Our Utopia 2:
Interests Rate in order to Increase the Internal Saving
Conditions for Growth
In the previous issue we have observed that increasing the internal saving is an indispensable condition for resuming growth. There is a close correlation between investment and growth, where cause and effect are confounded and have reciprocal feedback. Actually, perspectives of growth induce investment that, on the other hand, is necessary to increase production.
Our diagnosis is that the Brazilian economic growth problem is caused by limitations of offer and so it is necessary to increase investment to resume growth. As has been seen in the previous issue, the expected external contribution is modest and it will be indispensable to increase the internal saving in order to increase investment and resume the growth of the per capita GDP.
It has been observed that there is some production capacity in the conjuncture that is not used and that additional gains could come from an effort to increase capital production. In other words, the initial step depends on political conditions since there is already a basis for increasing the GDP. In what concerns growth, it depends on solving some structural problems of the economy that include the internal saving growth. Probably, resuming internal saving will show some inertia that we tried to consider in our projection shown in the previous issue of e&e.
The internal saving path has been shown in the previous article of the last issue as well as the best fit to the previous path of the internal saving (from 1947 to 1994). For adjustment purposes, it was chosen the logistic curve and we have found an “adjusted saving” that would tend to 27% of the GDP. In Figure 1 we have shown the internal saving behavior at current and constant prices (of 1980). The values at contant prices are shown in order to remind that the internal saving peak in 1989 and 1999 should be mainly due to a variation of relative prices. In these years there was a strong increment of investment goods prices corresponding probably to a flight of financial applications due to forecast of unpaid debt of the Collor Plan in 1990.
It is clear in Figure 1 that at the beginning of the nineties there was a rupture of the internal saving pattern. Probably, the first years were affected by perturbations caused by the holding back of financial assets and production decline. The maintainance of this trend must be related with the change of the economical model that conferred facilities for imports, made easy by the external influx of resources, that was made possible only because of decentralization of exchange rate and increase of interest rates.
This saving reduction also caused a reduction of investment since transfers from abroad were not sufficient to compensate the internal saving shortage. In Figure 1 we can notice a deficit relative to the previous trend in what could be called a “saving gap” This rupture coincides with the change of the economical model. The saving growth at the end of the eighties, as we have already commented, is associated with a variation of the relative prices and had no consequence on the growth of production capacity.
The internal saving gap that can be observed in Figure 1 should have to be compensated in the next years so that Brazil could reach the growth level of our modest utopia.
Government Interests and Investments
The government policy, namely interfering on macroeconomic variables in order to control the economy has been the favourite instrument of the model adopted at the end of the last century. This type of intervention has been generally identified as part of neoliberalism but this practice could well be called “neointervensionism”. The latter seems to let the market take the daily decisions and to intervene with all the governmental means on selected macro variables such as exchange rates, interest rates or inflation. Within this framework, high real interest rates were used in the first phase to attract external resources. Presently, they are considered as the main instrument for fighting inflation.
From the economic theory it is known that higher interest rates postpone consumption and by limiting demand they can help controlling inflation. When interests paid by the financial system exceed the productive investment gains they can also limit and burden investments. In the medium term, high interest rates increase financial costs and since they reduce investment, they reduce the future offer of goods. Larger availability of financial resources generates the possibility of satisfying the postponed demand once the application period is ended. Both factors put pressure on inflation
In Brazil, these effects could arrive fast and intensely because the terms of the government bonds are short and interests are very high.
In Figure 2 we show the evolution of the monthly rate of nominal interest rates since 1974. The interest rates represent the values paid by the Government, corresponding to the SELIC tax . The inflation index used to determine the real interests was the IGMP (calculated by the Fundação Getúlio Vargas).
In Figure 2 it can be observed periods when the nominal rates exceed inflation (positive real interests). It can also be observed periods when real interests are negative and inflation exceeds the nominal interests rate.
