0.11 States and markets - soes  (Page 4/9)

By 1995, Chinese SOE ^s fell into three distinct groups.

1. Giant state-owned enterprises in strategic industries such as natural resources, banking, telecom, transport and industry. These firms still act much like government ministries in many ways.
2. Joint ventures between Chinese state-backed firms and private firms, usually foreign firms.
3. Municipally owned SOE ^s backed by local governments.

In the view of some analysts SOE ^s in China are largely concentrated in what the Chinese call strategic sectors. Huang, The Chinese Regulatory STATE It is understood that politicians have much more power and control over state enterprises then is the case in other countries with large state enterprise sectors. Chinese SOE ^s are political as well as economic institutions. CEOs and other top managers are appointed by the communist party, and indeed are party members. Top SOE executives understand that they must adhere closely to government policies while pursuing commercial goals.

The SOE sector in China is truly huge. SOE ^s dominate, very strongly the financial system, especially banking. SOE ^s in China (and Russia) account for 1/3 of GDP.

Brazil’s recent economic history well reflects the ebb and flow of enthusiasm for SOE ^s .

By the eighties, Brazil had more than 500 SOE ^s . By 1990 Brazil began to sell off many of the smaller SOE ^s . And beginning about 15 years ago, Brazil developed its own, newer model of state capitalism.

After shedding over 100 SOE ^s , Brazil began investing heavily in natural resource and telecom firms, but only after partially privatizing them. This was the case with Petrobras the National Oil Company but not VALE the international hard minerals mining company.

The experiences of Petrobras and VALE furnish interesting privatization outcomes.

VALE (formerly known as Companhia Vale do Rio Doce) was fully privatized in 1990, meaning that 100% of VALE stock resides in private hands. VALE’s economic performance since then has been admirable by any standard.

But in the case of PETROBRAS, the government did not choose full privatization. Rather, the government of Brazil retains majority control. With this authority the government has not hesitated to remove CEOs when displeased, nor to instruct PETROBRAS what prices it may charge for gasoline, diesel fuel and other products, By 2014, there were plentiful reports of widespread corruption in Petrobras. Among other problems, corruption helped to increase sharply costs of refining. ( Financial Times , October 21, 2014). often with disastrous results.

And, the instruments of government control over SOE ^s in Brazil are not limited to share ownership. Indirect methods are also used, including indirect investment in the form of credits (loans) to SOE ^s from Brazilian SOE ^s in banking .

This pattern of control has also been quite common in other nations with large SOE sectors, especially China. It was also characteristic of the SOE sector in Indonesia and Bolivia in the period 1950-80, where state-owned banks were directed (“commanded”) by the government to lend to other SOE ^s , regardless of their viability. The risk here is that the government (of China, of Brazil), can easily builds itself a house of cards, setting the stage for a financial “time bomb.”