Why India Is No China

It's true -- India is no China. And Brazil's no Russia.

They've never been all that similar, really. In fact, Standard & Poor's recently questioned "whether the BRIC [Brazil, Russia, India, China] countries ever shared much in common, other than scale and high portfolio inflows."

Well, of course they didn't. In other news, S&P 500 components Google (Nasdaq: GOOG  ) and General Electric (NYSE: GE  ) don't share much in common, except that they're both large U.S.-based companies.

You wouldn't think that Google and GE are interchangeable -- so don't fall for the idea that countries are interchangeable. If you do, you'll get burned.

First, the status quo
As investors (heck, as humans), we like to group things together. It simplifies complex information and gives us a way to make complicated decisions.

And when it comes to international investing, it's convention to lump countries into one of two categories: developed markets vs. emerging markets.

The exact distinction is hazy. Former Secretary-General of the U.N. Kofi Annan defines a developed market as "one that allows all its citizens to enjoy a free and healthy life in a safe environment." Political scientist Ian Bremmer defines an emerging market as "a country where politics matters at least as much as economics to the markets."

Basically, to be considered developed, a country needs a high standard of living that isn't continually threatened by political crisis. Besides the United States, think of countries such as Japan, France, and Australia.

The emerging markets are then split into the BRIC countries -- a term coined less than a decade ago by Goldman Sachs, because it was sexy to bundle together the four emerging-market countries that combined size with tremendous growth prospects -- and everyone else (countries such as Peru, Turkey, Egypt, and Thailand).

These groups are dangerous!
All of that splitting and grouping gives investors the false sense that the BRIC countries are essentially interchangeable: emerging, large, poised for growth.

Even basic country data demonstrates just how large this fallacy is:

Country

GDP per person (in U.S. dollars)*

United States

47,165

Russia

12,487

Brazil

8,480

China

3,174

India

1,078

*Calculated using nominal GDP and population per CIA World Factbook, correcting for a typo in Russia's GDP figure.

Gross domestic product (GDP) per person is one way to gauge the standard of living and productivity of a country -- and they demonstrate just how different these countries really are.

Yes, the emerging markets are quite different from the developed market -- the U.S.'s GDP per person is more than 40 times greater than India's -- but the chart also shows the great disparity among the BRIC countries. Russia is almost 12 times as prosperous as India, and even China is roughly three times so.

And this is just the economic disparity.

You also have to factor in the country's political situation, overall economic stability, market conditions, cultural differences, and still more economic data such as national debt, balance of trade, inflation, savings rates, etc.

In other words, in international investing, country differences are at least as important as company differences -- because any potential that company has depends upon the context of its location.

For example, even though they're both companies that deal in global commodities, it could be argued that Vale (NYSE: RIO  ) is more closely linked to its fellow Brazilian Petroleo Brasileiro (NYSE: PBR  ) than it is to Aluminum Corp. of China (NYSE: ACH  ) -- aka Chinalco. In a more extreme example, Chinalco may be more closely linked to Chinese search engine Baidu (Nasdaq: BIDU  ) than it is to Vale.

Why? Because country-specific considerations frequently outweigh industry-specific considerations. Ask any company that has been subject to onerous regulation, excessive taxation, a devalued currency, or nationalization by its home country.

If this is true for a company like Vale, whose prices are dictated by global commodities demand, it's even more true for a company like Toyota (NYSE: TM  ) , which relies on demand from its home country for more than half of its revenue.

What does this mean for investors?
The substantial differences between countries -- not to mention between developed and emerging economies -- lead to three takeaways.

  • Because of the addition of tricky country-specific dynamics, diversification may be even more important in international investing than it is in domestic investing.
  • Emerging markets demand a greater risk premium than their developed brethren. In other words, you should demand a larger margin of safety (and lower earnings multiples) for companies in emerging markets.
  • It isn't enough just to pore over the financial statements of a company and its competitors. Knowledge of a company's country is just as important as knowledge of the company itself.

Those are some of the things our Motley Fool Global Gains investment team keeps in mind as they scour the globe looking for the best investments there are. They not only make frequent international scouting trips, but they also meet with the management of companies they're interested in, and report back to their members. To see all these prior reports, as well as their full list of recommendations, click here. A 30-day trial is free.

