The most important discussion about the Brazil we want to be in the future got off to a bad start. The decisive question for the type of country we are going to build – large State or strong State? — re-emerged driven by many words of command, another scandal with former Minister José Dirceu playing a leading role and practically no substance at all. Raised to the condition of pre-candidate for President of the Republic at PT’s mega event, which sealed her name, Minister Dilma Rousseff hit hard with illations about a supposed “neoliberal” attack, ready to be set off. “Some ideologues actually said almost everything would be solved by the market. The result was a disaster. The only reason the disaster was not even greater is because Brazilians resisted this dismantling and were able to impede the privatization of Petrobras, Banco do Brasil, Caixa Econômica or Furnas,” said Dilma, insinuating the line she will pursue in the campaign. In turn, the main promoter of her candidacy defended the Minister’s “nationalizing” blemish. “They say that about her. But that’s not bad. It’s good,” President Luiz Inácio Lula da Silva said at the time. Ironically, Dilma’s praises for this “nationalism” were pronounced a few meters from Dirceu – always him – nebulously involved in the attempt to create a new state-run company to disseminate broadband in the country and which may result in one of the biggest swindles of his complicated career as a “consultant”. In turn, in face of Governor José Serra’s indecision regarding the race, silence reigns among the opposition. So far, no one knows what PSDB intends if it returns to power. But, although in a tortuous manner, at least the question is raised: what will Brazil be like starting next year, when the Lula era comes to an end? In the difficult, but vital balance between State and market, which paths shall we follow? Do we want a strong State – in regulations, in enforcing the law, in respect for contracts, in guaranteeing safety and in so many other areas of life? Or do we prefer a large State – that employs more and more, produces goods and services, interferes in economic activity and that, in the end, characterizes Brazilian capitalism in the 21st Century?
One look at the country’s recent advances reveals the historical importance of this choice. The Brazil that today emerges as a global leader has consolidated an impressive series of achievements in the economy, politics and society over the past 20 years. We buried a military dictatorship. Opened our economy. Tamed inflation.
We accepted the basic rules of good macro economics. We lifted millions of people from poverty. We created an enormous consumer market. As a nation, we are stronger than ever. The next step – decisive for our intentions – is to understand what we want from our State. Historically, it is responsible for some of the country’s main ailments, such as the terrible quality of education, sufferable health care, lack of security that takes nearly 50,000 lives every year, an asphyxiating tax burden, a bureaucracy that torments the citizen, bars entrepreneurism and perpetuates itself government after government. The alternative is not to make the State insignificant – if anyone still wants proof that the market cannot be allowed to romp about freely, we recommend a visit to the United States and Europe to see the damage the lack of financial regulation produced. The point is another entirely. In whatever we elect as our priority, the State must function. Electoral bickering apart, the bitter partisanship that emerged around the issue is of no help. “Ideology is muddying the debate. Liberals do not preach the end of the State. We only recommend caution, because a heavy hand can generate distortions,” says economist Gustavo Loyola, former president of the Central Bank.
Therefore, it is worth stripping the theme of a little of its passion. It is not true that Brazil flirted with a minimal State during FHC’s term. Nor is it true that Lula is building a Soviet State. In the charts that illustrate this story, EXAME presents a complete diagnosis of the theme. The radiography shows that despite some reduction in the machine and of some important privatizations in the FHC era, Lula inherited a State still heavy in many aspects. But, rather than reduce it, he opted to make it grow more. Since 2003, the size of the machine has grown 120,000 employees. Its cost increased 60%. Eight new companies have been created and only one, Empresa Brasil de Comunicação, responsible for a TV channel without any audience, and therefore useless from every point-of-view, already has 1,500 employees. Fortunately, in democratic Brazil, the creation of state-run companies is not as easy as it was during the military dictatorship. The new companies must be approved by Congress. Lula government’s first attempt at getting approval for a state-run company, Petrosal, was recently blocked by Congress. Perhaps the most worrisome is not so much the present, but the future tendency. Authorities give every indication that the option for growing the machine is a conscious one and there will be no turning back. The list of ideas even includes the creation of a company to produce fertilizers, already being ridiculed by the nickname “Adubobrás”. “The government must be careful. Brazil cannot behave like China,” says Jim O’Neill, head of the research department at Goldman Sachs and the person who coined the term Bric to designate the four main emerging countries — Brazil, Russia, India and China.
At the center of today’s discussions is the government’s proposal to resuscitate Telebrás, the old holding for privatized telephony operators at the end of the 1990s. The reason behind bringing Telebrás back to life, today a mere administrator of old debts, would be in practice to make it a new state-run company, with a specific mission: accelerate the dissemination of high speed Internet, the so-called broadband. It is something that some of the most advanced economies in the world are undertaking at the moment (see story on page 32). Having a faster Internet that can handle the increase in image and data traffic is a goal of indisputable value for economic competitiveness. The question is how to make it happen. While other countries develop solutions that privilege private competition in the sector – like Brazil successfully did to free up telephony 13 years ago – or use public-private partnership formulas, here the signs thus far indicate a state-owned slant. Ignoring the historical inefficiency of state-run companies in a sector in constant technological change, the government is considering assuming installation of the National Broadband Plan.
