Carlos Feu Alvim:
Our objective is to quantify the macroeconomic path that could lead Brazil to resume development. For this purpose we have used a computerized macroeconomic model that permits to simulate the more relevant development variables.
Our previous analysis lead to the conclusion that in Brazil the main limiting factor regarding growth is the capital, as in other underdeveloped countries.
The present economic model, installed in the nineties, assumed that the capital necessary for growth would come from external saving. The rationale was to invert the negative flux of the previous decade when Brazil exported 3.1% of the GDP.
The opening to external capital and the interest rates offered, much higher than those of the market, resulted, in the nineties, in an average flux of external capital of only 0.3% of the GDP. The same high interest rates seem to have inhibited the internal saving. As a result, we have invested a smaller percent of the GDP in the nineties than in the eighties, as summarized in the table below
Internal Saving + External Saving = Investiment
Eighties 24,4% -3,1% = 21,3% of GDP
Nineties 18,8% +0,6% = 19,4% of GDP
On the other hand, capital productivity has been decreasing since the seventies. In 1990 (Collor Plan I) it had a sudden drop of 15% and did not recover in the ensuing years.
The first decade of the new millenium begins with a reversion of capital flux and already in 2002 Brazil will have transferred abroad about 1% of the GDP. In order to maintain under control the net external liability (external debt plus the amount of external investments in Brazil) it will be necessary, in the best hypothesis, to maintain external capital flux close to zero or export capital again.
In thesee circumstances, the difficult growth path includes increasing the capital productivity and recovering the ascending path of internal saving.
In order to attenuate sacrifices, we are proposing that recovery could begin by increasing capital productivity in Brazil. Countries, like Australia, that have governmental program for capital productivity have increased it 10% in 6 years.
A gain like that for Brazil, 10% of capital productivity, means an extra growth of 10% of the GDP and a smaller investment in the following years. During the whole nineties, the only explicit concern regarding productivity was that relative to labor. In the next years the concern should mainly be capital. Macroeconomic decisions coherent with these objectives and managerial measures similar to those used in quality assurance could make possible these objectives.
We are also assuming that the external real interest rates and remittance of dividends would be close to those values from 1998 to 2001, in the 5% range. This would permit to maintain the capital flux close to zero without substantially increasing our net liability relative to the GDP. The internal saving aim is to make it reach 27% of the GDP in 2020. Higher interest rates would make impossible any utopia.
With the values proposed for the internal saving and capital productivity and with reasonable interest rates, a 5% growth annually would be possible in the period from 2000 to 2020.
In the previous issue of e&e we have referred to the need of a New Utopia. In the present issue we will try to detail our economic utopia that could be summarized as economic growth in a democratic and more just society.
In our book “Brasil: O Crescimento Possível” Bertrand do Brasil 1996 we have pointed out the limts to our growth. At that time (1995), the country lived in the illusion of resuming growth with the stability of the Real Plan and economic opening. This growth resuming did not happen and the book antecipated some of the problems that are now evident.
In the book, we made projections based on extrapolations of historical trends and a diagnosis of the existing limitations. We have also pointed out factors that could lead to larger growth.
In order to make more explicit the consequences of structural changes we have developed the Projetar_e computer program that tries to fix the boundaries of Brazilian growth by projecting some parameters whose behavior has also been studied for the economy of other countries. Less determinitic than the book, the program permits to simulate the behavior of the main macro economic variables and to study possible growth scenarios.
The scenario for reaching our utopia, an annual 5.1% growth of the GDP between 2000 and 2020 is summarized in Table 1 below. As a consequence of our previous work (in the book), our utopia has some commitment with the possible.
Table 1: Growth assumed for the GDP by perios and GDP and GDP/inhab values at the end of the period
(*) Period of the next Govenment Administation
Capital as a Limiting Factor
From our previous analysis it seems to be clear that capital is the limiting factor to economic growth in Brazil. At the time when the book was published, we pointed out that the capital destined to developing countries was limited and Brazil participated substantially in this input. Therefore, it could not be expected that external capital input would favor development.
External capital actually arrived at an average proportion of about 2% of the GDP in the years after 1994 (1.8% from 1995 to 2000). This input was even a little higher than the value we had projected. However, the average contribution of the external capital at the decade of opening, the nineties, was only 0.6% of the GDP as shown in Table 2. In the year 2002 it shall be reduced to -1% (negative flux of 1%) of the GDP and it is expected that in the next periods it will be almost zero or even a negative flux.
