No 19 - April/May 2000
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Economy &
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The Simplified Macroeconomic e&e Model
Project (Back) 7 - External Trade One of the false premises when analyzing the Brazilian situation is the one that presupposes the increase of international trade insertion in the country. Due to a conjuncture of lower petroleum prices and less pressure on external accounts, .it is verified that Brazil was able to increase the imports volume. Since the export volume relative to the GNP was reduced in order to satisfy the larger internal demand, external trade, considered here as the average between imports and exports relative to the GNP, did not increase and was even reduced relative to the past decades. In the last years there was a overvaluation of the Brazilian currency that produces some distortions when calculating the GNP and contributes also to reduce the external trade as a percent value of the GNP. Anyway, opening to external trade was not what many Brazilians believed it to be.
External Trade Projection - Verified - Linear (Verified) - Projected An analysis of the historical data shows a notable stability in the average behavior of this parameter, which produced a disbelief in many optimistic forecasts about the external trade expansion. This trade has limitations linked to the Brazilian geographic extension and the relatively modest size of our neighbor's economy. In spite of this fact, the Brazilian economy continues to be relatively closed, with external trade value of 7% of the GNP, while, according to the above mentioned book, Brazil has a potential of 13% of the GNP for external trade of which 5% refers to trade with neighbor countries. In the essay presented here we have projected evolution towards an average of 8% in 2020 (see Figure 12). However, it should be mentioned that historical trend (inertial) points out to maintaining an average value close to 7% of the GNP.The commercial balance behavior is introduced in our model in an exogenous way and takes into account the possibility of getting into debt and the penetration of external capital in the capital goods stock of the country. The input of exogenous values is given from the next spreadsheets on, where the years are indicated starting from the last one known, some intermediary years, the present year, the following year and the 4 future years with intervals of 5 years between the starting from the present year. In creating a new scenario, the user should supply the values of the Commercial Balance starting from the last known year. The export and import results take into account the external trade extrapolation, shown in the previous figure, and interpolation between the exogenous values of the commercial balance.
Commercial Balance - External Transfers - External Trade -Export - Imports The program calculates endogenously, from the commercial balance data the external transfers that include goods and services considered as non-factors in the debt. The correspondence between these parameters is obtained through the behavior of previous data. There is roughly a deficit of 1% of the GNP in the non-factors service balance. As we will see in what follows, external transfers are used for evaluating investment. 9 - Reference Interest Rate, aiming at limiting External Transfers The flux of external investments, real or financial, is effective in the real economy only with the input (output) of goods and services in the economy. As the country does not issue currency for external circulation, the capacity of getting into debt is limited, the historical flux of real goods coincides with the financial flux in the accumulated value, with some lag due to reserve variations. Actually, this is what has historically happened in Brazil, as shown in the above-mentioned book. The so-called productive investment has a behavior similar to that of financial investment. The difference lies on who administers the investments. For cumulative control purposes, one could use the net external liability that includes the net debt and the accumulated investment in capital goods in the country. There exists the option of trying to impose, for practical or strategic reasons, some limit for this liability. In the example given we pointed out the 54% of the GNP line that corresponds to about 20% of the capital stock. The absolute limit would naturally be when all the capital stock would be in foreign hands. For a capital/product ratio of 2.7 to which we suppose this value will come - in the example shown here - this absolute value would be 270% of the GNP. Reaching this limit would mean that Brazil would literally have new masters. We have used the real interest rate (discounting inflation) paid in the country as a determining parameter of this accumulation since it is supposed that direct investments, called "risky", will be made if they foresee a return rate equal or higher than that one. Once the interest rate is known - and supposing the same rate of capital remuneration - it would be theoretically possible to suppose a transfer rate from outside necessary to maintain the net liability within its limit. As can be verified in the simulations that there are practical limitations for preventing this to happen in the real world, since we are assuming a limited internal saving. For this reason, we are assuming a positive net external transfer, i. e., a negative net foreign flux, which means practically positive commercial balances higher than 1% of the GNP. In this simulation we have considered interest rates of 6% annually, that could be considered ridiculous in the present circumstances but that corresponds to what happens in the real economy of licit productive investments. As can be seen in Figure 14, the adopted values for the commercial balance and these interest rates lead to stabilization of external capital around 50% of the GNP, which would correspond to about 19% of the total capital. An arbitrary limit of 50% of the GNP is also indicated.  Figure 14: The net external liability is used as a controlling variable and once a reference interest rate is established, the transfer of resources for a desirable net liability rate is adjusted. The indicated limit is arbitrary and corresponds to 20% of the total capital stock of the country that is on the hands of the external capital. As an illustration, we show in Figure 15 the results that would lead to a commercial balance as the one considered (tending to a surplus of 2% of the GNP) and real interest rates of 13%. It is verified that the initial commitments are much lower than the one presently described (data to be reviewed). Exercises considering these rates result in practical impossibilities that are not worth while to consider. In other words, natural mechanisms will cause these rates to drop to more civilized values.
