Economy & Energy
Year II - No 7

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Olla_de_oro5362.gif (580 bytes)How to Increase the Capital Productivity

Graphic Edition:
Editoração Eletrônic
Monday, 21 July 2003.

How to Increase the Capital Productivity

Carlos Feu Alvim
English Version:
Frida Eidelman

The Capital Productivity is declining.

We have been calling attention to the fact that the strangling point of the Brazilian growth is the capital factor. We have also shown that there are structural and cultural limitations to increasing the internal investment rate and there is no historical indication that it is possible to count on the ingress of significant regular external investments  (1) .

According to our evaluation the capital/product ratio - which varies in the opposite direction of productivity - has grown for the economy as a whole from 1.5 to 2.7 in the period of 1970 to 1996; this corresponds to a decrease in the capital productivity of 45%. It should be noted that we are considering as capital stock the set of the so called production or capital goods and not financial resources.

In the present situation and assuming that the capital productivity continues to decrease in the next two years (2) it is necessary to invest about 14% of the GNP in order to maintain the production stable. With an investment rate of 19% we would grow more than 2% annually. In order to grow 4% we would have to invest about 25% of the GNP annually.

A study carried out by the Economy Ministry (Régis Bonnelli and Renato da Fonseca, 1998) indicates a decrease in the capital productivity of about 30% in the manufacturing industries between 1979 and 1996 and a large increase in the manpower productivity.

A headline in the Economic Section of Jornal do Brasil which mentions the study, specifies as usually only the significant increase of the manpower productivity. In the text it is explained that this advance is due to sub-contracting. The graphic shown bellow indicates the recovery in the global productivity of the sector from 1992 on; this index has been decreasing since 1970.

It should be noted that the productivity rate of both factors - which have opposite signs in the case of substitution - may evolve in the direction when rationalization measures are applied.

Régis Bonnelli - Ministry of Economy in JB 03/02/98

Even though the press and authorities still insist on emphasizing only the gains in manpower productivity, accepting as inevitable the employment reduction, it is encouraging that the capital and global productivities are being taken into account. After all what is scarce in our economy is capital and not manpower.

The level of Busy People and Productivity

It is an elementary question that to maintain constant the number of busy or employed people (3), and at the same time to increase the manpower productivity it is necessary to increase the production in the same proportion. For a country with a growing potentially active population it is necessary to grow even more in order to maintain the occupation rate.

A sectorial policy may be in conflict with this rule and find compensation in the inefficiency of other sectors. To pretend that a global policy for increasing manpower productivity will not result in unemployment when there is not adequate economic growth is struggling with arithmetic, as the late Ministry Simonsen used to say.

From the point of view of global manpower productivity - measured by the production/ potentially active population ratio - it is only possible to increase its value in the medium term by increasing production (numerator of the fraction). The solution of deliberately reducing the denominator fortunately has not been considered since the defeat of nazism.

Exporting workers - which in a way we are already doing - does not seem a desirable solution for a country with natural resources like Brazil.

The Necessity of a Diagnosis

A correct diagnosis is fundamental for correcting the economical stagnation. Unfortunately, what we have done in the last years is to apply in the whole world a single recipe without worrying about the diagnosis for each country or region.

Among these errors, from our point of view, are the excessive preoccupation with increasing the work productivity which is not - as the national accounts show - a predominant factor in compensating our production. More serious than that is simply to subsidize the mere manpower substitution in the cases where this does not result either in production increase or in real costs reduction.

In our opinion this is not the only diagnosis error, or worse, the lack of diagnosis that we observe in the country. We are applying in Brazil a medicine probably more appropriate to another patient.

We have insisted on the diagnosis that capital productivity is an important limitation to economic growth (4). On the other hand, we assume that limitation to growth in countries like Brazil - as was demonstrated by the Real and Cruzado plans - is on the side of demand and not on that of supply

It should than be necessary to find new ways to increase the global productivity in a country with special emphasis on capital productivity. A program for increasing global productivity, including that of capital, should be the main concern of the economic and social policy of the present and future governments. The capital productivity is already , by the way, the explicit preoccupation of the governments of some countries of the British Commonwealth.

The Increase of Capital Productivity

Increasing the capital productivity is a topic that deserves analysis at the global, sectorial and specific level of production. We have neither the pretension nor the knowledge to present here a recipe, we will only try to anticipate some ideas for debate

In the first place we understand that it is not the case to propose measures aiming at reducing the manpower productivity. Larger production at competitive prices should continue to be the goal of the Brazilian economy.

Reducing working time, for example, as some economies which have demand limitations are doing does not seem to be the solution for the Brazilian case. This would be, from a macro-economic point of view , to reduce or cancel the gains obtained in manpower productivity, which by the way is a measure that would reduce both the capital and manpower productivity. at the same time

From the global point of view, one should increase production using the same stock of capital goods. It would be necessary to use better the productive complex by rationalizing its use in space and time.

As it is now fashionable to suppress the working class’ gains, it would seem in a superficial analysis that this would mean to remove - at least temporarily - some hindrance in the work legislation in order to get a larger production with the same production complex.

This would be socially acceptable up to the point when more jobs would be created and that they would be part of a set of measures aiming at promoting economic growth and a larger participation of work as a production input. On the other hand, the irrationality in capital use should not be stimulated by artificial incentives. The sacred market, through high interest rates, indicates that capital is a scarce resource.

It does not make sense, for example, to impose 80% tax on manpower and to offer subsidies for capital which in Brazil has been historically taken from manpower taxes.

Who ignores that works financed by resources from social security ( construction of Brasilia, among others) ,at the beginning and not without shame, and later on more explicitly by resources from FGTS, PIS - PASEP, or Support Fund for the Worker?

The Constitution of 1988 considered that the citizen has basic rights in what concerns education, health and support for those who are have not the age or condition to work. The

innumerable amendments adopted for its text do not alter this principle. Therefore it is not incorrect to consider, as we have done above, the social contributions that aim at guarantying these conditions as taxing since it is the duty of the State to satisfy the mentioned social needs.

Then why not charge this and other taxes more equitably over the value added by work and capital? For the first time we would be following the world recipe appropriate to our problem. Perhaps this would be a way of permitting the god market to correct the present distortions.


(1) See "Capital Productivity" in e&e 01 and Chapter 8 of the book Brasil:O Crescimento Possível - Editora Bertrand, 1996
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(2) The capital productivity decrease is preoccupying in the sense that a 1% reduction of this productivity implies an additional investment of 2,7% of the GNP. By adding about 10,8% annually to the GNP (4% devaluation of the capital stock) in order to replace capital goods, it is necessary to invest almost 13% of the GNP to maintain the same production with capital productivity decreasing 1% annually. Since for each additional percentage point of the product it is also necessary an additional investment of 2,7% of the GNP, it results that with an internal investment of 19% there would be an increase of about 2% in the economy. With the fairly optimistic hypothesis of an additional external input of more 2,7% we would have an annual growth of 3% of the GNP.
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(3) It should be noticed that we are deliberately talking about occupational rate and not employment rate in order to avoid the fallacy of solution through the growth of the informal market. Furthermore, we reject to admit that the productivity growth policy has the objective of falsifying the statistics by turning informal the manpower in order to eliminate employment.
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(4) With no intention of making any diagnosis for the case, it is interesting to remember as we have pointed out in e&e No , South Korea presented a capital productivity decrease in a course very similar to that of Brazil in the last decades. The excessive use of external speculative capital to finance economic growth seemed to be the cause of the financial unbalance that launched the crisis of last October.
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