Exchange rates, growth regimes and economic development:
Theory and Evidence for Brazil
Paulo Gala (FGV-SP)
Eliane Araújo (UEM-PR)
Resumo
O presente artigo possui dois objetivos. O primeiro deles é fornecer elementos teóricos para
analisar a relação entre taxa de câmbio real e desenvolvimento econômico. O segundo é
investigar empiricamente o regime de crescimento vigente na economia brasileira de 2001 a
2009. Os resultados mostram que, internamente, o regime de crescimento da economia
brasileira é do tipo wage-led, isto é puxado pelos salários, mas quando se considera o setor
externo pode ser caracterizado como profit-led. Essa classificação tem implicações
importantes para a análise convencional dos efeitos de uma depreciação da taxa de câmbio
sobre a produção nacional, mais especificamente, a depreciação da taxa de câmbio tende a ter
efeitos expansionistas sobre a produção nacional. Portanto, a recomendação principal de
política econômica derivada deste estudo é que a economia brasileira pode alcançar maiores
taxas de crescimento, renda per capita e seguir rumo a seu desenvolvimento econômico
expandindo seu setor industrial e evitando a desindustrialização, sendo as políticas de câmbio
competitivo um instrumento útil para esse objetivo.
Palavras-chave: regimes de crescimento; economia brasileira e nível da taxa de câmbio
Abstract
The objectives of this paper are twofold. First, it intends to provide theoretical elements to
analyze the relation between real exchange rates and economic development. Second, it
analyzes the growth regime of the Brazilian economy from 2001 to 2009. The results show
that, internally, the growth regime of the Brazilian economy is wage-led, but when
considering the external sector it can be characterized as profit-led. This has important
implications for a conventional analysis of the effects of a depreciation of the exchange rate
on domestic production, more specifically; depreciation in the exchange rate tends to have
expansionary effects on domestic production. Therefore, the main policy recommendation
derived from this study is that the Brazilian economy may achieve higher per capita growth
rates and find a stairway to economic development by expanding their industrial sector and
avoiding de-industrialization, and that competitive currency policy may be an useful
instrument towards that goal.
Keywords: growth regimes; Brazilian economy and exchange rate level.
JEL classifications: F43 (Economic Growth of Open Economies), F31 (Foreign Exchange);
E2 (Macroeconomics: Consumption, Saving, Production, Employment, and Investment)
Área 5: Crescimento, Desenvolvimento Econômico e instituições.
1. Introduction
There is now large empirical evidence and a relatively robust econometric literature on
the relation between currency over(under)valuation and long term per capita growth rates.
Competitive exchange rates have been associated with most East and Southeast Asian
successful growth strategies in the last 30 years. Growth periods in Chile, Uganda and
Mauritius in the 1980s and China in the 1990s are also related to undervalued currencies.
While the empirical literature on this issue is relatively rich, theoretical analysis of channels
through which real exchange rate levels could affect economic growth and development are
very scarce.
Two important channels through which exchange rate levels may affect long term
growth are related to investment and technological change. By affecting real wages, exchange
rate levels influence aggregate savings, investment and foreign debt dynamics. As some
authors have demonstrated, in capital account liberalization processes with strong inflows,
what usually happens is currency overvaluation which increases the consumption of tradable
goods. The artificially high real wages caused by the appreciation of the currency stimulates
consumption in the country that receives the inflows. Debt is used to finance consumption
instead of generating resources to repay it, causing what can be characterized as savings
displacement (Bresser-Pereira, 2010). The increase in external borrowing eventually
generates unsustainable debt dynamics and the result of those cycles is a balance of payments
crisis.
Overvalued currencies also have strong profit squeezing effects in the tradable sector,
which usually bring investment rates down. Undervalued currencies tend, on the other hand,
to be associated with higher investment levels at the macro level. On technological grounds,
an adequate exchange rate policy can, thus, help the non traditional tradeable sector of
developing economies, particularly the ones related to export manufactures. As Williamson
(2003) argues in his “development approach” to exchange rates, a competitive currency
would provide stimulus for the development of a non-commodity dependent tradable sector,
therefore avoiding Dutch disease problems and premature deindustrialization (see Bresser,
2010). By stimulating the production of industrial manufactures to the world markets, a
competitive exchange rate would help developing countries to climb up the technological
ladder.
