TWO BRICS: BRAZIL VS. RUSSIA Alexander I. Mechitov, University of Montevallo, Montevallo, Alabama, USA Stephen H.

Craft, University of Montevallo, Montevallo, Alabama, USA ABSTRACT Two members of BRIC, Brazil and Russia, are very similar to each other based upon macroeconomic factors which makes their comparison natural. This paper analyzes the recent economic progress of these two countries in light of underlying factors such as political and cultural environment as well as the level of infrastructure development. The authors argue that with almost equal other conditions, quality of the labor force will be the main factor defining their relative growth. 1. INTRODUCTION In 2001, Jim ONeall from Goldman Sachs coined BRIC abbreviation for Brazil, Russia, India, and China to emphasize the development of big emerging markets and the special role of these four large countries among them. Over the last decade the importance and economic impact of BRIC countries in the world economy have been steadily increasing, indicating a profound shift in the world economic powers. Both Brazil and Russia have long been considered as the junior members of the BRIC community given populations that are almost ten times smaller than China and India. Because of size, Brazil and Russia have received much less attention in business and research publications compared to the larger BRICs. There are many comparative studies of the pros and cons of the Chinese and Indian economic structures and their perspectives but comparatively few similar studies for Brazil and Russia. For a number of reasons, comparative analysis of Brazil and Russia is instructive. First, Brazil and Russia share a number of common characteristics such as size, current economic development, political system, and level of corruption. At the same time, they represent very different cultures, geographic locations, ethnic make-ups, and level of education. Currently, Brazil and Russia are the most similar in terms of economic development when pairing BRIC members. This study presents a basic overview of Brazilian and Russian macroeconomic performance and analysis of the contributing factors. Special attention is paid to the quality and size of labor force and each countrys business and political environment. The study concludes by discussion of both current and perspective changes in each national economy. Our findings may be important for companies considering Brazil and Russia as potential destinations for their direct investments and outsourcing projects. 2. RECENT ECONOMIC DEVELOPMENT Brazil and Russia are among the largest countries in the world with many similarities in their economic development. Russia is the first and Brazil is the fifth largest country by territory. With the population of about 195 million Brazil is the fifth largest country by population, while Russia with about 143 million people holds the ninth place. They have very similar GDP which at PPP exchange rate equals to $2.2 trillion for both countries in 2010 (CIA Factbook, 2012). In the last ten years, economic development averaged an impressive 3.6% in Brazil and 4.8% in Russia (Table 1) putting the two countries in an elite club of new emerging economic superpowers. After a long period of economic stagnation in previous decades, in the beginning of 21st century both countries managed to create stable political and economic environments, launched a series of economic reforms, accelerated privatization, and brought inflation under control. Both Russia and Brazil benefitted from high prices on commodities, expanded foreign trade, improved trade balances, and enhanced foreign direct investments. In 2000-07 Brazil and Russias stock markets were among the fastest growing with intensive IPO activities.

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2001 Brazil Russia 1.3 5.1

2002 2.7 4.7

2003 1.1 7.3

2004 5.7 7.2

2005 3.2 6.4

2006 4.0 8.2

2007 6.1 8.5

2008 5.2 5.2

2009 -0.6 -7.8

2010 7.5 4.0

2011 3.3 4.1

Table 1. GDP Growth Rates (from data.worldbank.org) The average growth rate was higher in Russia primarily due to steadily increasing oil and natural gas prices over the last decade. The Russian economy and trade balance is highly dependent on its energy sector due to its status as a world leader in oil production. Russia is second only to Saudi Arabia in oil exports. Brazil, on another hand, advanced its biofuel industry making it less vulnerable to energy prices and emphasizing development of its manufacturing sectors. The national aerospace industry is a good illustration of these differences. Russian civil aviation production has been in steep decline in the last two decades, this contrasts with Brazils leading aerospace company which has become the worlds third largest producer of civil aircrafts. The high dependence of the Russian economy on its energy sector explains both the fast GDP growth in Russia before the economic crisis as well as the steep decline in 2009 when oil prices plunged. 3. HUMAN RESOURCES Both Brazil and Russia are among the most populous nations in the world. Brazil, with 195 million people (5th place after China, India, USA, and Indonesia), is about 35% more populous than Russia. In addition to differing population sizes, these two countries have experienced very different demographic trends. In Brazil, population annual growth is about 1.1% with birthrate equating to 17.79 births per 1,000 persons (2011 est.) substantially surpasses its death rate of 6.36 deaths per 1,000 persons (CIA Factbook). Russia, contrary to the Brazil experience, is the only BRIC country with declining population. Since 1992, Russias death rate has far exceeded its birthrate. Despite robust immigration since 1992, the Russian population has declined from 149 to 143 million. As a result, Brazil and Russia have very different population age structures. Brazils population is substantially younger than the Russian population. In Brazil, 27% of population are 15 years old and younger and only 7% are 65 or older. In contrast, 15% of Russias population is 15 years old and younger and 13% are 65 or older. The Russian demographic pattern is closer to western developed countries with negative natural population growth, while the Brazilian population pattern is typical for developing countries with a slow positive natural increase. With this trend continuing in the near future, population projections for 2025 and for 2050 are 212 and 215 million for Brazil and 140 and 127 million for Russia. Brazils labor force market pattern is similar to other developing countries, including China and India, with large untapped growing labor resources. Meanwhile, Russia already experiences labor shortages which will likely grow worse in the next decade. In Brazil, a growing proportion of the population is poised to enter the most economically active period of their life. This phenomenon known as a demographic bonus will likely strengthens the dynamics of the domestic economy and boosts the country's development. A recent study by the University of Minas Gerais concluded that Brazil has the potential to grow GDP 2.5% per year as a result of this demographic bonus. This scenario on its own would increase the size of the economy to $3.3 trillion by 2030, about 50% more than what it is today. In Russia one sees the opposite trend. The aging and decreasing population will impose addition burdens on the economy and may hamper its economic growth. If Brazil looks more favorable in terms of human resources from a quantitative point of view, Russia has a clear competitive advantage in its quality. Russia historically had a good educational system with strong emphasis on engineering programs. Russian Academy of Sciences, established in 1724 by Peter the Great, has been one of the world leading academic institutions, famous for achievements in such diverse

