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Privatization and distributional equity: the case of Brazil.


Development economics has undergone a radical shift in recent years. After several decades in which it was widely assumed that state-directed import-substituting industrialization was necessary for independent development, the dominant view now is that market liberalization and privatization hold the key to economic progress.

Brazil was regarded as one of the success stories in the developing world during the 1960s and 1970s, but the debt crisis of the 1980s brought growth to an end. The intervention of the IMF with its structural adjustment programme resulted in higher unemployment and rising poverty, while per capital growth went into reverse. Nevertheless, it was only in 1989, with the election of Collor, that privatization was proposed as the solution to the country's ills. The main objectives of the new strategy were, first, to increase efficiency and boost economic performance; second, to raise revenue and improve public finance; and third to promote wider share ownership and redefine the social role of the state (BNDES, 1993, p. 7).

The political upheavals in Brazil since 1989 have meant that the scale and extent of the privatization programme have been limited to date and it is still too early to judge the full impact. Most of the discussion about privatization has focused either on efficiency or revenue. However, there are empirical and conceptual difficulties in measuring any improvement in the former, and many of the assumed gains in public finance are conjectural. Moreover, it cannot be assumed that privatization alone will be sufficient to increase efficiency or to reverse the recent negative trend in growth. But the other important and often neglected aspect of privatization relates to the distributional effect. This is less frequently discussed and yet it is a serious issue for economies in transition, like Brazil, which already have an unequal distribution of income and wealth and where it is important to maintain some degree of social cohesion.

Inevitably there will be winners and losers in the drive for privatization. There is no reason to believe that the move towards a market-based economy characterized by monopoly elements, externalities and information deficiencies will bring about a fairer or more equitable distribution of income or wealth. Yet there is no inevitable trade-off between efficiency and equity[1]. The size of the gains and losses and the extent to which some degree of distributional justice is achieved after privatization will depend on how the sell-off programme is designed and implemented.

This article is concerned with the distributional effects of privatization. There are three important channels through which privatization can affect distribution: the budgetary effect; the form of share allocation; and the emerging market structure. We consider each of these issues in turn and try to assess to what extent the early stages of the Brazilian programme have taken distributional justice into account.

The budgetary effect

An improvement in public finance has been a major aim of all countries pursuing privatization. The perceived benefit of state sell-offs is that they create new sources of revenue which can be used in one of three ways. First, to pay off part of the public debt; second, to remove some of the constraints on current expenditure; or, third, to reduce levels of taxation. These are not equivalent, as we will argue, but there is another, prior, issue to consider - the conditions under which the fiscal position will improve.

The sale of public assets does not always lead to improved public finances. If the earnings stream is the same both before and after privatization, the government merely exchanges or receives the present value of the future earnings stream[2]. In other words the net worth of the government remains unchanged. By using the proceeds to pay off public debt, there is a saving in interest payments which is equivalent to the earnings stream that was sold off. There is a zero net effect on public finances.

Gains to the public purse, on the other hand, are possible when privatization leads to an increase in net worth[3]. For example, loss-making public enterprises may become profitable after privatization. This then raises the question as to how or why this improvement takes place? If it is due to increased productive and/or allocative efficiency, then not only may national welfare improve but public finances will also show a clear net gain. If, however, net worth (profitability) increases because the newly privatized enterprise is expected to be able to exploit its market power, then there may be a trade-off between improved public finances and distributional equity. There are two possibilities. First, consumers may have to endure higher prices or a reduction in quality. Second, any anticipated reduction in costs may be due to wage cuts, deteriorating employment conditions or lost jobs. Any resulting improvement in profits would represent a redistribution of wealth and income to owners and shareholders and away from workers and consumers.

