Economy & Energy
Year III - No 13 March/April 1999

ollaoro.gif (978 bytes) Main Page
ollaoro.gif (978 bytes)The Structure of the Crisis
ollaoro.gif (978 bytes)Privatization in the Energy Area
ollaoro.gif (978 bytes)Energy Equivalence Coefficients
ollaoro.gif (978 bytes)Glossary of Energy
ollaoro.gif (978 bytes)e&e links
Following the Brazilian Economy:
ollaoro.gif (978 bytes)Brazilian Public Debt
ollaoro.gif (978 bytes)Internationl Reserves
Graphical Edition:
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ollaoro.gif (978 bytes)Glossário de Termos Energéticos
(soon in English)

THE STRUCTURE OF THE CRISIS

  Omar Campos Ferreira
omar@ecen.com
English Version: Frida Eidelman
frida@ecen.com

THE STRUCTURE OF THE CRISIS

The economical crisis of this end of century has been diagnosed and treated as a financial one, which can be solved by monetarist measures, but in reality it seems to have deeper roots. The opinions of the experts are contradictory and it seems that there is no assured diagnosis method. Nevertheless, there are some indications that the question is linked to the loss of productivity together with some idle capital in the central countries. In order to analyze the crisis it is safer to start with elements of the "physical economy" , using the currency only when there are difficulties to evaluate short term variations of some production factors. Therefore the method is similar to that used in the national accounting, where the product is expressed in cost of factors.

The starting point for the proposed analysis is the production function:

  1. Y = f ( K, L, E, M )

where: Y is the product, K the capital, L the labor, E the energy and M the raw material. As far as possible, the production factors should be expressed in physical units, which is difficult but conceptually possible.

The objective pursued by the economists is the "sustainable" growth of the product. The adjective "sustainable" is ambiguous, either referring to environment conservation or the possibility of continued growth. The ecological connotation is unacceptable as demonstrated by Georgescu-Roegen ("Steady State and Ecological Salvation" - BioScience, vol. 27, n0 4, April 1977) and the growth perspective is not defined so that it would be preferable to ignore the adjective.

The variation rate of the product is obtained from equation (1) as

(2) dY/dt = Y/ K . dK/dt + Y/ L . dL/dt + Y/ E . dE/dt + Y/ M . dM/dt

And the goal is therefore to maintain dY positive, operating on the production factors.

In this expression, the partial derivative represents the productivity of the factors and the time derivative represents the variation rate of the used quantities of these factors. Examining each term in (2), it is possible to weight the relative importance of the factors, which vary with time, in order to identify the best way to make production grow. If the productivity ( Y/ X) of the factor varies, its quantity used in production must vary in order to maintain the production configuration. If there is no way to compensate the loss of productivity, the production mode must be changed.

CAPITAL PRODUCTIVITY ( Y/ X)

This term was examined in detail by Carlos Feu Alvim in an e&e article ("Capital Productivity", vol.1, # 1, Feb/Mar-1997). The article shows that the ratio capital/productivity grows according to the logistic law in the economy of the analyzed countries, tending to the limit 3.5 as evaluated by the author. For some countries (Japan and Argentina) the ratio is already close to the limit; in the European economy (France, Italy, Belgium and United Kingdom) and Australia, the present value would be 3.0 while in the so called emerging countries (South Korea, Brazil, Chile, India and Mexico) the value stands between 2.0 and 2.5. Paradoxically, some emerging countries which offer better opportunities for new capital investments have been the target of speculative attacks which demonstrates that there is no intention to make productive investments in these countries.

The capital productivity, as defined in this article, is related to the capital/product ratio used by Carlos Feu. If this ratio is independent of time, it is equal to the inverse of capital productivity, since:

r = K / Y implies dY/dt = 1/ r dK/dt or r = dK/dY

If r varies with time, as assumed,

dY / dt = (1/ r ) . dK / dt - (K / r 2 ) . dr / dt

and both expressions are coincident in the limit of r, since there dr / dt ® 0. Therefore, it is legitimate to consider 1/r as representing the capital productivity in the limit. If r is close to 3.5, the capital productivity is close to its minimum value. All analyzed cases show that the capital productivity has crossed the inflection point, which means that the return of investment decreases and the increase of production by way of capital becomes improbable.

The Sep/Oct/1997 issue of Foreign Affairs published an analysis by Paul Krugman from MIT about the "global glut", as he called it, which would be a version of the "secular stagnation theory" and whose emergence is attributed by the analyst to the rise of the socialists to the government of France with the election of Lionel Jospin in 1996. According to this theory, the production capacity (capital) in this decade exceeds the consumption capacity, which explains the unbalance of the markets and the idleness of the financial capital.

