Variation of Methane Content in the Atmosphere

The Economy and Energy Organization e&e is publishing its projection of economic growth in the present issue of the e&e periodical. The first projection of this type was published ten years ago in the book “Brasil: O Crescimento Possível[i].

The methodology was incorporated in the projetar_e software where economic growth is calculated by projecting some variables that affect its behavior. The reference scenario now published foresees economic growth assuming the maintenance of the historical trends but aims at incorporating changes that occurred in the last years.

Generally, the projection of each variable is carried out by defining a future value that represents its trend. This value is fixed by a consensus process where it is taken into account the Brazilian historical behavior and reference values of other countries. Once defined this future point, a curve is fitted to the historical values and the product is the expected evolution of the variable. The software facilitates the consensus process by introducing exogenous values and calculating their influence on the GDP growth and on other variables so that some physical and financial limits previously established for the economy are not exceeded.

Furthermore, e&e carries out studies for subsidizing choice of values to be used in the projection. This note is the result of one of these studies and is the first of a series about projection of parameters regarding the macroeconomic scenario.

1. Compare two previous forecasts regarding the GDP evolution, using the present methodology, with what actually happened.

2. Study the evolution of the internal savings, an input parameter used in the projections, comparing the forecasts with effectively observed value.

3. Study the influence of real interests on the internal savings seeking a possible correlation that can be subsequently used in the projection exercises.

Economic growth projection is crucial for evaluating energy demand in the medium and long terms and a fundamental part of the national development policy. In the present article, as previously done in several occasions, the limitations to the Brazilian economic growth will be considered.

The methodology to be adopted is based on the identification of trends of the Brazilian economy in the last fifty years. The opportunity coincides with the tenth anniversary of publication of the book where the methodology was applied in its complete form for the first time. The book, edited during the state of euphoria caused by the Real Plan, pointed out to the persistent difficulties facing the Brazilian growth contradicting the almost absolute consensus that liberalization would launch Brazil into sustainable growth. The projection horizon was 2003. Projections made in 1999 using the present software in a report regarding the Emissions Matrix and published in the Nº 19 ( March/April 2000) issue of the Economy and Energy Periodical will also be analyzed.

The occasion is appropriate for simultaneously calculating a new projection and revising the results of the previous projections. This exercise will also permit a critical analysis of the methodology and the way to apply it.

It should be recognized that making accurate projections and confirmation of part of the diagnosis will make this revision more stimulating and this would not be the case if we had made completely incorrect growth forecasts. It should be said at once that not everything was right and the analysis already made here has shown that some compensation among factors have cancelled out projections errors.

Using this program, a Reference Macroeconomic Scenario was generated in order to Project the evolution of the Brazilian economy and of the macroeconomic regions. The present analysis aims at the revision of this reference scenario that is open to other approximations.

Two previous application of the methodology have produced the GDP projections shown in Figure 1.The projections of the book correspond to situations considered as limit, namely, continuation of the stagnant growth policy (without modifications) that would produce an average growth of 1.6% p. a.; maximum growth (limiting capital intensity and valuing exports) that would produce an average growth of 3.5% p. a.; and the intermediary one (the most probable) where capital intensity would be reduced and would produce an average growth of 2.5%. In Figure 1 are shown the intermediary projection of the book for the emission matrix (1999). The results of the two projections can be considered quite satisfactory and the 2003 growth coincides with the first projection.

Figure 1: Projections of the Gross Domestic Product of the book Brasil: O Crescimento Possível (without modifications, limiting the capital intensity and cumulatively, valuing exports). Projections for 1999 and the effective values are also presented.

One of the main factors to be considered in the Brazilian growth is the internal savings capacity. Internal savings has historically been the development engine in all countries. There is no example of country that has reached development without the predominance of internal investment. In the book[ii] it was shown that external investment represented 3.2% of the historical investment between 1962 and 1992 and 2.5% between 1947 and 1992. Between 1992 and 2002 the external share in investments increased to 4.4%. However, because Brazil became a capital exporter from 2001 on, the accumulated balance between 1993 and 2005 is negative (-3.1%) that is, Brazil has sent abroad more capital than it has received.

In Figure 2 it is shown the historical evolution of the data available for the 2003 projection which is compared with the actual path in current prices and at 1980 prices.

Figure 2: Evolution of internal savings in Brazil; projection is based on historical data until 1992 and values effectively observed.