Table 2: Participation of Internal and External Saving in the Brazilian Investments
Our internal saving was growing in each decade until the begining of the nineties and this was a positive factor for our perspective of growth. In the eighties, Brazil continued to save, even though it was subject to foreign capital remittance similar to that imposed on Germany after the First World War.
Figure 1: Average Quinquennial Investiments with contribuition of Internal and External Savings
In Figure 1 we can observe schematically the contribution of the external capital that was practically zero in the fifties and sixties, positive in the “Brazilian miracle” decade (seventies), negative in the misdenominated “lost decade” (eighties) and close to zero in the first half of the nineties and positive after the Real Plan. In this period, the net Brazilian external liability (external debt+foreign investments) reached 70% of the GDP (about 30% of the capita stock). Our indications are that we have reached our indebtment limit and that in the next years we must comply with fluxes close to zero or slightly negative.
It should be remembered that for real growth the important factors are flux of goods and real assets and services that can really contribute to the gross formation of fixed capital. This is the way how the national accounts, that handle the real economy, accounts for investments. Almost always the ciphers officially published in order to enhance the importance of external investments refer to financial flux. The value normally mentioned is that of gross resources input without discounting the remittance of interests and dividends. That is why our ciphers regarding external investment seem much more modest than those announced in the financial area.
That is, external currency that arrives for accumulating reserves or to feed the financial speculation is transformed into production capacity only when it is transformed into equipment and constructions that permit to increase this capacity. However, in a way or another, the net financial flux, except for reserve variations, coincide in the medium term with the flux of real goods and services.
In our evaluation, the way to grow again does not seem to lie either on the linear salary increase or on increasing exports. The measures for increasing internal demand (by increasing salaries) or external demand (by increasing exports) cannot solve the problem that, according to our diagnosis, is fundamentally capacity of production and offer.
In the first case, we would increase demand without increasing offer and the resulting inflation would eat up the salary. In the case of increasing foreign sales, our export profile, concentrated on intermediary goods, implies interruption of the production chain in order to be able to export. In the last five decades it has always been necessary a shock to restrain internal demand in order to export more. It is no coincidence the fact that our largest positive commercial balances correspond to periods of internal recession.
That is, in Brazil limitations to growth lie fundamentally on the medium- and long-term offer and not on demand. Every increase in production must have increase of capital goods stock or productivity gain. In order to increase goods stock it is necessary an amount of investments that is able to replace what needs to be scraped and to increase productive capacity. Gains in capital productivity are possible in the existing park by a more intensive use of this capacity or by improving managerial techniques, as it will be discussed in the next topic.
As it will be seen below, something can be done relative to production capacity, that is currently idle, and much will have to be done concerning capital productivity. Perhaps this is the way to “pick up the threads” and grow again. On the demand side, income redistribution can redirect demand towards goods that are less capital-intensive such as food and clothing. To change the demand profile and production of goods among the sectors can be a way to get a smaller capital/product ratio for the country and consequently increase the capital production.
Level of Internal Saving Necessary to Grow
The first condition to resume growing is to have internal saving. What is the necessary level of this internal saving and how to get it? We will try to answer here the first part of the question. As a reminder of the answer to the second part, it should be remembered that the decrease of internal saving coincided with the periods when the Government paid its creditors positive real interests. High interest rates reduce demand in the short term and, if in the medium term are higher than the remuneration for the productive activity, reduce investments and, consequently, offer in the ensuing years .
Our utopia regarding internal saving consists of returning to the path followed before the nineties. Our projection is shown in Figure 2. The change in the internal saving would be gradual and constant in time, similar to its decrease in the last years.
Figure 2: Territorial Internal Savings, projection for resuming growth.
Even though we are proposing a vigorous resuming, the average value for the first decade of this century would be smaller than that of the eighties and only 0.7% of the GDP higher than that of the seventies. The historical values of the five last decades and the projected ones for the two next decades are shown in Table 2.
It is normal for the capital productivity to grow together with the per capita income. Actually, since capital and labor are competing inputs, it is natural to assume that per capita income increase corresponds to its substitution for machines and equipment. The problem in Brazil is that it has reached a capital/product ratio similar to that of the developed countries without reaching their income level. In Figure 3 we show the evolution of the capital/product ratio for some OECD countries. The values corresponding to the last years are close to the Brazilian values in those same years.
The possibility of reducing the capital/product ratio (increasing the capital productivity) is not a theoretical incoherence. What theory forecast is that the production method will adapt itself so that capital cost and labor are minimized. Due to the high load on Brazilian labor (a minimum of 70%) and the way production is transferred from the developed world, it is possible and even probable that the use of labor and work are far from this optimization.
