Brazil's public enterprises turned in impressive growth performances over the last two decades by amassing and deploying large amounts of labor and capital and absorbing new technologies. This chapter looks in more detail at how these various factors were combined and examines the economic and financial rate of return achieved on Brazil's substantial investment in public enterprises. What can be said about productivity in the state-owned firms? How profitable have these firms been? How does this productivity and profitability record compare with available evidence on the private sector in Brazil? With the record of public enterprises in other developing countries? These are the types of questions addressed here.

Production and productivity: a framework

In general, the factors determining productive capacity in an enterprise are summarized in a production function in which the rate of output is expressed as a function of a flow of inputs. In addition to capital and labor, determinants of output include natural resources, management skills, the scale of production, and so on.

Statistical representations of the production function commonly make explicit consideration of just two inputs: capital and labor. Both of these are usually assumed to be homogeneous. Increases in output are attributed in part to change in the quantity of either input. The changes in output not explained statistically by changes in factor usage are usually attributed to a “catch-all” category known as “technical progress” or the “residual.” Subsumed within such broad terms are many output determinants – economies of scale, innovation, and so on – which are more difficult to identify statistically, but nonetheless important in explaining increasing productivity.

The Brazilian experience with public enterprise has been reviewed from a number of different viewpoints. The task has required the gathering and interpretation of many facts and figures. This leaves us with the question: “What does it all mean?” I have approached this in three ways. First, the major conclusions on the Brazilian performance itself are assembled and reviewed. Second, the relevance of the Brazilian experience for other developing countries is discussed. Third, in the light of past performance, I consider the future role of public enterprise in Brazil.

The Brazilian experience reviewed

A steadily increasing role for the state in the economy has been a generally “stylized fact” of the post-1930 Brazilian industrialization experience. This growing role can be measured in terms of the two categories of the “state as regulator” (e.g., controls over foreign trade, traditional fiscal functions) and the “state as entrepreneur.” Through the combined impact of its spending, taxing, regulating, banking, and directly productive activities, the Brazilian state exercises an enormous direct and indirect effect on decision making and resource allocation throughout the economy. This role has grown in the absence of any specific socialist ideology and, indeed, has bloomed vigorously under governments, such as those of the post-1964 period, that expressed deep philosophical and practical commitments to retaining this central role of the marketplace as the guide to economic decision making.

To understand why Brazil has embraced the apparent contradictory principles of an activist state and a basically decen- tralized economic system one must understand its underlying concept of the proper role of the state.

Public ownership per se will not ensure that state-owned enterprises always act in line with the broader public interest. An inherent problem is that the state-owned company is primarily an agent of government development policy, but it also pursues a set of sometimes conflicting microeconomic objectives. The conflicts between the “macrosocial” and microeconomic objectives of the public enterprise pose institutional problems that would not appear to have been resolved in a completely satisfactory manner in any national setting. In Brazil, they have been a source of controversy over the last two decades. What types of social controls over public enterprises have been created? How well (or poorly) have these operated in practice? What forms of control might emerge in the future?

Control over public enterprises in Brazil has been a matter of relations between individual public enterprises and the central government as represented by a supervisory ministry. This ministerial model of control has demonstrated weaknesses that have resulted in either poor control of the public enterprise sector, causing public firms to overlook broad social objectives, or excessive control that has prevented them from paying attention to proper business goals. Yet these ministerial controls have been the only controls functioning since Brazil's closed political system removed from the scene other potentially important agents of social control over public enterprises, for example, a legislature, political parties, consumer groups, and labor unions.

An argument developed in this chapter is that the overall condition of the Brazilian economy has been a determinant of the quality and intensity of ministerial controls.

By most standard measures, the fifteen-year period between 1965 and 1980 witnessed as thorough – even revolutionary – a change in the structure of the Brazilian economy as any in the country's history. It was a period during which GDP expanded by 8.5% per annum, real per capita income doubled, and the output of the industrial sector practically quadrupled. All of the usual indicators of economic progress – steel production, electricity generation, auto–vehicle production, paved highways, energy consumption, imports, exports, and so on – reflect the feverish pace of economic activity in these fifteen years.

By the early 1980s, Brazil had established itself as the dominant economy in Latin America and, arguably but plausibly, the largest and most important economy in the Third World. If the status of world power still eluded it, Brazil had achieved an undeniably important position in the world economy. Almost every multinational corporation of any standing had operations in Brazil. Every large bank in the world had on its books loans to Brazil equal to a substantial proportion of its capital. Increasingly, Brazilian manufactured goods ranging from frozen orange juice to computers were penetrating world markets, large and small.

The definitive story of Brazil's economic growth from 1965 to 1980 would contain important chapters dealing with stabilization in 1965–7, rapid economic expansion through 1973, the first oil shock and the transition to slower growth from 1973 on, and – while its inception is hard to pinpoint – the gathering crisis and the restructuring of the Brazilian economy in the 1980s.