Projection assumed a logistic-type curve where internal savings would tend to 35% of the GDP. It can be seen that from 1990 on there is a gap in the internal savings, namely 8% of the GDP (about 30% of the expected value). This decrease occurred in two steps: the first one due to the Collor Plan and the second one after the Collor and Real Plans. From 2000 on there has been a clear recover of the internal savings. It should also be noticed the savings peak in current values (not coinciding with real values) that preceded the internal Collor Plan swindle and therefore associated with a overvaluation of real assets[iii]. It should be noticed that in the national accounts concept the internal savings correspond to the share of the GDP that is not internally consumed and refers to real goods.

In the projections of the following years it was necessary to interpret the behavior of the internal savings in order to find out if the decrease in the first half of the 90s characterized a change in the behavior of the Brazilian economy or a transient move. In other historical variables it is common to observe sudden changes in behavior followed by a resume of the previous trend which corresponds to a phenomenon like hysteresis where there is a gradual return to the original situation but with a transient determined by the characteristics of the system. The adopted option was to assume that it was a transient; once the causes that produced the change have disappeared, the historical trend is resumed.

In Figure 3 it is shown the extrapolation of the internal savings adopted in the reference scenario. The foreseen behavior is the resume of the previous trend what effectively occurred as can be seen in what follows.

Figure 3: Internal savings path projected in 1999 that forecast a resume of the previous trend that was interrupted in the first half of the 90s. The foreseen recovery effectively occurred, as shown in Figure 6.

It is interesting to notice in Figure 4 the internal savings behavior (relative to non-monetary goods) relative to the real interest rates of the Government bonds. The graphic shows the behavior of the monthly interest rates that present from the 80s on periods of real positive values followed by confiscation in each economical plan. It is also shown the corrected inflation value (IGPM) of an investment of 100 monetary units in January 1970. Until 1979 (second petroleum prices shock) the imaginary investor would be satisfied in defending his money against inflation; from that year on the real interests were persistently negative and the real value reached only 60% of its initial value at the end of 1982.

From then on there occurred a recovery of the invested values that remained stable between 1986 and 1988 (close to the 100 value).In the period before the Collor Plan there was a period of positive interests that was cancelled by that Plan. From the Ministry Marcílio Marques Moreira administration on (February 1992) it was established the present policy of high interests rates where the decrease of real remuneration of Government bonds in the implantation of the Real Plan and in the transition between the Fernando Henrique Cardoso e Luis Inácio Lula da Silva administrations can be considered as “unexpected events” from which there was a prompt recovery in the following months.

The unhappy individual who trusted his economy to the Government in January 1974 had in September 1991 a remuneration of 13% for the whole period (0.7% p. a.). However in the following years he would have his investment multiplied by six and would have an incredible average remuneration of 13% p. a.

Figure 4: Real monthly interests and real value of an investment of 100 currency units in January 1974.

The causes of the internal savings reduction have a complex nature and they could hardly be assigned to a sole factor. However, its link with the increase of remuneration concerning financial investments seems natural since speculative applications compete with real investments.

In Figure 5 are shown the interests rates (mobile average of seven years) and the internal savings; their behavior conforms to what was expected. The long-term investor considers the historical trends with a term similar to that of his application as long as the long-term financial gains exceed those of real applications and it is noticed a reduction in the productive investments.

Figure 5:A gap in the internal saving is observed from 1990 on seems inversely correlated with the real remuneration of the Government bonds in Brazil.

The projetar_e program is based on the extrapolation of past data and on fixing future values for some parameters by a consensus process. As an aid to this consensus, one can observe values from other countries or look for the best fitting concerning the existing historical data. In the present case, the best fitting is 25% for internal savings, which is coherent with the behavior of the last years.

The internal and external savings and the investments of different countries are shown in Table 1. The world average for the internal savings is 21% , that of the Euro zone. Concerning the external investments, even though they are considered a source of investments, the United States are the largest capital importers and their investments rate strongly (and dangerously) depends on external investments[iv].The developing countries, except China and India, are the large capital exporters. Brazil, that did not export capital for some years (while the Real euphoria and the assets spending lasted), has returned to the condition of capital exporter in the last five years. As it was shown in the preceding article, this is the reason why the internal savings growth did not result in the corresponding investment increase.

The internal savings values represent the part of the GDP not absorbed by the apparent consumption (it includes stock variation), that is:

The external savings represents the net inflow of goods and services in the country:

External Savings/GDP = (Imports of Goods and Services – Exports of Goods and Services)/GDP

Therefore, the external savings represents the net inflow of goods and services in the country[v]. So, we have:

Considering the reference scenario, the projection of the internal savings was obtained from historical data that were fitted considering a limit of 30% in the long term. Extrapolation of the internal savings produces a value of 26% in 2025. The time constant used to “match” the fitting to the historical data is 3 years.

