|No 58 Em Português|
Text for Discussion:
Energy and Economy
João Antonio Moreira Patusco
The author analyses the correlations between energy and economy in Brazil, presenting indexes regarding the penetration of capital and energy intensive sectors in the country and the effects on the capital productivity and economic growth. At the end it is suggested a structural change in the active biodiesel program so that small producers will have a larger participation and a larger income.
For this purpose the Brazilian economic sectors are aggregated in three groups as follows:
Group 1 – Sectors intensive in capital and energy with low aggregated value.
Group 2 –– Sectors intensive in capital with average energy intensity and average aggregated value.
Group 3 – Sectors with low capital and energy intensity and high aggregated value.
According to a survey and analysis of data from different institutions and documents (research made by Gazeta Mercantil about assets and jobs in about 11,000 commercial and industrial enterprises, National Accounts of IBGE, studies concerning capital stocks available in the Internet and the National Energy Balance), the sectors are arranged in the following groups:
Group 1:steel, aluminum, ferro-alloys, cement, sugar and energy.
Group 2: chemistry, paper and cellulose and ceramics.
Group 3: services, electric-electronic, mechanical, pharmaceutics, clothing fabrication , civil construction and finally, the remaining sectors not specified in groups 1 and 2.
Analyzing the available data the following average indexes were found for each group:
Group 1: 7 per 1
Group 2: 4 per 1
Group 3: 1 per 1
Group 1: 1 (one)
Group 2: 3 (three)
Group 3: from 5 to 500
Due to the different characteristics, the higher or lower insertion of each group in the productive structure of the country leads to effects on the economical growth level.
In fact, mainly from 1980 on, in Brazil an accelerated growth process in groups 1 and 2 (except for cement and ceramics, aiming at the internal market) was started to detriment of the sectors of group 3, as shown by the following indexes.
1. In 1980, the total energy aggregated to exported products (steel, aluminum, ferro-alloys, sugar, cellulose and soybean) corresponded to 9% of the industrial energy consumption and in 2004 it reached 28%;
2. In the case of electric energy, the percent value changed from 5% to 16% (28.1 TWh in 2004);
3. In 1990, the average value of tons of imported products was 1.9 times the value of tons exported. In 2006 this ratio was 2.8 – we import at almost 900 dollars per ton and export at about 300 dollars per ton;
4. Concerning China, the ratio was 2.2 in 1990 and now it is 18.8 – today we import at 1,600 dollars and export at less than 90 dollars per ton;
5. 40% of Brazilian exports are centered on primary commodities, as compared with the world average of 11% (according to studies carried out by IPEA);
6. In the other end, only 12% of Brazilian exports concern products of high technology as compared with the world average of 30%;
7. In 1974 the share of the sectorial aggregate “steel, aluminum, ferro-alloys, sugar, paper and cellulose and energy” in the energy final consumption was 18%, changing to the considerable value of 32% in 1985. However, the share of this same aggregate remained practically constant in the same period, around 8%. As a consequence, the capital productivity was reduced. In 1974 about 2.3 units of capital stock per GDP unit were necessary and in 1985 this value changed to 3.3 and it has practically remained constant. The growth of this aggregate’s share in the final energy consumption was directly proportional to the loss of capital productivity;
8. Likewise the capital productivity of the sectorial aggregate “Other Industries of BEN”, inserted in group 3, decreased its share in the GDP from 21.5% in 1974, to 18.5% in 1985 and to 16.7% in 2004;
9. Therefore, the economy of the country, influenced by the significant penetration of groups 1 and 2 in the productive structure increased only 2.1% annually between 1980 and 2004, while energy consumption grew 2.6% annually. The loss of economic growth capability can be explained by the following sequence of facts: (i) continuous implementation of large undertakings of groups 1 and 2, (ii) strong presence of the state (iii) increase of the public debt, (iv) increase of margins for corruption and exchange of favors, (v) increase of Brazil risk, (vi) increase of interest rates, (vii) restricted investments, (viii) income concentration and (iv) taxes increase;
10. In 1960 the productivity of an American corresponded to the productivity of 4 Brazilians (PIB/PEA), in 1980 the ratio improved from 1 to 3 and in 2002 returned to the same plateau of 1960 (IPEA);
Daily we learn news about what is necessary for getting out of the economical inertia state. Political, taxing, labor, trade union, justice, social security, credit system, concessions model reforms and reduction of the state role are mentioned , among others, but little is heard about technological innovation.