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areas as space exploration, mathematics, nuclear physics and medicine. The Russian college system, close to the German academic system, was always highly specialized and well-known for its intensive course structures. Direct comparison of the time students spend in classes in American and Russian schools indicates that Russian programs are almost 50% longer than American programs (Mechitov and Moshkovich, 2010). In addition, Russian higher education in Soviet times always placed emphasis on engineering and natural science at the expense of liberal arts and social sciences because they represented the main fields of interest to the national military-industrial complex. As a result, Russian schools are famous for rigorous math programs, which in turn help local colleges to graduate many students in all areas of engineering. Brazil, to the contrary, does not have the same traditions of excellence in education (Omestad, 2008). As in many South American countries, college humanity programs are traditionally more popular than math and engineering programs. Brazil also lacks experience of undertaking large-scale technological projects. Thus, having a large pool of educated workforce, the country still faces some difficulties in producing substantial numbers of qualified workers with technical skills. In general, educational system in Brazil lacks proper resources, including infrastructure and qualified instructors. Though country has recently initiated ambitious programs aimed at advancing all levels of education in Brazil, due to very inertial nature of educational system, it will likely takes decades to achieve visible progress. 4. BUSINESS ENVIRONMENT In recent years both Brazil and Russia made significant progress in promoting market reforms and attracting foreign investments. While both countries simplified tax structures and improved their legal systems in an attempt to become more active players in the global economy, they still have many problems to solve and lag behind many other countries. According to Doing Business rankings, in 2011 Russia held the 120th place while Brazil held the 126th position of 183 countries listed (Table 2, ranking 1 is assigned to the country with the best business climate). As a result, both countries lag behind many of th st rd st their neighbors (Chile with 39 , Peru with 41 , and Mexico with 53 in case of Brazil; and Latvia with 21 nd st and Poland with 62 ranking in case of Russia). Russia and Brazil are both behind China at 91 place and are marginally better than India, which is in the 132nd position. One of the main reasons for such low standings is that national economies in Russia and Brazil are still highly regulated with government agencies playing a decisive role in many business decisions.

Factors StartingaBusiness DealingwithConstructionPermits GettingElectricity RegisteringProperty GettingCredit ProtectingInvestors PayingTaxes TradingAcrossBorders EnforcingContracts ResolvingInsolvency AggregatedEaseofDoingBusinessRank

Russia 111 178 183 45 98 111 105 160 13 60 120

Brazil 120 127 51 114 98 79 150 121 118 136 126

Table 2. Doing Business ranking (from doingbusiness.org)