Anand Chokkavelu owned shares in Toyota at the time of publication. Petroleo Brasileiro is a Motley Fool Income Investor selection. Google and Baidu are Rule Breakers recommendations. The Fool has a disclosure policy.


Read/Post Comments (37) | Recommend This Article (101)

Comments from our Foolish Readers

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  • Report this Comment On April 13, 2009, at 5:03 PM, poracer wrote:

    This is all true...but it's too much of a sale for services.

    MF has to tread a fine line; is it a community or a company thatcontinuously sells services to it's community....err, captive audience.

    I say this directly to the owners. I really like the site and, sometimes it gives really good advice on investing.

    But, too much sales undercuts trust.

    G

  • Report this Comment On April 13, 2009, at 5:05 PM, paultaut wrote:

    Mobius gave India his lowest interest, China and Brazil were 1 and 2 respectively.

    There is one product which the population of India will surely embrace, the Tata Motors $2500 car.

  • Report this Comment On April 13, 2009, at 5:11 PM, hemingway007 wrote:

    GDP is not a good measure of standard of living. The cost of living matters. Indian middle class has a much higher effective standard of living than the middle class in some of the most developed economies, including US.

  • Report this Comment On April 13, 2009, at 5:14 PM, hemingway007 wrote:

    No one thinks India and China are interchangeable. The article states the obvious, and offers no real insights into what makes India and China different. For one thing, India is a democracy. China is not.

  • Report this Comment On April 13, 2009, at 5:22 PM, ponderponder wrote:

    I second the last comment. To do a fair comparison, you should compare only the middle-class and the disposable income from these countries. If you take the GDP, it dwarfs the whole nation. India's middle-class is 30% of its population and it could be 300 million and its buying power would be much higher than the GDP. Still nowhere near the US though.

  • Report this Comment On April 13, 2009, at 5:41 PM, jyotip00 wrote:

    What about the impact of government and living systems of China (dictatorship), Russian (semi-dicatorship) against real democracies of India and Brazil? You are being outright silly and imperialistic to call only pro-western economies like Japan, France, Australia and US as democracies. India is more secular, more diversified and much bigger in population than all of them. Also if India's GDP is lower than US, don't forget $1k in India buys 5 times more than what it does in US. Please don't live in the US bubble only.

  • Report this Comment On April 13, 2009, at 7:07 PM, fjose wrote:

    India is a WS creation. this is a country that WS wishes the US emulates. It is a land of the robber barons. WS is envoious of this.

    this is a place where hotel room rates in Mumbai are equal to those of the Western cities and yet they pay their employees a paltry sum compared to other cities.

    I always believe the only way to grow a country is by paying better wages. This I believe is done to a certain degree in China (I wish they did more).

    The robber barons who know no better since they were schooled by the ivy league, believe in the primero yo, segundo yo, tercer yo battle cry. What they term capitalism is nothing more than the robber baronism of the vanberbilts and their ilk.

    Capitalism will only work if it adhered to the philosophy that guided Henry Ford.

  • Report this Comment On April 13, 2009, at 8:34 PM, BigDog2all wrote:

    So, when positions are relocated from the US where the GDP is $47K to India where the GDP is $1000... and those US workers can no longer find a job, who's stimulating the economy? Obviously the person in India doesn't have the buying power of the US consumer... and with that US consumer now in the soup line with no buying power as well... it sounds like short term gains over long term strategies has put this world in a financial train wreck! It doesn't take a financial guru to understand that!

  • Report this Comment On April 13, 2009, at 11:36 PM, TMFBomb wrote:

    Thanks for the comments, all.

    Agreeing that the political systems are an important country-specific consideration...I made mention of it in the article, but discussing it in depth is a whole other article.

    Regarding using per capita GDP to determine approximate standard of living...I used nominal GDP, which doesn't factor in cost of living differences (but requires less approximation). The latest per capital GDP's using purchasing power parity are:

    U.S.: $47,000

    Russia: $15,800

    Brazil: $10,100

    China: $6,000

    India: $2,800

    The disparities are less pronounced, but large nonetheless.

    -Anand

  • Report this Comment On April 13, 2009, at 11:51 PM, bagh1 wrote:

    Okay, India is no China and??? What's your point? This article is pretty much as vague as it gets! I read it thinking the author would talk about companies from the two countries or how investors should approach one or the other. Thanks for the sales pitch, I am not buying...