An alternative scenario would consider that the observed trend until the end of the 80s would be that expected for the future. In this case, the limit for the external savings would be fixed at 35% of the GDP. The resume of the internal savings observed in the last years would continue. The evolution of the internal savings adopted in the reference scenario and in the alternative one are shown in Figure 6.

Table 1:	Average 2000 to 2004
Table 1:	Internal Savings	External Savings	Investment
AUSTRALIA	21.9%	3.1%	25.0%
CANADA	24.8%	-4.8%	20.1%
CZECH REP.	24.8%	4.0%	28.8%
FRANCE	19.8%	-0.5%	19.3%
GERMANY	22.2%	-2.4%	19.8%
ITALY	14.7%	5.1%	19.8%
JAPAN	26.8%	-1.7%	25.1%
KOREA	34.8%	-4.8%	30.0%
MEXICO	18.1%	2.2%	20.3%
PORTUGAL	15.8%	10.2%	26.0%
SLOVAKIA	24.4%	1.9%	26.4%
SPAIN	22.7%	3.8%	26.5%
SWEDEN	24.7%	-7.9%	16.8%
SWITZERLAND	27.9%	-5.9%	22.0%
TURKEY	14.5%	3.3%	17.8%
UNITED KINGDOM	13.6%	3.4%	17.0%
UNITED STATES	14.4%	4.6%	19.1%
European Area	22.2%	-1.4%	20.7%
BRAZIL	20.3%	-1.6%	18.8%
CHILE	24.5%	-3.5%	21.0%
ARGENTINA	22.2%	-6.9%	15.3%
VENEZUELA	26.4%	-13.3%	13.1%
South America	19.7%	-2.3%	17.4%
CHINA	40.0%	-0.6%	39.5%
INDIA	22.0%	0.1%	22.1%
INDONISEA	27.8%	-6.8%	21.0%
MALAYSIA	43.3%	-19.4%	23.9%
RUSSIA	31.6%	-13.8%	17.8%
TAILAND	31.5%	-8.5%	23.0%
VIETNAM	26.2%	4.1%	30.2%
World	21.2%	-0.1%	21.1%

Figure 6: Projection of the internal savings in the reference and alternative scenarios; the latter assumes that the observed trend until the end of the 80s would be resumed.

The internal savings[vi] has indicated a gap relative to the trend historically observed until the last years of the 80s. From 2000 on. this trend was partially reversed. However. the internal savings recovery just increased exports and until 2005 it had not had observable effect on investments[vii] .

The gap in the internal savings and the considerable transfer of resources abroad observed in the last years (to be analyzed in another paper) has direct negative consequences on the investment capacity and on the economical growth.

The internal savings decrease is closely related with the real interests rates paid by the government for its bonds. The option between application on real and financial investments is logically connected with the real interests paid to investors.

On the other hand. the recovery of the internal savings shows that the most painful part for resuming investment (consumption restrain) was partly achieved in the last years. This fact offers perspectives for a substantial economic growth. However. the real interests rate reduction is fundamental for the recovery of the internal savings.

The results of the Reference Scenario. described in the precedent article. do not take into account the possibility of resuming the path observed until 1990. This could lead to larger economic growth rates. Soon some complementary notes will be presented. regarding variables that are important in the growth projection such as capital productivity^{^[viii]}and external trade balance that determines the contribution of external savings to investment.

[i] Brasil: O Crescimento Possível _ Editora Bertrand do Brasil 1996. All quotations of the “book” in the present article refer to this publication.

[ii] All references to the “book” refer to the publication mentioned in the footnote of the previous page.

[iii] This overvaluation of real goods prices indicates a distrust of the market regarding the imminence of financial rupture that actually occurred in that Plan.

[iv] This situation already existed 1994 but in the collective imaginings the USA EUA continued to be the capital supplier of the world.

[v] Namely, goods and services (does not include the debt services).

[vi] The internal savings, as well as other concepts such as investment – associated with the gross formation of fixed capital – is carried out here in the financial approach implicit in the National Account mechanism

[vii] See the reference scenario results in the present issue.

[viii] It means productivity of the capital stock.

Editorial :

The e&e Organization

Macroeconomic Scenario - 2026 Horizon:

Variables affecting Brazilian Growth

Note 1: Internal Savings