However, for the devaluation to exert its beneficial effects in the dynamics of exports
and capital accumulation, the economic growth regime observed in the country should be
profit-led. Thus, the purpose of this paper is to investigate the growth regime of the Brazilian
economy and economic policy implications inherent to this result. Besides the introduction,
the article is divided into five sections: the first one introduces some important theoretical
facts about the patterns of growth and long terms effects of real exchange rate levels. The
second section deals with theoretical aspects of classification of growth regimes. Next we
analyze the trends of key macroeconomic variables in Brazil; in the following section an
estimate of the economic growth regime in Brazil is presented and, finally, in the last section
we present the final considerations of the research and some implications for economic
policy.
2. Long term effects of real exchange rate levels
For given productivity levels, the real exchange rate defines the level of real wages by
setting the relative prices of tradables to non-tradables; a relatively appreciated currency
meaning lower tradable prices, higher real wages, lower profit margins, higher consumption
and lower investment and a relatively undervalued currency meaning higher tradable prices,
lower real wage levels, higher profit margins and investment. In the latter case, an
undervaluation would also contribute to more employment and investment by increasing
capacity utilization through higher exports. With sufficiently elastic investment and export
responses, the economy would get into a profit-led pattern of growth. Overvaluations would
reduce employment and investment.
It is also possible to investigate the shortcomings of low investment levels at the
macro level due to overvaluations from a technological perspective. Excessively appreciated
currencies affect mostly the profitability of investments in the manufacturing (tradable) sector
where increasing returns are ubiquitous. By relocating resources to non-manufacturing
sectors, especially non-tradable activities and commodity production, where decreasing
returns rule, overvaluations affect negatively the overall productivity dynamics of the
economy. Undervaluations, on the other hand, tend to boost profitability and investment in
increasing returns sectors.
This second channel describing the influence of exchange rate levels on growth comes
from models of circular and cumulative causation in the Kaldorian tradition. The basic
argument is that an initial growth in output induces productivity gains that allow for reduction
of unit labor costs and, given a mark-up pricing rule, for fall in prices, increasing the
competitiveness of a country or region. These gains, in turn, allow for further output
expansion through increasing exports, which reinitiate the cycle. In conclusion, once a
country or region acquires a growth advantage, it will tend to keep it through the process of
increasing returns and consequent competitive gains that growth itself induces.
Kaldor (1970) developed the broad ideas and mechanisms behind the cumulative
causation model in an intuitive and verbal way. A few years later, Dixon and Thirlwall (1975)
provided the first formalization of the standard cumulative causation model. Based on this
model and subsequent developments in the literature, two arguments can be put forward
relating exchange rate policies and growth. The first and more immediate one is that
competitive real exchange rates may provide a “start up” shock on exports which may initiate
a virtuous growth cycle along the lines described in the model. As Frenkel and Taylor (2006,
p.5) put it: “If export demand and production of import substitutes are stimulated immediately
or over time by a sustained weak RER, aggregate demand should rise and drive up economic
activity and employment in the medium to long run.”
The second argument refers to the effects of exchange rate levels on the economy’s
pattern of specialization, and the related Kaldorian statement that “manufacturing is the
engine of growth” – also known as Kaldor’s First Growth Law (Kaldor, 1966). The starting
point here is the recognition that actual experiences of long-run growth and development are
associated with structural changes in the economy, generally leading to the decline of lowproductivity traditional sectors and the rise of high-productivity modern sectors. In particular,
it is argued that the size and dynamism of the manufacturing sector represent a central
element in successful development strategies. In other words, it implies that high growth rates
are usually found in cases where the share of manufacturing industry in GDP is increasing.