Net External Liability 10 - Use of the Installed Capacity Not all the variables that influence the GNP are included in the model. The difference between the model and the effective economic activity express these factors not included in the model. This difference is due to the use of the installed capacity relative to its average utilization. The graphic in Figure 16 shows that it can be associated with conjuncture factors that increase or decrease the GNP level around its long-term trend. The utilization factor so measured is extrapolated to the future and it tends to the average using a "de Poisson" transition, as previously described. As the utilization factor would be in 1999 six percent points below the average, one can foresee the recovery of this factor. Therefore, the economy would increase its production capacity that would tend again to its historical average. Opposing this premise, there is the possibility that competition with external products would cause a "scraping shock" that would be irreversible. On the other hand, there are news concerning productive installations that resumed their normal operation after the 1999 exchange rate shock. The future will tell if recovery is possible within the margins suggested by the model. The utilization factor evolution relative to the average is shown in Figure 16. On the screen shown it is possible to see the utilization factor behavior in the past as well as to list some of the conjuncture causes that have influenced it. The expected values that can be taken into account in the extrapolation can be indicated in years where partial results about performance of the economy are available (1999 in this case). Corrections to the GNP values can result from projection of the utilization factor. On the screen below one has the GNP values initially projected from the model and the estimated GNP values that now include the influence of the utilization factor variation. Due to the evolution of this projected factor, the growth rates in the last years of the series are practically not affected by this factor that has reached the value 1.
Utilization Factor (relative to the
average) Utilization Factor - Projection - Scenario: Reference It is allowed to introduce GNP growth values in the first projected years and they will take into accounting the projection and the adjustment will be compensated in the GNP growth projected for the following year. 11 - Results of the Macroeconomic Model The results are presented in the following graphic, click on button " GNP Results" in the spreadsheet of Figure 16. The spreadsheet shown in Figure 17 summarizes the projection of the most relevant variables. The same results - and other complementary ones - can be checked in the specific spreadsheets or graphics.
The spreadsheet presents as well the following summarized results: Table 1: Results
Results of the spreadsheet shown on screen "Input 5"; the first extrapolated years and the intermediary years are indicated. The GNP is shown by year or by period. Several other results are available under the form of graphics or tables. Some values serve as an additional control mechanism, for example the GNP and per capita consumption data shown in Figure 18. Actually, internal saving growth means consumption relative reduction. The scenario considers as a boundary condition that the per capita consumption parameter - truly socially important - does not show negative rates due to the resuming of saving. The program does not automatically verify this boundary condition.
The spreadsheets of results can be obtained through the menu item Results/Macroeconomic as shown in Figure 19 for an application developed for Eletronorte.
Values for "Synthesis Values" are shown in Table 2. Table 2: Synthesis Values
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