Economic Salvation: Can Privatization Prove to be Prudent for Brazil?

By: Roberto Carlos Ventura

“In the midst of economic downturn, President Michel Temer is spearheading Brazil’s biggest privatization package. However, will this alone save Latin America’s largest economy?”

Brazil is currently fighting through a gruesome recession; it is the worst in more than a century. Ironically, Brazil attracts almost half of all South America’s foreign direct investment (FDI) influx, and these investments continue to increase despite Brazil’s evident economic turmoil. A large chunk of the blame for this turbulence falls on former president Dilma Rousseff’s leftist practice of government intervention, as stated in an article by The Economist, a magazine-format newspaper. Expectedly, leadership in Brazil shifted elsewhere in hopes of achieving economic alleviation.

In the wake of a vacant presidency, following Rousseff’s impeachment at the end of 2015, pro-business President Michel Temer and his contentious administration have come into power and are spearheading the biggest privatization package Brazil has ever seen. Privatization refers to the transferring of ownership and control of a business, industry, or service from the public to private sector. However, the new reform agenda proposed by Temer entails an auctioning off of an overwhelming number of state-owned enterprises. According to an article by the U.S. News and World Report, a multi-platform publisher of news and information, 57 state assets are included in the privatization drive, encompassing Eletrobras–a major Brazilian electric utilities company and, in fact, Latin America’s biggest power utility enterprise. Additionally, as provided in a Financial Times article, Petrobras–a former state-owned oil company–has been shedding assets and selling them to international investors. Petrobras is now deemed as a semi-public Brazilian multinational corporation.

The Brazilian government justifies its privatization agenda with promises of increasing efficiency, attracting more foreign investment, and lifting the economy out of its dreadful pit. Nevertheless, the plan comprises deregulation, which, for many companies, can invite excessive risk-taking and disregard for social responsibilities. Another article by The Economist highlights Temer’s constitutional amendment proposal which would freeze public spending. This amendment is the centerpiece to his plan and could be unmerciful to health and education, which consumes more than a fourth of the country’s revenue. Brazil’s high taxes are also faulted as paying for its past fiscal profligacy.

Michel Temer’s goal is to strike out every barrier listed in Brazil’s foreign investor profile. According to the U.S. Department of State: 2014 Investment Climate Statement, Brazil is considered friendly for FDI, however, taxes, local content, and regulation are its impediments. Therefore, it makes sense as to why the president’s agenda targets these three facets of the economy, as it would allow for greater attraction of foreign investment and Brazil to proceed with privatization. But, is this plan of action enough? Does privatization ensure efficiency and can it singlehandedly lift Brazil’s economy out of its economic downturn?

In the same statement by the U.S. Department of State, it was noted that Brazil had begun a Logistics Investment Program worth 240 billion dollars with the aim of attracting private capital and managerial expertise to upgrade the country’s infrastructure–including roads, ports, airports, energy, urban mobility, etc; all infrastructure concessions are especially open to foreign companies. Notably, this program’s ambition had been put in place right on time as Temer’s government set its intention to sell off everything from the mint to the state lottery in order to raise revenue and boost infrastructure investment, as written in the Financial Times article. Steven Horwitz, the Schnatter Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, explains this favor of privatization as one that stems from the private sector’s ability to provide goods and services at a lower cost and higher quality than the government can. Sounds ideal, except, as Horwitz points out, privatization is only the first step and alone cannot achieve this efficiency that Temer and his government so urgently want to reach.

According to Horwitz, there is an essential stepping stone to attaining the paybacks of privatization and it lies not necessarily in private ownership, rather in competition amongst private owners. He also claims efficiency may require private ownership but it alone is not enough, that is, until de-monopolization is introduced. Changing from a government monopoly to a private monopoly apparently does not lead to clear economic solutions. Horwitz distinctly underlined in his account of privatization, “notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not consumers.” Therefore, de-monopolization is vital in the initiation of competition, which then enables a country to attain the private sector’s fruitful efficiency–providing greater quality, lower cost goods at the benefit of consumers instead of government agents reaping political benefits.

With the wave of ownership shifting to the private sector, Brazilians grow worrisome and skeptical. The U.S. News article reveals Brazilians’ suspicion regarding the selling of state-owned assets to private hands, for these private, foreign entities are accused of making corrupt deals with the government in the first place. In fact, Temer was apparently taped participating in a discussion of bribes with former chairman of JBS, a major meat packing company, as brought to awareness by a Financial Times article. Moreover, there has been talk about corruption scandals in both Eletrobras and Petrobras. Nevertheless, these allegations may not come as a surprise to Brazilians for even the U.S. Department of State has referred to corruption scandals as regular features of Brazilian political life.

Still, there are great severities directly affecting Brazilians on a day-to-day basis. According to last week’s The Economist magazine, state governments–such as Rio de Janeiro–are experiencing failure of policing, financial mismanagement, and economic misfortune, which give the state no other option but to turn to the federal government for aid. However, the helping hand that is the federal government places certain conditions on its support, specifically on cuts in spending. This has lead the state of Rio de Janeiro to cut 30% of security spending–a vital necessity for an area filled with ever-increasing gang violence–as well as the halt of salary payments for public workers, especially policemen. With law enforcement winding down and violence increasing at a quicker rate, many Brazilians are at the center of a chaotic catastrophe. Citizens are going missing and flying bullets are becoming so common that victims can barely be distinguished. Are Brazilians supposed to wait until the privatization process takes effect and foreign investment improves infrastructure, and with it a possible end to what is still an ongoing violence within favelas? Government has its plan set but action is gradual and may prove to have gaps in its implementation.

After almost 6 years of leftist government interventionism by Dilma Rousseff, President Temer and his government have shifted gears and set Brazil in course for privatization. Although this course of action may possess potential for Brazil to finally overcome a pernicious recession and government meltdown, its execution is questionable. If Steven Horwitz’s exposition holds true, Brazil’s leadership may be overlooking a crucial aspect of the process that can ultimately direct Brazil to a much needed economic salvation. Brazilians anticipate the day when they no longer live in anxiety and amid corruption.

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