A TALE OF TWO CYCLES AND THE UNDERLYING LONG TERM CHANGES Seminário em honra a Albert Fishlow Pedro Malan Monica B. de Bolle.

Apresentação em tema: "A TALE OF TWO CYCLES AND THE UNDERLYING LONG TERM CHANGES Seminário em honra a Albert Fishlow Pedro Malan Monica B. de Bolle."— Transcrição da apresentação:

1 A TALE OF TWO CYCLES AND THE UNDERLYING LONG TERM CHANGES Seminário em honra a Albert Fishlow Pedro Malan Monica B. de Bolle

2 Preliminary Draft A TALE OF TWO CYCLES AND THE UNDERLYING LONG TERM CHANGES Pedro S. Malan Monica B. de Bolle It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way— in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only. Charles Dickens, A Tale of Two Cities, 1859 Versão preliminar do trabalho apresentado em seminário em homenagem ao professor Albert Fishlow, em 3 de julho de 2015, no Instituto de Estudos de Política Econômica (Casa das Garças), Rio de Janeiro. Os autores agradecem a generosa ajuda de Carolina Melchert Marques, Valéria Duboc Andreiolo e Carla Emilia Brunet Lopes. Os erros que permanecem são de exclusiva responsabilidade de Pedro Malan.

3 Outline 1.Why two cycles, and 35 years apart? 2.The two cycles compared The International Conditions and the Balance of Payments Accounts Origins: Some Key Domestic Dimensions of both Cycles Consequences: Policy Responses to The Different Ways the Cycles Ended 3. The longer term underlying domestic transformation Urbanization and Demographics: Deep Tectonic Shifts Responses to Growing Demands and Expectations: How “State Intensive” ? 4. The long term underlying “External” Trasformation Primary Products, Manufactured Goods, Terms of Trade: The Case for Industrialization Quest for Modern Industry and Modern Technology: How “State Intensive” is the Promotion of Industrialization and International Competitiveness? 5. Concluding observations: Back to our recurrent traps? Footnotes Tables and Graphs

4 Introduction This article is a tribute to Professor Albert Fishlow. The relationship between cycles and long term structural changes have always been dear to his mind and heart. The title of the paper is, of course, taken from Dicken’s justly famous book – and from Fishlow, who wrote the excellent “A Tale of Two Presidents: The Political Economy of Crisis Administration” (1). The pont of departure of the article goes back to the PhD dissertation of one authors, who had Fishlow as his thesis supervisor in Berkeley, entitled “Foreign Exchange – Constrained Growth in Semi-Industrialized Economies” (1997) (2). In the part about Brazil, the thesis sustains that from the 1940’s to the mid - 1970’s, Brazilian economic growth had, as the (ex-ante) fundamental macroeconomics binding constraint, the balance of payments restrictions – except for an extraordinary growth cycle in the period 1968 to 1973. The present paper shows that the country had to wait for 35 years to experience another, similar, non-foreign-exchange constrained cycle of relatively high growth: 2003 – 2008, followed by a major boom year in 2010. Section I tries to explain why focus on two cycles, and 35 years apart. Section II compares the two cycles in three dimensions: (a) the international “origins” and their reflection on the Brazilian balance of payments accounts; (b) the additional domestic “origins” of the cycles, in terms of some key, common elements; and the (c) some “consequences” of the policy responses to the different ways in which each cycle came to its end. Since history never repeats itself, and the two cycles differ, not only for being 35 years apart, Section III focuses on longer term structural domestic changes in Brazil which underlined both cycles, trying to suggest some additional reasons for the recurrent Brazilian “macroeconomic trap” (3). Section IV attempts to take the same longer term view for the external front, with comments on the old case for industrialization, the hypothesis about long run terms of trade deterioration, and the ongoing debates about “de-industrialization” and the so called middle-income and lower-growth traps. Section V presents concluding observations.

5 1. Why two cycles, and 35 years apart?