  • Report this Comment On April 14, 2009, at 12:18 AM, easyrob wrote:

    Dear TMFBomb et. al. I woud like to support the comments about the vagueness of the articles on your site being used as marketing tools. I think you would do better financially if you were to provide real in depth articles on select subjects, and then maybe not give free trials. Then... you would need to provide better information in your premium services. I joined and then left the income investor this year and retirement 2 years ago. In both cases I was disappointed by the depth and current applicability of the content. I like your mission but am finiding that i do not open your links much anymore because i learn very little that is insightful. But i wish you the best and hope someday i will feel it worth my while to join a premium service again.

  • Report this Comment On April 14, 2009, at 12:58 AM, dyadco wrote:

    Easyrob, I couldn't agree more.

    I am getting so tired of emails from TMF that are plainly sales pitches.

    The MF Million Dollar portfolio was interesting, BUT it was never their money, it was the subscribers.

    IF (and its a BIG "IF") TMF were really serious, they would say that the ownership of a certain product rests with the subscribers and any profit (or loss) will be with the subscribers. If this was true of MDP, then I would have still been a subscriber.

  • Report this Comment On April 14, 2009, at 5:06 AM, summertimeVA wrote:

    gdp- nominal or real is useless unless converted using PPP then you have a diff picture. Secondly the article in itself is false as comparison's between global companies like Vale and Chinalco need to be made in order to understand the market conditions and not between companies located nationally which do not offer the same service. If the author had focused on world class companies and shown the impact of PPP on their business models it would show why arcelormittal, vale, chinalco, TATA are world class organisations (until the recession is over).

    Rank country GDP (ppp) YEAR

    3 United States $ 14,290,000,000,000 2008 est.

    4 China $ 7,800,000,000,000 2008 est.

    5 Japan $ 4,348,000,000,000 2008 est.

    6 India $ 3,267,000,000,000 2008 est.

    7 Germany $ 2,863,000,000,000 2008 est.

    8 United Kingdom $ 2,231,000,000,000 2008 est.

    9 Russia $ 2,225,000,000,000 2008 est.

    10 France $ 2,097,000,000,000 2008 est.

    11 Brazil $ 1,990,000,000,000 2008 est.

  • Report this Comment On April 14, 2009, at 10:25 AM, Deepfryer wrote:

    I love Brazil. They seem very stable and safe compared to the other 3 BRIC countries, and they have tremendous growth potential. I wouldn't invest in Russia if my life depended on it... politically they are moving in the wrong direction. Personally, for my BRIC investing I would try to go with 50% Brazil, 25% China, 25% India. But I would love to hear other's thoughts on this.

  • Report this Comment On April 14, 2009, at 1:13 PM, gggordy wrote:

    I have done business in both China and India. There is no doubt that India will loose to China. They have the most overwhelming bureaucracy in the world thanks to the British occupation. It prevents any creativity.

  • Report this Comment On April 14, 2009, at 3:02 PM, krajha wrote:

    This article lacks any insight and what exactly is the point that the author is trying to convey? MF should not waste our time by letting amateurs write articles on subjects that require serious analysis.

  • Report this Comment On April 14, 2009, at 3:21 PM, Beagle2Mars wrote:

    What do India and China have in common? A huge market potential from 'dinkies' - dual income no kids and 20-somethings with Western degrees under their belts and yearning to make money back home and then some. Overlooking that ... how did you overlook it? Is social economics not part of the equation?

    They won't grow at the same rates because they are hugely different yet we are long-term investors.

  • Report this Comment On April 14, 2009, at 4:03 PM, ethansb wrote:

    Greetings:

    Investments need to be evaluated on a case-by-case basis.

    One should be aware of collective nouns. From the perspective of an investor, one needs to pay careful attention to (i) the region in which the economic activity is occurring and (ii) the sector of the economy. For example, with the exception of BP, all foreign companies have been driven out of the Russian energy sector, but a company like Medtronics can operate in Russia since it has no genuine native competitors.

    Other important factors are (i) the extent of the rule of law (the degree to which officials and judges make decisions based on the merits), (ii) the extent of corruption, (iii) whether the country observes the 1958 NY Convention on the Enforcement of International Arbitral Awards.

