Clash of Titans

By, Krunal Barabde

 

Once a company grows, the hunger to multiply its top line keeps on increasing like gap between poor and rich. To feed this hunger, some companies target mass market, some develop new product lines, some even enter new sectors, but most prefer to go global (Very few companies achieve global status, since most companies are regional or glocal[1]). In planning global strategy, political situation in host country is the most crucial parameter; especially, if it is Brazil.

Brazil on Oct 26 2014 re-elected their president Ms Dilma Rousseff with a marginal mandate of 51%. Brazil is 5th most populous nation on the earth (total population approx 200 million) with estimated GDP of $2.2 trillion, is the most influential country in Latin America. Presidential battle was closely fought between incumbent President Dilma Rousseff from Worker’s Party and rival Mr. Aecio Neves  from PSDB Party.

For past 10 years Brazil has been performing exceptionally well on the economic front, Brazil was one of the top Emerging Nations in BRICS race (Brazil, Russia, India, China, and South Africa), even during 2009 and 2010 global recession period Brazil was posting GDP growth of 4% to 7.1%. The growth largely credited to soaring middle class, approx 30 million consumers had entered into middle class segment, benefit of large stockpile of raw material (iron, soybeans, beef, cane sugar, coffee, uranium).

However, Brazil is ranked 127th among 183 nations to do business for foreign based companies by world bank, as government intervention has led to complex and expensive tax policy, corruption, costly credit and strict labor policies. Brazil’s current economic situation is not good, since it has suffered technical recession in first half of 2014 with GDP contracting to -0.2% and -0.6% respectively in two quarters. Industrial production growth for 2014 is -2 %, directly affected by high interest rate of 10% and coupled with inflation of 6.5%. Brazil faces some tough economic decisions in future.

 

This year’s elections marked economic policies as the front line of discussion/debates as all runners were pitching their version of economic reforms. Ms Dilma has been the proponent and architect of inclusive growth, her policy of social spending (Bolsa Family Program) combined with economic growth helped to reduce poverty and unemployment, this has given her popularity in the length and breadth of the country. However, her interventionists policies are not business friendly and have been considered as one of the reason for slowdown, even rich are not enthusiastic on Ms Dilma regaining office.

Rival, Mr Neves (Belongs to a political Family) was pitching for pro-business policies and is banking upon growth-oriented development, by spurring Brazil’s infrastructure which is the demand of the newly transitioned middle class population. Business community prefers Mr. Neves  as he pledges to deliver on minimum government intervention, open market policy and investment friendly climate. In recent years, Brazil has seen no growth in FDI which is essential to control fiscal deficit and put economy back on growth trajectory. However, his party faced skepticism from poorer class voters, corruption and policy problems which reminds Brazilian 2002 economic problems[2]

How does this election impact on global business environment? In last decade, Brazil has emerged as a global leader in BRICS and G20, Brazil hosted BRICS presidential summit in early 2014. Under Ms Dilma, foreign policy has shifted from regional to global focus[i].  Brazil’s form of south-south development (supporting developing nations to support on technology, knowledge, and resources between developing nations) is considered as global model in waiting. China and United States are its top commercial partners with estimated trade of around $202bn. Additionally, Brazil is a vital part of Mercosur (Sub-regional  bloc comprising Argentina, Brazil, Paraguay and Uruguay and Venenzula). Mercrosur and EU free trade agreement is in formation as round of talks are in progress since 2012.

Courtesy: http://a57.foxnews.com/global.fncstatic.com/static/managed/img/fn2/feeds/Associated%20Press/2014/10/02/876/493/Brazil%20Elections-4.jpg?ve=1&tl=1
Courtesy: http://a57.foxnews.com/global.fncstatic.com/

Ms Dilma’s foreign policy has been independent that of United States influence, in fact it has been countering United States on trade, war, and surveillance[ii]. United States has not been able to extend its pressure tactics on Venezula and Cuba, due to lack of Brazil’s convergence. Ms. Dilma by taking opposite sides on international issues has exerted pressure on United States. Getting a pro-business and pro-United States government would have been vital for global political environment. Additionally, Workers Party in power will ensure greater cooperation with Developing nations and with election round the corner in United States establishing relationship some relationship with Ms Dilma will be a big challenge.

It will be interesting and challenging tenure of Ms. Dilma as she will be facing a stiff challenge of managing fiscal budget deficit and inflation under control, maintaining current subsidies and social programs which have re-installed her presidency or to go for revival of economy. The risk of plunge in credit rating looms large over Brazil. Currently she enjoys only 51% of nations confidence and

The business environment in Brazil will clearly define how the FDI flows for the other emerging markets as India, China and SA.

 

 

 

 



[1] From the lecture notes of Prof Ram- Thunderbird School of Global Management

 



[i] http://www.telesurtv.net/english/opinion/Brazil-Elections-Whats-at-Stake-20140927-0035.html

[ii] http://therealnews.com/t2/component/content/article/236-greg-grandin/2193-the-importance-of-brazils-elections

[ii] http://www.nytimes.com/2014/10/06/world/americas/brazil-presidential-elections.html?_r=0

 

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