Russia vs Brazil, A Macroeconomic Comparison

These are the foundations of how macroeconomic thought evolved into what we know today. The purpose of this paper is to compare Russia’s macroeconomic objectives to Brazil’s ones. It is worth mentioning that such a comparison can take a long time, and therefore for purposes of such a paper, will have to be brief.

Russia’s economy is very different to Brazil’s. Firstly, Russia used to be a communist/socialist state. This meant that its economy was entirely run by the state and therefore centrally planned. There was no market mechanism at play whatsoever, since socialist ideology believes that this can only led to more inequality and ultimately revolution anyway. Brazil’s economy, although under socialist influence in some years in the 20th century, has remained mainly free market. Secondly, in terms of land size, and population (as well as growth rates), the countries are very different. Russia has enormous land size, and access to endless resources (oil, gas, uranium and so on). Brazil on the other hand, although the largest country in South America, does not have as many ‘fuels’ as Russia does. It has access to large supplies of timber (Amazon), coal, and not much more. Brazil was also not at one stage a ‘super-power.’ So by this very nature, the comparison of these two countries is rather strange. There are, however, some similarities. Both countries underwent irresponsible, and at times, short sighted and stubborn policies (both monetary and fiscal, in Brazil’s case).

Below is a quantitative comparison of the two countries.

BRAZIL

Source: (forecasts)

Source:

One of the biggest curses of South America, especially from the late 1970s onwards, has been that of persistently high inflation. This can be seen for the four countries in Latin American below, including Brazil. From 1975 to 1990, the average monthly inflation rate for Brazil rose by about 700%. These countries practiced various stabilisation programs, ranging from populist to exchange rate programs, some successful and some not. There were various reasons for this persistent inflation, of which a few are listed below.

Source: International Financial Statistics, IMF

1. Backward indexation, which meant that buyers and sellers in the economy, knowing what the recent inflation rate had been, would factor that index into their prices, even if the inflation rate had gone down. This would contribute to increase in future inflation rates. This clearly made the monetary policy tool almost useless for the central bank.

2. With regards to fiscal issues, there was little success in raising tax revenues. Provinces were always in debt, looking at central bank for financing.

3. A great deal of the government debt was in foreign currency, and external debt to exports ratio was very high. This resulted in a external financing crisis. With significant external debt, its credit rating was very important and of course sensitive, if fear of risk of default emerged, Brazil lost external financing.

The figure below shows the inflation rate (consumer and producer prices) between 1995 and 2006.

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The unemployment rate between 1995 and 2006 is shown in the figure below. Clearly unemployment rose drastically between 1998 and 2000. The Phillips curve suggests a trade-off between inflation and unemployment. This theory is seen in practice in this case. There are some cases where this does not occur, where both unemployment and inflation rise together (stagflation), which causes further problems for policy makers.

After Russia's debt default in August 1998, Brazil’s currency (real) plummeted, which forced the country to raise annual interest rates to 50%. Massive amounts of capital flight occurred, due to loss in investor confidence and about $30 billion in capital left the country in August and September. A fiscal adjustment program was implemented as well as some level of structural reform and Brazil received a $41.5 billion IMF-led international support program in November 1998. Capital, however, continued to fly out of Brazil. Investors, who were concerned about the rising mountain of debt, and currency which was overvalued, did not regain confidence. In 1999, the Central Bank announced a one-off 8% devaluation of the real, and the currency was declared to be freely floating.

Source:  

RUSSIA

Source: (forecasts)

Source:

Russia’s GDP has been surprisingly similar to that of Brazil’s, however it has realised much higher growth rates. This indicates a much better level of investor confidence in the country than Brazil, even though it is now an ‘emerging market’ in the sense that it is still in the process of fully becoming a free market economy. Inflation has been quite high, although not at the alarming rates of the Latin Americans, and such high rates are expected when the economy has such high growth rates as well. Considering the continued rise in oil prices, as well as recent dramatically increased global demand in oil and gas by India and China, there is obviously some sort of justification for high inflation, mass investment, and good growth. Russia is also currently sitting on a current account surplus, which has been forecasted by some economists to be narrowing down. As Russia becomes a more open market, and more pro-free trade, it is likely that they will increase their import volumes much more than the current flow.

Many former socialist states, when in transition (like Russia), are not foreign to experiencing high rates of unemployment, since there is a high level of restructuring going on. The question is, how long will that unemployment last. How much of the workforce will emigrate, and what will the power of unions be. In Russia, unemployment has been difficult to measure, since there are still many firms who employ individuals unofficially, which results in the inefficient allocation of the labour force. Registered unemployment in Russia is now 2 percent, although surveys indicate that true rate actually lies somewhere between 5 and 6 percent.

Similar to Brazil, there are also large amounts of capital flight from Russia. Many profits are invested outside of the country. Although Brazil suffers from lack of investment due to a bad fiscal reputation, and some level of corruption, Russia (in addition to corruption) suffers from lack of investment largely due to barriers to entry. Recently and oil and gas reserves found on the Eastern coast of Russia have been completely monopolised by them. International firms, willing to bid and invest to attain a piece of the activity, have been completely shut out. This does not add to ‘good reputation’ with regards to Russia’s restructuring and transition. In a global economy, like the one we live in today, such mal practices can be very damaging for future foreign policy, and Russia is looking likely to suffer from that as well.

In conclusion, one can state that no single set of macroeconomic policies are full proof. Rather the authorities implementing them need to be pragmatic and dynamic, being able to exercise the right instruments at the right time in order to achieve stability and healthy growth. Macroeconomic objectives cannot be achieved through the implementation of one instrument alone. It is often the case that a policy mix of some sort is required to achieve targets.

REFERENCES

Dornbusch, R; Fischer, S; Startz, R, Intermediate Macroeconomics, McGraw Hill (9th Edition), 2003.

Economist Intelligence Unit (databse), website, , accessed 08/11/2006.

Heilbroner, R, The Worldly Philosophers: The Lives, Times And Ideas Of The Great Economic Thinkers, Touchstone, 1999

IMF International Financial Statistics database, , accessed 08/11/2006

Brazil Travel, The Real Plan, , accessed 08/11/2006

 

Latin Focus Consensus Forecast, , accessed 08/11/2006 

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