Economy and Energy
Year  II - N° 9
July/August/1998

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Capital Accumulation in the Brazilian Economy
Olla_de_oro5362.gif (580 bytes)Economical Growth 1997 to 2010
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Graphic Edition:
MAK
Graphic E
dition
marcos@rio-point.com
Revised:
Sunday, 13 December 1998.

Brazilian Economical Growth - 1997 to 2010

Carlos Feu Alvim
feu@ecen.com
English Version:
Frida Eidelman
frida@password.com.br

 

Our previous studies have shown the limitations to the Brazilian growth. We have reformulated the model in order to point out paths to growth. The post-Real trend aggravated the difficulties of growing. It is possible to grow only by raising the internal savings and improving the capital productivity. The projections presented here were extrapolated until the year 2010.

The Possible Growth

In 1995, when the book Brasil: O Crescimento Possível (Editora Bertrand – 1996) was written, we have forecasted an economical growth for the next years to be limited to 4% annually, except for the case of substantial corrections in the economical path. Without these corrections, a reasonable growth would be possible only through significant external transfers and that, in the model based on national accounting, would mean to accept a deficit in the balance of goods and services. We have projected superior and inferior limits to growth as a function of this transfer to or from outside the country. The transfer out of the country of about -2% (net external transfer of goods and services corresponding to 2% of the GNP), as it has occurred in the last three years, would cause growth between 2.5% and 4.3% according to our projections, what was considered at the time as extremely pessimistic, since it was believed that Brazil was entering into a new cycle of sustainable growth. We have called attention to the fact that the ingress of resources that would allow for this growth would not be sustainable in the medium term. The average growth in the last three years was 3.3% and we will end the fourth year with about 3% of annual growth. The main limitation pointed out in the book was the scarcity of investments and a declining capital productivity. We had substantial divergences with the fashionable evaluations about the investment rates necessary for growth. Nevertheless, we believed that the territorial savings would continue to grow – with the corresponding reduction of consumption rate – what would favor future growth. This trend was reversed in the last years what makes growth even more difficult.

The projection made by e&e for the next years

From data between 1947 and 1996 and using those available for 1997, we have evaluated the perspective of economical growth in Brazil in the next 10 years. As a function of input hypothesis, one may get different rates of economical growth. This is part of e&e’s effort aiming at rendering available to our readers and colleges tools for projections in the energy and economy areas which are our main field of action. Differently from our previous effort (the book) in which we considered an inertial scenario and another one with some optimization but following the same trend, we will deal here with a scenario that includes a policy of explicit increase in capital production. This scenario will be opposed to the inertial one. This approach, according to our evaluation, was encouraged by the deterioration of the present model which does not foresees the economical growth needed by the Brazilian society.

Growth within the present trend (inertial) and in the modified scenario

The projection model adopted - described in the book – conditions growth to three main factors: the national savings P (part of the GNP that was not consumed), the capital productivity c (Product/capital ratio) and the transfer outside the country T. The first two quantities (P and c) are extrapolated from their historical behavior. In the present approach, we will introduce the hypothesis of a change in the historical trends by supposing limit values.

In this adaptation, we had the collaboration of our colleague Eduardo Marques who has been working with the model in other scenarios and in a version that permits the construction in a microcomputer and through a visual iterative process of different scenarios. The transfer T is exogenously introduced and monitored through economical parameters notably the accumulated net external financial commitment. This commitment can be evaluated for different values of capital interest rates. Investment I is in every year the result of territorial savings less resources transferred outside the country, i.e.:

I = P – T

Algebraically, when the net transfers are negative, investment is the result of national savings plus the transfers to outside the country. By projecting P and T, I is also projected. Starting with the hypothesis about the initial stock of capital goods, when calculation of national accounting was started (1947), with historical data of gross formation of fixed capital from IBGE and with hypothesis about depreciation or scrapping of these goods, one obtains for each year the historical and projected capital stock K. The capital productivity is calculated for the past from known values of the Gross National Product (Y) and from the stock of capital goods. Projecting the productivity, one obtains the expected product value. The multiplying effect of the net ingress of goods and services on the GNP (proportional to -T) is also taken into account. We have assumed that the fundamental limitation for growth in the medium term is related to the production capacity expressed by the accumulated gross capital. The economical and financial conjuncture causes the production to vary around the average use of the installed capacity. Projections are based on this average (they are not maximum projections).

