In this study David G. Greene has attempted to evaluate the performance of three major Latin American integrated steel mills—the Companhia Siderúrgica Nacional (Volta Redonda) in Brazil, the Compañía de Acero del Pacífico (Huachipato) in Chile, and Altos Hornos de México, S.A.—from the time when their operations began (1947, 1951, and 1944 respectively) through the late fifties.
He finds that the ratios for the steel firms have fallen substantially since their initial years of operation. This was to be expected because a huge enterprise like a steel firm will take a few years to reach output levels close to capacity. Nevertheless, they were still substantially higher than the incremental capital-output ratios of the manufacturing sectors and of the economy as a whole in the late fifties in each of the countries. This is an indication that “more often than not, there were investments being made in manufacturing which had greater output increments associated with them than were found in the case of the investment in steel” (p. 91).
In one of the final chapters the author turns to a comparison of domestic steel prices in each of the countries with the price of imported U.S. steel. The latter was estimated by using the prices of steel products produced at Sparrows Point plus transport costs to ports near the steel consuming centers in each of the three countries. The steel prices of the three Latin American firms were found to be substantially higher than the price of imported steel, even after a decade of steel production. Greene takes this as additional evidence that investment in steel in Brazil, Chile, and Mexico was not an economically wise move and that therefore in the future “the lending policies of international development agencies, particularly the World Bank and the Export-Import Bank, should be re-evaluated” (p. 92).
Although Greene’s computations of capital-output ratios were an interesting exercise, I doubt their value in leading him to such rash conclusions. His judgment based on these computations is open to even greater doubts when one considers a number of examples which reveal the author’s lack of acquaintance in depth with the economies of the three countries and with steel technology. For example, Greene maintains that the Brazilian government took the first steps toward the expansion of the steel industry in early 1939. Actually the efforts towards creating a large integrated, coke-based steel industry in Brazil go back to the earlier part of the century, and the government began to get involved in a more active promotion during the early thirties.
In another place Greene comments on the fact that Volta Redonda operated for many years below capacity, and attributes this mainly to supply problems, insufficient rolling stock, etc. He never makes it clear that capacity is a hard concept to define for a steel mill. For example, the rolling mill section of a steel firm represents the most lumpy part of the investment. Thus for a long time a firm might have its blast furnace and steel shop work close to capacity, while rolling mills are operating substantially below capacity. This makes the capacity of any firm quite difficult to measure and makes it even trickier to estimate a meaningful capital-output ratio.
Greene’s analysis might have gained in perspective had he compared some of his ratios to those in developed countries. Is the capitaloutput ratio of U.S. or European steel firms also higher than the incremental ratios to be found in the manufacturing sector or in the economy as a whole ? Also, is it relevant to compare the ratio for steel with the ratio for the existing structure of the manufacturing sector ? Or should one not compare it to the ratios of sectors for which there is a potential market?