6 Taxas médias decenais de crescimento do PIB, 1940-2005 (%)

7 PIB per Capita, 1900-2005 (R$, a preços de 2005)

8 Picos*Vales* RecessõesExpansõesCiclos Número de meses de pico a vale Número de meses do vale anterior a este pico Pico a PicoVale a Vale out/80 (IV)fev/83 (I)28--- fev/87 (II)out/88 (IV)20488868 jun/89 (II)dez/91 (I/92)3082838 dez/94 (I/95)set/95 (III)9366645 out/97 (IV)fev/99 (I)16253441 dez/00 (I/01)set/01 (IV)9103831 out/02 (IV)jun/03 (II)8132233 jul/08 (III)jan/09 (I)6616967 Duração média15,828,749,346,1 *O trimeste estabelecido na datação trimestral é apresentado entre parenteses. Cronologia Mensal dos Ciclos de Negócios Brasileiros

9 2. The two cycles compared

10 Preços de Exportação (Px); Preços de Importação (Pm) Quantum de Exportações e Capacidade para importar Qx Px/Pm PeríodoPXPX PMPM QXQX QmQm Qx Px/Pm 1968-1973 Index (1967=100)172143209276250 Average Annual Rate of Growth (%)9.46.213.018.516.7 2003-2008 Index (2002=100)204183160200179 Average Annual Rate of Growth (%)12.810.78.412.610.5 MEMO: 2010 Index (2002=100)213196157228198 2010/2009 Rate of Growth (%)20.53.99.516.627.9 Índices e Taxas médias anuais de crescimento (%)

11 Brazilian exports and imports: price and quantum indices - terms of trade and import capacity, 1967 - 75 (1967 = 100) Qe Ic Pe Pi Qi Tti Px/Pm Qm Px Ic Pm Qx

12 Balance of Payments: Main Accounts (US$ million) Balance of Payments (US$ million)Average 1968-73Average 2003-2008 I. Current account-1.1982.807 Trade balance (FOB)035.744 Good exports3.338130.711 Good imports-3.338-94.968 Services and income-1.218-36.640 Services-587-9.578 Income-630-27.062 Interests costs-386-6.125 Unilateral current transfers203.703 II. Financial and capital account2.16220.598 Capital account0702 Financial account2.16219.896 Direct investment45912.254 Portfolio investment8710.674 Other investments1.616-2.724 Amortizations-898-13.209 III. Overall balance1.10322.680

13 3. The longer term underlying domestic transformation

14 Anexos

15 Some Basic Indicators of Structural Change | Brazil 1950, 1980 and 2010 195019802010 GDP (U$ billion, Current)112522143 1 GDP (U$ billion of 1980)30252537 1 Composition (Factor Cost) Primary Sector (%)24,310,05.3 1 Secundary Sector (%)24,138,128.1 1 Terciary Sector (%)51,651,966.6 1 Population (million)51,9119,01190.76 1 Rural (%)643216 1 Urban (%)366884 1 (Cities over 20,000)21511,650 2 GDP per capita (U$ Current)2142.08011,234 3 GDP per capita (U$ of 1980)5702.0802,815 3 Labor force (million)17,143,896.6* Primary Sector (%)603017.4* Secundary Sector (%)142420.5* Terciary Sector (%)264662.1* Men (million)14,630,754,5 Women (million)2,511,547,3 Number of Contributors to Social Security (1,000)2.85723.78260,200** Energy Installed Capacity (Mw)1.88331.147112,400*** Hydro Eletric Production (Gwh)5.850133.767422,785**** Trucks (stock at year-end)10.966932.5892,143,467 11 Automobilies (stock at year-end)200.7448.155.70737,188,341 11 Fontes: 1-IPEADATA. 2-Dados para 2011, Perfil dos Municípios Brasileiros 3-Censo 2010, IBGE * Dados para 2009, IBGE. ** Ministério da Previdência Social, Anuário Estatístico da Previdência Social 2010. *** Relatório Quadrimestral Indicadores Nacionais do Setor Elétrico 2011, GESEL. **** Dados relevantes 2010, ONS. Average Annual Rate of Growth % 1950-19801980-2010 -- 7,42,56 4,13,4 8,41,7 7,42,9 2,81,6 0,5-0,7 5,02,3 3,012,3 -- 4,51,0 3,82,8 0,8 5,12,2 5,13,8 2,51,9 5,24,8 7,33,1 9,84,3 11,03,9 16,02,8 13,15,2

