Market Power and State-Owned...

Cristiane Alkmin Junqueira Schmidt

[email protected]

Commissioner

10/Nov/2017

Brasília – BRICS meeting 111/17/2017

Market Power and State-Owned

Enterprises

What is State Capitalism? Degree of intervention

11/17/2017 Cristiane Alkmin J. Schmidt 2

Source: Mussachio, Aldo e Lazzarini, Sergio. Reinventing state capitalism: Leviathan in business, Brasil and beyond. Pg. 265.

Ex: Eletrobras

Ex: BRF / OiEx: Post Office

Ex: Embratel

New Nationalism: Crony capitalism & State Capitalism, all financed by the BNDES: did not work!!

Economic system: property rights & rule of law11/17/2017 Cristiane Alkmin J. Schmidt 3

Is Capitalism a Problem itself? Is Capitalism the Problem of Brazil?Is State Capitalism the Problem of Brazil?

5 messages1. Brazil’s government has always been too paternalist, too protectionist we need a smaller State to focus on the important

issues (national security, education and health), we need to open the economy, we need more investment in K & H, we need less SOE’s and better regulation to deal with market failures - in order to foster productivity;

2. The so called “public interest policies” has been towards “industry policies”, not towards “competition policies” we need to stop financing the rich entrepreneurs with subsidies, we need to stop “vertical industrial policy” to a horizontal one and weneed to impose more competition policies - in order to foster productivity;

3. There is a huge confusion between pro-market and pro-business policies we need more pro-market policies in order to lower the so called “Brazilian cost” - in order to foster productivity;

4. Brazil faced the “New Nationalism”, specially after 2007: crony capitalism & SOE’s. Entrepreneurs should not have to came to Brasilia to get their work done and politicians should be at the Parliament, not managing SOE’s. So, we need to privatize allSOE’s. It is not only about efficiency, it is also about corruption terrible consequences for Brazilian productivity, growth and income distribution;

5. 2018: Brazil is “screaming” for a change we need well-designed macro and micro economic policies to foster productivity. The agenda is gigantic, but it is feasible. We have started the change with a new economic team (with Temer), but it is just the beginning. The Parliament has a crucial role. Next President as well.


Brazil at a glance…Why Nations fail? Acemoglu & Robinson1990 a 2007: almost 20 years of relevant institutional reforms positive consequences to

Brazil (plant and, then, harvest)1

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Cardoso appointed

minister of finance

Cardoso elected

president

Privatization and

the Banking

system clean up

(privatization)

Asian

crisis

Forced devaluation

Fiscal

Responsibility

Law

Electoral campaign

uncertainty

Pre-salt discovery

2014 World Cup host

announcement

Real Plan

&

Competition Law

(8.884)Russian

crisis

Cardoso reelected

MACRO

TRIPOD:

Floating

exchange rate

regime,

Inflation

targeting

and

Fiscal adjustment

(primary surplus

by law)

Electricity

shortage!

Lula elected

president

Palocci´s macro

policies

Credit measures

Payroll loans

Lula reelected

Roussef elected

president

“Mensalão” trial

2016 Olympic Games host

announcement

Brazil

becomes

investment

grade

Source: Werneck, 2008

Electricity

shortage!

19

90

Trade

liberalization

11/17/2017 5

Brazil has followed the world’s trend

80’s: after 3 E.P., Plano Real succeed! 1994!

Since 2002…. Since 2002/03…

Nominal Short Run Interest Rate (Selic)

Monetary stabilization: Inflation at 6%. Unemployment at 5%. Wealth and consumption going up. Nominal interest rate and Gov. total debt going down.

Since 1999….

Less vulnerable: Brazilian risk and External total debt going down. Balance of payment getting better (more X and M). International Reserves going up.