From the mid-1960s through the early 1980s Brazil's stateowned enterprises carried out an enormous program of capital formation. In retrospect, the mobilization of savings that this entailed was a remarkable achievement in the context of a developing economy with thin domestic capital markets. Further, the financing of public enterprise investment in Brazil affected in important ways the behavior and relative autonomy of public enterprise managers and the overall performance of the Brazilian economy.

The sources of public enterprise finance in Brazil

The potential sources of finance for Brazilian public enterprise may be classified as either internal or external according to whether financing arises from cash flows under the direct control of state-enterprise managers or of agents outside the enterprise, including the government. Internal sources include retained earnings, depreciation funds, and proceeds from the sale of assets. Receita vinculada (earmarked tax revenues) resulting from a tax on the ordinary selling price may be considered “quasi-internal.” The tax is imposed by the government and proceeds are, theoretically, at the disposition of government. But in most sectors where such earmarked taxes are important – telecommunications, petroleum, and electric power, among others – a large part of the proceeds may be considered as an increment to retained earnings since such funds support public enterprise investment and are exempt from ordinary budget review.

External sources of finance include state equity injections, equity raised directly from the public, and long-term borrow- ing from foreign and domestic credit institutions, both public and private. Several of these outside sources require brief comment.

State-owned enterprises have emerged as important instruments of development policy in most of the mixed economies of Latin America and, indeed, throughout the developing world. The entrepreneurial and commercial activities of the state typically extend to such diverse sectors of the economy as national resource development, banking and finance, external trade and commerce, light and heavy manufacturing, as well as transportation and the utilities.

Brazil has experimented widely with state-owned companies: By 1980 more than six hundred public enterprises were operating in many sectors of the economy. More importantly, the government's firms have grown rapidly in both size and scale of operations and now include all but one of the thirty largest enterprises in the country. At the same time, a large private sector has grown and prospered in Brazil, often with close input or output links with the state companies. The mixture of public and private ownership has resulted in the construction, in the short span of thirty years or so, of a highly integrated industrial complex capable of producing an increasingly sophisticated array of goods for domestic and world markets. Brazil recorded an average annual rate of economic growth of about 7% from 1950 through 1980, emerging as the most dynamic economy in the developing world and, with a GDP well in excess of $300 billion, as one of the largest economies in the world. Brazil is hardly a shining success story of contemporary economic development, but its economic strategy has produced an impressive transformation of a once very poor country. The state-owned enterprises, the subject of this book, were close to the heart of this strategy.

How did Brazil come to possess such a large and diversified public enterprise sector by the 1980s? Was it the result of particular historical and political circumstances? Or the calculated moves of a determinedly interventionist government?

The argument can be made that the creation of public enterprise in Brazil has been almost accidental, that is, the result of historical circumstances, such as a balance of payments crisis, rather than of conscious government policy. Suzigan, for example, observes: “The rise of the State as entrepreneur did not result from any planned action and its ideological motivation does not extend beyond the economic nationalism that was in vogue at the time that some of these sectors were created.”

Recent Brazilian governments have certainly made many public statements that any decision to use state-owned enterprises was taken with the greatest reluctance. An official document of the high-level Council for Economic Development in 1976 emphasized: “There will be projects under control of the government enterprises if, in practice, the private sector demonstrates clearly that it either cannot or does not wish to carry them out.”

Another point of view, best expressed by representatives of the Brazilian public sector during the often strident debate on estatização (“statization”) in the mid-1970s, roundly rejected this “accidental” or “circumstantial” explanation of the creation of public enterprises by a regime with a presumed commitment to fostering private initiative. For these business groups, the explanation rested much more heavily on the unbridled exercise of power by autonomous state bureaucrats.

Public policies on pricing of outputs and inputs and on the recruitment of managerial personnel are keys to overall stateenterprise performance in any setting. The examination of the record shows that, on the whole and with few exceptions, Brazilian public enterprises turned in strong growth records and were reasonably successful from the standpoint of profits. How much of this performance can be traced back to price policies?

An obvious problem is to resolve the tension between “microtechnical” considerations (e.g., prices that allocate resources “properly” or “fairly”) and political considerations (e.g., prices that will provide the public firm with investment finance or that will contribute toward moderating increases in the cost of living). The theory of public enterprise pricing guidelines has been treated at great length in the literature, but the complexity of the topic does not admit much agreement on proper policies. Most of the discussion assumes that public enterprises operate in sectors in which competition is weak or nonexistent, so control over pricing is needed to achieve a more efficient allocation of resources and to avoid welfare losses. Under such market structures, it is not sufficient to tell public enterprise managers to follow commercial guidelines in setting prices. In the search for a basis for pricing that avoids the extremes of complete price-setting freedom and arbitrary price controls, discussion usually centers upon the applicability of marginal cost pricing in public enterprises. This is because, under certain very restrictive assumptions, the most efficient allocation of resources is obtained when prices everywhere in the economy are set equal to (or equiproportionate to) marginal costs.

