State Corporations

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State Corporations

The origins of state corporations, variously known as state-owned enterprises (SOEs), parastatal companies, and government-linked companies (GLCs), are found in economic nationalism. They symbolize national economic sovereignty in Latin America, East Asia, sub-Saharan Africa, the Middle East and North Africa, and even Europe. In developing parts of the world, SOEs have emerged as newly independent states (many of them former colonies), lacking domestic private capital, technology, and managerial know-how, have endeavored to develop their economies without allowing European firms to take control of their economies. This position dictates that the state-held enterprises become the principal instruments of national development, and that the state therefore is responsible for financing, production, management, distribution, and sale.

Typically state corporations dominate in natural resources, heavy industries, banking and finance, utilities, telecommunications, transport, and other infrastructure areas. SOEs were often created out of necessity, when a new type of political regime was instituted or when a government nationalized foreign-owned assets or private properties belonging to enemies of the new state. In Cuba under Fidel and Raúl Castro (1959–), Chile under Salvador Allende (1970–1973), and Nicaragua under the Sandinistas (1979–1989), Marxist governments established compañías estatales including banks, airlines, and energy, utility, and manufacturing companies. In Brazil, they are known as companhias estatais. In Africa, the wave of anticolonialism and post-independence socialism led to the creation of a host of parastatals. In noncommunist East Asia (Japan, Korea, Taiwan) and Southeast Asia, government-linked companies (GLCs) were built in the early stages of export-promoting industrialization, but once the economic sectors matured, they were privatized. Except for China, there are now few SOEs in East Asian countries. In Southeast Asia, GLCs play a prominent economic role. Petronas (Malaysia's state-owned and run oil company), SingTel (Singapore's telecommunications firm), and Pertaminas (Indonesia's oil and mining giant) are a few examples of the region's major state corporations.

In the past, the typical state corporations were the tools of import-substitution industrialization (ISI), drawing factors of production internally. The desire to become self-sufficient in industrial goods became the principal driver for Latin American ISI. The state owned, planned, financed, managed, distributed, and sold what it produced. Citizens regardless of their social station were given access to state products and services. The other side of this egalitarian economic philosophy is political populism. In Latin America, SOEs were founded on an ideology of populist consumption, a vital tool of social development. Economic nationalism, with its need to keep out and even compete against foreign firms, also played a major role in the creation and maintenance of SOEs, especially in energy, telecoms, transport, and banking.

There are three types of SOEs currently in operation throughout Latin America: production-oriented, service-providing, and financial and banking. Latin America's oldest state corporation still in operation, the Bank of Brazil, dates to 1808, but the continent began to establish state corporations only after the dawn of its populist age, around 1930. And the proliferation of today's major state-owned enterprises occurred during and after World War II. By the mid-1980s states in Latin America began to operate in such nonessential sectors as hotels, resorts, farms, bakeries, bookstores, and even beauty shops. State corporations became a fiscal burden to the public coffers, wrecking finances but remaining the countries' biggest employers. Employees were badly paid, productivity declined, and inefficiency grew. Brazil's SOEs hired four million employees, equivalent to the population of Norway. Of the 12,000 SOEs in Latin America, Mexico claimed 1,200, Argentina and Brazil 800 each, and Chile 400. As losses mounted under mismanagement, states covered them with taxpayers' money and money borrowed in international financial markets. As states ran out of money, international bankers refused to loan and Latin America led the Third World external debt crisis. In September 1982, Mexico became the first Latin American country to default. Soon others followed. Latin American states owed closed to $300 billion, 60 percent of Third World debt. As much as 80 percent of all Latin debt was held by SOEs. State corporations became ripe targets for public criticism, refuges for hard-to-place retired military officers, and growing nests of political nepotism. Savvy private businessmen exploited major state companies as contractors and suppliers who regularly overcharged for their goods and services; the result was the socialization of the costs and the privatization of the profits.

The World Bank, the International Monetary Fund, and the U.S. Treasury championed the now widely resented "Washington Consensus," which promoted privatizing the state sector, liberalizing international trade, and deregulating domestic markets. Although this neoliberal recipe has had global significance, the policy was more directed to Latin America's political economy. In East Asia, privatization occurred slowly, expanding the private sector's share of the national economies. By the mid-1980s, as the crisis worsened, international bankers refused to renegotiate debt until debtor countries adopted the Washington Consensus reform agenda.

In Chile, where neoliberalism was forced upon the country by the military coup after 1973, properties seized by the Allende government were either returned to the original owners or auctioned off. One ingenious approach Chile employed was "debt swap." One debt dollar held by the state was valued at as low as 18 cents in the international financial market. The government of Chile was willing to pay up to 87 cents per debt dollar. Many mining properties, public transportation, utilities, airlines, and other state firms were sold off to international and Chilean buyers. Although each dollar bought 87 cents worth of state assets, it actually cost the buyer 18 cents, a rate of discount that, one minister of mining observed, had the Chilean state playing the role of Santa Claus to international capital. The government justified the policy by insisting that the swap reduced the country's external debt. The debt swap was one of a host of neoliberal measures introduced by the dictatorship, among them the privatization of the national pension fund (akin to the American Social Security system). In spite of the zeal for privatization, the Chilean government kept the country's biggest copper mining SOE, Codelco, off the auction block, and it continues to this day as state corporation.

The great transformation of Latin America's economy from the populist, statist capitalism to the neoliberal market system has produced a mixed result. Chile is a success story, but not all Latin American economies are like Chile's. Many buyers of state assets expected to create private monopolies through privatization. To make the project work, the state often conceded monopoly rights for a fixed duration. Often old habits continued, of privatizing profits and socializing losses. Many privatized firms collapsed when the protection ran out. The governments of Argentina, Brazil, Mexico, and even Chile had to take back bankrupt firms in order to save jobs. And there were SOEs that proved unsaleable—national railroads, state-owned shipping lines, and airports. Except for Argentina, Latin American governments did not privatize oil companies. Pemex (Mexico), Petrobrás (Brazil), and PDVSA (Venezuela), among others, remain state-owned, although they compete in the neoliberal environment of the domestic and international markets.

The current trend is that the state must retain control over its domestic economy and external trade relations. Ever-expanding neoliberal globalization has made countries vulnerable to international competition. The Washington Consensus of neoliberal markets implemented throughout the hemisphere has not produced prosperity for all. Since the 1970s Latin America's economies have grown, but income distribution has for the most part retrogressed, and mass poverty has not been eradicated, seemingly confirming the popular belief that the rich get richer and the poor get poorer. Populism has returned and spread throughout the continent, with Hugo Chávez in Venezuela and Evo Moráles in Bolivia swept into office with mandates to reverse neoliberal economic policies. The return of SOEs has been one outcome.

In countries in which SOEs have been strengthened, much of state revenue comes from oil and gas. In Venezuela, state revenues are used to fund social programs intended to alleviate poverty, improve housing, make education accessible, and provide health care to a previously neglected population, reinforcing the regime's popularity. Rising anti-Americanism has turned oil into an important weapon for many states to challenge and resist current U.S. foreign and security policies. More importantly, SOEs are seen as a proper instrument to protect the national interest in the era of globalization, when many developing and developed countries fail to benefit from the global market.

See alsoDependency Theory; Economic Development; Foreign Trade; Globalization; International Monetary Fund (IMF); Neoliberalism; Privatization; Public Sector and Taxation; World Bank.


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                                        Eul-Soo Pang

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State Corporations

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