National Savings

The fraction of the GNP that is not consumed, national savings, is an important amount projection of the economy of the country because it indicates disposition of the population to give up consumption. Fundamentally, these savings are intended for investment or to be sent abroad (in the form of debts of goods and services). The trends of systematic growth of this parameter were a positive factor in growth expectations. The extreme values, relative to 1988 and 1989, are due to distortions in the relative prices as shown by the constant prices (of 1980) values. Our previous projections were a bet on the maintenance of this trend in the growth of national savings. Starting in the nineties and particularly after the Real plan, there was a decrease of this indicator, namely saving tends. Even though values at prices of 1980 are not available, data from IBGE with reference to prices in effect in the previous year show that the observed decrease is real.

The decrease of this indicator puts at stake the perspective of growth since it results in an investment that is just sufficient for a minimum growth of the per capita GNP. In the figure above we see the projection of these parameters for two scenarios. In the "inertial" scenario the trend of the last years would be maintained. Even in this scenario, we have considered the resumption of the saving rates in the next years until its stabilization around 20% of the GNP annually. In the "modified" scenario, the national savings would resume the "pre-Real" trend.

The best fit is adopted for data until 1994, and it is foreseen that it will reach – in the long run – a national savings rate of 28% of the GNP. It was assumed that the return to the previous trend would occur in the next four years. This change, even meaning resumption of the previous trend, implies an adjustment from 1990 on, when some restrictions to consumption and investment stimulation will occur. It is opportune to remember that in the National Accounting concept, adopted in the model, investment is associated with gross formation of fixed capital, i.e., with the increase or renewal of machine stock, equipment, civil works goods and others. The so called financial or speculative investment, mainly in economies like the Brazilian one where its main function is to finance the public debt, has little to do with the investment we are talking about.

Capital Stock

Capital stock comes from data of investment accumulation, expressed by the gross formation of fixed capital of the national accounts, accumulated along the time. This capital is depreciated according to the scraping curve, different for civil construction goods, machines and equipment (and others). From these data one obtains the capital expressed in terms relative to the GNP of 1980. We also indicate the values in dollars of 1997, even though we consider – as most of the analysts – that this is an artificial value for the exchange rate.

 

Capital Productivity

Capital productivity results from the division of the GNP by the value of capital stock represented above. The following figure represents the capital productivity so obtained. A logistic curve was adjusted to the data and it can be used in the projections.

In a previous article we have shown that the decrease in the capital productivity is not an isolated phenomena of the Brazilian economy (e&e No 1). It was evident in countries like South Korea and Japan. In Korea, which in the mid sixties invested about 18% of the GNP to grow 10% annually, was investing in the eighties 30% of the GNP to grow the same 10%. At the beginning of the nineties, even investing 35% of the GNP, it did not reach this growth. Japan, which maintained during more than three decades an investment of the order of 30% of the GNP, grew 10% in the sixties and less than 5% in the eighties. In the sixties, Brazil invested about 16% of the GNP to grow 6% annually. In the eighties, Brazil invested about 22% of the GNP and grew only 2%.

We have considered as inertial some loss of capital productivity reaching a value the value of 0.35% (better fit for previous data) and the value of 0.40 in the modified scenario (capital/product ratio 2.5). This difference of 12.5% between one hypothesis and the other modifies fundamentally the projections of economical growth. This productivity gain – whose value is not impressive – nevertheless signifies considerable changes in the economic policy and in the productivity system. Probably it will be easier to obtain progress in the productivity of machines and equipment than in civil work goods, which constitute the most significant part of capital stock (76% in 1997). Increasing the national savings and the capital productivity are the fundamental pillars of economical growth policy for the next years.

External Transfers

It is easy to understand that the capital inflow creates possibilities of investment. Conversely, outgoing capital limits this investment.