A recent survey carried out by the Rio de Janeiro Stock Exchange, as reported by Viana (1994), points to encouraging results from the first batch of privatizations and growing support from the employees of privatized companies. The survey shows that for ten companies privatized between October 1991 and April 1993, production rose 16.8 per cent; idle capacity fell from 17.9 per cent to 9.4 per cent; and profits rose 50 per cent (Viana, 1994, p. 12). Nevertheless, selective dismissals in less productive departments, as well as the elimination of unnecessary expenditure, contributed to the improved results. This indicates a trade-off between improved profitability and greater poverty among the resulting unemployed.

More detailed analysis of privatized companies is required, but the evidence to date does not rule out the need for government action if a less equitable distribution of income and wealth is to be prevented. Yet in Brazil none of the administrations in recent years has been willing to regulate prices, incomes or employment to prevent such distributional injustice occurring. Moreover, Brazil has a poor record in providing a welfare safety net, and adherence to the IMF's structural adjustment programme has meant there has been limited scope for using government taxes and expenditure to correct for the adverse distributional effects of privatization.

Under the circumstances, there are continuing fears that privatization may exacerbate existing inequalities and be used to funnel income and wealth to the rich and privileged. This has meant that support for privatization among the various social groups and economic agents has been mixed (Felix, 1992).

Privatization creates considerable uncertainty about business and employment prospects, and the trade unions and public sector salariat in Brazil have generally been antagonistic. Ultimately it is hoped that privatization will increase overall efficiency and generate economic growth, but unless or until this occurs - and there are grounds for scepticism - some groups will lose from privatization. Not surprisingly, under the circumstances, there is widespread apprehension over privatization in Brazil and it is still not clear at this juncture if there will be sufficient support to complete the rolling back of the state.

So far the scale of public asset sales since 1991 has been small, amounting to US$6.65 billion[4], representing less than 5 per cent of the public sector deficit in the last two fiscal years. The central issues for Brazil focus on what forms of private financial asset are acceptable as legal tender for the sales and how the revenues should be used. We consider these in turn.

The decision to accept a wide range of non-cash private financial assets, including public sector debt, for conversion to equity has been a distinctive feature of the Brazilian privatization programme. Given the market value of Brazil's public enterprises (worth an estimated US$80 billion), the current flow of savings is not able to absorb the stock of state assets. There is a stock-flow constraint (Bolton and Roland, 1992). Successive governments, therefore, have taken the view that they have had little choice but to allow both cash and noncash purchases of shares by means of debt conversions. A breakdown of assets which have been used to purchase shares in privatized companies is shown in Table I.

The controversy surrounding the debt-equity conversions relates to the types of public debt accepted, their valuation and the distributional consequences. Most of the public debt conversions were for medium- to long-term securities and this has been criticized by some because of the lost opportunity to swap highly liquid short-term bonds for equity. The criticism collapses into a variant of the argument in favour of cash payments, but it misses the central point. If the main goal was to improve the fiscal position, it would have been better for the government to minimize the opportunity cost, i.e. to restrict debt conversions to the highest interest-bearing securities, although there is no evidence to indicate that the government pursued this policy[5]. Only in so far as short-term bills or bonds yield the highest interest rates should they have been the preferred debt for conversion. Other goals, however, might lead to a different solution as we will argue later.
Table I. Assets used to purchase shares in privatized companies

                                     Value USS    Total %

Securitized public sector debt         2,434.9       34.7
Siderbras debentures                   1,415.1       20.2
Privatization certificates             1,287.4       18.4
National Development Fund bonds          597.6        8.5
Agrarian debt notes                      527.9        7.5
Brazilian currency                       379.1        5.4
Housing bank obligations                 300.3        4.3
Foreign debt notes                        68.7        1.0
Total(a)                               7,010.9      100.0

Note: a Includes US$32.4 million to be received from the sale of

Source: BNDES (1994a)

Having decided to accept government debt in exchange for equities, the Brazilian authorities further agreed to convert them at face value despite the fact that they were being traded in secondary markets at highly discounted prices. Whatever the underlying reasons for this decision, and one cannot rule out political or other interest group pressure, it was difficult to support on grounds of equity and it was also misguided on two other counts. First, it ran counter to the stated aim of maximizing the contribution to public finances. Second, it resulted in unanticipated wealth transfers to speculators in the secondary markets.