16 Some Basic Indicators of Social Change | Brazil 1950, 1980 and 2010 195019802010 Birth Rate (per 1,000 pop.)443214 1 Death Rate (per 1,000 pop.)1596161 Life Expectancy at Birth Rate (years)48,962,673.9 2 Southern States46,868,175.9 2 Northeastern States4,0853,971.2 2 Infant Mortality Rates1308616,0 2 Southern States1006311.6 2 Northeastern States16411619.1 2 Youth423836 1 (Under age 15 as % of total) School Enrollment (1,000) Primaryn.a.22.52229,900 3 Secondaryn.a.2.812823 3 Universityn.a.1.3835,773 3 Literace Rate18,474,588.3 1 (defined as 10 yrs. Or over) Population per Physucuan2,210 (1960)1.200522* Daily Calorie Supply per Capitan.a.2.5291,610** 1960197019802010*** %% Income Distribution Top 5%27,734,937,030,8 Top 10%39,747,849,643,1 Botton 40%11,610,09,511,3 Botton 50%17,714,913,416,7 Gini Coefficient0,500,5680,5920.536 11 Fontes: 1-Base Sidra, IBGE 2-Southern Statesse referem ao Paraná, Santa Catarina e Rio Grande do Sul, DATASUS. 3-Indicadores Social 2012, IBGE. * "Demografia Médica no Brasil", CMF. ** Pesquisa de Orçamentos Familiares 2008-2009, IBGE. ***PNAD 2011; parcela dos Top 5% estimada pelo autor. 11-Censo 2010, IBGE.

17 4. The long term underlying “External” Transformation

18 Preços de commodities de volta à tendência de longo prazo? Fonte: relatório "Macro Visão: Declínio secular das commodites, de volta à tendência?"

19 Metals, Metals (trend) x Energy, Energy (trend)

20 Commodities x PPI

21 Some Basic Indicators of Change in External Sector | Brazil 1950, 1980 and 2010 195019802010 Export (U$ million Current)1.33520.132201,915 1 Quantum Index1004412488 1 Price Index100324576 1 Primary Products %87,442,645.5 1 Coffe %63,912,52.6 1 Manufactures (plus semi) %12,657,354.5 1 Imports (U$ million Current)94222.955181,768 1 Quantum Index1004472904 1 Price Index100536653 1 Oil and Oil Products %14,842,114,2 Consumer Goods %13,75,615.6 1 Intermediate Goods %40,733,649.9 1 Capital Goods %30,818,720.3 1 Terms of Trade10060,588,3 Purchasing Power of Exports1002672198 195019802010 Foreign Direct Investiment (U$ millions) Stocks and year-end1.00017.500682,346 3 Flow in year31.53248,506 3 Fontes: 1-IPEADATA. 2-Possui 1980 como ano base, IPEADATA. 3-UNCTAD.

