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Capital as Limitation to Economic Growth

In the book we tried to check if the phenomenon was present in developed countries in the seventies and eighties in four countries (France, USA, Germany and United Kingdom). Data from the OCED did not show an increase in the capital/product ratio for these countries from 1970 on. In the present article we show that the loss of capital productivity occurs in several countries - noticeably in the more dynamic ones - and indicates a structural growth problem for the next decade. Some remarkable exceptions - that confirm the rule - merit analysis.

Productivity has been a major concern in an economy that is turning global an in which-with the elimination of protectionism - only the more capable will survive. Production factors such as manpower, raw material and energy have been object of analysis which lead to significant advances in the agricultural, industrial and service sectors.

The capital productivity, maybe due to methodological and measurement difficulties, have been less studied at the enterprise level. Nevertheless, at the global level several countries - mainly from the British Commonwealth - have evaluated the global productivity performance of the capital accumulation in each country.

This productivity of the accumulated capital in each country can be evaluated from the capital (physical) accumulation/product ratio. A larger capital/product ratio indicates a smaller productivity.

How to Evaluate the Capital /Product Ratio or Capital Productivity

The International Monetary Fund (IMF) published data about the National Income Accounting of a large number of countries in historical series from 1947 or from more recent years. In the Brazilian case, in spite of the large variation of the investment rhythm and considerable oscillation of the machine and equipment participation relative to the civil construction goods, it was shown in the above mentioned book that a 4% amortization in capital accumulation supplied an acceptable approximation of the capacity of the capital goods to aggregate values.

Applying the same depreciation (4% of the capital accumulation) to the investment data published by the IMF and evaluating indirectly the initial capital accumulation it is possible to obtain a comparable series in the capital accumulation for the different countries. The objective is to use the capital/product function to better understand the interdependence between the annual investment rate and the average annual GNP growth.

That is, it is tried to establish one parameter that permits to correlate the investment made with production capacity. The GNP of the country is supposed to represent, deducting the oscillation in its utilization rate, this production capacity.

Evolution of the Capital/Product in some Countries

The IMF data allowed us to evaluate the capital / product rate for a more significant period and for a larger number of countries. The evolution shows that for the most part of the countries studied it also occurred the fall in the capital production.

In the sixties the capital / product ratio in Brazil changed, according to our evaluation in the mentioned book from 1,3 ( US$ 130 of capital was necessary to produce US$ 100) to 2,7 in 1995 ( values were adjusted in order to avoid the utilization rate variation). Of the studied countries ( 8 developed and 6 developing), Brazil showed the largest increase in this ratio, that is, the largest loss in capital productivity.

Among the developed countries, Japan and France showed the largest increase in the capital / product ratio between the 1960 and 1990 decades. In these countries , 1973, the year of the first oil prices shock, signals the start of the capital / product ratio increase.

The association with the oil crisis is explained by the energy substitution and conservation measures that were taken by these countries for strategic reasons. As a matter of fact either the nuclear option - strongly adopted by Japan and France - or the conservation measures mean larger investments for the same product. Besides that modernization of the product process, with emphasis on automation, can result in an increase of the capital / product ratio or loss of capital productivity.

Another factor that probably contributes to the increase of the capital / product ratio is the environment protection measures that require larger investments for production.


Some developed countries showed a smaller increase in the capital/product ratio in the 1960's. In Canada there was a high capital productivity (reduction of the capital/product ratio) in the seventies, returning to the same value-about 3- in the 1980's and 1990's.

In the table below it is shown that the capital/product ratio grew from an average of 2,5 in the seventies to 3,2 in the nineties. This means that-assuming that the capital/product ratio has reached a new stability plateau - these countries must invest 13% of the GNP to keep the production (corresponding to the replacement of 4% of the capital) and additionally 3.2% of the GNP for each percentile point that they intend to reach. Nevertheless, it is not evident that this plateau has been reached, a stabilization around 3,5% seeming probable, which is the value in Japan. This implies that there will not result in growth of productivity.

With an average investment of 22% of the GNP for the developing countries one should not expect a grow rate above 3% for the next decade.

The developing countries studied showed rather distinct behaviors in the capital/product evolution. Brazil, Mexico and Korea showed a strong increase of the capital/product ratio coincident with the second oil crisis rather than with the first one. India and Chile that had capital/product ratios much lower than those of the above three, succeeded in keeping the capital productivity relatively stable, with a slight rise in the two last decades. Argentina presented during the period studied high values of capital/product ratio.

In the 1950's and 1960's the so called developing countries had capital/product ratios much smaller than those of the developed ones. Naturally, this made easier to have a larger economic growth even if they invested a smaller fraction of their GNP. In Brazil this ratio was 1,2 and reaches 2,7 in 1995. Mexico and Korea reaches quite similar values for this parameter and, together with Argentina that already showed high values for the capital/product ratio, have reduced their comparative advantage relative to the developing countries.

 

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