Although public asset sales have been open to foreign investors, their level of participation has been limited mainly because of the 40 per cent voting share restriction and the requirement that capital should stay in for six years. Moreover, in the few privatizations where foreign bids were lodged, it was domestic public debt rather than foreign debt that was used to pay for the shares. The reason for this was that the 25 per cent discount required on foreign debt conversions may have been judged to be too severe, particularly as debt renegotiations were still proceeding. Subsequent discussions with the main creditor banks seem to indicate that a lower discount rate may ultimately be agreed and that, from their position, foreign investors were wise to delay converting foreign debt.

The 40 per cent rule is now under review but, as a measure designed to maintain domestic control of industry, it misses an essential point. Foreign ownership of Brazilian based companies does not threaten sovereignty if they operate in competitive markets. Indeed, just like import competition, overseas ownership can be an important factor in creating competition and improving efficiency in domestic industry and all social groups stand to gain from such developments. When the public utilities like telecommunications and electricity come to be privatized, the 40 per cent rule may make more sense because of the natural monopoly element. But even in such cases the foreign domination fear recedes if the industry is competitively structured with unrestricted entry and regulation is competition augmenting. To date, the authorities have missed the opportunity to create open competitive markets and the distributional consequences of this are considered further later.

The question of how the revenues from public asset sales should be used has also led to confusion, and there has been a notable absence of a clear and consistent approach to the fiscal deficit in Brazil. While deficits can be financed in several ways[6], there is overwhelming evidence that large deficits damage economic performance (Easterly and Schmidt-Hebel, 1993). Inflation, high interest rates or financial repression leading to negative effects on investment and loss of international competitiveness and growing external deficits are some of the adverse effects that can occur. Fiscal adjustment is not sufficient, but it is a necessary step towards the improved economic performance and higher growth that will broaden opportunities and permit a more effective policy for dealing with poverty[7].

Nevertheless, while the economy is being restructured, it is important for the government to consider the priority areas of expenditure. The planned privatization of social security in Brazil will only have relevance for those employed in the formal sector of the economy. Equity considerations point to the need to promote a state social reform programme, concentrating on education, health and social security, but the past record of successive governments indicates that serving the poor has ranked low on the agenda.

The greatest danger is that distributional issues and revenue-raising activities will be ignored and the privatization receipts will be used either to finance current expenditure indiscriminately or reduce the need to raise taxation. Receipts from public asset sales may temporarily ease the public sector borrowing requirement, but they are also providing the authorities with time to implement fiscal adjustment measures and achieve a fundamental reform of both the public sector, the welfare state and the wider economy[8]. The Brazilian authorities appear to refuse to recognize this, but their failure simply delays the day of reckoning and the size of the problem may grow considerably in the meantime.

The distribution of shares

If equity is a consideration, then it is important for the authorities to design procedures for privatization which ensure that asset sales are transparent and result in a fair outcome. This inevitably raises questions about the meaning of fairness and it has important implications about how to privatize. Yet, in Brazil, the years of dictatorship and more recently the political tremors caused by the Collor impeachment have meant that there is widespread distrust of the system of government. Under these circumstances, it is very important that the process of disposing of public assets should be seen to be fair and equitable and, to avoid suspicions of corruption, open to public scrutiny. It is also important to consider the effects of the disposal of assets on incentives and the allocation of resources.

The Collor administration was accused in certain quarters of making very slow progress with the privatization programme. Nevertheless, one of the beneficial aspects of this unhurried approach was that a relatively transparent and prescribed process of privatization was established (BNDES, 1991).

