Cristiane Alkmin Junqueira Schmidt
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.
11/17/2017 Cristiane Alkmin J. Schmidt 4
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
99
3
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
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
6,5
7,0
7,5
1992 1995 1998 2001 2004 2007 2010
30
40
50
60
1992 1995 1998 2001 2004 2007 2010 4
6
8
10
12
14
16
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%
20
07
.03
20
07
.06
20
07
.09
20
07
.12
20
08
.03
20
08
.06
20
08
.09
20
08
.12
20
09
.03
20
09
.06
20
09
.09
20
09
.12
20
10
.03
20
10
.06
20
10
.09
20
10
.12
20
11
.03
20
11
.06
20
11
.09
20
11
.12
20
12
.03
20
12
.06
20
12
.09
20
12
.12
20
13
.03
20
13
.06
20
13
.09
20
13
.12
20
14
.03
20
14
.06
20
14
.09
Credit Share: Free and Directed
Free Credit
Directed Credit
0%
10%
20%
30%
40%
50%
60%
70%
20
07
.04
20
07
.07
20
07
.10
20
08
.01
20
08
.04
20
08
.07
20
08
.10
20
09
.01
20
09
.04
20
09
.07
20
09
.10
20
10
.01
20
10
.04
20
10
.07
20
10
.10
20
11
.01
20
11
.04
20
11
.07
20
11
.10
20
12
.01
20
12
.04
20
12
.07
20
12
.10
20
13
.01
20
13
.04
20
13
.07
20
13
.10
20
14
.01
20
14
.04
20
14
.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
11/17/2017 Cristiane Alkmin J. Schmidt 10
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.
11/17/2017 Cristiane Alkmin J. Schmidt 11
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$50-60bi/y)
190.000
4x
11/17/2017 Cristiane Alkmin J. Schmidt 12
Treasure funding BNDES – 2001-2015
567,43
0,91% 0,52%
9,57%
0,00%
2,00%
4,00%
6,00%
8,00%
10,00%
12,00%
-
100,00
200,00
300,00
400,00
500,00
600,00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
SaldoR$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.
11/17/2017 Cristiane Alkmin J. Schmidt 14
11/17/2017 Cristiane Alkmin J. Schmidt 15
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.
11/17/2017 Cristiane Alkmin J. Schmidt 17
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%
11/17/2017 Cristiane Alkmin J. Schmidt 18
The Impact of the New Nationalism2016: Highest Inflation since 2003 and GDP back to 2011/2012
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2007.01
2007.06
2007.11
2008.04
2008.09
2009.02
2009.07
2009.12
2010.05
2010.10
2011.03
2011.08
2012.01
2012.06
2012.11
2013.04
2013.09
2014.02
2014.07
2014.12
2015.05
2015.10
2016.03
2016.08
2017.01
2017.06
Inflation(IPCA,%)- Source:IBGE
2011,2,975
2012,3,088
2016,3,141
1500
1700
1900
2100
2300
2500
2700
2900
3100
3300
3500
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Brasil- GDP(PPP)- US$millionSource:TheWorldBank,WorldDevelopmentIndicators(WDI)
11/17/2017 Cristiane Alkmin J. Schmidt 19
The Impact of the New Nationalism13% of unemployment and deindustrialization
11/17/2017 Cristiane Alkmin J. Schmidt 20
TPF Brazil (1960-2006): back to the same level
0
20
40
60
80
100
120
140
160
180
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
11/17/2017 Cristiane Alkmin J. Schmidt 21
CDS (bps) - 5Y Brazil (2012-2017)
500,5
179,1
-
100,0
200,0
300,0
400,0
500,0
600,0
9/1
2/1
2
12/1
2/12
3/1
2/1
3
6/1
2/1
3
9/1
2/1
3
12/1
2/13
3/1
2/1
4
6/1
2/1
4
9/1
2/1
4
12/1
2/14
3/1
2/1
5
6/1
2/1
5
9/1
2/1
5
12/1
2/1
5
3/1
2/1
6
6/1
2/1
6
9/1
2/1
6
12/1
2/16
3/1
2/1
7
6/1
2/1
7
Real Interest Rate - NTN-B (2022)2012-2017
7,81
4,47
3,00
4,00
5,00
6,00
7,00
8,00
9,00
9/12
/12
12
/12/
12
3/12
/13
6/12
/13
9/12
/13
12
/12/
13
3/12
/14
6/12
/14
9/12
/14
12
/12/
14
3/12
/15
6/12
/15
9/12
/15
12
/12/
15
3/12
/16
6/12
/16
9/12
/16
12
/12/
16
3/12
/17
6/12
/17
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.
11/17/2017 Cristiane Alkmin J. Schmidt 23
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.
11/17/2017 Cristiane Alkmin J. Schmidt 24
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.
11/17/2017 Cristiane Alkmin J. Schmidt 25
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
16.000
18.000
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
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
11/17/2017 Cristiane Alkmin J. Schmidt 27
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
11/17/2017 Cristiane Alkmin J. Schmidt 28
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
Top Related