Why after so many successive administrations no reforms were introduced? Concretely there was no structural rupture that would permit the public structure to serve society and not use it for its own purposes. It seems that the Brazilian politics, influenced by old politicians who maintain their privileges, blocks the reforms and/or only permit them to be implemented very slowly even when the authorities have good intentions.
In 2005 I had the opportunity of reading one article that mentioned one Cooperative of small rural landowners in the sugar-alcohol sector in the state of Alagoas. The Cooperative, named Pindorama, is composed of 2,600 families and has the considerable merit of being the owner of the industrial process of sugar and alcohol production as well. In 2004 each family received an average monthly income of R$ 2.000,00 (two thousand reais) – an excellent income by the rural standard – for the production of 40,000 m³ of alcohol and 40,000 t of sugar. About R$ 12 million were left for investment and other expenses. The city of Pindorama, with 27,000 inhabitants, has its economy practically directed to satisfying the goods and services demands of the workers and the industry. In the city there is no street children and beggars. It should be mentioned that the Cooperative is competitive in the market even given the fact that the Northeast region has one of the lowest productivity level.
Full of enthusiasm aroused by the article, I had a dream in the same night and, out of habit – 30 years working with statistics of the National Energy Balance – I made some mental calculations (16 million m³ of installed capacity for alcohol production divided by 40 thousand m³ of the Cooperative would result in 400 cooperatives that times 1,600 families is equal to 640,000 families that times 4 people per family would result in 2,560,000 people directly involved in the production and, extrapolating to the economy of the Pindorama city, one would have more 6,750,000 people getting their earnings from the goods and services for the cooperatives – a total of 9,310,000 people.
Then the dream changed from calculations to the scene of children playing in good structured schools, with well-paid teachers and then I saw my children peacefully walking in the streets in the small hours coming back home after a party. When I woke up, frustration came: it was a dream.
I have no data available but I suppose that the sugar-alcohol industry is practically 100% in the hands of important entrepreneurs. It is probable that the Pindorama Cooperative is the only example.
The fundamentals of the Brazilian economy – based on physical capital stock with low aggregated value, based on human capital with low levels of education and quality, based on passive technological development and with a high public debt – have obstacles in the short and medium term to start a cycle of virtuous and sustainable growth.
Exports of commodities with low aggregated value and concentrated on few products cannot maintain economic growth at sustainable levels. When exports are high – with commercial surplus – the internal demand is low and when internal demand is high imports grow and part of the export products remain in the internal market and there is commercial deficit. Brazil depends on machines and equipment of medium and high technology and when internal demand is intense there is a larger import of these goods.
In the last 35 years there has been a concurrent growth of exports of commodities and internal demand. The growth rates of physical exports concerning groups 1 and 2 presented a behavior opposite to the growth rates of the Industrial aggregated value.
The energy consumption behavior of “Other BEN Industries”, of group 3, as opposed to commodities, properly shows the cycles of good performance of the economy. In the 1970-80, 1983-88 and 1992-98 periods, while the Brazilian GDP has grown 8.6% p.a., 5% p.a. and 4.6% p.a., respectively, energy consumption of the aggregate grew 10.1% p.a., 6.3% p.a. and 6.2% p.a. Therefore, this aggregate is strongly related to the internal consumption performance and, in virtuous cycles of growth, demands more high technology imports besides larger demand of national commodities (steel, aluminum, ferro-alloys, among others).