A Privatization Committee was set up consisting of members drawn from both the private sector and the civil service. All members were selected by the President and, although they had to be approved by Congress, this did not entirely allay the suspicions of political manoeuvering. The President of the National Bank for Economic and Social Development (BNDES) was appointed as head of the Committee. BNDES also provided executive support for the Committee and took on managerial responsibility for the programme.

BNDES was given responsibility for inviting tenders and subsequently selecting two consultancy firms which were required to provide independent assessments of the enterprise(s) to be privatized. The assessments were also subject to monitoring by independent auditors. A privatization agent would be chosen from the two consultancy firms with the fees determined according to the measured success of the transaction. The Privatization Committee acted as an intermediary, receiving recommendations from the consultancy firms and in turn making recommendations to the President. The latter maintained close control of the process, being involved in approving which public enterprises should be privatized and having the final ruling over the mode of the sale and the minimum price required.

In the period after the Congressional inquiry was set up to investigate Collor's activities, there were several proposals to change the privatization procedures[9]. The new regulations which emerged in January 1993 increased the discretionary powers of the President and replaced the former standard procedures with a more ad hoc system. A new Privatization Committee was set up and, although the president of BNDES was replaced, the bank kept its role as manager of the programme. This new approach has been criticized for being less open to scrutiny. It certainly means that the privatization process is exposed to political manipulation, but it does also provide the opportunity for the privatization conditions to be varied according to the structural features of the industry. For example, although the 40 per cent limit on foreign participation remains, there is now the possibility that this could be waived by Congress when competitive conditions in an industry are such that they provide an adequate regulatory mechanism. Nevertheless, given the Franco administration's ambivalence towards privatization, the new hands-on approach allowed it to control the direction and pace of public asset sales. The possibility of golden share arrangements in newly-privatized firms may also indicate the government's preparedness to use its power if required. There is no reason to believe that such intervention will necessarily be confined to issues of efficiency or justice.

Turning to the disposal of state assets, there are two interrelated criteria to consider - equity and incentives. There are no easy answers to these issues, and the forms that privatization programmes are taking throughout the world indicate a considerable diversity between countries depending on their priorities and country-specific factors. Nevertheless, there are two broad alternatives for disposing of public assets. They can either be sold or distributed free. There is the related question of how?

Free distribution has been argued for by Blanchard et al. (1991) in their study of Eastern Europe. It has the advantage that it appeals to fairness and it can generate considerable popular support in favour of privatization and market reforms. Moreover, everyone becomes a shareholder and therefore has an interest in improving the efficiency of the economy. All citizens can be given a share in collectively-owned assets. "Give away" (or should they be called "return back") schemes also appear to have the edge if quick mass privatization programmes are favoured.

There is considerable uncertainty as to how the incentives might operate, particularly for those who sell their shares quickly, but the major disadvantage to free shares is the impact they would have on public receipts. For a country like Brazil, with a large budgetary deficit, privatization is seen as a way to improve the fiscal position and achieve macro-economic stability. This is regarded as a prerequisite for a revival of economic prospects.

Free share schemes also have the potential disadvantage that they leave the incumbent management in place. This might be an important factor in concentrated markets where there is an inefficient management team unless procedures can be set up to monitor and replace management whenever necessary. With dispersed share ownership and narrow capital markets, there is no guarantee that the market for corporate control will be an effective regulatory mechanism. We return to this later.

As in most other parts of the world, the privatizations in Brazil have so far involved the sale of public assets. However, given the stock-flow constraint mentioned previously, both cash and non-cash sales have been necessary. This opened up the possibility that the government could have allowed wealth-constrained individuals to participate by "lending" to them on the basis of the future revenues generated by the privatized enterprise. In this case there would be no cash receipt nor would public debt be cancelled but, instead, the government would acquire a claim on future cash flows produced by the assets. In terms of equity, the main advantage of this kind of arrangement is that all adults can potentially gain from the disposal of public assets. Even if the newly-acquired shares are subsequently sold, there will have been a temporary improvement for the less well off. However, there would still be the problem of unequal information and those with "insider knowledge" would know what shares to buy or sell. Nevertheless, despite its distributional attractions, this form of disposal of state assets involves heavy administrative costs and it was not pursued in Brazil.