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5. SOME ECONOMIC COMPETITIVENESS FACTORS 5.1 Infrastructure and Location Although the Brazilian and Russian infrastructures remain well behind modern western standards, both countries have made substantial infrastructure improvements in recent years. Both countries have a large net of international and local airports, seaports, and an effective railway system although each suffers from undeveloped highway systems. Large cities in both countries offer large volumes of modern office space, with Brazil being ahead in providing affordable hotels and apartment buildings. Brazil and Russia are also similar in having regional disparities in their infrastructure development. If large cities in both countries look very dynamic and cosmopolitan, vast areas in rural Russia and Brazil still lack basic services. The Russian economy is geographically centralized in the capital of Moscow and few other big cities, they account for a large share of national capital flows and deprive other areas of much needed resources. In Brazil, national wealth is more evenly distributed geographically with some differences existing between coastal regions and the vast Amazon inland areas. Another important consideration coupled with infrastructure is location - where Russia has a certain advantage over Brazil. With its large territory, Russia is beneficially located between the European Union and East Asia as well as in close proximity to Middle East. Such proximity plays an important role in minimizing transportation costs for traditional industries and for organizing virtual teamwork for hi-tech outsourcing projects (Mechitov and Moshkovich, 2010). In addition, Russia benefits from global air and land transit services between European and East Asian countries. 5.2 Political and Legal Environment After a long period of soviet regimes in Russia and military regimes in Brazil, both countries benefit from a more stable political environment since the end of 1990. Brazil has experienced a period of stable democratic development since the new Federal Constitution was introduced in 1988. The very popular former president, Luiz Lula da Silva, served two terms from 2002-2010 and was succeeded by his former chief of staff, Dilma Rousseff. In Russia, former President Vladimir Putin managed to unify and secure the current political system at the expense of some democratic institutions. Though in both Brazil and Russia democratic political systems have very short traditions and are still very personality driven (both Lula and Putin were succeeded by their close political protgs), they look comparatively stable and remains largely untouched by internal political strife or large social unrest. Legal systems in both countries are substantially based on the European civil law: most of the new laws originate in the legislature. In both countries, the development of the judicial system is still an ongoing process, leaving a number of judicial issues unresolved. Formally the judiciary system is independent from the executive and legislative branches, though in Russia it is under heavy control from the local political establishment. In addition, Russia is famous for extremely high level of corruption: in global rd Corruption Perception Index Russia occupies 143 place between Nigeria and Uganda with Brazil being rd at 73 place. 5.3 Communication and Cultures Brazil and Russia look attractive and similar from a cultural perspective. Both countries are highly westernized. Majority of analysts believe that it is easy to communicate, socialize, and work with both Brazilians and Russians on both a business and a personal basis. At the same time, Brazilian society is likely more tolerant than Russian society, primarily because Brazil is a more diversified country than Russia. Brazil represents a melting pots of Spanish, Portuguese, Polish, Japanese, Chinese, and others nationals with remarkably little racial frictions. Famous for being more opinionated, Russians like to question and discuss all aspects of business projects, and are sometimes perceived as too vocal in their criticism. Russia has some competitive advantage over Brazil when language issue is considered. Russian secondary schools and colleges often require English as part of their curricula resulting in a younger generation that is comparatively fluent in English. Russian language is still used in many former Soviet republics and some countries of Eastern Europe. On other hand, with more diversified society and large

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ethnic communities from all over the world including Asia and Middle East, it is more likely to find locals with foreign language skills in Brazil than in Russia. 6. CONCLUSIONS Comparing countries economic conditions and real performances has many practical applications. First, it allows analysts to understand which factors in what combination best accounts for economic development. Second, such analysis provides useful recommendations for companies considering foreign investments and outsourcing projects. Comparing Brazil and Russia looks extremely promising as both are in the same category of big emerging markets and they share many similarities in terms of economic assets and challenges. The two are similar in size, abundance of natural resources, political traditions, infrastructure development, and share similar social problems. Both countries are typically included on lists of the most attractive perspective markets and outsourcing destinations. With many similarities between Brazil and Russia, there is also at least one important distinction. Brazil represents a classical type of emerging markets with long history of poor economic development and th backward educational system. Russia for the last half of 20 century was one of the worlds superpowers with highly developed industry, excellent educational, and stable social systems. Thus, if Brazils development shares a substantial historical similarity to other developing economies as identified by Fareed Zakaria, Russian transformation from communist economic and political system to a market economy represents more unique and unusual case. There is another substantial difference in the countries economic progress. While Brazil successfully diversifies its economy, the Russian economy increasingly depends on its energy sector. Almost 70% of Russian revenues come from exporting oil and natural gas while other sectors of economy remain stagnant. Current high prices and huge oil and gas deposits ensure economic growth in Russia, but large dependence on the sale of natural resources makes its future prospects rather shaky. With rather close standings in other criteria, the most important factor for future economic progress in Brazil and Russia would appear to be the quantity and quality of human resources. From a quantity point of view, Brazil has clear advantage over Russia, and that advantage will continue to increase. From a quality point of view, Russia still has and will likely continue to have more educated and qualified labor force in coming year, especially in science and engineering. Though during its transition from communism, the Russian research and hi-tech sectors suffered many losses, the country still has a lot of know-how in running large-scale technological and innovative R&D projects. Likely, under equal economic and political conditions, these differences in quantity and quality of labor capital will determine long-term progress in both countries. REFERENCES: CIA: The World Factbook, (2012),www.cia.gov/library/publications/the-world-factbook Corruption Perceptions Index, (2011), http://en.wikipedia.org/wiki/Corruption_Perceptions_Index Doing Business: Measuring Business Regulations (2011), http://www.doingbusiness.org/ Mechitov A., Moshkovich H.M. (2010) IT Outsourcing :a Comparative Analysis of Brazil and Russia. International Journal of Strategic Management, vol.10, Issue 2. Omestad, T. Brazil Finally Finds Its Groove, (2009), U.S.News & World Report, Vol. 145, No.7, 34-36. The Global Competitiveness Report 2011-2012. World Economic Forum, www.weforum.org/reports World Bank (2012), www.data.worldbank.org. AUTHORS PROFILES: Dr. Alexander Mechitov earned his Ph.D. in MIS from Russian Academy of Sciences, Russia in 1987. Currently he is a professor in Stephens College of Business at the University of Montevallo. Dr. Stephen Craft earned his Ph.D. in Marketing from The George Washington University, Washington, DC. Currently he is Dean in Stephens College of Business at the University of Montevallo.

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