 years. All selected commodities export have increased from year 2003 till 2010. The largest jumps in export experienced commodities: Food and live animals, Mineral fuels and Crude materials export (form almost 0 value to fifth most important export commodity); on the other hand the smallest increase in export experienced: Manufactured goods, Chemicals and related products and Machinery and transport equipment. Other four commodities groups are not very important for Brazil.

Graph 6: Brazilian export of primary and manufactured goods and % of Brazilian export to China (2000;2011)

Brazil’s export earnings from manufactured goods continue to fall while those from primary goods continue to rise. In year 2009 export earnings from primary goods has taken over manufacturing goods earnings. Despite of political struggle to support manufactured goods export, they failed to do so. More than half of the $ 33bn year-on-year increase in Brazilian exports in the first three quarters of 2010 came from primary products. This was mainly driven by a sharp rise in the value of exports of iron ore and crude oil, which almost doubled from the same period last year. The main reason for this change is China, which became Brazil’s largest trading partner, overtaking the US. Iron ore is now the biggest Brazilian export product (17% of total export, more than half goes to China). Analysts say Brazil must decide soon whether it is happy to be an exporter of low value-added goods or whether it wants to compete in markets for higher value goods. Romei, V., Wheatley, J.(2010, 1. November). Chart of the week: Brazil’s shifting export structure Beyondbrics, found in May 2012, on website: http://blogs.ft.com/beyond-brics/2010/11/01/chart-of-the-week/#axzz1uJFNpQ00

Graph 7: Russian export

Note: A: food, raw materials except petroleum and gas; B: Crude materials, inedible, except fuels; C: Petroleum; D: Gas; E: Manufactured goods without steel and iron; F: steel and iron; G: Other

Russian export tippled in nine years. The most important Russian export commodities are represented in graph. The leading export commodity is fuel, followed by gas. Mineral fuels, lubricants and related materials export has increased the most, from 13% of total export in 2000 to 46% in 2009. The largest share of this increase goes to petroleum and gas export. In 2009 chemicals and related products, manufactured goods, machinery and transport equipment and miscellaneous manufactured articles represented 13,5% of total export. Data suggest that Russian export is very dependent on primary goods export. Politics is trying to avoid all negative impacts of resource based economy, including Dutch disease, but they are not successful in diversifying Russian’s economy. They are struggling to make their oligarchs owned industry more efficient, but distortions are too large.

4. Concluding comparison

Brazil and Russian Federation are both middle income countries. They have gained international interest in 2002 when they were declared as members of BRIC countries, who have chance to become world’s leaders in the future or at least play more visible role in world order.

Differences in economic development indicators are most visible in population movement. When Brazil experiences high population growth Russian Federation grew at negative rate, which can in longer turn mean obstacle to growth. Income inequality is higher in Brazil, but is becoming lower, when in Russia the opposite is true. Brazil ranked 58 and Russia 63 with concern to global competitiveness index 2010;11. Brazil is doing much better fighting inflation than Russia, but Brazil experiences lower GDP growth rates. Russia has actually no public debt, with just 5,9% GDP debt (due to oil revenues), Brazilian public debt is 60,8% and they managed to lower it 2,3 percentage points in ten years.

Russian GDP per capita (PPP, constant prices) more than doubled in ten years (2000 to 2010), Brazilian increased almost by one third. Brazil experienced on average 3,14% economic growth (1997;2010), Russia 4,42%. Both countries were hit by economic financial crisis 2009, but their economies were prepared. Brazilian growth in 2009 was — 0,644% and year later already 4,03%. Russian economy was hit harder, because they are more open than Brazil and due to drop in oil demand, what caused — 7,8% growth in 2009, but she was back on track next year with 4% growth.