Better social indicators Source: CPS/FGV and PNAD/ IBGE

4,5

5,0

5,5

6,0

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7,0

7,5

1992 1995 1998 2001 2004 2007 2010

30

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60

1992 1995 1998 2001 2004 2007 2010 4

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18

1992 1996 1999 2003 2006 2009

Gini Index Years of Schooling (population over 25)

Miserable (% of population)Middle Class ( % of population)

0,52

0,53

0,54

0,55

0,56

0,57

0,58

0,59

0,60

0,61

0,62

1992 1995 1998 2001 2004 2007 2010

2012-2014….CCC Model was getting exhausted!!Credit from 30% to 60% of the GDP, but directed credit was growing faster than free

credit. Boom of Commodities was getting over. Consumption >> Supply: deindustrialization. Sectorial subsidies. Source: BCB, IBGE, Ipeadata

20%

30%

40%

50%

60%

70%

80%

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.03

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.03

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.06

20

14

.09

Credit Share: Free and Directed

Free Credit

Directed Credit

0%

10%

20%

30%

40%

50%

60%

70%

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07

.04

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.07

20

14

.10

Credit (%GDP)Free Credit

Directed Credit

Total

Nov 12, 2009 Set 28, 20134 years….

The perception … the front cover of the Economist


State Capitalism and the role of Development Banks• BNDES

• Loans were given to companies that could get loans from the private sector. This distorts: (1) the BNDES’s main objective and (2) the LR private financial market;

• Loans should be focused only to industries in which there had credit constraints or had positive externality to society (infrastructure projects and renewable energy);

• Results: no effect on economic activity or on investments;

• Robin Hood multiple by (-1)!!!!

• Therefore: Subsidized loans transferred income from the State to large firms, without any consistent effect in terms of investment or profitability or market valuation.


15.49

18.54

14.00

15.00

16.00

17.00

18.00

19.00

20.00

21.00

22.00

1996T1

1996T4

1997T3

1998T2

1999T1

1999T4

2000T3

2001T2

2002T1

2002T4

2003T3

2004T2

2005T1

2005T4

2006T3

2007T2

2008T1

2008T4

2009T3

2010T2

2011T1

2011T4

2012T3

2013T2

2014T1

2014T4

2015T3

2016T2

2017T1

NominalInvestmentRate- (%PIB)- Source:IBGE

The Impact of the New Nationalism in BrazilThe National Champions and beyond

BNDES – Total Disbursement

BNDES (2010-2013) – loaned more (US$83bi/y) than TWB (US$50-60bi/y)

190.000

4x


Treasure funding BNDES – 2001-2015

567,43

0,91% 0,52%

9,57%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

-

100,00

200,00

300,00

400,00

500,00

600,00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

SaldoR$bilhões %doPIB

Total Failure of the National Champions Policy: a complete disaster! Some examples.

1. National Champions – this policy was implemented especially from 2008 to 2014, giving market power to SOEs;

2. Oi, JBS (from J&F), EBX and LBR were largely financed by BNDES (which was largely financed also by the Treasure – I mean, by the Brazilian tax payers);

3. Oi (ex-Telemar, 2007), the biggest fixed telecom company in Brazil, is in “judicial organization” since June/2016 (recuperação judicial). Biggest and most complex judicial organization ever in Brazil. Too big to fail. Overall debt = R$ 65,4bi (3,2bi to BNDES);

1. Telemar operated at: N, NE, SE (except SP State - Telefonica);

2. In 2008, M&A with Brasil Telecom also CO, S.

3. Then came Portugal Telecom, with a lot of scandals;4. BNDES: R$ 2,5bi in 2008 and then R$ 5,4bi in 2013;

5. Moreover, pension funds + Banco do Brasil also financed.

4. JBS, the biggest meet processor in the world, was implicated at “Car Wash” investigation:1. BNDES: R$ 12,8bi in from 2002 to 2013;

2. FI – FGTS (CEF is the manager) also financed.

5. EBX (holding) had OGX (oil and gas) and OSX (shipyard) asked for “judicial organization” in 2013;1. BNDES: R$10,4bi in loans and equity.

6. LBR (Parmalat and Poços de Caldas) asked for “judicial organization” in 2013.



Another example of Government interventionNow, Indirectly.

In this case, gov. has 40% of Vale!!SOE and market power!!

