The Influence of Emerging Economies in International Affairs
In the last few years, Brazil, Russia, India, and China have been making global headlines in the world of international trade. The four countries, alias the BRICs, are considered to be at the same level regarding economic development. One of their characteristics is that they offer relatively cheap labour. Consequently, many multinational companies are finding these states in their expansion strategies. The media has extensively covered the rise in their economic power as well as the challenges they face. These countries are doing very well in international trade. However, volatile exchange rates pose a significant problem for them. This article discusses the exchange rates, the various aspects of macroeconomics and the recommendations for the Big Four.
In a free economy, the value of a country’s currency is dictated by the forces of supply and demand. However, some states tend to regulate the value of their money. Through analysis, two conceptual facts are evident. The first point is that foreign exchange affects the cost of a country’s currency. The appreciation or depreciation of the currency is influenced by several factors. Among these factors, there is government debt, political and economic stability, the balance of trade deficits and, demand and supply. As a consequence, the dynamics of these factors adversely affect the rate of exchange. The four economies often fall prey to the negative effects of the uncertain and rapid changes in the forex. The thematic study also establishes that when the exchange rates keep on fluctuating, in bilateral relations, the smaller economies are the most prominent losers. In such circumstances, the BRICs may thus shift their focus to the third world economies. By trading with these countries, they reduce the potential risk. On the other hand, however, their competitiveness in the international trade goes down.
A statistical/macroeconomics analysis was also carried out apart from the thematic study. It used the Vector Autoregressive (VAR) model. The model’s principal aim is to understand the causal relationships and the dynamics that are there in the local and international macroeconomic variables as well as the forex rates. The empirical study used time series data. Among the quantities used is the nominal exchange rate, the inflation rate (based on the Consumer Price Index), the Foreign Direct Investments (FDIs) as a percentage of the gross domestic product, the real interest rate, and the rate of growth of the gross domestic product. Among the global variables used are America’s government funds rate and the price of oil in the international market. The findings led to the conclusion that all the variables had a different impact on the four economies.
Some of the critical implications are that both Brazil and China have been quite stable generally. Unlike Russia and India, the duo has progressively managed to escape being the victims of unstable exchange rates. However, China has some metrics that are unstable,e.g. inflation rates. In this country, the prices of various goods and services keep on rising uncontrollably. On the other hand, Russia’s economy is quite unstable in many ways. It has very high rates of fluctuations. Notably, of much concern, is the recession, currency devaluation,and sanctions among many others. Equally, when it comes to the factors that determine the change of exchange rates, India does not enjoy stability. Summarily, the BRICs have a big task of establishing confidence in their respective economies.
From the study, it is clear that volatile exchange rates are a significant threat to the BRIC’s economies. Several recommendations can, therefore, be proposed to minimize the consequent economic damage.
- The first thing that the BRIC countries should embrace is the diversification of the goods they export (Cohn, 2015). The nations that suffer the severity of the impacts of fluctuations are those with a narrow line of exports. Russia and India are examples of such countries. The main export from India is energy. Having no other significant goods in the international market, the nation hardly maintains a stable currency. If these countries have to remain competitive in the internal market, they should revisit their strategies about their exports. They should diversify their industries. By so doing, they will be in a position to supply a wide range of goods to the international market. A good start point is the issuance of incentives to the producers of goods different from their primary exports. In Russia for example, the government should incentivize other products other than the energy. Relevant policies need to be put in place.
- Another way of tackling this risk is by fighting corruption. The most corrupt countries incidentally are the ones that face the worst consequences of the risk (Ji et al., 2015). Specifically, corruption is deep rooted in India and Russia. This has been a significant hindrance to free market. A free market promotes more innovative practices and diversification of products. Corrupt activities in the market, however, thwart such efforts. Economic inefficiency affects productivity. This is a problem that India and Russia need to fight altogether. In China, however, one can start seeing some hygiene introduced in their economy. The second most robust economy in the world has put a lot of efforts to fight corruption. They have enacted quite a good number of legislation to handle the menace. The rest of the BRICs need to follow suit. Additionally, eliminating corruption helps in avoiding a monopoly industry. Monopolies act as a barrier towards the growth of an industry.
- The BRICs also have to remove bureaucracy in their policies on international trade and foreign investors (Cohn, 2015). The global ranking of the BRICs in the ease of doing business index is inadequate. It is tough for the international businesses to invest in these countries. They have so many unnecessary hurdles against potential international partners. A favorableand fair business environment needs to be introduced. This will attract the international investors as they won’t fear unfair competition or insecurity of their investments. A healthy interaction with the world will enable the countries to get foreign income. A steady flow of the revenue into the state reduces the rate of forex fluctuations.