In Figure 2 we have indicated the different heterodox plans, from the Cruzado to the Real ones. In some of these plans the real interest rate was strongly negative as indicated in Figure 3. We have also indicated the average values corresponding to the previous 6 months (mobile average) that give a better idea of how the adopted interests rate policy is sensed by the investor. There were periods in the seventies and eighties when the real interests were systematically negative with confiscations in some of the plans. From 1994 on, except for the represented 5 months, the interests were systematically positive.
Figure 3: Real interests paid by the Government and its average value in the previous semester (mobile average). The applied heterodox plans and the negative and positive peak values are indicated.
Normally, the plans were followed (or antecipated) by important variations in the real interests. Some of these values are indicated in Figure 4. In order to have an idea of the "loose-gain” moves in Government bonds, we have represented in Figure 4 the hypothetical situation of a person who would have in his bank account, in the first day of 1974, 100 national monetary units. The values indicated in Figure 4 were obtained by applying on the capital the monthly nominal interest rates and discounting inflation, measured by the IGPM.
Figure 4: Accumulated real value of investment on Government bonds remunerated by the real interests indicated.
The person with 100 monetary units in the first day of 1974 would have in the middle of 1976 only 80% of the initial value. In the middle of 1979, he would have the equivalent of the original 88 units. From this moment on, there would be a systematic loss and in September 1981, the mentioned person would have only the value corresponding to 57 units. From then on he would see his account grow in real value and finally in January 1985, he would have recovered the original value after 11 years. He would reach the Cruzado Plan with 116 units and this value would remain relatively stable for two more years. The Cruzado and Bresser plans were approximately neutral for investment in federal bonds. The end of the Sarney Administration was a time of high interest rates and the small loss that occurred in the Verão Plan was widely recovered in the following months. Our investor would have at the beginning of the Collor Administration an account of 178 units.
In the first months of the Collor Administration he would have the first sudden confiscation and his balance of 108 units (after confiscation) would possibly be retained. Still in the Collor Administration, the real value of his investment would go up to 122 but in May 1991 the Collor Plan confiscation would reduce his balance to 110 units. After more than fifteen years, the net gain of our investor was 10% with an annual average of 0.6%.
The period of the Finance Minister Marcílio Marques Moreira marked the beginning of a time of extraordinary gains. In the eve of the Real Plan these gains would result in a balance of 242 units that would be reduced to 179 in a confiscation so well disguised that only some privileged people could recover up to now some of their assets.
At the end of the first term of President Fernando Henrique Cardoso, the person would already have 430 units. His average gain was 20% monthly and the value of his investment would be doubled in these 4 years. If we examine a longer period, between June 1990 and June 2002, even with the Real confiscation, the value invested in government bonds was multiplied by a factor higher than five. The annual average gain in these 12 years was 15%.
It can be observed in Figure 5 that the saving gap (and investment gap too) started in 1999. In Figure 4 one can observe that from this year on the financial investments had systematic real gains. Therefore, it is no wonder that in this period the saving percent and internal investment have decreased. There are very few licit investments that present such result in such time.
From the point of view of the Country, the financial income should not exceed the average productive activity. In Brazil, it is now necessary 270 units of capital to generate 100 units of product. Once consumption is discounted, 18 units are left for reinvestment, of which 10 or 11 are used to replace the capital. In other words, 270 units of capital would generate a surplus of 8 units that would increase the capital stock. Comparing with a company, this would be the profit that could be reinvested. On the other hand, the Government, that gets loans, has practically reached the limit of tax collecting and endebtment and could only pay real profits that would not exceed the pace of GDP growth.
This means that, by any criterium, in order to resume growth the Brazilian Government will have to pay real interest rate that do not far exceed 3% annually. In investments ruled by the SELIC tax, this is already happening: in the last five months, the real interests are negative.
 It is the cost that commercial banks have in order to get currency from the Central Bank and this tax is the parameter that determines the cost of capital for all sectors of the economy.
 This index records the price changes along the productive process, from the raw material up to the final consumed goods and services.
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.