Luigi Zingales: Towards a Political Theory of the Firm (2017)Saving Capitalism from the Capitalists (2003)

A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (2012)Sérgio Lazzarini – Capitalismo de Laços (Crony Capitalism)

Economic power and political power can be a problem = giving more market power to SOE’s

• The idea is that Economic and Political power reinforce each other (Medici vicious circle);• In that sense, huge concentrations (national champions) normally result in an unaccountable

economic power, that gives a firm an expressive political power, that gives the firm moreeconomic power, and so on…

• Another translation to this worry is named “crony capitalism”, when politicians and the privatesector need one another to maintain their market power;

• The result is that the entrepreneur has a greater ability to influence public policies;• And that is the reason they need to go to Brasília;• Moreover, it is an open space for corruption;• In Brazil, the State plays a huge role in the private sector by the BNDESpar and by SOE’s pension

funds (that have equity on Private Companies), giving them a lot of market power;• Moreover, in Brazil, the private sector finance candidates, what is a questionable action.


The Impact of the New Nationalism in Brazil, as a part of a bigger macroeconomic policy, called

The “New Macroeconomic Matrix” (2007-2016)

Worst recession ever in Brazil!

2Q_2014 to 4Q_201611 Quarters-8,6% overall

2nd worst9 Quarters (1981-1983)

-8,5%

3nd worst11 Quarters (1989-1992)

-7,7%


The Impact of the New Nationalism2016: Highest Inflation since 2003 and GDP back to 2011/2012

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2014.12

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2015.10

2016.03

2016.08

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2017.06

Inflation(IPCA,%)- Source:IBGE

2011,2,975

2012,3,088

2016,3,141

1500

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2100

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Brasil- GDP(PPP)- US$millionSource:TheWorldBank,WorldDevelopmentIndicators(WDI)


The Impact of the New Nationalism13% of unemployment and deindustrialization


TPF Brazil (1960-2006): back to the same level

0

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1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

TFP

(1

96

0=

10

0)

Source: Pedro Cavalcanti

TPF China (1960-2006): 3x more than in 1960

1960 19602006 2006

The Impact of the New NationalismProductivity back to 1960


CDS (bps) - 5Y Brazil (2012-2017)

500,5

179,1

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2/1

7

Real Interest Rate - NTN-B (2022)2012-2017

7,81

4,47

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The Impact of the New NationalismThe Growth of the Brazilian risk and the Real Interest Rate

2015/2016 2015/2016

State Capitalism in Brazil• 1850 - 1930: First stage of state capitalism

• Subsidies to support specific industries. Guarantees and protection against failure;

• Nationalization of railways, shipping, etc.

• 1930-1955 (Getúlio Vargas’s Presidency): Brazilian state as an entrepreneur

• Variety of sectors as a founder of major enterprises: CSN, CVRD, FNM, Chesf, Cofavi, Acesita, Petrobras, etc.

• 1952: BNDES was created - In the beginning, major financing (or lending) role mainly to infrastructure;

• BNDES always had a crucial role in the Brazilian economic history.

• 1970 - 1980: The peak of state capitalism. Consolidation of Brazilian state as an entrepreneur

• Largest expansion in the number of SOE (Industrial; water and sewage; energy; telecom; etc);

• Over 40% of gross capital formation came from SOEs;

• Until 1979: government did not monitor these companies’ cash flows. Brazilian SOE’s were anonymous;

• Few private companies among the top 100 companies of the country.


The State Capitalism in Brazil• 1980 - 1990: Crisis. The so called “the lost decade”. The need to privatize (fiscal problem)

• Large debt – internal and, especially, external;

• Necessity of shrinking state’s expenses and liabilities.

• 1982: BNDES PAR was created as a new form of minority state ownership

• New business model: BNDES is not only a financing institution anymore;

• BNDES development instruments of control by: (i) finance, (ii) purchase equity and (iii) convert debt.

• BNDESPAR was created to do (ii) and (iii) - manage holdings:

• Direct: when it participates as a direct shareholder of the target firm;

• Indirect: when it participates in an intermediate firm that in turn participates of the target firm.

• 1990-2002: Privatization – 165 firms

• Privatization process started in 1990, but stopped when Lula became President, in 2002.


The State Capitalism in Brazil• Stages of Brazilian Privatization Program

• First State: 1981-1989: fiscal readjustment context. Small firms, easy target. US$ 700M

• Second Stage: 1990-1994: National Privatization Program. US$ 12 bi

• BNDES in charge of the desinvesture process. Profitable firms. Ex: Usiminas, CSN, Embraer.