In the past, the capital surplus was solved by wars, as the Second World War, which would have been the solution to the 1929 depression. The present turbulence coincides with the end of the "Cold War" during which the war industry absorbed the exceeding capacity production.

 

ENERGY PRODUCTIVITY ( Y/ E)

Several researchers have occupied themselves with the per capita income/per capita consumption ratio, among them Howard T. Odum ("Environment, Power and Society", John Wiley & Sons, 1971) and Chauncey Starr ("Energy and Power", Sci. American, vol.225, # 3, 1971), both with energy consumption and income data of the year 1964. A compilation of 1984 data, in the document " Basic References" from the National Energy Commission/1986 for some countries which have consolidated energy balances are shown in graphic 1.

 

ENERGIA FINAL/HAB EM RELAÇÃO A RENDA/HAB = Final Energy/Inhabitant relative to the Income/Inhabitant

Brazilian data are from BEN/97 for final energy demand and from the book "Brasil: O Crescimento Possível" for the GNP. Due to the difficulty in choosing a single deflator for all countries, it is not possible to compare the results of both studies (data from 1964 and 1984, before and after the petroleum price shock), but it is possible to verify the internal data consistency. In 1964 there was an almost linear correlation (correlation coefficient R2= 0.989) between income and energy consumption for the sample. In 1984 the correlation for the sample is weak (R2=0.800), and it is noticeable the marked deviation of the USA, Canada and Australia relative to the line defined by other countries of the sample.

Considering separately the countries with large territorial extension (USA, Canada, Australia, China, Brazil and India) the correlation improves considerably, reaching the value of 0.988, equal to the coefficient obtained in 1964. The countries with smaller territory show a reasonable linear correlation, with R2= 0.934. For the large countries group, the average energy intensity is 0.46 tep/1,000 $80; for the other group the average intensity is 0.16 tep/1,000 $80. Brazil, China and India present the energy intensity around 0.60 tep/ 1000$, appreciably higher than the group's average, and a lower income , seemingly the unit value of its predominantly primary products ($/kg) also affects the correlation. It is also noticeable that in the income range up to about 3,000 $80 there is certain indefiniteness between the prevalence of the territorial extension or the income, probably due to the interdependence of the use rates of the factors, which are linked by the production function. The physical difference between the two groups, the territorial extension, suggests that the change in the relative positions would be related with the internal transportation cost increase, strongly dependent on petroleum cost, and with organization and administration cost. Extended territory signifies a larger diversity of economical (and political) situations and therefore a larger administration relative cost.

This result finds support in the external trade analysis from the book "Brasil: o Crescimento Possível" , which showed a decreasing correlation between the territorial extension and the external trade coefficient, a fact that must be considered in strategic planning, specially for Brazil which is a large country and has low income. Taken together, the energy and external trade analysis show that countries with large extension have minor vocation for external trade due to the fact that the internal consumption potential is high and the transportation of goods with lower value density ($/kg) is energetically expensive. Carlos Feu's article about capital productivity allows for comparing the Indian economy evolution with that of Brazil, from the fifties on, when the Indian economy was more capitalized then the Brazilian one. Since then, the Brazilian economy became capitalized in a faster way and at the end of the eighties both countries had practically the same capital-product ratio. In the nineties the Brazilian economy continued to increase its capital-product ratio while the Indian one had a slower evolution. The Indian product has been growing regularly between 4 and 5% in the last 40 years while the Brazilian economy shows large oscillations in the growth rate in the same period, suggesting that the option for the industrial model, more capitalized, made our economy more vulnerable to imported crises. Another data that reinforces the conclusion about the influence of the internal cost (transportation and organization) is obtained from the Basic References and refers to the impact of the petroleum crisis on the economy of the large and small countries. Graphic 2 shows the per capita income variation in the USA, Italy, France and India between 1970 and 1984 where it is noticed that India, not so much dependent on petroleum, was practically not affected by the crisis and that the Europeans were less affected than the USA.

Finally, still with data from the Basic References, it is observed that the ratio between the final energy demand and the primary energy offer decreased for all the analyzed countries in the same time interval (graphic 3).

The relevant conclusions about the energy productivity are:

  • countries with large territorial extension have energy costs intrinsically larger and are more sensitive to supply crisis and have a smaller vocation for external trade;
  • the petroleum price crisis of the seventies gave evidence to the larger energy intensity of the large and industrialized countries.
  • the conversion efficiency of primary energy to final energy, including the distribution loses, decreases systematically in all analyzed countries between 1970 and 1984;
  • the energy productivity decreased in the analyzed interval and possibly will continue to decrease as long as the petroleum offer decreases;
  • the technological gains that in the past compensated the loss of energy availability seem to have saturated its compensation efficacy.