Since Brazil does not produces hard currency, in the medium run, capital inflow corresponds to a deficit in the balance of goods and services and outgoing capital corresponds to a surplus. Transfers abroad influence directly the economic growth. But these transfers are not a result of political will. In counties like Brazil, having an internal market with vast potential of demand growth, surpluses are in great part a result of consumption restrictions for goods produced in the country as well as those imported. The internal economic policy must adjust itself to produce credits in the balance of goods and services. The two scenarios and not much different relative to these transfers. One gets in both scenarios in the year 2010 a credit in the balance of trade of 2% of the GNP which is maintained in the following years. This means a transfer abroad of about 1.1 % of the GNP. The continuous inflow of external capital in net values only occurs as a probable scenario in irresponsible minds. The direct investments presuppose dividend payment as well as the financing of interests. One must not expect in debtor nations or those with a significant part of their capital in the hands of investors other than a negative flow of capital in the medium term.

The projections

The following tables summarize the economic growth in the two scenarios. The expected GNP still takes into account the multiplying effect of transfers on the global economic activity projected of the year (in order to avoid iterations, we have used projected transfers for the previous year). This correction, explained in the mentioned book, takes into account on one hand the multiplying factor on the economy of a surplus of imports over exports caused by the value locally aggregated to the imported products. Likewise, the export of products (mainly intermediary ones) breaks the chains of products and services associated with their integration in the productivity chain associated with their consumption.

Scenario: inertial

Variable

Unit

1997

1998

1999

2000

2005

2010

2015

2020

Capital Productivity

0,38

0,38

0,38

0,37

0,36

0,36

0,36

0,36

National Savings

Bi US$ 1997

139

144

153

162

180

188

197

205

Balance of Trade

Bi US$ 1997

-8

-4

-2

0

7

19

20

21

Transfers abroad

Bi US$ 1997

-19

-15

-14

-11

-4

10

10

10

Investiments

Bi US$ 1997

158

159

167

173

184

177

186

195

Annual rate

%

3,1%

0,6%

4,9%

3,7%

0,7%

-1,1%

0,9%

0,9%

GNP

Bi US$ 1997

803

816

830

840

904

941

984

1027

Variation

%

3,0%

1,6%

1,7%

1,2%

1,5%

0,5%

0,9%

0,8%

GNP per capita

US$97/hab

5059

5076

5097

5091

5416

5123

5154

5216

Annual rate

%

1,4%

0,0%

-0,6%

-1,2%

0,3%

-0,5%

0,1%

0,2%

Consumption

Bi US$ 1997

664

672

677

678

724

753

788

822

Population

Million inhab

158,7

160,8

162,9

165,0

166,9

183,6

191,0

196,9

Consumption per capita

S$97/inhab

4182

4181

4155

4107

4336

4100

4125

4174

Annual rate

%

1,7%

0,3%

0,4%

-0,1%

0,3%

-0,5%

0,1%

0,2%

Scenario: modified

Variable

Unit

1997

1998

1999

2000

2005

2010

2015

2020

Capital Productivity

0,38

0,38

0,38

0,39

0,40

0,40

0,40

0,40

National Savings

Bi US$ 1997

139

153

177

205

290

366

468

601

Balance of Trade

Bi US$ 1997

-8

-4

0

4

11

28

36

45

Transfers abroad

Bi US$ 1997

-19

-16

-11

-7

-1

16

19

23

Investiments

Bi US$ 1997

158

168

188

212

291

350

449

579

Annual rate

%

3,1%

6,4%

11,4%

13,2%

4,7%

3,6%

5,1%

5,2%

GNP

Bi US$ 1997

803

822

844

879

1136

1410

1777

2256

Variation

%

3,0%

2,4%

2,6%

4,1%

4,8%

4,2%

4,8%

5,0%

GNP per capita

US$97/hab

5059

5114

5181

5325

6808

7681

9303

11458

Annual rate

%

1,4%

-0,4%

-1,6%

-0,4%

3,5%

3,1%

3,9%

4,2%

Consumption

Bi US$ 1997

664

669

667

673

847

1044

1309

1655

Population

Million inhab

158,7

160,8

162,9

165,0

166,9

183,6

191,0

196,9

Consumption per capita

S$97/inhab

4182

4163

4096

4081

5072

5687

6852

8404

Annual rate

%

1,7%

1,1%

1,3%

2,8%

3,6%

3,2%

4,0%

4,3%

The following graphics summarize the expected GNP evolution, GNP per capita and consumption per capita.