There are measures at the micro and macro levels for which production increase exceeds that of capital. Some other measures require structural changes since in many cases it is a matter to go further in the production chain, aggregating more value with proportionally smaller additional investments. Other measures regard the micro level (of the sector or of the industries) such as eliminating the holding up of the production chain and some managerial measures similar to quality assurance. There are also measures that might need a social pact that would allow for a more intensive use of the productive park (more operaing hours and days).
Several countries, like Germany, Australia, New Zealand and the United Kingdom, have already programs for increasing or stopping the decrease of capital productivity. Studies comparing the capital/product ratio at the macro and sectorial levels have tried to investigate why countries like Germany and Japan have a capital productivity lower than that of the United States. Even though one should be careful when comparing countries of different sizes, it would also be interesting to verify why countries, like Chile, have maintained the capital/product ratio close to 1.5 during the last decades and have reached GDP/inhab much higher than that of Brazil. Another interesting example is that of India that has increased the income without significant capital productivity losses.
Capital/Product Ratio of the OECD countries
Our assumption for the capital productivity is that the process of productivity loss can in part be reversed. We have projected a value tending to 2.45 in the next decades. The historical and projected values are shown in Figure 4.
Figure 4: Capital/ Product ratio for Brazil: historical and projected
More for a didactic purpose than adding more information, we show in Figure 5 the inverse values of the capital/product ratio. This representation has the advantage of directly showing the factor that will give the product when multiplied by the capital stock.
Figure 5: Capital Productivity (Y/K) for Brazil: historical and projceted values
The accumulated capital multiplied by the productivity “adjusted” to the historical data results in the expected production average value (adjusted GDP). This productivity is obtained by the best fitting of a logistic function curve to the capital/product curve along time. By introducing a correction linked to the external transfers, one obtains the expected production (expected GDP) for each historical or projected year.
By comparing the expected values, one obtains a utilization factor concerning the expected average production. It was common in the past (and it persists in some studies) to consider as maximum the largest historical utilization of the installed capacity. Normally, the adjustments point out to the year 1973 as that of maximum utilization.
The utilization factor is strongly linked to the conjuncture, as can be seen in Figure 6. For the GDP projection we have assumed an average capacity utilization in the next future. The representation of this factor in the past and the projected one are shown in Figure 6 both for the average and maximum productions (right and left axis).
Figure 6: Utilization Factor of the production capacity relative to the maximum (left axis) and average (right axis) utilization.
The good news of this verification is that we would be (assuming for 2002 a 1% growth for the GDP) 8% below the average production level, which opens a perspective of recovery in the short term if the political conditions are favorable.
First Conclusions and Continuation in the Next Issue
Resuming growth seems possible if it follows the real economic limitations. The financial contingencies, mainly the public debt, seemed (when we wrote the book) the largest financial limiting factor. Time has given us reason. The high interest rates policy that came with the decision of betting on external investment has already its consequences, limiting the productive internal saving.
However, it should be remembered that this policy influences the saving inclination, it does not represent an internal limitation since credits and debits are mostly internal and determine a distribution of assets and liabilities than can also, in principle, be internally settled.
The main limitation of the system is the net external liability that is included in the studied scenario. However, this scenario had considered that the external interest rates and the remittance of profits and dividends would follow the pattern of the last years. In the next issue we intend to discuss the limitation of the external liability and how in our utopia we would considere the problem of the internal public debt.
 In theNational Accounts Investment is I = (Y-C) + (M-X) where Y is the Gross Domestic Product (GDP), C is the apparent consumption (including stock variation) and M and X are the imports of goods and real services. These services do not include taxes, interests and other factors of the debt.
 We already have a negative shock of demand.
 Until the mid-eighties, due to a partial monetary correction, the Government paid real interests very close to zero and the middle class was even grateful to get rid of part of the inflation. From 1986 to 1990, the sucessive heterodox plans (from the Cruzado to the Collor II), that implied confiscation, zeroed the gains. The last one, the Real Plan, did not even compensate the high real gains from the period when Marcílio Marques Moreira was Ministry of Finance from 1992 on.
 Following the example of the central countries, the high interest rates have been used in developing countries to control demand and, consequently, inflation. This practice has been recommended by the international financing organizations. In the case of central countries, it is premature to question its efficiency, since the real interest rates rarely exceed the average remuneration of the productive activities. However, when it is applied in countries with small monetary mass and at levels that far exceed that of productive activities, it should not be surprising that it leads to financial collapse (the case of Argentina) or to high exchange rate pressure (the case of Brazil). When applied to short-term credits, it increases, in practiice, the volume of monetary mass and can even lead to hyperinflation.
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.