The explanation for the correlation between the growth of manufacturing output and
the overall performance of the economy is to be found on the impact of the former on the
growth of productivity in the economy. There are two possible reasons for such effect. The
first relates to the fact that the expansion of manufacturing output and employment leads to
the transfer of labor from low productivity sectors (or disguised unemployment) to industrial
activities (that present higher productivity levels). The outcome is an increasing overall
productivity in the economy and little or no negative impact on the output of the traditional
sectors, given the existence of surplus labor. According to Kaldor, this process is
characteristic of the transition from “immaturity” to “maturity”, where an “immature”
economy is defined as one in which there is a large amount of labor available in low
productivity sectors that can be transferred to industry.
The second reason for the relation between manufacturing growth and productivity
relates to the existence of static and dynamic increasing returns in the industrial sector. Static
returns relate mainly to economies of scale internal to the firm, whereas dynamic returns refer
to increasing productivity derived from learning by doing, ‘induced’ technological change,
external economies in production, et cetera.
There is an additional way of looking at the relation between pattern of specialization
and growth, and the effects of exchange rate policies. A basic proposition from the wellknown Balance-of-Payments constrained growth model developed by Thirlwall (1979) is that
economic growth in the long run is bound by the country’s ability to keep its external
balance1. Under restrictive assumptions, it is shown that an economy’s growth rate in the long
run is given by the ratio between export growth and the income elasticity of imports – the socalled Thirlwall’s Law.
In this case, it can be argued that the income elasticity of imports is not independent
from the patterns of specialization of the economy, in the sense that different sectors show
different responses in terms of imports when the economy is growing. This idea is put
forward in a formal model by Araujo and Lima (2007). They develop a multi-sectoral model
based on Pasinetti’s structural dynamics approach (Pasinetti, 1981, 1993) in which the
aggregate income elasticities of imports and exports depend on the sectoral elasticities as well
as on the share of each sector in the total of imports and exports. Taking this result along with
Thirlwall’s Law, it is straightforward to conclude that the economy’s pattern of specialization
affects its balance-of-payments constrained growth rates.If we follow the view from classical
development economists according to whom primary products show low income elasticities
and manufactures present high income elasticities, it becomes clear that promoting a pattern
of specialization based on manufacturing exports may benefit growth, and that processes of
deindustrialization may harm economic growth in the long run.
The implications in terms of exchange rate policies reinforce the arguments put
forward in this paper. i.e., by stimulating non-traditional industries, a competitive exchange
rate may be able to change the share of each sector in aggregate exports or imports, and
therefore cause a decline in the overall income elasticity of demand for imports, with positive
effects on long run growth. On the other hand, “a prolonged period of exchange-rate
appreciation can be detrimental for growth in the long run, because it may induce a change in
the structural determinants of the BoP constraint” (Barbosa- Filho, 2006, p. 3).
From this perspective, the real exchange rate level is, thus, a key variable affecting
development in an open economy environment. By defining the relative prices of tradables to
non-tradables and, therefore, the level of profitability in most manufacturing industries, the
real exchange rate determines which sectors are viable or not. In a developing economy,
intense overvaluations tend to shut down whole industries, blocking the channel of
productivity increases in the overall economy through the relocation of abundant labor from
low-earning and low-productivity jobs to high-earning and high-productivity jobs in
manufacturing. In Kaldorian terms, overvaluations may impede developing economies
reaching a “mature” state where surplus labor has been exhausted. Relative undervaluations
A detailed description of Thirlwall’s model and of the large literature on the topic is beyond the scope of this
paper. See, in this respect, McCombie and Thirlwall ( 1994).
1
may, on the other hand, contribute to productivity increases by integrating workers in
increasing returns sectors, avoiding the problems raised by the Dutch disease literature.
By stimulating these non-traditional industries, a competitive exchange rate may be
able to change non-price characteristics of goods in the sense of changing export and import
elasticities as Barbosa-Filho (2006) argues. If the country is able to move from traditional
commodity production to manufacturing for world markets by the help of a competitive
currency then exchange rate policy may promote better “non-price characteristics” of the
goods and higher productivity levels. The framework is Kaldorian in the sense that increasing
returns are assumed in manufacturing production (or non-traditional commodity related
tradables) and by stimulating those industries a competitive currency may help increasing
productivity.