According to sector specialists heard by EXAME, this re-creation is not only unnecessary but it has also become a source of uncertainties. “By announcing we are going to reinvent Telebrás to compete with private companies, the government inhibits our investments in the sector,” said a top executive at a Telecom operator. The first counter indication in relation to the idea has to do with the historical inefficiency already demonstrated by the holding. In 1998, when Telebrás ran the country’s telephony sector, only 32 % of Brazilian domiciles had phone lines. Today, between cell phones and fixed lines, more than 80% of all homes have telephones. Last decade, mobile telephony companies alone invested 77 billion reais. The system is not perfect. There is much room to improve. But its evolution in the hands of private initiative is incomparable, as demonstrated by the data. Besides, the nearly 200 employees still at Telebrás are technicians who work for Anatel. Pulling it out of limbo could mean the creation of a new lot of positions of trust and who knows how many common jobs.
The second counter indication has to do with the nebulous 35,000% appreciation of Telebrás’ shares on Bovespa during Lula’s government. This leap is partly the result of rumors. But recently, from the top of his soap box, President Lula himself said “Telebrás shall be reactivated to bring broadband to the country.” The stratospheric appreciation of the state-run company’s shares is being investigated by the CVM, the government entity responsible for inspecting the stock exchange. Another chapter surrounded by much doubt concerns reactivation of Eletronet, a mixed capital company that went bankrupt and which began with the Eletrobrás system in the 1990s. Eletronet’s big asset is a fiber optic network measuring 16,000 kilometers that spreads over 18 states. The government intends to transform the Eletronet network into the backbone of its broadband plan and transfer its management to Telebrás. There are strong suspicions of traffic of influence and use of inside information in a lobby supposedly made by former Minister José Dirceu, stripped of his political rights during the monthly bribery scandal. This case helps us remember that such inroads by the State cannot be considered from a theoretical perspective alone. In real life, noble arguments tend to fit the defense of private interests like a glove.
The revival of Telebrás is just part of a broader movement the government has been making over recent years to reinforce its presence in the economy. The maximum expression of this tendency is the strengthening of the country's largest company - Petrobrás. Contrary to common sense, the company began to gain muscle when it lost the legal monopoly it had of oil exploration and production, in 1997. At first, Petrobras strived to gain competitiveness in face of the arrival of multinational firms. More recently, an aggressive expansion project that drove Petrobrás to establish itself in nearly every energy sector was added to the success of its exploration campaigns and discovery of pre-salt reserves. Today, besides being responsible for nearly all oil production and refining in the country, the company controls nearly 40% of fuel distribution, has one-fourth of the natural gas distribution market and already has the capacity to generate electricity equivalent to half of Itaipu. It has become the fourth largest energy company in the world, with an estimated market value of 180 billion dollars. This leap not only transformed it into an international giant, but also into one of the main driving forces for growth in the country and one of the most privileged instruments of intervention in the economy. “We are no longer an oil company. We go from the well to plastic. And we are not going to stop growing,” José Sérgio Gabrielli, president of Petrobras told EXAME.
The company’s most recent move was in the petrochemical sector. In January, by increasing its share in Braskem, which belongs to the Odebrecht Group, Petrobras made it possible for it to buy rival Quattor, thus forming the fifth largest petrochemical company in the world with annual earnings of 26 billion reais. Is it good for the country when a single company is more and more dominant in so many markets? That’s an open question. Petrobras’ advances into the petrochemical sector had government support, using the argument that Brazilian industry had to gain international competitiveness. This step is a good representation of what the government means when it defends its role as a “fomenter of development”. In the recent past, the government worked hard to forge the consolidation of national capital groups with global firepower. This logic permeated, among other deals, the incorporation of Sadia by Perdigão, resulting in BR Foods, in the food sector, and the purchase of Bertin by JBS-Friboi, today the largest meatpacker in the world. In both cases, in which the BNDES or employee pension funds of state-owned companies, like Previ and Petros, injected billions, one of the justifications was the creation of green and yellow multinationals. It makes sense from a scale perspective. However, the effect for the country will depend on the degree of competition in each market after consolidation. “In theory, support for the creation of these groups may make sense if it generates gains in efficiency in international competition and the incorporation of new technologies that benefit the country,” says consultant Juan Peréz Ferrés, former head economist at the Secretariat for Economic Rights. “The risk is having actual domestic monopolies. Then, the consumer is the loser."