22 Concluding observations Back to our recurrent traps?

23 This article attempted to make the following points: 1. Among the many cycles of expansion (of 5 years or more) experienced by the Brazilian economy over the last 100 years (1915-2015), two clearly stand out as extraordinary, in the sense that they were not foreign- exchange constrained: 1968-1973 and 2003-2008, with a remarkable rebound in 2010. 2. All the other relevant cycles faced balance-of-payments constraints either in the form of insufficient purchasing power of exports (terms of trade times export quantum, which defines import capacity) and /or insufficient inflows of external financing (given previously accumulated external debt stocks and the terms under which it was contracted). For most of the last 100 years this was the macroeconomic binding constraint on Brazilian growth. 3. The paper presents a comparison of the two cycles and of their domestic and international contexts, showing how these two dimensions mutually reinforced each other. Of course, there were many differences, because the cycles were 35 years apart, but there are some relevant similarities in the unprecedented balance of payments accounts and in the interplay of international and domestic forces. 4. The article attempts to go beyond the international scene and note some key common domestic elements in the “origins” of both cycles, in terms of prior reforms and modernization of institutions. A short observation is offered on the implications of the different ways both cycles ended, one in 1973, the other in about 2010. The consequences of the policy responses post-1973 are still the subject of a lively academic debate. Not as lively though as the ongoing debate about the policy choices underlying “the origins and the consequences” of the second cycle. 5. Given the fact that two cycles were about 35 years apart, and that history never repeats itself, the paper gives some attention to key underlying long term structural transformations experienced by Brazilian society (which were taking place well before the first of the two cycles, continued to play in between them, and will continue to play a key role well into the future. Concluding Observations | Back to our recurrent traps?

24 6. The key domestic long term changes in this paper are: (a) the demographic change, or the speed of the demographic transition in Brazil in the last few decades and (b) the rather impressive process of urbanization in Brazil. Only China and India in the world have increased the absolute number of people living in cities more than Brazil over the last sixty five years. The Brazilian urban population increased from about 18 million in 1950, to 173 million now, an additional 155 million people in urban areas in just 65 years! In this period, well above the US, which has the third largest urban population in the world. 7. A major implication of these remarkable changes in demographics and urbanization has been, especially over the last half century, exponentially increasing demands for urban infrastructure, both physical (energy, transportation, housing, sewerage and water systems) and social (education, health services, security). These demands have traditionally been seen in Brazil as "state intensive", i.e. requiring Government and State enterprises leading role. The pressure is for increased spending, increased taxation and increased indebtedness at the Federal, State and local governments. The (legitimate) dream is for a sort of Brazilian "welfare state" modeled upon the European social democratic experience. 8. The paper notes that these (ex–ante) plans, desires and attempts to increase public and private consumption and investment, expect that domestic supply will respond properly. When it doesn’t, the country faces its recurrent “macroeconomic trap”, as we have seen many times over the last 100 years: growing inflationary pressures, fiscal problems and growing balance of payments disequilibria on current account – up to the point that they could be financed through the capital account, without undue increase in external debt. A recurrent trap, in part due to recurrent attempts on the part of incumbent policy makers to speed up the rate of growth. But also recurrent because longer term structural changes (domestic and international) generate the need for policy responses – and not just short term – on the part of successive administrations.. Concluding Observations | Back to our recurrent traps?

25 9. The two cycles dealt with in this paper allowed the foreign exchange constraint to be relieved, for a while, but a sudden upswing in the purchasing power of exports, combined with easy access to external financing does not affect (but are affected by) longer term processes of change such the forces of demography, urbanization, and the determinants of our international competitiveness (other than exchange rates) in the long run. In this respect, the three observations mentioned in the previous section (Paul Krugman, Arthur Lewis and Amartyia Sen) are all correct and remain as valid today as ever. Like Schumpeter’s "creative destruction is the essential feature of capitalism". In the medium and longer term, “almost everything” if not everything depend on them. 10. Whether focusing on the current (2015), painful downward phase of the cycle we are in now, or focusing on the underlying long term changes that will continue to go on, Brazilians should recognize – as Fishlow would have reminded us, through his research – that both cyclical and structural elements of our quandary could reinforce each other, for good or for worse. And that for this reason, both require mutually consistent policy responses, which do not seem to be in place now. 11. “The bias for hope in this situation is that pressures of an intensifying economic crisis are bound to concentrate the country’s minds, energies and political ingenuity. The record thus far is not altogether reassuring. However, it is important to recognize that significant changes are already taking place as both government and society try to sort out what went wrong in the past, to cope with the harsher realities of the present – and to look towards the future with some broadly shared sense of purpose and direction. As we have seen, this was attempted in the [past]. If Brazil is to consolidate both democracy and an open, modern economy, it will have to be tried again”. 12. The entire previous paragraph was written about 25 years ago. It was the very last paragraph of an article by one of the authors of the present paper, written in the dire conditions of 1990 in Brazil. The country rose to the task and gave support to fundamental changes, especially after the success of the Real Plan in 1994. We conclude this article with the same observation – it will have to be tried again. With due consideration to the interactions between the cyclical and the underlying long term changes. As Fishlow would expect us to do. Concluding Observations | Back to our recurrent traps?