    In many countries (e.g. Russia and China), law is all too often a tool used by the authorities to achieve their own objectives).

    While there is corruption in all countries, its extent, consequences, and form vary. While this is a complex area, one needs to know whether government officials and judges have in their minds an acceptable ideal about how commerce should operate.

    For those who might want to see some of my writings on this topic, please write: esb34@law.georgetown.edu.

    Regards,

  • Report this Comment On April 14, 2009, at 7:52 PM, yamanoor2001 wrote:

    If the true measure is stability in a country, then wouldn't the actual order be either

    Brazil India Russia China or

    India Brazil Russia China.

    Why doesn't the TMF raise the possiblity on it's Chinese website and see how long it lasts?

    Long term futures WILL need a democracy, regardless of GDP. Dudes, don't invest in black holes...

  • Report this Comment On April 14, 2009, at 10:37 PM, SunnyFLA wrote:

    I don't know what PPP is, but I do know what a Quarterpounder costs here at home.

    Whats the BRIC order and ratios in QPs ?

  • Report this Comment On April 15, 2009, at 2:12 AM, rajeevsingh111 wrote:

    I agree that China and India a economies of the world are not interchangeable.. There are lot of diferences between them. The only similarity is that both of them are the top 2 fastet growing economies of the world at the moment. Differences are

    1. China is has an autocartic communist govt, while India has democarcy.

    2. Chine grows because of the govt intervention in business affairs, while , India is growing despite govt intervention in business.

    3. China has large PSUs which are driving growth, while India has vibrant private sector much like USA.

    4. Chinese dont enjoy full human rights, while Indians have all the human rights given and honoured by the govt.

    5. Chinese still are learning english which is official language of the world, while India has largest population of english speaking citizens anywhere in the world, more than in britain also.

    6. Chinese are good in manufacturing while Indians are superior in services.

  • Report this Comment On April 15, 2009, at 2:13 AM, rajeevsingh111 wrote:

    Also check out http://moneyforinvestment.blogspot.com for more such articles.

  • Report this Comment On April 15, 2009, at 8:19 AM, VickyThakre wrote:

    i am not agree with some comments ...as in my view India will beat china in few years ...the assumption are

    india have more number of young workforce

    india have diplomacy and stable politcal scenario

    both points are well defind and quantified...

    whereas china lack in both ....i m in india and visited china....in my view the show will stop from china very soon

    which we have also seen after the olympics

    however i agree that resource are abundantly avaialbe with china and demand ansd supply too....

    lets have other comment

  • Report this Comment On April 16, 2009, at 3:03 AM, kurtisj wrote:

    Hey krajha, lighten up. The writer made some pretty clear points:

    1. Grouping geographic regions together as a "BRIC" is counter-productive for individual investing purposes.

    2. International investing requires research and insight into various issues listed.

    3. The global gains advisors take these issues into consideration for their recs.

    Nothing wrong with that. If you're looking for investment advice and discussion, get a subscription. TMFCanuck's posts are exhaustive on HG, and some of the GG responses are to the point. Good luck.

  • Report this Comment On April 16, 2009, at 9:55 PM, sportscliche wrote:

    Chinese health care providers are not legally required to treat anyone who cannot pay. This is true even if you have an immediate, life threatening ailment. There is no capital gains tax. No dividend tax.

    What else does today's China have in common with the US of 100 years ago?

  • Report this Comment On April 17, 2009, at 5:11 PM, JAYBOSLIN wrote:

    Mobius was Squawk this morning-Friday-and he said China is by far the country to buy, followed by India, Brazil and Russia--in other words the BRIC countries. This article just shows the potential in all of them even though it's intent is to show how different each is and how dangerous it is to treat them alike. Buy the BRIC!

  • Report this Comment On April 17, 2009, at 5:56 PM, rajam2000 wrote:

    Isn't the audience of this article investors?

    Don't the investors care more about growth of their invested amounts through underlying value and dividend payments?

    So if India's GDP/Cap = 2K but it grows to 3K more interesting that US GDP/Cap = 48K grows to 52K ?

    If I were to use the GDP/Cap numbers quoted by you and then updated by you in the comments, the growth in this metric is

    US - 3.5%

    Russia +23%

    Brazil +19%

    China +89%

    India +160%

    BTW, which years are these two metrics from? The latest figure quoted by you are from which year's CIA Factbook?