So, the vicious circle repeats itself during various years as follows:
Intense internal demand => growth of imports of high technology goods => reduction of commodities exports => commercial deficit => inflationary pressure => increase of the Brazil risk => increase of external and internal interest rates => reduction of investments => increase of interest rates => moderate internal demand => increase of commodities exports => commercial surplus => restricted internal demand => reduction of interest rates => intense internal demand.
On the average, the economy has been moving around 2% p.a., increasing poverty and taxation.
In case of investments growth – for various years it has been below 20% of the GDP - Brazil would have necessarily to direct a good part of it to medium and high technology (group 3) so that the external dependence would be reduced and the exported products would have a higher aggregated value. In this condition there would be the possibility of internal demand growth concurrent with exports growth and commercial surplus. The big challenge would be to win market vis-à-vis the fury of the developing Asian countries.
It would be essential to undertake actions aiming at giving technological support to national enterprises, in order to increase the technological and knowledge intensity. For this purpose larger investments on Research and Development -R&D - are necessary. The author suggests reading the article “A Model for National Development” by José Fantine and Carlos Feu Alvim available at http://ecen.com/eee57/eee57/eee57p/um_modelo_de_desenvolvimento_nacional.htm,
that has a detailed approach on the subject.
Assuming that the desired technological development can be ripe only within twenty years, parallel actions could be undertaken, focusing on the present comparative advantages, notably on the agri-business area, but with policies regarding a better income distribution, exemplified by the Pindorama Cooperative. For example, it would be necessary to define policies and undertake actions to establish bio-energy market reserve for cooperatives that own the industrial process and is composed of small producers. At least, Brazil would be developing a situation of better social well-being.
The Pindorama Cooperative is a real example of what is possible regarding government programs, such that for biodiesel, in order to generate better income distribution, at least from the point of view of the author. Further on it will be suggested a way of creating cooperatives with small producers that own the industrial process and that have a compulsory share of the biodiesel market. Even if the present legislation permits that, without the direct governmental action the small producers cannot organize themselves in a cooperative and compete in the auctions with enterprises already established.
The participation of the small producer in the sale value of vegetal oils, according to the present biodiesel program framework, will no exceed 10% and, even then, with the minimum monthly wage per family between 300 and 350 reais – very low from the point of view of the needs of a family.
If vegetable oils will be subsidized, at least most of these subsidies should be directed to small producers via the suggested cooperatives.
The investments necessary for the first phase, namely the production of 800,000 m³ of vegetable oil (2% of the present 40,000 m³ of diesel consumption) are around 480 million reais, an amount that represents only 1.4% of the foreseen investments by PETROBRÁS for the 2007 fiscal year, therefore easy to be applied if partly directed to cooperatives.
The advantages of the cooperatives and their members are: (i) they make it possible lower cost regarding the flow logistics, if correctly localized regarding the region; (ii) they keep the earnings of the industrial process, whatever the margins are; (iii) they keep the gains from the technological advances of agriculture and industrial processes; (iv) they can use the oleaginous plant that have larger local productivity; (v) they don’t need government assistance anymore; (vi) they maintain the worker in the countryside, reducing the social pressures in the cities; (vii) they pay the investment loans and (viii) they generate local development.
For example, the government resources used for social assistance could be redirected to R&D.
The BNDEs (National Development Bank) would contribute to the financial engineering, PETROBRÁS to the industrial engineering and logistics and the State to the potentialities of the workers and respective lands.
PETROBRÁS, due to its competence and entrepreneurial structure, would coordinate the actions and would have some stock participation in the initial years and would leave as soon as the worker’s children, engineering, agriculture or administration graduates, could administer 100% of all processes.
Both for alcohol and vegetal oil, PETROBRÁS could sign long-term contracts that would guarantee its commitments concerning exports and internal market sales.
Graphic Edition/Edição Gráfica:
Tuesday, 11 November 2008.