On technological grounds, an adequate exchange rate policy can, thus, help the non
traditional tradeable sector of developing economies, particularly the ones related to export
manufactures. As Williamson (2003) argues in his “development approach” to exchange
rates, a competitive currency would provide stimulus for the development of a noncommodity dependent tradable sector, therefore avoiding Dutch disease problems and
premature deindustrialization (see Bresser-Pereira, 2009). By stimulating the production of
industrial manufactures to the world markets, a competitive exchange rate would help
developing countries to climb up the technological ladder. Learning by doing and cumulative
technological progress would depend heavily on the development of the manufacturing sector.
The argument is especially relevant for resource-rich countries. Appreciated currency levels
originating from high commodity exports would prevent the development of an industrial
sector with its related economies of scale and technological spill-overs. In this sense, by
avoiding overvaluations, exchange rate policy could work as an effective industrial policy
tool.
To sum up, following all those approaches, competitive exchange rates would avoid
savings displacement and contribute to capital accumulation by stimulating investment. On
technological grounds, it would encourage the development of the non traditional tradable
sector, helping countries go through structural change and climb up the technological ladder.
By increasing productivity and employment, the development of a dynamic non-traditional
tradable sector could also increase real wages, counteracting the negative effects of a weak
currency for workers.
3. Theoretical Aspects of Growth Regimes
The pioneering work of Robert Solow (1956) was, until the mid-1980s, the dominant
economic growth theory. The basic structure of the model focuses on the consideration of an
aggregate production function in which two factors (physical capital and labor) are combined
according to the existing technology to give rise to the production flow of the economy in a
given period of time. The hypothesis of diminishing returns on the accumulated factor has a
fundamental implication of zero growth in the long term. In the structure of this model, longterm growth is only possible thanks to exogenous technological progress, which is an
exogenous factor that increases the productivity of production factors in the long term.
The discussion around the problems of economic growth got a second wind with the
endogenous growth theories. These focus their analysis on the sources of growth, trying to
explain the long-term growth (technical progress) based on the behavior of agents, and
without having to necessarily resort to elements exogenous to the economic system. The
phenomenon of endogenous growth comes mainly from the presence of a mechanism that
neutralizes the diminishing marginal productivity of a cumulative factor essential to the
production. It’s in the endogenization of productivity growth of an accumulative production
factor that resides the great novelty of endogenous growth theories. These models differ
mainly by the sources of growth considered, namely the externalities associated with physical
capital, human capital, public infrastructure and technological innovation. 2
In these models, both exogenous and endogenous growths are determined entirely by
the supply side of the economy, being that the aggregate demand is irrelevant to explain it.
Following a different path, the Keynesian literature has developed models of growth led by
demand, in which aggregate demand determines the income both in nominal and real terms.
In this tradition, aggregate demand can affect product growth due to the possibility of
insufficient demand, and by the influence it exerts on the development of productive
resources, which in turn affects the potential output in the long term.
The Keynesian models also consider the influence of income distribution on growth
rates producing important insights that are not found in neoclassical macroeconomic models.
The Keynesian approach researches the effects that the changes in the wage share and profits
share in national income have on the different components of aggregate demand, especially
consumption and investment.
From the relationship between growth and income distribution it is possible to identify
patterns of economic growth. Thus, if aggregate demand responds positively to an increase in
the profits share, it is said then that the economy is characterized by an accumulation regime
based on profits or profit-led. In a situation in which aggregate demand responds negatively to
an increase in the profit share, the regime of economic growth can be characterized as wageled or based on wages.
Since the publication of the article by Bhaduri and Marglin (1990), which analyzes the
effects of a change in income distribution on aggregate demand, several studies have been
devoted to the empirical research of the relationship between distribution, accumulation and
aggregate demand, among which Bowles and Boyer (1995), Uemura (2000); Stockhammer
and Onaran (2004); Naastepad (2006), Hein and Vogel (2008); Stockhammer and Onaran and
Ederer (2009) stand out as well as others.
In order to analyze the effects of a change in income distribution on aggregate
demand, this section begins by defining the rate of profit, which, being the driving force of
capitalist economies, emerges as a key category in the analysis of the process of capital
accumulation; it can be defined as:3
2
See Romer (1986) for models of capital accumulation, Lucas (1988) for models of accumulation of human
capital, Rebelo (1991) for the AK models and the importance of domestic institutions to encourage the growth of
economies, See Abramovitz (1986).