    Anand, what are you smoking now? I'll stay away from it, thank you.

    I agree this article is utterly useless to the investor. There's no mention of the market mover stocks in either India or China. Political and social factors are important, but ones I as an investor cannot act upon.

  • Report this Comment On April 17, 2009, at 7:02 PM, zanehu wrote:

    May be a lot of comments here were from real fools that didn't know anything about China and India or pretended to not to know.

    India is a democracy and with more than a million baby girls murdered every year, discrimination on untouchable who are in numbers half the size of US, third of elected officials has criminal backround, 58% people practice open defecation and most of the population are in the risk of eating feces if they are not already doing so (Bloomberg Market, April 2009).

    I choose China any minute of the day over India even with her authroritarian system. Look at what the parasites at Wall Street did to our country in the name of free market and democracy. May be you can go home feed your kids with democracy and discuss company democracy with your boss. China made greater progress on citizen's living standard than any governments in the last 30 years. If you still insist India has better political system than China, what can I do with a real fool?

  • Report this Comment On April 17, 2009, at 7:29 PM, getrichdietrying wrote:

    Maybe but I still like to be not worried about the SS. Being accused and put in jail without proof and hope of ever being free. USA "Give me Liberty or Death!" Otherwise what is our constitution but a piece of paper. Besides today's USA was not built in a day, give India time.

  • Report this Comment On April 18, 2009, at 4:21 AM, mpwh wrote:

    Basic point is the power of the local medium class. China did a good job growing their local medium class, the same as Brazil did as well. While in India you have more than 90% of the population living under the poverty line and starving to death. That is why is easy to hire 100 indian telemarketing robots with the monthly wage of any entry level mail-clerk in the the US.

    A country needs its own money to grow, as China, Brazil and even Russia are doing. (Russia lost it now, as it relies too much in oil prices)

    But, India? India got no own money. That is why you see plenty of H1B beggars trying to sell that pathetic place to investors. Because they need to suck like leeches on foreign cash, as they have nothing from them on.

    India is just a pathetic country based on cheap labor and a bunch of "sahib, sahib" starving beggars.

    If I had to put my money on a foreign market I would pick Brazil, as they have more than 50% of the population as medium class, their economy foundations look strong, they are the main leader economy within their Latin American peers, they got plenty of hard cash reserves, they got the right balance between natural resources supplies and population demand, and they are even lending a couple billion dollars to the International Monetary Fund, while India is begging for international money...

  • Report this Comment On April 18, 2009, at 11:55 AM, figotong wrote:

    I am chinese. Recently, I want to learn something about the USA stock market. can some of you help me? my e-mail address is figotong@gmail.com. If you like, I can also tell you something about the chinese stock market which I am really very familiar with. Thank you.

  • Report this Comment On April 18, 2009, at 11:55 AM, maddsri wrote:

    I hate this motley fool propaganda coming to my inbox but i read this headline and had to read yet another pathetic attempt towards sub-par marketing. anand, you need a new job, ya little slave. as far as what zanehu wrote on 4/17 7:02 PM, everything s/he wrote is absolutely correct. if you go to india, it really is as disorganized as you can get for an "emerging" market. i had an argument with a chinese friend over which had more potential about a year ago. he supported india, i supported china. two years ago, i equated india to being a bank with a sign up front indicating the alarm was off and the front door was unlocked during closing hours open for robbery. the politicians are complete imbeciles. i know many of them as they are friends of the family, and i feel like throwing up on these people. i have no respect for them. many are, indeed, criminals. they siphon all the wealth that is coming into india for themselves. they make at least a couple million each month easily through business ventures with companies, that is, if they're important enough, which isn't hard with the british burauacracy there. there is little money being invested in infrastructure, roads, and simply getting rid of the poverty that is so prevalent there. the difference b/w china and india is that one has order, while the other does not. one is authoritarian, but that same communism is the strongest form of political foundation for the strongest form of economic growth, capitalism; the combination is more potent than socialism. india is very much like the u.s. in that the wealth may trickle down to the rest of the populus, but in large part rests in the hands of the plutocracy and corporatocracy. btw, india's population prevents any real trickling-down effect there. india, from what i see, may have some growth (or had it when i went to india a couple years ago), but it won't be able to hold on whereas china will - simply b/c chinese govt. has an objective, a goal to reach. india has a bunch of greedy diksmack politicians who have no concept of how to create an efficient path towards future economic prosperity. they live in the now, rather than think long and hard about next week or next year. the cities are insane in how they're designed. when india came into wealth, they simply built around the crap that they already had. heck, the country is the same as it was when the british ruled. lmao, no pride. no clue as to what they're doing. there is no cooperation b/w states. they don't want to wake up and hold conferences together on a national level and get things done TOGETHER. (while china has a single group of people who dictate legal and economic guidelines.) they're very different due to language barriers and egos and pride and a unique history to the country itself, so yea, no way india will rise to reach its potential, not with the poverty and the kids on the street eating out of trash and defacating, all right next to a billionaire's home. what a joke. i feel burning that billionaire and his home. the country (and therefore economy) will simply never grow in terms of a safe long-term investment. not a chance would i invest in india long-term. just get in, take your profits, and get out.