26 ON CYCLES: “In misreading the cyclical tendencies of the import substitution process as an indication of insufficient secular market demand, the pessimism of the early 1960’s obscured the extent to which it was supply incentives rather than demand that was driving the system”. ON LONGER TERM ISSUES: "Increasingly, it has become apparent that a much smaller part of increased income per capita is explained by capital accumulation pure and simple. Both technological change and improved quality of the labor force play large roles. Not until relatively late did such factors begin to receive attention in Brazil, masked by the apparently satisfactory process of import substitution industrial growth”. From “Origins and Consequences of Import Substitution in Brazil” (1972) “As we all have come to appreciate, and Prebisch among the first, import substitution was not an unmixed blessing. It was a second-best policy imposed to tax agriculture and reallocate resources toward industry that was eventually brought down by the very circumstance it was to avert: a shortage of foreign exchange”. “Albert Fishlow’s Comment on Raul Prebisch’s Memoir both in Meier. G. and Seers. D.”Pioneers in Development. Oxford University Press (1984) Professor Fishlow: Three Quotes

27 How “State Intensive”? “Não é possível esperar apenas pelas iniciativas particulares e deixá-las atuar desarticuladamente, sem ligação entre si. Por que esperar apenas pela iniciativa privada? Por que não deverá o governo provocar ou chamar a si incumbências que não a interessam ou são superiores às suas possibilidades?” (Edmundo Macedo Soares e Silva) e foram publicadas em dezembro de 1944 no Boletim do Círculo de Técnicos Militares sob o título “A Engenharia Brasileira no Projeto de Volta Redonda: Um Capitulo do Planejamento Econômico”, citado por Pedro S. Malan na abertura do seu artigo ao O Estado de São Paulo em 12 de Janeiro de 2014. Permita-me o eventual leitor, uma impertinência: em qual das últimas oito/nove décadas de nossa história o texto acima teria sido escrito? A resposta está adiante neste artigo. Mas me atrevo a levantar a hipótese de que há, de longa data, uma expressiva corrente de opinião no “Brasil profundo” que subscreve – hoje – senão a precisa formulação acima, o espírito que a anima e cuja chama permanece viva entre nós. Parágrafo seguinte à citação acima no mesmo artigo de Pedro S. Malan. Não é necessário, por certo, “apenas esperar” pela iniciativa privada, mas é necessário, sempre, que Governos expliquem e prestem contas ao Parlamento e aos seus cidadãos das razões, por exemplo, que podem levá-lo a conceder acesso privilegiado a recursos escassos a determinados grupos específicos (através de subsídios créditos, isenções e proteções comerciais). Ou quando resolvem “chamar a si incumbências” que consideram que não poderiam ser deixadas a outrem. Mesmo porque, neste último caso, é possível que uma discussão aberta, transparente e não ideologizada mostre situações em que existam “incumbências”, existentes ou programadas que poderiam estar além das possibilidades técnicas, humanas, financeiras e fiscais do próprio Estado – e suas empresas. Pedro S. Malan, O Estado de São Paulo - 12 de Janeiro de 2014. Artigo intitulado “Nem Mínimo nem Máximo: só mais Eficiente”. O dois últimos parágrafos deste artigo.