When Gómez seized power in 1908 his underlying objectives were to bring peace and work to Venezuela. By engineering his political supremacy he managed to secure peace, but the latter objective would be ensured only by laying the foundation for a stronger and more modern economy. One of the first measures he took was the improvement of the health and sanitation conditions of the country. In addition, education was stimulated and reorganized under the 1912 Código de Instructión. From the fiscal chaos under Castro the National Treasury was also restructured, a process which culminated in 1918 with the enactment of the first Ley Orgánica de la Hacienda Nacional. At the same time Gómez strengthened his own position by establishing in 1910 the Inspectoría General del Ejército, ‘so that the army would be under constant and operational supervision’, and also the Military and Naval Academies. However, the greatest change which occurred in these initial years resulted from the stimulus given to road construction. The country's transport system, as Gómez had witnessed during his past military campaigns, was in an appalling state; roads were almost non-existent, and the easiest and fastest form of travel was by sea, or by the small rail network where it existed. Consequently, in order to knit the country together, and thus bring greater unity and prosperity, on 24 June 1910 Gómez initiated a massive programme of road building and repair work, with half the Ministry of Public Works' annual budget devoted to the building of new roads.

On the assumption of power on 19 December 1908, Gómez presented the country with an economic plan to rehabilitate it after his predecessor's chaos. An important element in this plan rested on a healthy and striving mining industry, which would spearhead economic development and provide the government with an independent source of income. Thus, from the very beginning the importance of this sector of the economy was recognized. It is therefore no surprise to find that keen interest was aroused when several British oil companies, after lengthy negotiations, entered the country. The government was well aware of the importance and value of oil, and was determined to get a fair return from the companies, as well as to establish effective control over the industry. We find that recommendations of this nature were made very early during Gómez's regime by people closely associated in the Cabinet with the oil industry, and that unsuccessful attempts were made prior to 1919 to increase oil production. Despite his personal links with the industry, the possibility that it would provide Gómez with an independent source of income made him aware that in order to ensure his own political survival he would need to get as much out of the companies as possible in taxes. Thus from 1914 onwards the government pursued a consistent policy of securing a larger tax return from the companies.

This book is not a history of Gómez's dictatorship but examines specifically the relationship between the Gómez regime and the oil industry which developed during his government. I am most grateful to my parents, to whom the book is dedicated, for their support in the preparation of this work. As always, my wife María Cristina, was very helpful at every stage in the preparation of this book. I would also like to thank Malcolm Deas for his detailed and meticulous comments on the manuscript and for his general encouragement. I am also indebted to Senator Dr Ramón J. Velásquez for his hospitality and counsel in Caracas, and for gaining me access to the Archivo Histórico de Miraflores and to the Archivo dependiente de la División de Conservatión de la Oficina Técnica de Hidrocarburos (Ministerio de Energía y Minas) for my studies. I wish also to thank the following people in Caracas: Dr Gumersindo Torres Ellul, Professor Manuel Pérez Vila, Dr Pedro Grases, Dr César González, Dr Nikita Harwich, and last but not least, Dr and Mrs William M. Sullivan for their kind hospitality and help. A special thanks is also due to the staff of the Centro de Estudios Latinoamericanos ‘Rómulo Gallegos’ who bore my many requests with great patience and tact.

My stay in Caracas was financed by a Foreign Area Fellowship granted by the Social Science Research Council (U.S.) and the American Council of Learned Societies, and by grants from the Centro de Estudios Latinoamericanos ‘Rómulo Gallegos’, Fundación John Boulton, and St Antony's College, Oxford.

The oil companies were attracted to Venezuela because of the expectation of large oil deposits, relative political stability, and the good terms offered for the exploitation of the country's oil resources. Venezuela's geographical position vis à vis the major oil markets placed her at a freight advantage over both her Mexican and Middle East competitors, and even over some American oilfields. Maracaibo is 113 miles nearer New York, and 863 miles nearer Southampton, than the Mexican port Tampico, and is only 644 miles from the Panama Canal. This meant that Venezuela was ‘favourably situated to export to Europe, to the United States and to the Pacific coast of America, and the Far East via the Panama Canal’. Furthermore, her logistic production problems were far fewer than those of her Middle East competitors, because the oilfields were conveniently situated near sea transport, and because the offshore Dutch islands of Curacao and Aruba provided the companies with a safe haven in which to build their large refineries. Unlike the Middle East and Iran, Venezuela devised a concessionary system whereby most oil companies, regardless of nationality, could operate. In addition, production costs were much lower than in the U.S. and the number of barrels produced per active well much higher. Moreover, 80.5 per cent of the total number of wells drilled in Venezuela up to 1935 were productive, thus demonstrating much lower exploration and drilling costs in Venezuela than in the U.S.