Text for Discussion:
Evolution of Investments in Brazil
This text tries to show that the growing trend recently observed regarding the gross fixed capital formation (GFCF) is, in part, due to the increase of the investment price level. Furthermore, it intends to analyze the implications of this increase on the investment rate (GFCF/GDP) and, consequently, on the sustainability of the Brazilian growth.
The gross fixed capital formation series as a proportion of the GDP (GFCF/GDP) at current prices as well as the real variation of the GFCF and of the GDP, Table 1, demonstrate that from de second semester of 2003 on both investment and product show a growing trend.
Table 1: Evolution of the GFCF/GDP ratio, of the GFCF and of the GDP
Source: IBGE and GFCF/GDP seasonally adjusted by X12
Furthermore, some previous indicators related to the GFCF and GDP behavior, such as the capacity use (CU) also show an increasing behavior.
Graphic 1 : Capacity Utilization – General Price Index from FGV and GFCF/GDP at current prices (both seasonally adjusted by X12)
When the increasing behavior of the CU is observed, Graphic 2, it indicates not only the expectancy of a larger growth of the GDP and of the GFCF but also the need of more investment and the possibility of inflationary pressure from the demand (the CU has already exceeded its historical average value).
Graphic 2: Capacity utilization – Quarterly and average General Price Index from FGV
Regarding the recent increase of the investment level, it should be pointed out that part of this behavior is determined by the variation of the relative prices. That is, when one observes the GFCF and GDP deflators series, one notices a larger increase in the first series relative to the second one .
Graphic 3 below shows the increasing trend of the GFCF deflator and GDP deflator ratio . This ratio shows a change of plateau in the 1980s , a small decline in the middle of the nineties and from 1999 ( year of the exchange rate devaluation) on this trend increases.
Graphic 3: Implicit deflator (ID) of the GFCF/Implicit Deflator of the GDP, both series consider 1980 as the base year.
That is, in what concerns the recent period, when the price of investment is compared with the GDP since 1999, one has a smaller investment rate (ratio between the GFCF and the GDP) at constant prices (Graphic 4).
Graphic 4: % of GFCF/GDP at current prices and at 2000 constant prices.
Table 2 shows, therefore, that most part of the changes in the investment rate at constant prices are due to the relative prices variation. For example, between the first quarter of 2000 and the second one of 2003 the drop of 8.3% in the average investment rate is due to a reduction of 4% in the GDP price relative to the GFCF
Table 2: Growth of %GFCF/GDP rate at constant price decomposed in the relative price variation between GFCF/GDP and the %GFCF/GDP variation at current price.
According to the basic model of Solow, Cobb-Douglas function, the increase of one factor causes the increase of the productivity of this factor in the same proportion. However, in Feu (2004), it was observed that the marginal capital productivity in Brazil did not present this behavior, it actually decreased considerably in the 1970s and 1980s.
Graphic 5 shows the annual investment rate (constant 2000 prices ) until 1990 and the quarterly one since 1991, as well as the average value verified in the first quarter of 1991 and the second one of 2004, 19.1%.
The gross fixed capital formation series as a proportion of the GDP at 2000 constant prices has its lower historical plateau  which occurred in the second quarter of 2003. However, in the second quarter of 2004, the investment rate at constant prices, 17.3% , remains about 2% below the average value verified from the first quarter of 1991 to the second quarter of 2004.
Graphic 5: % GFCF/GDP at 2000 constant prices and average value in the period
Concerning this subject, in previous articles we have shown that if the average value of the total productivity of factors growth, of labor and of the average investment rate, respectively 1.2%, 2.0% and 19.9% are maintained, the expected product growth in Brazil would be 2.8%, reaching the maximum value of 3.5% when the potential growth is considered (the latter is sustainable only in the short term).
We point out that the previous analysis considers only the average parameters, that is, shocks in other factors can increase the Brazilian sustained growth. As an example, a 2% positive shock on the capital productivity during 5 years would increase the expected sustained growth to 3.1% (and the potential one to 4%) while in the five-year transition period there would be an extra gain of about 2% in the expected growth.
Therefore, this article aims at enhancing the understanding that Brazil is taking a positive path to growth, whose magnitude depends on the investment efforts to be made in the next years. The mentioned effort is considerably increased with the increase of investment prices level relative to the product price level.
Annex I – Ratio between the Deflators and the Investment Rate at 2000 Prices
[i] This article resulted, in part, from a previous extensive research study carried out within the ambit of UNESCO’s Participation Program Nº 5136 (1990/91).
 Campbell, C. J. – “An oil depletion model”, Petroconsultants, 1994.
 Conventional petroleum is the current designation for petroleum having characteristics similar to those of the petroleum that is presently extracted using the existing or predictable technology and with costs compatible with the competition from other energy resources.
 The original reserve formed million of years ago remain practically unchanged since the then existing physical-chemical conditions (biomass buried under a thick clay layer, absence of oxygen, high pressure, etc.) possibly will not occur again. The international technical literature denominates in its projections the original reserve as the ultimate one (final value).
 Este procedimento evita o trato da função mais complexa y(t) que se assemelha a uma curva de distribuição normal, mas que é assimétrica.
 Ratio of total Industrial Production to Installed Capacity.
 De Long and Summers (1993) have observed that the ratio between the investment deflators and the GDP deflators is larger in the poor countries than in the rich ones, inducing the poor countries to increase investment efforts (investment at current prices), lowering the consumption level in order to obtain the same physical investment (investment at constant prices).
 The series was built according to the GDP and GFCF deflators taken from the National Accounts System – NAS, published by IBGE, added to the price variation implicit in the New National Accounts System – NNAS, when one compares the current price series with the constant price series (built by adding the real variation in the NNAS to the constant price series of a specific year from the NAS).
 This calculation was carried out considering the movable average value of the series (previous year, present year and next year) and decomposing the investment rate growth at constant prices in: investment rate growth at current prices, growth of the GDP relative price vis-à-vis the FBKF and the residue (crossed term – that was equally distributed between the previous two components).
 We remember that in the constant price series, according to the year considered as the base year, the investment rate level is altered but not its behavior. Therefore, the investment rate presented in the graphic for the base year, 2000, has a different level from that usually used in studies relative to the Brazilian economy with base year 1980. This year was used as reference because that year was considered as a fixed base in the NAS (1968), before the establishment of the NNAS (1993).
 One can distinguish four periods of change in the behavior of the investment rate: (i) from 1953 to 1967, when the investment rate presented an average value of 23.7% and a variation coefficient of 6.2%; (ii) from 1968 to 1980, a period that comprises the Brazilian economic miracle, with elevated investment rate of 32.8% but with large variation around the average value; (iii) from 1981 to 1989, the lost decade, when the average rate drops to 23,8%, with an elevated variation coefficient and with a decreasing trend and (iv) from 1990 to 2004, when the investment rate presents a smaller plateau, 19.2%, and small variation around the average value.
 Aumara Feu, Capital Productivity in Brazil from 1950 to 2000. PhD Thesis, University of Brasília, December 2004. (e&e N0 42).
 The growth accounting used was that of the Solow model, with CES production function and neutral Harrod technology.
 Feu (2004).
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.