The alternative of auctioning off shares to the highest bidder(s) in exchange for cash and non-cash bids was the preferred option. The advantages of auctions are that they may achieve a better matching between firms and management teams, they overcome the valuation problem and, very importantly, they also allow the government to write off public enterprise debt without adversely affecting revenue from sales. From the point of view of equity, the disadvantage of selling to the highest bidder(s) is that existing inequalities affect the outcome. The rich are favoured at the expense of the poor.

A positive feature of privatization to date has been the participation of employees' groups. As part of the policy of privatizing social security, employees' groups have been encouraged to subscribe to the share issues of their companies. By March 1994 97,539 employees held shares worth US$263.1 million representing 3.96 per cent of the receipts from privatization. The total employee shareholdings are worth almost US$2,700 per capita, but there are wide variations between companies. Employees with Mafersa have shares worth only US$40 per head, whereas for those with Acominas the holdings are worth US$8,388 per head. While the principle of employee ownership may be incontrovertible, the meagre size of the average shareholding indicates that it will have only a marginal effect on the lives of those individuals. But the main problem is that the vast majority of employees are excluded from the benefits. Out of a labour force of 58 million, less than 0.002 per cent have shares in the companies or organizations for whom they work. With millions of other workers in the informal economy also excluded, it is clear that employee participation in privatization has done little to reduce the existing inequalities in the distribution of income or wealth.

In the case of large privatizations where individual non-cash shareholdings are permitted, the problem of separation of ownership and control may emerge. Under these circumstances, efficient money and capital markets are essential both to monitor firms' performance and to achieve an efficient allocation of resources. Brazil now has over 600 companies quoted on its stock markets, the oldest of which (Sao Paulo) has a record going back over ten years. Nevertheless, by OECD standards the Brazilian markets are small, underdeveloped and vulnerable to manipulation. A tighter legal and regulatory framework is required to enforce stricter reporting and provide more reliable performance indicators. In the absence of these reforms, it is unlikely that quoted companies will be monitored adequately and, therefore, the market for corporate control will be ineffective. Moreover, as was pointed out earlier, unless commodity markets are competitive, there is the danger that privatized firms will exploit their market power at the expense of those least able to protect themselves.

This danger also relates back to the use of debt-equity swaps. These were discussed previously in relation to the budgetary issue, but they also raise a number of other concerns. Investors may be merely taking the opportunity to convert, what is perceived as, "bad" public debt into private sector equity without any real interest in the company they buy into. Alternatively, another firm in the industry may use its public sector debt to acquire a competitor which will give the new enlarged company a dominant share of the market. This happened in a number of cases in the Brazilian ferro-alloys sector. Such an outcome can rarely be justified and it is likely to transgress both efficiency and equity criteria. This issue is taken up in the next section.

The pattern of ownership and market structure

The 24 state enterprises that have been privatized so far are concentrated in the steel and chemical, petrochemical and fertilizer (CPF) sectors of manufacturing. Each enterprise was sold off separately, so on the surface a number of competing independent firms have been created. The reality is different. The privatization rules in Brazil permit a single buyer to acquire control of any number of companies coming up for auction. A number of concentration-increasing acquisitions have occurred and the emergence of vertically integrated firms is worrying not only on equity grounds but also in terms of efficiency.

