Brazilian Economy

1
Brazilian Economy

• Privatization

2
Brazilian Economy Basic Information
3
Some Problems

• Asset ownership is highly concentrated.
• Access to education is uneven and heavily
  influenced by wealth.
• Very high inequality and little progress toward
  poverty alleviation.
• Public debt is increasing.

4
History

• After WW2
• Military rule
• Import substitution policy
• (The replacement of imports by products from
  domestic industry.)

5

• 1968 - 1973

Brazilian miracle
Average growth rate 11
Expansion of Consumption Investment
High level of Production Employment
6
In 1974, First Oil Shock
Lost decade until mid 80s
Democratic government was established in 1985
Real Plan in 1994
Low inflation rate Stabilized economic situation
7
The role of State-Owned Enterprises(SOEs)

• 1. Provide low price
• 2. Over employment creation
• 3. Investment in less-developed regions
• ? an instrument of stabilization
• the Treasury shareholder
• official banks source of financing

8
Problems of SOEs

• 1. Less incentive ? inefficiency
• 2. Unclear cash flow
• (investment or loans turns into subsidies)
• ? Government deficit

9
What is Privatization?

• Researchers Definition
• Refers to the scale of all or part of
  governments equity in state-owned enterprises to
  the private sector.
• Transfer of functions for which the government
  previously held a monopoly into the hands of the
  private sector.
• Shift of individual involvement from the whole to
  the part.
• Common Definition
• It is a process of transferring assets from the
  public sector to the private sector.

10
Why Privatization in Brazil?

• The failure of State-Owned Enterprises
• Produced a staggering burden of subsidy costs for
  the government.
• Borrowing on the international market added to
  the national debt.

11

• Brazil opted for privatization as a means to
• Reduce poverty
• Increase income
• Improve their balance of payments
• Reduce subsidization
• Shrink the size of government expenditure
• Promote competition in the global markets
• Offer a better quality of goods and services to
  customers

12
Forms of Privatization

• There are several forms of privatization
• Contracting out
• Voucher
• Sales of assets by the government to private
  sector
• Subsidies
• Load-shedding
• Private payment
• Management privatization
• Liberalization or deregulation

13

• The most commonly used forms of privatization in
  Brazil are
• Contracting out
• Management Privatization
• Sales of Assets or Equity

14
Contracting Out

• Private sector is involved in the provision of
  certain goods and services but the government
  remains in charge of all major activities.

15
Management Privatization

• The private sector, with its expertise and
  know-how, is invited by the government to take
  over the management of a particular State-Owned
  Enterprise. However, under the agreement, the
  government still retains complete ownership of
  the State-Owned Enterprise.

16
Sales of Assets or Equity

• Change of ownership of an enterprise from the
  public to the private sector.
• Developing countries can benefit from it due to
  lack of developed capital markets.

17
Proceeds
Source Banco National de Desenbolvimento
Econômico e Social (BNDES)
18
Proceeds (1991-2000) Federal Privatization telec
om PDN State Privatization Total
US million Sale Proceeds 46,647 26.978 19,744 2
5,168 71,890
Debt Transferred 11,326 2.125 9,201 6,461 17,7
87
Total Proceeds 57,973 29,103 28,945 31,629 89,67
7
Source Banco National de Desenbolvimento
Econômico e Social (BNDES)
Debt Transferred sell public debt at lower
value than the face value
19
Sectors already privatized

• Stage I Industry
• Steel 4 Petrochemicals
• Fertilizers 4 Mining
• Stage II Infrastructure
• Railroads 4 Telecommunications
  (including mobile phones)
• In progress
• Power utilities Gas F Banks
• Ports F Sanitation
• Highways

20
Total results (1991 - 1999)
US million
Number of companies
Debts transferred
Total
Proceeds
Sector
Steel Petrochemicals Railroads Mining Telecom
Power Others Participation Total
5,562 2,699 1,697 3,305 26,978 3,909 1,451 1,046 4
6,647
8 27 7 2 26 3 17 - 90
8,188 3,702 1,697 6,864 29,103 5,579 1,794 1,046
57,973
2,626 1,003 - 3,559 2,125 1,670 343 - 11,326
Source Banco National de Desenbolvimento
Econômico e Social (BNDES)
21
Proceeds by sectors
Source Banco National de Desenbolvimento
Econômico e Social (BNDES)
22
Foreign Participation
44 of privatization
Source Banco National de Desenbolvimento
Econômico e Social (BNDES)
23
Use of the Revenue from the Sale of SOEs
? Reduce the chronic budgetary deficits ? Reduce
external debts ? Increase Social expenditures
Education / Health / Housing
24
Foreign Direct Investment (FDI)

• Investment Package
• -- Includes equity finance, larger amounts of
  loan finance, management expertise, modern
  technologies, technical skills, and access to
  world markets.

25

• Developed countries
• Make profits
• Access to world market

• Developing countries
• Promote economic growth and improve the standard
  of living of the people.
• Achieve industrialization.
• Helps the expansion of capital formation and the
  transfer of technological knowledge.
• Make easier to obtain external funds.
• Employment creation.

26
Privatization FDI
FDI1.60.63(Privatization) t-value4.72 R-square
-0.90 of sample7
Source BNDES Banco Central de Brasil
27
Unemployment rate
Source Banco Central do Brasil
28
Standard Deviation of Unemployment rate
29
Household income distribution
Share of bottom 20 3 2 2 5 5
Share of bottom 40 9 8 7 15 16
Brazil United States
Period 1970-75 1980-85 1989-94 1970-75 1980-85
Share of top 20 62 63 68 43 42
SourceStatistical Abstract of Latin America
Wilkie/Aleman/Ortega, UCLA Latin American Center,
P.417 Table1419 Original Source World bank,
Social Indicators of Development 1996, country
table
30
per capita GDP vs School enrollment(tertiary
rate)
USA 80.6
Japan 42.7
Brazil 11.7
Source World bank, Global Development Network
Growth Database Original source Global
development Finance World Development Indicators