That is one of the criticisms regarding the help given Braskem, which after incorporating Quattor has become practically the only manufacturer of some plastic resins in the country. Another controversial operation supported by the government was Oi’s purchase of BrT telephony, which required a change in a law to make the deal possible. In this case, the logic would be to have a big national operator in an environment where the other large companies — Telefônica, Claro and TIM — are multinational. The gain for the Brazilian consumer is still not clear. New and big business is also being prepared in the electric sector. There is strong state presence in this area through the mastodontic Eletrobrás, which owns 38% of generation capacity and more than half of the power transmission line grid. President Lula has already declared it will be strengthened to become the “Petrobrás of the electric sector". But the moves in the sector won’t stop there. In energy distribution, where Eletrobrás has a reduced participation, a new, mixed capital, super company is being planned. The strategy would be to initially merge CPFL assets, controlled by the Camargo Corrêa Group, with those of Neoenergia, whose main shareholders are Previ and Iberdrola, of Spain. In a second phase, the new CPFL would also incorporate Brasiliana, today a company split between Previ and the American group AES. Command of the resulting company would go to Camargo Corrêa. With the blessings of Lula and Dilma, the new CPFL would be dominant in important markets of the country, like the state of São Paulo and the South.
In short, the examples mentioned speak of the risks of an economic system that could be emerging in the wake of the financial crisis – State capitalism. American political scientist Ian Bremmer, president of the political risk consulting firm Eurasia Group and one of the most respected voices in the international scenario, best captured this phenomenon. With the rich world wallowing in problems, said Bremmer, the liberal model went into decline. The moment now belongs to countries whose economic driving force is the State, whether through state-run companies or through their sovereign funds. According to Bremmer, the new international dichotomy is no longer between socialism and capitalism, but between market capitalism (as practiced in the United States, Europe, Japan, Canada and Australia, among others) and State capitalism (whose representatives would be China, Russia and Arab oil exporting countries). He sees Brazil as currently flirting with both models, without any clear definition of which way it will go.
Although Brazilian nationalism is still light-years from the kind practiced in Russia or China, there is no doubt the international crisis re-energized defenders of the model around here too. While the country’s credit market was completely on hold, the federal government made use of its position as majority shareholder in Banco do Brasil and Caixa Econômica Federal. First, in April 2009, Antônio Francisco de Lima Neto was fired as President of BB because President Lula was apparently displeased about the high interest rates practiced by the bank. After the change in command, Brazil’s largest bank began to reduce rates and inject money in the market. The result is the institution has granted 33% more credit in 2009 than in 2008, reaching 301 billion reais. This growth in the credit portfolio had a direct impact on BB’s profit, which grew 15% in the period (a number also influenced by a settlement of accounts with Previ, which yielded 2.3 billion additional reais). “BB had a more appropriate reading of the crisis and is reaping the results now,” says Flaviano Faleiro, executive of strategy for the financial area at the consulting firm Accenture. Like BB, the Caixa was also urged to provide more credit — especially in the real estate segment. Strong action by the two institutions increased the share of state banks in the country's credit offer from 36% to 40%. However, this phenomenon should be understood as circumstantial. Banco do Brasil has already advised it is studying the possibility of raising 9 billion reais by 2011 through an IPO to reinforce its capital. Banco do Brasil’s and Caixa Econômica Federal’s participation in the commercial segment is growing. In 2008, the two institutions represented 37% of all assets of the five largest commercial banks in the country. Last year, that number reached 42% of the total. For the country, state activism in credit was fundamental during the crisis, when private banks retracted. However, despite undeniable improvements in public bank governance, like BB, there is no doubt the government – this one and the next – now has renewed power over almost half the money available to companies and people.
The discussion about the State’s role has become more complex in recent years. The era of extremes is gone, when the socialist option, as well as blind faith in the markets, were still taken seriously. In a way, we have come back to a classic matrix, since even Adam Smith, the father of economics, defended the State. “He preached state action in areas such as defense, administration of Justice, providing for public goods and education,” said economist Eduardo Giannetti.
“Curiously, it was Marx who spoke of abolishing the State.” The fact is the current debate has room for several nuances. One example: different policies can generate discrepant results over time. Sudden nationalizing turns can have a beneficial effect over the short term – and remove the competitive element that generates growth over the long term. Besides that, state intervention is not uniform. There is a sort of action geared towards income distribution, which has a good example in the Family Allowance Program. This is radically different from state action in the production of goods and services. Which, in turn, has nothing to do with greater or lesser rigidity in regulation. In face of this range, different policy mixes are available. The next government may decide to be more active in the social area – spending more and better on health care and education. But it may choose to interfere less in the day-to-day activities of companies. In that case, will the State have grown or shrunk?
In face of these options, we go back to the initial question: which State do we want? Historical experience suggests gigantism does not produce wealth in the long term, except for the small group of privileged persons who enjoy the fruits of all their resources. It also seems to indicate that robust and fair institutions are the key to success, compatible with a strong State. We have much work ahead of us to get there. Cleaning could start by taking a scissors to the infernal bureaucracy that surrounds citizens and companies at every moment, perhaps the most glaring manifestation of the large State in national life. Its invisible hand is in the certificates, civil registries, documents and bureaucratic jurisdictions that create obstacles in the country’s day-to-day activities. A State that intends to be strong should also increase its economy’s competitiveness and stimulate growth abolishing the increasing tax asphyxia, regardless of the party in power. These measures may not enthuse certain publics avid for an easier and faster power to be obtained. But the rest of the country would only gain from this.
Story by Angela Pimenta, Fabiane Stefano and Renata Agostini.