In the steel industry Gerdau, the largest non-flat steel producer, acquired a 100 per cent holding in Cosinor and an 89.8 per cent stake in Piratini, thereby considerably increasing its strength in the market. There are other examples. Petrocoque and Petroquimica Uniao (PQU), which were privatized in January 1994, and Copesul (May 1992) were all from the Petroquisa group yet after the sales Petroquisa still held shares in all three companies. Fosfertil which was privatized in August 1992 subsequently became a major shareholder in Goiasfertil, privatized in October 1992, and Ultrafertil (June 1993). Bamerindus is a major shareholder in Copesul and CSN (March 1994). Banco Bozano and CVRD are main shareholders in Usiminas (November 1991) and CST (July 1992) and in August 1992 CVRD also acquired a major shareholding in Fosfertil. Unipar is a main shareholder in Petroflex (April 1992), Poliolefinas (March 1993) and PQU, while Poliolefinas itself is a main shareholder in Copesul (BNDES, 1994b).

These examples are illustrative of the concentration of ownership that has occurred with privatization. There are many other examples, but a full analysis of these developments is beyond the scope of the present study. From the point of view of this article, such instances of interlocking and overlapping share ownerships are rarely innocent. They provide the opportunity for firms to collude at the expense of the worker and the consumer, but not only does this have distributional implications, economic efficiency may also be adversely affected.

There are numerous instances of firms that have been investigated for engaging in restrictive practices and different forms of collusion. The pharmaceutical industry was investigated and fined in 1992 for withholding stocks to raise prices above minimum established levels. Moreover, evidence on prices charged for fertilizers, chemicals, flat steel products and cars indicates that privatization has not only failed to eliminate many restrictive practices but may have facilitated the introduction of others (Abreu and Werneck, 1993).

New economic thinking indicates that competitive market structures are the best way of guaranteeing both efficiency and a degree of equity. This means that the competition-restricting regulation which exists in Brazil as a result of the years of dirigisme needs to be reviewed while at the same time it is essential that a new competition-augmenting regulatory structure is introduced. Progress on both aspects has been limited. We first consider deregulation.


A vast array of regulations relating to all aspects of economic and social activity was introduced in Brazil after the depression of the 1930s. Recent attempts to dismantle the regulatory structure and simplify some of the bureaucratic arrangements and procedures have had only limited success. This must be seen as part of a broader failure to reform the whole of public administration. We return to this later.

Part of the problem is that there seems to be no clear general position on the significance of comprehensive deregulation for competition enhancement. The distribution of power and responsibility between the Federal and State governments can also give rise to conflicting objectives. Politicians generally want to hold on to their areas of control and influence since it can be traded off against political support. This often leads politicians to oppose deregulation when it threatens their leverage. The survival of many small state banks and the reluctance of those in power to deregulate radio and television services can be explained in this way.

Nevertheless, while deregulation may remove some of the power held by politicians and help to democratize the bureaucracy, there are important exceptions to the general principle of deregulation relating to instances of market failure. Hence, while pursuing deregulation aimed at removing government failure, it is important to introduce new forms of intervention/regulation to deal with poverty and the environment and to ensure that there is adequate consumer protection and health and safety legislation. These issues are central to any notion of fairness, but successive administrations have merely paid lip service to it. A major problem is that there is a limited history of this kind of regulation in Brazil and, even if it were introduced implementation and enforcement would be difficult.

There are many sectors of Brazilian industry which have remained essentially undisturbed by deregulation. Whether the lack of progress in these instances is due to inertia or the lobbying of sectional interests, the result is the same. Market distortions, restricted competition and widespread economic rents are indicators of the failure to achieve productive and allocative efficiency and to take distributional justice seriously.


Large monopolistic corporations, possessing the power to control prices and wages and, hence, influence the distribution of income, need to be regulated. Experience elsewhere in the world indicates the need for two distinct regulatory structures. First, anti-monopoly legislation with a strong anti-cartel or antitrust agency equivalent to the UK's Monopolies and Mergers Commission; second, an industry regulator with powers to introduce competition-augmenting regulation when competition is weak. Brazil has made limited progress with the first but, so far, none whatsoever with the second type of regulation.

Anti-trust regulation in Brazil goes back to 1962 when the Administrative Council for Economic Defence (CADE) was established. The volume of work referred to CADE was limited, but it was also largely ineffective for a number of reasons (Farina, 1990). It was never entirely free from government interference, it had no authority to restructure an industry, its power to penalize was limited and its decisions had to be confirmed by the courts.