Gross value added by economic activity is very similar between observed countries; this is due to similar economical development. The most important value added activity is for both: mining, manufacturing and utilities. 49% of total industrial value added in Russia is dedicated to fuel, what shows on resource based growth. Supply side economic growth analysis has shown, that 50,3% of whole economic growth in Brazil is dedicated to growth in capital (62,5% in Russia), only 0,6% to growth in labour (0,1% in Russia) and 49,1% to technology growth (38% in Russia). The most important part of GDP in both countries is household consumption (61,5% Brazil and 44,5% Russia). Government spending, gross investments and import share are similar, but major difference is made in export. Russian’s export share in GDP is 32,5%, when Brazilian’s is just 14,32%. Between middle income countries Russia is unusually open and connected to other world, but they are still not WTO members. During the crisis the decline in output in both countries is due to fall of gross investment (- 41% RUS and — 10,2% BRA).

Total Brazilian export more than doubled and Russian export more than tripled from 2000 till 2009. Russian export is mostly based on petroleum and gas. Brazilian export is more diversified, but major changes happened in 2009 when revenues from primary goods export overtook manufactured goods export earnings. Especially export of iron ore (17% of total export) increased. Brazilian number one trading partner is China. In the future observed countries can become more similar, with taking into concern oil foundlings in Brazil.

References

1. Romei, V., Wheatley, J.(2010, 1. November). Chart of the week: Brazil’s shifting export structure. Beyondbrics, found in May 2012, on website: http://blogs.ft.com/beyond-brics/2010/11/01/chart-of-the-week/#axzz1uJFNpQ00

2. United Nations, Commodity Trade Statistics Database (COMTRADE)

3. Chetwynd, G. (2011, August). Brazil’s strong currency bnefits consumers but punishes business. The Gaurdian, Rio de Janeiro, found in May 2012 on website: guardian.co.uk

4. Cunha, A., Prates, D., & Filho, F. (2011). Brazil Responses to the International Financial Crisis: A Successful Example of Keynesian Policies? PANOECONOMICUS, 2011, 5, Special Issue, pp. 693−714.

5. Russian Federatrion Federal State Statistics Service (ROSSTAT)

6. Instituto Brasileiro de Geografia e Estatistica

7. Banco Central do Brasil

8. ILO G-20 Country briefs The russian federation’s Response to the Crisis, http://www.ilo.org/public/libdoc/jobcrisis/download/g20_russia_countrybrief.pdf, april 2010, found in May 2012

9. A pathifinder report found in May 2012 on http:// www.pathfinderinternational.net/images/uploads/Brazil2.pdf

10. Ahrend, R. (2006). How to sustain growth in a resource based economy? The main concepts and their application to the Russian case, Economic department working papers No. 478, OECD.

11. Jones, C. (1998).Introduction to economic growth. New York.: W.W.Norton & Company, Inc.

12. Kvintradze, E. (2010). Russia’s Output Collapse and Recovery: Evidence from the Post-Soviet Transition, IMF working paper, found in May 2012 on: http://www.imf.org/external/pubs/ft/wp/2010/wp1089.pdf

13. From miracle to Disaster: The Brazilian economy in last three decades, found in May 2012 on website: http://www.degit.ifw-kiel.de/papers/degit₁₀/C010₀₀₉.pdf

14. Roett, R. (2010).New Brazil. Washington D.C.: The brookings institution.

15. Brazil oil discoveries brings new challenges, found on May 2012 on http://www.frbatlanta.org/documents/pubs/econsouth/11q1_brazil_oil.pdf

16. Sakwa, R. (2008).Putin, Russia’s choice (2.th edition). New York.: Routledge.

17. World Bank database

18. Wikiposit, found on: http://wikiposit.org/am?WB.RUS.SI.POV.GINI=95&WB.BRA.SI.POV.GINI=13

19. WEF Global Competitiveness Report 2010;2011

20. Nation master statistics, found on: http://www.nationmaster.com/graph/eco_pub_deb-economy-public;

21. IndexMundi found in May 2012 on website: http://www.indexmundi.com

22. http://inflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp