From the Introduction:
Despite decades of liberalization and privatization in many countries, state ownership and state-led business activity remains widespread (Christiansen, 2011). Governments still often use state-owned enterprises (SOEs) to promote local development and invest in sectors in which private investment is scant. Many SOEs endured over the years and turned into large corporations partnering with market investors and competing on a global scale against private multinationals.
The forms of ownership and control governments use in the set of surviving SOEs is, however, poorly understood. Beyond the traditional wholly-owned SOEs, governments also intervene to support specific industries by propping up privately held enterprises (i.e., “national champions”). These private firms receive government support in the form of minority equity investments, direct subsidized loans from development banks, and equity and debt purchases by sovereign wealth funds. In the economics and finance literature these forms of state ownership are understudied; most of the theory and empirical work has focused on either wholly-owned SOEs or firms in which the government is a majority shareholder.
In this paper we use Brazil as a case study to examine the functioning and performance implications of these new and complex forms of state capitalism. Brazil is a good laboratory to study SOEs for various reasons. The emergence of state capitalism in Brazil followed a similar path found in other countries, where governments created and managed myriad SOEs in the second half of the 20th century. Thus, after World War II, many governments in Continental Europe owned and ran water, oil, gas, electricity, telecommunications, shipping, and other companies (Millward, 2005). We label this model of state capitalism, with SOEs completely controlled and run by the state, as the Leviathan as an entrepreneur model (Musacchio & Lazzarini, 2014). In Brazil, state ownership of large scale enterprises began mostly after World War I when the government ended up bailing out a large portion of the railway companies of the country. Then, in the 1940s, President Getulio Vargas created many state-controlled SOEs in sectors that were considered fundamental for economic development, such as mining, steel, chemicals, and electricity. Yet, the heyday of state capitalism in Brazil took place in the early 1970s, during the military dictatorship (1964-1985). By 1976-1977, the public sector represented 43% of the total gross capital formation in the country, with around 25% of those investments coming from large SOEs (Trebat, 1983).
In fact, as the importance of SOEs increased, the deficiencies of the model became increasingly salient. Governments frequently used SOEs to artificially maintain employment in the face of economic crises (such as after the oil shocks of the late 1970s) and even control consumer prices (Shirley & Nellis, 1991). Lack of insulation from social and political objectives meant that managers of SOEs had to deal with a multiplicity of goals beyond profitability. Furthermore, SOEs lacked managerial practices commonly found in private firms, such as close monitoring by independent board members, transparency, and high-powered incentives for their managers (i.e. pay-for-performance schemes). Facing escalating debt and realizing the high opportunity cost of allocating state capital to unprofitable SOEs, many governments in the late 1970s and the turn of the 21st century experimented with reforms in the public sector (Gómez-Ibañez, 2007; Shirley, 1999) and eventually undertook large-scale privatization programs (Megginson, 2005). Despite the efforts to get countries to privatize state assets en masse, governments had political reasons to slow down the process and to keep some strategic assets under their control. That is why at the turn of the 21st century surveys such as Bortolotti and Faccio (2009) and OECD (2005) show that governments all around the world still remained as important shareholders in large SOEs, even after the privatization wave of the 1990s. In a nutshell, decades of reform and privatization did not defeat state capitalism, but transformed it. Governments adopted new forms of state ownership and reinvented the way in which state capitalism operated.
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