Even though the purpose of the present analysis does not include the political and institutional aspects, it is hard to resist the temptation of predicting growing difficulties for the large countries in order to maintain their organizational systems in scenarios where low cost energy is less available. In this aspect, it is apparent that the USA will have less difficulties to maintain the institutional stability due to the greater autonomy of the states. In Brazil, the political-administrative centralization, the economical concentrations in the Southeast-South region, the low efficiency of the transportation system and fuel price policy are a hindrance to the maintenance of the federative system as it exists today. The hard dialog between the Federal and State Governments suggests that the problem already emerged.

RAW MATERIAL PRODUCTIVITY ( Y/ M)

It is hard to evaluate this term since the physics reasoning induces to consider finite resources as being decreasingly available. The natural expectation of price increase for primary products has not been confirmed. Possibly, the technological development and the inequality of exchange power between exporting and importing countries have been producing the decrease of raw material prices in the postwar period. Nevertheless, mineral resources are not recyclable by photosynthesis, what would determine the inexorable decline of its availability, as suggested by Georgescu-Roegen in "Fourth Law of Thermodynamics". Robert U. Ayres ("Eco-Restructuring : The Transition to an Ecologically Sustainable Economy" - INSEAD/1995) evaluates in 5 decades the horizon for the exhaustion of fossil fuels and aluminum, copper and uranium ores.

There are perspectives of gains in the natural resources economy by recycling wastes, by changing production processes and by material substitution (for example, copper for aluminum in electrical conductors), but with growing costs due to collecting and transporting the wastes to be recycled and to the high investments necessary to change processes and materials. In spite of the ecological appeal, this practice has been limited to a small variety of wastes, in special aluminum, whose energy production cost would compensate for collecting and transportation costs. Anyway, it is undeniable that resources are finite, which implies expected decrease of raw material productivity.

LABOUR PRODUCTIVITY ( Y/ L).

Measuring economical development by labor productivity was an acceptable practice in the old days when salary was the highest cost component of production. Now this indicator for productive gain is questionable because while it increases, the world economy sinks. The salary mass (salary, retirement and pensions) lost 1/3 of its participation in the Brazilian GNP in the last 30 years in favor to capital costs (mechanization, automation and computing). In Europe, the welfare state collided with the need to eliminate the economical differences among the members of the European Union. Nevertheless, if we combine the capital productivity fall with the decreasing trend of this parameter for energy and raw material, the last free variable in world terms is the labor productivity. In the same way as the technological gains determined the fall (maybe temporary) of petroleum prices and raw materials, the development of the worker's qualification may be the factor for natural resources conservation, among them the energy resources, and product growth.

In the case of Brazil, which has natural resources, with large and still growing workforce and favorable conditions for biomass conversion, it would be natural to think about associating these conditions in an strategy to explore natural resources, with a more balanced partnership of capital and labor, by means of promoting the production of popular consumer goods which require simple technology that is already available in the country. Producing for exportation requires more capital since the products of interest for the potential importers are more specific and capital and energy intensive. In order to improve the worker's qualification it is necessary both investment and putting money into education, health, mass transport and housing services, items that have been systematically reduced by successive cuts in the Brazilian public budget. The same trend is happening in public education with the practical extinction of secondary schools and professional courses that previously were supported by public resources.

CONCLUSIONS

The equation production-consumption admits several solutions, either by the production path or that of consumption. The first path will require the development of a set of rationalization and investment measures to be applied on infrastructure, with medium term results. The second one can be executed more rapidly, especially when it concerns compressing the consumption of wage-earners in view of the monthly circulation of salaries. Nevertheless, as consumption products are not reachable to the average salary, the population fraction hit immediately is that of lower income, and it is inevitable the deterioration of income distribution. Repression measures against price abuse in commerce hardly produce the wanted results since there are many escaping ways for those who contravene norms and laws. The voluntary consumption compression occurs only when the population goes along with the Government's plan and this is more natural when in situations of external threat, when political leaderships are more easily accepted.

Nevertheless, a more durable solution for the world economy will come from factors that in some way are within the reach of human actions, which excludes the availability of energy and raw material, both regulated by natural laws. A new boost growth for the economy in the present configuration of productive factors depends on the better use of the natural resources or on the development of new energy resources with costs comparable to that of petroleum. Countries that still have a margin for development relative to the developed ones should carefully explore each production factor in order to find its own more productive configuration, since it is difficult, if not impossible, to reach the level of income and consumption of the already industrialized countries.

The results of the present analysis seem to completely disagree with the economical guidelines prescribed by the international organizations, coincidentally under the management of the rich countries. The crisis is a structural one and will not be solved by financial measures.