3
There are several models that analyze the effects of a change in income distribution on demand, but this section
is based largely on the work of Uemura (2000) and Bowles and Boyer (1990, 1995). Bruno (2003) also (2003)
follows these articles as the basis for his analysis of growth regimes in Brazil between 1973 and 2000.
(1)
In this previous equations r is the profit rate; ∏ is the real profit; Y is the gross domestic
product; Yp is potential output; π is the profit share, K is the real capital stock; u is the
capacity utilization; σ is the ratio between potential output and the fixed capital stock; py is
the prices of output; pk is the price of capital; p is the ratio of product price and the capital
price; W is the real wage (and ws = W / Y is the wage share), w is the nominal average wage;
λ is the labor productivity which is equals to Y / N, where N is the level of employment.
In the equation that defines the profit rate, the idea that investment decisions are
driven by expectations of profit is implied. Investment spending is what enables profits and
therefore there is a macrodynamic interaction between the two, which determines the level of
capacity utilization, as suggested by Keynes and Kalecki.
As for wages, they are at the same time determinants of aggregate demand, of
production cost and an important tool in management strategies as well as discipline in the
relationship between capital and labor. Thus, even indirectly, the wage level will influence the
level of capacity utilization and the behavior of labor productivity.
The following macroeconomic relationship can be mobilized in order to clarify the
links between the dynamics of productivity (λ) real average salary (w) and wage share (ws)
and w the average real wage.
(2)
This is, considering that the primary distribution of income can be formulated as Y =
Π +W and W = N.w.
Among the factors that influence labor productivity (λ), three can be pointed out for
the purpose of this analysis: in the short term, capacity utilization (u) and the unemployment
rate (μ); in the long term, the rate of accumulation (I / K) has a positive effect on productivity
growth, expressing the existence of increasing returns on a dynamic scale as indicated by the
Kaldor-Verdoorn law (Kaldor, 1978). The latter represents the cumulative effects of growth,
when higher levels of demand pull productivity which in turn pulls the demand through the
income and acceleration effects on productive investment.
(3)
As a result, the rate of employment growth can be formulated as:
(4)
As for the rate of investment, it can be defined as follows:
(5)
In equation (5): I / K is the rate of accumulation, with I being the real rate of investment and
K capital stock, r is the rate of gross profit, which includes depreciation of capital stock, u is
the level of capacity utilization.
Thus, the rate of capital accumulation (I / K) is influenced by three main factors: a) the
coefficient (g0) that captures the influences of the macroeconomic environment on
investment decisions, b) the sensitivity of the accumulation rate to gross profit (gr) plays an
active role and varies with the changing expectations in the process of capital accumulation,
and c) the response of capital accumulation rate to the development of capacity utilization (gu)
may be perceived as an adjustment mechanism to adapt supply to oligopolistic conditions of
production.
Using a saving function based on Kaldor (1978), we have:
(6)
Where sw is the rate of savings from wages, W is the wage; sr is the savings rate from the
profits; Π is the amount of profits. Following the Kaldorian hypothesis, capitalist’s marginal
propensity to save is higher than that of workers, sr >sw.
Given the increasing of exports share in GDP, another important point to consider is
the portion of the demand made up by exports, and more specifically how exports are related
to the profit rate. The export function can be written as:
(7)
Being NEXk net exports normalized by K, e the exchange rate; π the profit share
With regard to estimates of export function, Hein and Vogel (2008) point out that
authors who include profit share and the exchange rate on export function, as do Uemura
(2000) and Ederer and Stockhammer (2009), suffer from theoretical inconsistency because the
effect of exchange rate on the international competitiveness of domestic producers is already
contained in the profit share. Highlighting that real exchange rate depreciation increases the
profit-share and reduces real wages.
A function of excess aggregate demand (ED) is obtained from the investment and
saving functions. When ED normalizes through nominal capital stock pkK, we have:
(8)
In equation (8), g is equal to I/K, G is government spending and T is tax revenues.
