Toward the crisis: a Kaleckian-Keynesian interpretation of the instability of growth and capital accumulation in Brazil

Abstract

This article examines theoretically and empirically the instability of Brazilian investment and growth for the past couple of decades, highlighting the evolution that led to the current crisis. A theoretical discussion highlights the importance of Kaleckian and Keynesian approaches in understanding the semi-stagnation of the Brazilian economy since the 1990s. Empirical evidence shows that investment has increased until 2013, but not to the point of getting the economy back on the track of high growth rates and higher investment-GDP ratios. The econometric findings are compatible with the theoretical underpinnings of investment activity based on Keynes and Kalecki and suggest the existence of room for activist policies in Brazil in order to stimulate economic activity.

Keywords:

• Investment
• Brazilian economy
• Kalecki
• Keynes
• VEC Models

JEL Classification:

• E12
• E22
• O54

Acknowledgement

The authors thank the anonymous referees for comments and suggestions. All remaining errors are the authors’ responsibility.

Notes

1. Between July 1994, when the Real was created as a legal tender currency, and December 2014, the average inflation rate was 7.9% per year. Authors’ calculations based on statistical information from IPEADATA (2016).

2. In the 1950s, 1960s, 1970s, 1980s, 1990s and 2000s, the average annual growth rates of GDP were, respectively, 7.1, 6.1, 8.8, 3.0, 1.9 and 3.4%. Authors’ calculations based on statistical information from IBGE (2016).

3. Authors’ calculations based on Table A1, in the annex.

4. Based on both theoretical models, this section shows that the main variables that affect investment and should be dealt with in an empirical analysis are capitalist savings or retained profits, changes in profits, output growth, technical progress, expectations, credit (or debt) and interest rates.

5. We must emphasize that the concepts of ‘short’ and ‘long’ term used by Kalecki are different from the Marshallian concepts. The separation by Kalecki of short and long term seems to be related to the difference between an analysis that ignores the factors that influence long-term behavior (therefore, an analysis of short term considers only cyclical fluctuations in a static economy), and a long-term analysis that takes into account the factors that influence economic growth.

6. For additional details, see, for instance, Arestis (1996), Sawyer (1985), Duménil and Lévy (2012), Lavoie (2014), and Skott (2012). Arestis (1996) highlights the importance of profits and interest rates for investment in Kalecki’s view. Sawyer (1985) presents the main features of the different Kaleckian theories of investment, business cycles, and growth. Duménil and Lévy (2012) and Lavoie (2014) develop formal models for Kaleckian investment theory, adding mathematical rigor to the analysis, and confirming its theoretical relevance. Finally, Skott (2012) presents a few shortcomings in the Kaleckian theory. He challenges a few behavioral aspects of Post-Kaleckian investment theories (more than Kalecki’s proper), mainly the ones related to the role of capacity utilization. He also criticizes the lack of empirical support for investiment functions with specific results regarding capacity utilization.

7. Thus, for Kalecki (1969, 91) ‘the variety in the size of enterprises in the same industry at a given time can be easily explained in terms of differences in entrepreneurial capital’. Obviously, this does not answer the question of why the amount of entrepreneurial capital differs between firms in the same sector. In other words, why do some firms have a larger entrepreneurial capital than others?

8. He assumes that a/(1+c) < 1.

9. It should be noted that, in Kalecki’s theory, the trend for decreasing intensity of ‘development factors’ implies the decrease of profit rate and an increase of idle capacity level. However, it is important to highlight that the direction of causality is different from that proposed by Marx. For Marx, it is the decreasing trend of profit rate that results from technical progress (or, in Kalecki’s terminology, from the increase of ‘development factors intensity’), which, in turn, determines the deceleration of the capital accumulation process (and therefore of economic growth) and ultimately causes the periodical crisis of the capitalist system.

10. Keynes (2007, Chapter 17) shows that there is an insufficiency of effective demand – and, therefore, of investment – due to the fact that individuals allocate income in the form of non-reproducible wealth instead of allocating it for the acquisition of goods produced by work.

11. For additional details, see Studart (1993).

12. For a specific discussion about the data on investment in Brazil, see Santos et al. (2015).

13. Another study on the determinants of investment in Brazil, but focusing on private investment for the period 1970–2005, with a different econometric methodology, is provided by Luporini and Alves (2010). The use of variables in levels in our model shows the limits of statistics and econometrics to accommodate more complex macroeconomic models that incorporate changes in the variables considered by capitalists in their decisions to invest.

14. This study does not split the GFCF into residential fixed investment and business fixed investment, which would allow us to isolate and focus on the capitalists’ accumulation decisions. For a detailed study segregating investment by sectors, see Bielschowsky, Squeff, and Vasconcellos (2015).

15. The institute responsible for supplying the series, IBGE, uses two different methodologies for calculating gross operational surplus. There is therefore one series with data from 1990 to 2009 and another one with data ranging from 2000 to 2013. We used the first one for the period 1994–2009 and the second one for the period 2010–2013, since the difference between the series is not large. Profits were adjusted based on the GDP deflator for year 2013 prices, the GFCF was corrected by the deflator for prices of capital goods, and the real value of capital stock at 2013 prices is supplied directly by IPEADATA (2016).

16. According to Davidson (1994), investment (or the maximum amount of capital goods desired by the firms) depends on the market price of capital goods, quasi-rent expectations, interest rates, and the number of firms in the economy. Analytically, D_I = f(p_I, i, α, β), where p_I = market price, i = quasi-rent expectations, α = interest rate and β = number of firms, where f_pI < 0, f_i > 0, f_α < 0 and f_β > 0.

17. IPEADATA (2016) provides data about the confidence index since 1999, which increases the difficulty of estimation by reducing the degrees of freedom. Moreover, the way the index is constructed makes the variable stationary because it fluctuates around a reference point. Anyway, it is unclear to what extent this type of indicator captures expectations as theorized by Keynes, since radical Keynesian uncertainty cannot be measured, as discussed above.

18. The specific statistics of trace and eigenvalues are not reported here. The complete set of auxiliary statistics can be obtained from the authors upon request.

19. The model assumes a long-term stationary equilibrium relationship (cointegration) between non-stationary variables, with the trajectory of the variables having corrections or adjustments in the short term. The discussion regarding the extent to which this traditional concept of equilibrium and adjustment process can be consistently applied to the theory of Kalecki and Keynes is beyond the scope of this work.