Although the powers of CADE were increased by the Collor administration in January 1991, there has been a lack of political will to use its regulatory mechanisms. Issues of competition, efficiency and equity were put aside as the Franco administration prioritized inflation and fiscal stability. It is too early yet to indicate whether Cardoso will reverse this trend.

Even if the anti-trust agencies are functioning effectively, there are inherent difficulties in dealing with injustices caused by the abuse of market power. Predatory pricing and entry-deterring activities are not easily detected and the dividing line between predatory pricing and aggressive, but wholly legitimate, competitive behaviour is difficult to define and apply. There is another problem with anti-trust agencies and that is that they are required to act after the event and the process of correcting the abuse can be long and protracted. It is also essential that industry regulators remain independent and that regulatory failure is avoided. The experience of CADE is that it has not been immune to capture by government and, as a consequence, it has not always been able to act to achieve either economic efficiency or social justice. Government reform which opens up political decisions to public scrutiny, simplifies and clarifies ministerial structures and responsibilities and establishes a scrupulous civil service, is an essential first step towards competent corruption-free government. It is unclear yet whether the Cardoso administration will prioritize these issues. Failure to do so will almost certainly mean that equity will continue to be a minor factor in the privatization process and that the wider issue of social justice will remain of secondary importance.

Summary and conclusions

Privatization in Brazil has been part of a wider public policy response to poor public enterprise performance, high levels of inflation and unsustainable public sector deficits. Given the relative newness of privatization, insufficient time has elapsed to pass judgement on the performance of the privatized enterprises although because of unfavourable conjunctural factors the overall economic benefits to the economy may turn out to be limited, at least in the short run. Distributional equity has been given only notional support and, in practice, the issue has had little influence on the implementation process.

The scale of public asset sales in Brazil has been small to date and largely confined to steel and CPF. The government's ambivalent position on privatization, mirroring the opposing views of diverse social and economic groups and reflecting the apprehension over the distribution of future benefits, means that it is still uncertain how far the programme will be extended and whether, and to what extent, it will include the public utilities.

A major goal of public asset sales is to improve efficiency in the context of a more equitable distribution of income and wealth, but whether privatization is the important element is unclear. In Brazil, privatization can be seen as the conversion of quasi-public monopolies into private oligopolies with all the attendant dangers of collusion, predatory pricing and barriers to entry. A simple assumed relationship between ownership, performance and equity has to be treated with caution. An alternative hypothesis is that the level of competition in markets, improvements in management, changes in employment contracts, deregulation and new forms of regulation are more important for increasing efficiency and reducing inequality.

This implies that there will continue to be an important role for government after privatization, but it is not clear that the administration in Brazil recognizes the full significance of this. In addition to intervention to correct for externalities and public goods, it is necessary for the government both to foster competition and provide support for domestic industry. It is now widely recognized that privatization needs to be accompanied by effective regulation of anti-competitive practices, new forms of competition-augmenting regulation and deregulation. The latter is particularly important in Brazil since 60 years of dirigisme has left a plethora of controls and subsidies and many of them need to be removed if competition is to be enhanced and resource allocation and distribution improved. Incomplete deregulation and ineffective anti-competitive regulation will not eliminate economic rents but merely transfer them to another activity.

The relation between government and the market is particularly important for an economy in transition such as Brazil. The experience of the South East Asian economies indicates that governments have a vital role in designing development policies to support domestic enterprises. Governments are in a unique position to co-ordinate economic development and investments in physical infrastructure and education along with appropriate backing for research and development can make a significant contribution to successful economic transformation.