The function of excess aggregate demand (ED) can also be written as a function of
profit share and the level of capacity utilization (u):
(9)
The market-clearing condition can be written so as to match the investment demand to
aggregate savings or ED = 0. In this context, investment determines savings, where we can
obtain the following partial derivatives, fundamental for identifying the patterns of economic
growth:
(10)
The effect of the changes in profit share on the capacity utilization is determined by
total differentiation of the balance condition in the product market. Thus we have:
(11)
Following Bowles and Boyer (1995) and Uemura (2000) ED = 0 is the Keynesian
stability condition. If ED> 0, the growth regime is considered "profit-led" in the sense that an
increase in the profit share leads to an increase in the excess of aggregate demand because of
the high sensitivity of investment to profit rate. Under these conditions an increase in the
profit share in the product would lead to an increased rate of accumulation (I/K). On the other
hand, if ED <0, the growth regime is "wage-led." In this case, an increase in the wage share
(ws) would provoke an increase in excess demand and then in the rate of accumulation, due to
the high sensitivity of investment to aggregate consumption.
As for the role of the external sector in the classification of growth regimes, Hein and
Vogel (2008), for example, analyze the relationship between income distribution and
economic growth in Austria, France, Germany, Holland, USA and UK, from 1960 to 2005.
The results found by the authors suggest that in France, Germany, USA and the UK the
growth regime is wage-led, while in Austria and the Netherlands it is profit-led. In the case of
Austria, domestically speaking, the economy has a wage led growth regime, but when
including the external sector the growth regime becomes profit-led. The authors conclude,
based on this result, that a wage led growth regime becomes less likely when one considers
the effects of distribution on the external sector.
Blecker (2010) also shows that countries that are highly vulnerable to international
competition and whose exports and imports are relatively sensitive to price are less likely to
follow regimes which are strongly wage-led, and are more likely to have profit-led growth
regimes, when compared to closed economies (or open without trade volume which are highly
insensitive to price). The author also discusses that the relationship between distribution and
growth varies according to the source of a change in income distribution in an open economy.
This may have important implications for the conventional analysis of the effects of a
depreciation of the exchange rate on output and trade balance. More specifically, if an
economy is wage-led, depreciation in the exchange rate is likely to have contractionary effects
on output, though it may be effective in improving the trade balance. On the other hand, in a
regime where the economy has profit-led growth, depreciation in the exchange rate tends to
have expansionary effects over output. However, it is less effective for improving the trade
balance.
4. Economic Growth Regime of the Brazilian Economy
4.1 The trends of Key Macroeconomic Variables in Brazil
The analysis of the dynamics of some macroeconomic variables such as real GDP
growth, profit rate, capital accumulation, wage share and level of capacity utilization provide
an overview of Brazil's economic growth and allows us to infer some aspects about the
economic growth regime in Brazil.
Figure 1: Trend of GDP growth rate in Brazil after 1960.
Source: World Bank national accounts data.
It is possible to derive that the Brazilian economy records high growth rates in the
corresponding period of its "Economic Miracle" (1967-1973). But in the 1980 and 1990 it
goes through periods of irregular growth, alternating between positive and negative GDP
growth rates. From the 2000s, especially after 2004, the Brazilian economy started to show
positive economic growth rates, but lower than those recorded in the 1970s.
The period of high economic growth rates is also characterized by high rates of capital
accumulation and profit rate. Thus, during the 1970s, the observation of these series reveals
that the rate of investment was driven by increases in the profit rate, which may be indicative
of a profit led growth regime, as shown in Figure 2. The capital accumulation rate and profit
rate even share a common trend of evolution for the period of 1966-1993 and remain clearly
in positive correlation. There is, however, a growth period (1966-1975) and then a drop in
these variables together, which express the unfolding crisis in the regime during the "miracle
growth" with the structural and cyclical problems over the decade of 1980.
Figure 2 – Average profit rate and accumulation rate (1966-2008)
Source: IBGE e Marquetti (1998).