The net external financial commitment.

The external debt is an important parameter in the projection of a country’s development. In the long run it represents a limitation to growth since it implies the outflow of resources – without counterpart. It is opportune to remember that the external credit provided for development is not negative in itself. On the opposite, the development surge of the seventies was accelerated by the inflow of capital – and the corresponding goods and services. If the investment increase allows for production surplus whose net result permits to surpass the loan charges, the investment made possible by the external credit may have a beneficial result to the country. In the book "Brasil: O Crescimento Possível" we have shown that due to the interests shock and to the trading loss, the positive result of the seventies had been canceled out in the eighties and in the beginning of the nineties, the balance was rather negative, resulting in a loss equivalent to 13% of the GNP. The same may happen to the present external investments in Brazil or with the acquisition of capital goods stock by the external capital. The outgoing dividends are related to direct investments as payment of interests is related to loans. In this case, the merit would be the increase in net production resulting from these investments relative to the losses due to outgoing dividends. To give an idea of the importance that outgoing dividends already have, it should be remembered that Brazil in 1997 paid net interests of US$ 10.4 billion and net outgoing dividends of US$ 5.6 billion. Namely, outgoing dividends represent already more than 50% of the interests. From the point of view of an enterprise a loan is of interest when the additional profit permits the payment of interests and of part of the loan. From the global view of the country the same is true. What Brazil achieves as savings is of the order of 20% of the GNP or 7% of the capital stock. Since capital depreciation is 11% of the GNP or 4% of capital, interests and outgoing capital may not surpass 3% annually. This is the limit of real interest (or dividends) that the country may send abroad in the present trend (inertial scenario) so that the external resources do not hinder growth. Evidently, this would not be a viable country for speculators or risk investors. Even with the hypothesis that these capitals would remain in the country for a longer time, this might mean that a growing percent of the national economy would rest in the hands of external capital. The permanence of capital in the country, with reinvestment of interests would correspond to no payment of interests. In the case of interests, the external debt grows, in the case of reinvestment the capital grows which - sooner or later – will send dividends abroad. Therefore it seems of interest to evaluate the net external financial commitment. that would exist in both scenarios. This debt corresponds to adding to the external debt the accumulated capital stock, both physical and financial. The evolution of this parameter was compared in both scenarios for a capital interest rate of 6.2% annually. The limit considered reasonable in terms of the country was 40% of the GNP or about 15% of the capital stock. In the year 2010, this debt would reach 80% of the GNP or 28% of the capital (about 40% of the capital in 2020). Definitely and literally, the country would be about to not belong to the Brazilians anymore. It is interesting to notice that for a capital interest rate of 6.2% annually (real), that was adopted – modest in terms of investors that come to the Brazilian market – there is no transfer scenario that renders under control the net Brazilian external debt. A substantial transfer that could reduce the debt (numerator) reduces also the GNP (denominator) of the variable represented in the graphic below.

 

 

 

Preliminary Conclusions

As we were already convinced in the middle of this decade that only with the optimization of the current model we would be able to grow at a reasonable rate, today we are absolutely certain that the persistence of the model applied in the last five years, with important consumption increase (reduction of national savings) and decreasing capital productivity is not viable: the model must be changed. The first effect of the structural changes that arrived with import opening, mainly directed to consumer’s goods, was profoundly negative for economical growth. Modernization at any price represents, on the other hand, losses in capital productivity. If some economical growth was possible in the last five years it was due to the capital stock previously accumulated and to the multiplying and complementing effect of imports (or of the internal consumption that was previously exported). This resource has been exhausted and in the adjustment years that certainly will come, it will be reversed. The receipt to grow is not in disagreement – surprising the economical prestidigitators – with what common sense indicates: to save more and to use better the production capacity.

With reasonable capital productivity gains and recovery of the historical trend of savings it is possible to grow, not in the wishful pace – with an eye on elections or not – but, after an adjustment in the next two years, firmly and consistently at about 5% annually.