  • Report this Comment On April 18, 2009, at 4:14 PM, venkytalks wrote:

    Unfortunately, maddsri is right about India.

  • Report this Comment On April 18, 2009, at 9:04 PM, getrichdietrying wrote:

    Agree, look at how the politician's handled India's own 9/11. Nothing really changes and will not till corruption ends and the poor are not as ignorant as they are currently are; who are bribed with words while the corrupt eat real food out of their hands. For me to invest a large amount or small is scary without outright buying those same corrupt politician's myself. And since Maddsri or his family?, knows those same people. He should also know that the only way to really know them is if your own family is corrupt too, and/or bribing those same politicals/criminals(really) who come to call. Does it not just propagate the same? Cause they only come to call to fill their coffers for their present and/or future. Yes ben/bhaia!

  • Report this Comment On April 24, 2009, at 12:36 PM, maddsri wrote:

    don't go there getrichordietrying. my family is not corrup. that's why we don't do business there though my dad has had multiple oportunities to invest and create companies, some of which are now worth in the billions. yea, billions. but he doesn't want any part of it. as for me, i won't touch it either. neither will my brother. we're all doing just fine in the us, where we both were born and raised. we're those indians that are all doctors and work hard and never cheat anyone while we're in a country of thieves (that's america, buddy). my father simply studied his arse off to get here and many of his classmates are enormously wealthy now or are politicians themselves, some very high-ranking though you don't need to know who they are. but you're right though, it's shameful. and like i allude to, if i had the chance, i would annihilate many of my dad's friends simply b/c they don't deserve the wealth. greedy bastards. next thing you know they'll have casinos there. good riddance. just don't invest there long-term. short-term is fine. that's my advice to you all.

  • Report this Comment On June 26, 2009, at 10:22 AM, munemura wrote:

    Everybody gets confused about India because it is such a mozaic. The government is full of crooks but there are also great persons around. Consider one of the greatest

    men who ever lived, Gandhi.

    I have had experience outsourcing in India. Some

    Indian companies will give you a dime's worth of work

    for a dollar. But there are others which satisfy my dreams.

    As for China, they don't waste time with religion and work very hard. But I was arrested in Communist China decades ago and tortured and to this day I don't know

    why. You might risk some money in China but living there means you are risking your freedom.

  • Report this Comment On July 17, 2009, at 10:34 PM, hc72Walker wrote:

    Not a very good article, I'm afraid...

    The BRIC countries are very different countries, as said, this is why you I think you shouldn't compare them by merely looking at some stats...which are not be completely accurate, by the way (Brazil's GDP that you stated to be around USD 8,800, but in fact is actually over UDS 10,000...)

    Anyway, I agree with what some wrote re: GDP not being a good way of comparing these emerging economies with the so called developed world. Mind you, one dollar goes a lot longer way in India than it does in Brazil ....Let alone Europe or Japan...

    Overall I think Brazil is looking very good...According to the Brazilian agencyof National Statistics, brazilian middle and upper class add up to 65% of the population of the country. This means they have a huge domestic market, so lots of room for growth and therefore great opportunity for investment.

    Don't forget also that Brazil is a large democracy, politically stable, with no domestic comflicts or instabilities, which allows them to concentrate in growing and developing. Corruption has consistently fallen and macro-economic policies are beginning to give good results. I'm not sure if the same can be said about Russia.

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