From 1994, the pattern of evolution is very different, highlighting two other phases: a
phase of relative stagnation, when profit rate and accumulation rate disconnect. The first
variable maintains itself in a growth path while the second remains almost stagnant. Just as a
direct macroeconomic result, economic growth had become very unstable and under very low
rates, relative to the historical average. The third and last phase reveals that these two
variables go back to showing expansion paths, just as the Brazilian economy begins to grow
again. But, in fact, it was the rate of capital accumulation which grew in a fast manner again
(average 7.8% annually between 2004-2008), because the profit rate had been growing since
1999, with an average annual growth of 1.8%.
It is interesting to perform a more detailed analysis of what happens in the recent
period of the Brazilian economy. As of 1994, as shown in Figure 3, the rate of capital
accumulation grows again, just when the profit rate seems to be the main determinant of
capital accumulation rate, while (at the same time that) the level of capacity utilization seems
to not have had great influence. It is noteworthy that the profit rate used here is the corporate
profit rate, in other words, that which is calculated on the corporate profit rate, which is what
really matters for investment decision. This variable goes up during the period of economic
growth (2004-2009) relatively to the variable used as proxy for the cost of use of productive
capital.
Figure 3 – Profit rate and its components
Source: IPEADATA
Note: g is the accumulation rate, r is the profit rate, f is de the cost of productive capital and u is the level of
capacity utilization.
Another interesting point is that between 1991 and 2003, corporate profit rates and this
proxy go together, in such a way that companies can not profit in a way that justifies the
allocation of productive resources, hence the trend towards a semi-stagnation as observed.
Figure 4 shows the behavior of wage share in Brazil since the 1960s, from which one
can also infer profit share behavior which is given by a minus for wage share. One can see
that the 1960s and 1970s are characterized by a reduction in the wage share. In the 1980s
wage share gains ground but soon after enters a downward trend.
Figure 4: Wage Share
Source: IBGE e Marquetti (1998).
Figure 5 presents more recent data of the wage share evolution in Brazil and a few
more indicators of the labor market. According to the Figure, we can see a growth in wage
share from 2006, which is caused mainly by growth in employment and real wages.
Figure 5 - Macroeconomic Determinants of Share of Wages in GDP
Source: IPEADATA e IBGE
Note: ws = wage share; w = nominal wage; GDP = growth rate; n = employment growth rate ad PR = labor
productivity.
4.2 Estimates of Growth Regime of the Brazilian Economy
In this article the classification of growth regimes is based on the theoretical model
discussed in section 3 of the article and performed for the period 2002 to 2008, with quarterly
data. 4
Previous works, such as Bruno’s (2003), have already rated the regime of economic
growth in Brazil between 1973 and 2000, using the same methodology employed in this
research. The results found by the author suggest that between 1973 and 1979 the growth
pattern of the Brazilian economy was the profit-led type, while the period from 1981 to 2000
had wage-led growth pattern.
The classification of growth regimes for the recent period can be done by estimating
savings investment functions and net exports (Table 1).
Table 1 – Estimated Equations (2002-2008)
Investiment function:
Dependent variable G0
Gr
Gu
R2
I/K
-7.68
0.31
1.30
0.55
t test
(-1.97)
(1.96)
(1.59)
Prob.
(0.063)
7(0.063)
(0.12)
Savings Function:
sw
sr
R2
S
0.42
1.46
0.79
t test
1.77
4.19
Prob.
(0.08)
(0.00)
Dependent variable
Export Funcion 1:
Dependent variable nx0
nx
nxu
nxe
R2
NEXk
-2.90
1.31
0.48
0.40
0.63
t test
(1.07)
(3.62)
(0.96)
(3.26)
Prob
(0.29)
(0.00)
(0.34)
(0.00)
4
The chosen period is after the change in the methodology for calculating the series of employment and before
the financial crisis, whose effects began to be felt in Brazil in the last quarter of 2008.
Export Funcion 2:
Dependent variable nx0
nx
nxu
R2
NEX
4.88
1.45
-0.85
0.46
t test
(3.22)
(3.40)
(-2.43)
Prob
(0.00)
(0.00)
(0.02)
Considering the model presented in the theoretical section, the rule for the decision of
classifying the internal growth regime of a country is:
If: – (sr – sw – gr) > 0  profit-led
If: – (sr – sw – gr) < 0  wage-led
According to the decision rule and without considering the external sector we have:
– (1.46 – 0.31 – 0.42) = – 0.63
This implies a wage-led system of internal growth.