But structural reforms invariably result in lost jobs and a changing, more unequal distribution of income with adverse effects on economic welfare. Deregulation, too, can have detrimental effects on the poor and those least able to protect themselves if it results in the removal of subsidies or regulations controlling health and safety, poverty, consumer protection and the environment. There will be a high price to pay in the absence of a comprehensive social welfare programme and new forms of regulation. Brazil has failed to give due consideration to equity in other ways too. The regulations governing privatization and the institutions created to carry through the programme have been altered in such a way as to cast doubt on the fairness and transparency of the process. Moreover, privatization has not been used to promote widespread share ownership and in the long run it is likely that share holdings will be concentrated in the hands of a relatively small number of large industrial, commercial or financial institutions.

Finally, the impact of privatization on public finances has been negligible to date. There are serious doubts whether the form of debt-equity swaps and the way that the revenues have been used so far are consistent with the need to achieve fiscal adjustment, economic reform or equity. The danger is that privatization is being used as another way of allocating the cost of structural adjustment and economic reform to those least able to resist.


1. Recent evidence from SE Asia indicates that rising per capita incomes have been achieved with declining inequality in the distribution of income.

2. This would not be the case if the government took the decision to sell the public assets at a discount, in which case there would be a redistribution of wealth in the form of a transfer of net worth from the public sector to the acquiring owners.

3. An anticipated increase in the future earnings stream of a privatized public enterprise will mean that it can be sold off at a higher present value than it is currently worth.

4. The 24 companies privatized to date were worth US$9.57 billion in resources, including US$6.65 billion in sales value and US$2.92 billion in transferred debt.

5. This is particularly important in Brazil because of indexation. This has meant that real interest rates have been inflexible and during recessionary periods the share of income going to rentiers has increased.

6. There are three ways of financing the fiscal deficit: money financing via the Central Bank; domestic borrowing; and external borrowing.

7. Eliminating a large public sector borrowing requirement is rarely painless and in the short run there is likely to be a trade-off between jobs and fiscal adjustment.

8. As a first step towards fiscal adjustment it is essential that the fiscal accounts are accurate and transparent. It is also important to give priority to the simplification and rationalization of taxation.

9. One of the proposals was to streamline the privatization programme by channelling sales through a government business bureau but the idea was never implemented (this is mentioned by Abreu and Werneck, 1993).


Abreu, M. and Werneck, R.L.F. (1993), "Privatization and regulation in Brazil: the 1990-92 policies and challenges ahead", Discussion Paper, No. 300, Department of Economics, Catholic University of Rio de Janeiro.

Banco Nacional de Desenvolvimento Economico e Social (BNDES) (1991), Programa Nacional de Desestatizacao: Legislacao Basica, 1990, Gabinete da Presidencia, Rio de Janeiro.

BNDES (1993), Brazilian Privatization Program, BNDES Finame BNDESPAR, Gabinete da Presidencia, Rio de Janeiro.

BNDES (1994a), Programa Nacional de Desestatizacao, Gabinete da Presidencia, Rio de Janeiro.

BNDES, (1994b), "Privatisation in Brazil: investment opportunities", seminar organized by the Brazilian Embassy in London, March 1994.

Blanchard, O., Dornbusch, R., Krugman, P., Layard, R. and Summers, L. (1991), Reform in Eastern Europe, MIT Press, Cambridge, MA.

Bolton, P. and Roland, G. (1992), "Privatisation in Central and Eastern Europe", Economic Policy.

Easterly, W. and Schmidt-Hebel, K. (1993), "Fiscal deficits and macroeconomic performance in developing countries", Research Observer, Vol. 8 No. 2, The World Bank.

Farina, E. (1990), Politica Antitruste: A Experiencia Brasileira, mimeo, Sao Paulo (quoted by Abreu and Werneck (1993)).

Felix, D. (1992), "Privatizing and rolling back the Latin American State", CEPAL Review, No. 46, April.

Viana, F. (1994), "Privatisation: wheels within wheels", Revista Borespa, No. 6, March.
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Author:Ayres, Ron
Publication:International Journal of Social Economics
Date:Dec 1, 1995
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