• Third Stage: 1994-2002. US$ 78 bi

• Sold or transferred control of public services – electricity, telecommunication and some financial firms.

• Concession of Ports, Transportation, Roads, Sanitation, etc.

• Ex: Vale do Rio Doce, Eletrobras (some distributors) and Telebras.

• The role played by BNDES during privatization

• Operation agent of privatization transactions;

• Provided financing for buyers in some transactions;

• Purchased minority stakes in privatized firms through BNDES PAR;

• Operated as a holding company for the government.


0

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4.000

6.000

8.000

10.000

12.000

14.000

16.000

18.000

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19

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20

04

Y/N Y/N simulado

Brazil and Korea: investment (K)

Source: Pedro Cavalcanti

Brazil would have been 18% richer Brazil would have been 40% richer

Brazil and Korea: education (H)

Agenda: Investment in K and HIf Brazil would have invested in K and in H with the same rate

as South Korea did since 1950, ….

EducationPhysical Capital


Jan/93

2,5

1,0

Source: Pedro Cavalcanti After trade liberalization in the 90’s, Brazil faced the fastest growth after the post-war era

Agenda: Open the EconomyEmpirical evidence: there is a + relation between

productivity and trade openness


Taxes (% GDP, 2016)

36,0%

32,7%

26,8%

21,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

EconomiasDesenvolvidas

Brasil EconomiaEmergentes

América Latinae Caribe

Agenda: Lower the ”Brazilian Cost”Taxes should go down, but we have a HUGE deficit problem

Gov. Primary Surplus (% GDP, 1991-2020) with gradual adjustment

-0,25%

-2,48%

-2,40%

-2,23%

-1,80%

-0,78%

-3,00%

-2,00%

-1,00%

0,00%

1,00%

2,00%

3,00%

4,00%

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Source: BACEN e Tesouro NacionalSource: IMF and OCDE

Gross Public Debt - % do PIB 2016 (FMI)

106,50%

47,30%

78,30%

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

120,00%

EconomiasAvançadas

EconomicasEmergentes

Brasil

OBS: metodologia do FMI inclui títulos públicos na carteira do Banco Central

59,21

51,54

73,76

40

45

50

55

60

65

70

75

80

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017/JUL

Fonte: Banco Central

Gross Public Debt - % do PIB – 2008-2017/Jul

Agenda: There is a need to lower the debtGross Public Debt should go down, but we need to pass some reforms

Gasto Social: Brasil e Países Desenvolvidos (2014-2015) - % PIB

Alemanha; 27,3%

Reino Unido; 24,0%

França; 33,7%

Canadá; 21,3%

Brasil; 24,5%

BolsaFamilia,0,50%

Seg.DesempregoeAbono,0,80%

Previdência+LOAS,12,40%Educação

Pública,6%

SaúdePública,4,80%

Fonte: Tesouro Nacional e Banco Mundial

Políticas Sociais no Brasil (2014/2015) = 24,5% do PIB

Agenda: There is a need for a pension reform to keep the social programsGross Public Debt should go down, so reforms are needed

Fonte: OCDE

Conclusion• Brazil has always been too protectionist – vertical industrial policies;

• SOEs always existed in Brazil (with different degrees of intervention) and they have been related to have a lot

of market power (economically and politically speaking);

• Brazil had “planted” good institutional changes between 1990 to 2007, so it could have “harvested a very

good crop” between 2004 to 2014;

• The CCC model was over in 2014. The “New Macro Matrix” was implemented: fostering demand. The Micro

policy was implemented: national champions. No relevant institutional reform was made;

• All those policies resulted in a 3Y recession, 13% unemployment, 10% inflation and a fiscal crises;

• Future? There is a need to foster productivity, designing well-planed macro and micro economic policies.

Competition can play a crucial role! There is a need to revert the market power given to SOEs;

• Among those policies, Brazil should open its economy, do an aggressive privatization program (with all SOEs)

and focus at: (1) “taking always the rocks” for the private sector and (2) giving opportunity to the ones that

never had (specially regarding education, health and security ). 39

Market Power and State-Owned...

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