However, when considering the function of export we have:
– (1.46 – 0.31 – 0.42) = – 0.63 + 1.31= 0.68  profit-led
Or,
– (1.46 – 0.31 – 0.42) = – 0.63 + 1.45= 0.82  profit-led
Therefore, when including the participation of the external sector, the growth regime
of the Brazilian economy can be classified as profit-led, which is consistent with the idea that
a wage-led growth regime is less likely when considering the effects of distribution on the
external sector. These results were reported by Hein and Vogel (2008) and established by
Blecker (2010).
The body of evidence presented, though fairly strong, requires further refinement.
Therefore, one must be cautious about the findings presented: because of the relevance of the
implications derived from them, further research is still needed.
6. Final Thoughts
This paper provided theoretical elements to analyze the relation between real exchange
rates and economic development. Our main hypothesis is that competitive currencies
contribute to the existence and maintenance of a dynamic manufacturing sector in the
economy. This, in turn, brings about higher growth rates in the long run, given the existence
of increasing returns in the industrial sector, and its importance in generating technological
change and increasing productivity in the overall economy.
The empirical results revealed on the one hand that, internally speaking, the Brazilian
economy follows a wage-led growth pattern, in such a way that aggregate demand responds
positively to an increase in the wages share. On the other hand, when considering the
participation of the external sector, such as the determination of net exports, the accumulation
regime can be established as a profit-led. This result, according to international empirical
evidence, becomes increasingly characteristic of internationalized economies. Thus, when
considering investment and exports, aggregate demand responds positively to an increase in
the profits share. Therefore we can say that the economy is characterized by an accumulation
regime based on profits, in other words profit-led.
This conclusion has important implications for the analysis of exchange rate policy
and the possible effects of a more depreciated exchange rate in the Brazilian economy. A
greater exchange rate has positive effects on investment profitability, given the
characterization of the Brazilian economy as profit-led. This would imply greater capital
accumulation, savings, exports and higher demand. Moreover, stimulation of aggregate
demand via the exchange rate could lead the Brazilian economy to a macro-pattern of growth
more sustainable and less subject to problems of external constraint, pulled by more
investment and less consumption, which would lead to higher economic growth rates, as in
China and other Asian countries like Korea, Thailand and Malaysia.
Therefore, the main policy recommendation derived from this study is that developing
countries may achieve higher per capita growth rates and find a stairway to economic
development by expanding their industrial sector and avoiding de-industrialization, and that
competitive currency policies may be an useful instrument towards that goal.
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TABLE 1 – VARIABLES
Variable
Comment
Source
Capital stock
Stock of fixed productive capital. This corresponds to the sum of
IPEADATA
(K)
stock for machinery and equipment in non-residential constructions.
Gross profit rate
Corresponds to the mass of macroeconomic gross profit divided by IBGE and
(r)
total fixed productive capital stock (K) of the Brazilian economy.
IPEADATA
The gross income was calculated by the difference between GDP
and wages. The latter included the remuneration of employees and
self-employed workers and social security contributions.
Rate of
Corresponds to the ratio between gross fixed capital formation and IPEADATA e
accumulation of
stock of productive fixed capital (K) available to the Brazilian IBGE
fixed productive economy.
capital (g)
Level of
Corresponds to the seasonally adjusted series produced by the
installed
National Industry Confederation (CNI).
IPEADATA
capacity
utilization (u)
Savings (S)
Private Savings
IPEADATA
Investment (I)
Corresponds to the ratio between gross fixed capital and GDP
IPEADATA
Real effective
Real effective exchange rate
IPEADATA
Trade Balance
IPEADATA
Total Wages
Corresponds to the sum of income of employees, revenue of
IBGE
(W)
autonomous workers plus social contributions.
Total Profits (L)
Corresponds to non-agricultural GDP minus wages (W).
IBGE
Profit share ()
Corresponds to profit shares (L) in GPD
IBGE
exchange rate
(e)
Net Exports
(NEX)