1. Situation Analysis Brazil is being considered as a growing economy. In fact the country, one of the BRIC nations is seen by analyst of Goldman Sachs as one of the five nations that will be at the top of all nations with regard to a countrys GDP (The Goldman Sachs Group Inc., 2007). To understand Brazils current situation and how the country may be able to grow out of this position as a global player in the near future aiming a better globalization of the country by the year 2050, one has to see Brazil within a bigger frame. Within this frame, actions taken have to be integrated into the five obstacles Brazil currently faces.
1.1. The five obstacles Brazil has to overcome (Brazil Cost) There are five obstacles according to McKinsey that Brazil has to pay attention to in order to grow in the future as a global player. These obstacles are a reduction of size and importance for the informal sector, to correct deficiencies of macroeconomic nature, which are for example the high real interest rate and a high government debt-to-GDP ratio.
Further does McKinsey advice the Brazilian government to reduce the excessive bureaucratic regulation and to improve the quality of its public services, which are for example the Brazilian education, justice and security. Another point on the agenda for future growth of Brazil should be the development of the countrys infrastructure. These five areas of improvement, which run under the name Brazil cost, are a good start for Brazil to consider future plans and further to consider in how actions taken so far fit to the aim of being a country of globalization. These actions taken by the Lula government will be analyzed within the context of the countrys future growth.
1.2. Actions taken by the Lula government Being aware of the obstacles Brazil has to fight, it was the aim for the Lula government to initially reduce the poverty and inequality Brazilian citizens were facing. The outcome of a thorough action plan set up three pillars. The first was to stabilize the macro economy. Further was trade an issue for Brazil to grow and become a global player. The third pillar is dedicated solely to the issue of inequality. Regarding the macroeconomic stability, Brazil was able to increase its investment grade from B+ to BB, which made Brazil more attractive to investors. Part of it can be credited to the improved corporate governance standards for new companies listed on the Sao Paulo Stock Exchange, through which foreign investors got attracted to the Brazilian securities. In addition did the debt-to-total exports ration decrease from 3 to less than 1.
The concept regarding macroeconomics was to only use the available money at hand so that stability finds itself. This concept was a new milestone to Brazils macroeconomic instability, the country went through to prior years. Based on an instable macro economy the aim for a growth rate of 5% arose (The Goldman Sachs Group Inc., 2007). To tackle a rate of growth at 5% or higher the Lula government was active in the Doha Round, which negotiated the topic of trade. Brazil was able to gain negotiation power through the creation of the G-20, which consists of 20 developing countries. This way Brazil was able to lower the tariffs and subsidies on their agricultural products that were exported. On the other side did the import tariffs on manufacturing goods decline as well.
Through the excessive demand of agricultural goods from China, was the Brazilian GDP increasing to 4.9% (in 2004). However could only be a few farmers being credited for this growth, which has even spread the gap of inequality. To fight the inequality Brazil increased the national minimum wage from $80 to $160. Further did the Lula government continue with its noncontributory pension program as well with the Benefits for Continuous Service. Expanded was the School Grant, which was renamed the Family Grant, which gave families dependent on their income a surplus.
2. Recommendation analysis It is believed that Brazil has the potential to even grow faster than with the proclaimed 5%, president Lula was aiming for (The Goldman Sachs Group Inc., 2007). The key for an even higher growth rate is to challenge the countrys way of operation. Thus Brazil can be seen as a country of the future. Even though the country has to find its place within the BRIC nations. By comparison with the other nations, it can be seen that Brazil is considered to be the weakest nation. Given the fact that globalization can be seen as the future for every country (Naim, 2009), also Brazil will be able to take a stance of defining the nations globalization strategy with a thorough plan of actions. BRIC nations are defined as becoming the largest economic bloc in the world by 2050.
