e&e No 27
Brazilian Investments are Lacking and not only in Energy
Carlos Feu Alvim
The physical investment, or the gross development of fixed capital, is the sum of the territorial saving (fraction of the GDP that was not consumed) and transfers from abroad. Of these fractions that compose the real investment, the first can be considered as internal saving and the second, the external saving. Except for the stock variations which we are considering as part of the apparent consumption, this is the arithmetical result of the basic equation of the national accounts (Nota1) .
The adoption of the globalizing model of the economy made us believe that external saving could substitute the internal one and complement it in a substantial way. In 1995, in the book Brasil: O Crescimento Possível we have pointed out that this was an illusion that had neither logical ground nor historical volume of external capital flow. The financial flow of the so-called direct investment on which we became dependent was not translated into real investments as shown by the figures of the national accounts represented in Figure 1.
Investments in the second half of the nineties (1995/1999) were on the average 19.6% of the GDP. The transfers from abroad contributed with 0.3% of the GDP and the internal saving, 19.3%. In these five years, on the average, 116 billion dollars/year (1994 prices) were invested. Only 2 billion/year are due to transfers from abroad. There is a contrast between these values and those ascribed to external direct investment accounted for in the financial part (Note2). The view of the national accounts ignores the financial flow and accounts for the net input of real goods and services that do not include the interests attributable to the debt. From the production point of view this is the external input that does counts.
The investment values at constant prices are still more disappointing and show that we have dropped from a 24% investment at the end of the eighties to only 17% of the GDP at the end of the nineties. Our estimates are that the investment necessary to compensate for the depreciation of the Brazilian capital stock is around 11% of the GDP. For a capital/product ratio of 2.7, growth will be limited to (8.6%/2.7) 3.2% annually (we have grown 2.2% from 1995 to 2000). In order to minimally balance the external accounts, in the next years, we will have to transfer to abroad 2% of the GDP. Provided that the internal saving rate and present capital productivity (product/capital ratio) are maintained, our growth would be limited to slightly more than 2% annually.
The huge challenge for the next years is to recover the internal saving. This means to invest more and consume less which would be socially acceptable only if there is some income redistribution. The energy crisis is showing that it is possible to produce using a smaller capital stock. Improving capital productivity is also included in this challenge.
Many say that we need to deepen our external opening so that we can develop. We are concluding a decade of failures of this model that was unable to increase the investment rate. There is no reason, according to our experience and that of our neighbors, to think that the model will be able to increase this rate. In our specific case, the Real Plan was established when Mexico encountered the crisis and it was necessary, within the system’s logic, to adopt high interest rates and a overvalued Real. It is known that high interest rates reduce consumption but it reduces the productive investment as well.
In truth, from a more general point of view, there is no country that had developed without a strong contribution from internal saving and capital. In order to resume growth, the policy of honoring the speculative external capital in detriment to the productive internal (or external) one will have to be modified.
(*) Note 1:
Production + Imports = Apparent
Consumption + Exports + Investments
(**) Note 2:
It is frequently mentioned the need of external investment in order to compensate for the deficit in the Payment Balance fundamentally caused by the payment of interest and dividends sent abroad. This almost explains the small effect of this financial flow on real investments. Attracting external capital justified the interest rates, already called “pornographic”, that multiply by three the risk capital that entered the country at the start of the nineties. A good part of this capital was not transformed into real investments. Even from the financial point of view it is difficult to distinguish in the direct investments what was channeled to privatization (acquisition of production goods that already existed) or to speculation in the stock exchange which rarely results, in our reality, in direct investments of the companies. From this fact resulted a historical record of the internal debt as a percent of the GDP, even with a record fiscal collecting and sale of a large part of the government-owned companies.
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.