The foundation therefore among other aspects lies in the population of these countries. Brazil has a population of 186 million (in 2006) people. Further can be seen that the human development index (in 2003) can be found at 0.792, which is following Russia the highest index. In addition should be noted that the latest government practices a democracy steered towards globalization. This democracy as well allowed more privatization. Another way of seeing the global Brazil, is by acknowledging Brazils major industries regarding its exports. Seeing these factors as a foundation for Brazil to become an economic leader in the future, the nation still has to work its way there.
Hence are there a few issues Brazil has to get a hand on. So is for example the agricultural business, which is owned by only a few inhabitants, an area the country wants to step away from and focus more on the manufacturing industry. Some financial issues need to be solved. So is the tax rate not favorable, as it is way too high with 72% (in 2006). The cost of hiring and firing workers is too high as well, which makes Brazil unattractive for new businesses. Unattractive as well for new businesses is the long lasting regulatory process before a business is allowed to start operating. Interest rates are too high, with 48.7% (in 2006) for lending and 15.3% (in 2006) for investing.
Further has Brazil a quite low percentage regarding its savings with only 22% (in 2006) and the GDP is at worst compared to the other BRIC nations. Another major problem the county has to solve is its Inequality. Even though financial measures were taken, inequality is not going to be solved that way. Sticking with the agricultural business might be profitable for the short-run.
However future trends show that Brazil should engage more in the manufacturing industry. Key for 2050 is know-how, meaning that a country with a great population should build on its citizen. They should be seen as the capital of tomorrow. The government budgeted quite a high amount for higher education, but did miss out to stimulate the early education. By doing so inequality was even further build out. If Brazil wants to foster from its human capital it has to start budgeting fair amounts for elementary and secondary school, so Brazil can gain from its people by 2050.
3. Recommendation In order to be able to aim or even exceed the 5% growth rate it is recommended to Brazil to reduce the Brazil cost, meaning that the informal sector will be reduced as much as possible, so the government is aware of its GNP, hence the tax rate can be cut to a substantial amount simultaneously. Further should the Brazilian government correct some macroeconomic deficiencies. Hiring and firing workers should be reasonably priced and the red tape should be decreased, so that an entrepreneurial spirit can rise that makes Brazil attractive. Interest rates have to be cut down, so borrowing and lending within Brazil will not be questioned as much as it is now.
By making the Brazilian market interesting, Brazil should also increase its foreign direct investment on the other side. A movement should occur from the agricultural business to the manufacturing industry, as there will be future revenues. With this step also the inequality issue has to be resolved. Key to good operations within Brazil is a functional infrastructure, therefore it is recommended to Brazil to improve its infrastructure. Further is a currency re-evaluation recommended, as there is a high conversion rate when comparing to the US Dollar.
Regarding Brazils education, the government should enhance the budget for elementary and secondary education, since the country will depend on its educated people in the future, so that Brazil can become a big global player. If Brazil will be able to work on these recommendations, it is prognosticated that in the first step, taxes will be reduced and new businesses will feel encouraged to open up their businesses. Privatization will eventually increase, due also to the reduction of the inequality. A devaluation of the currency may occur and general transparency will increase, which can be observed for example on the GNP. The government will have an increased spending on Brazils infrastructure and the education of its citizen for future profits. Based on this prognosis it can be expected that Brazils liquidity will increase, so will as well the purchasing power.
Domestic investments will increase, due to an attractive market, but also the foreign direct investments will increase. On the counter side it can be expected that inflation will go up and the government will make losses, due to a cut back in taxes. Eventually will these action items enhance Brazilians growth. Depending on how far the government is able to build on these recommendations can it be thinkable that the growth rate exceeds the aimed 5%. Furthermore should be said that the suggested implications will have an influence for Brazils future growth.
However are these implications only based on a theoretical background established from the information gained from the case. Additional recommendations gained from the Goldman Sachs paper can be gained from Table 1 in the appendixes. New actions may want to be considered by Brazil throughout the process of becoming a global player. Adjustments will have to be made from the point of time the country starts to perform on the mentioned action items.