The implicit agenda of a conservative patrimonial reform

Luiz Carlos Delorme Prado; Leonardo Weller
Instituto Brasileiro de Análises Sociais e Económicas (IBASE)

Although it was argued that the proceeds from privatisation would be invested in social reforms, from 1995 it became clear that those revenues generated an important inflow of international capital, to be used not for social investment, but rather to finance trade deficits and debt service. The economic results of privatisation were mixed, while in social terms they have been a failure.

TheNational Programme of Privatisation (PND) was created under the CollorGovernment in 1990 by Law 8.031/90. Two institutions implemented this programme:the National Council of Privatisation (CND) and the National Bank of Economicand Social Development (BNDES). The CND was the main planning council of theprivatisation processes. It reported directly to the presidency and hadministerial status. The BNDES managed the National Privatisation Fund (FND),which is the trustee of privatisation revenues.

Objectivesand official justifications of the PND

Theprivatisation programme was launched as one of the bold conservative structuraleconomic reforms proposed by president Fernando Collor to end the economiccrisis of the late 1980s. (The short Collor presidency was marked by accusationsof corruption that led to his impeachment in 1992.) Succeeding presidentsdeepened the process. Privatisation officially had two main objectives:


·       Improveefficiency.Privatisation policy assumes that the private sector is more efficient than thepublic sector. Supporters argued that increased productivity achieved throughprivate entrepreneurship would spill over to the rest of the productivestructure.

·       Reducegovernment expenditure. By privatising the state companies, the State would no longer beresponsible for investment (or losses). Therefore, the government would be ableboth to reallocate those resources to other areas, such as health and education,and to increase its budget surplus.

Theimplicit agenda of PND

Thetrue reasons for privatisation became evident after the Plano Real waslaunched in 1994. Although the Cardoso government argued that the proceeds fromprivatisation would be invested in social reforms, from 1995 it became clearthat those revenues would also help supply foreign capital funds to finance thehuge current deficits caused by the exchange rate policy, which in turn was usedto strengthen the currency and curb inflation. (See Table 1).

Table1.- Current account (USD billions)













CC balance











CC balance/GDP











Source: Conjuntura Econômica/FGV

Inorder to maintain a stable exchange rate, it was necessary to import capital. Inaddition to privatisation revenues, the government obtained foreign capitalthrough high interest on its bonds. Over time this forced the government toallocate more revenues to service its growing debts.

ThePND worked in both these directions. While the resources deposited in the FNDincreased the government’s revenue, foreign groups bought almost half ofequity sold by PND. Therefore, the privatisation programme generated animportant inflow of international capital, to be used not for social investment,but rather to finance trade deficits and debt service.[1]

Theprivatisation process

From1990 to 1992, 18 steel and petrochemical companies were sold to the privatesector. During 1993 and 1994, PND privatised 14 companies, completing thetransference of the Brazilian steel industry to the private sector. In 1995, thePND started the privatisation of public services, such as urban electricity andpublic transport firms. In 1996, the privatisation programme of companies ownedby the federal states began. During 1995 and 1996, the PND privatised 19companies. The privatisation process was extended to telecommunications in 1997,when PND revenues came to USD 26.3 billions, more than its combined revenuesfrom 1991 to 1995.[2]In 1998, the PND collected its largest revenues, USD 35.7 billion. During 1997and 1998, the PND privatised most of the state companies. After 1999, theprivatisation process lost steam, with revenue dropping to USD 4.2 billion in1999. After increasing in 2000 to USD 10.2 billion, the programme’s revenuefell to USD 2.8 billion in 2001 and to USD 2.0 billion in 2002. The PNDcompleted the privatisation of the electricity sector in 2000. In 2001, theprogramme completed the telecommunications concession bidding. Privatisation in2002 was in the banking sector. Of total PND revenues of USD 105.3 billion, USD70.6 billion came from the privatisation of federal government companies, whilethe remaining USD 34.7 billion came from state (provincial) companies. Summingup, 65% of the revenue of theprivatised companies belonged to the public service sector. Among those, 62%were in energy and telecommunication, 29% were in the productive sector and 6%in the financial sector.[3]Foreign investors had an important role in the PND: 48.3% of all the resourcesinvested in the programme was international capital. Americans, Spanish,Portuguese and Italian were the main foreign investors. (See Table 2)

Table2.- Foreign investors in PND (USD millions)



Federal State-owned Companies






































































Total Foreign Investors






General Total







Privatisationproponents appear to have lost political support for their policies. The loss ofdynamism of the PND since 2001 is largely due to stronger public opposition toattempts to sell out large government companies such as Petrobras, Bancodo Brasil and Caixa Econômica Federal. Another reason for theslowing pace of privatisation is increasing scepticism about its efficacy inareas such as electric energy, in the wake of the disastrous electricityshortage that plagued families and business during 2001.

Resultsof the privatisation process

From an economicperspective, the results of the privatisation process depend on each sector. Thebest efficiency gains were made in manufacturing companies, such as steel,mining, airplanes and petrochemicals. The most celebrated case is Embraer,a state owned aerospace firm that became one of the world’s largest commercialairplane manufacturers after privatisation.

However,in the public service sectors results were mixed. There was some improvement intelecommunications, as the supply of fixed and mobile telephone lines increasedsharply. In the process of modernising telecommunications, private firmssometimes imported technology and abandoned domestic expertise, in some casesusing foreign manpower in place of the dismissed domestic engineers andtechnicians. The most famous case was Embratel, the government’s maintelecommunications holding company, which in June 1998 was sold to WorldCom, anAmerican firm that went bankrupt after a major accounting fraud was revealed. Embratelwas set up in 1969 to run all the interstate and international Braziliantelecommunications. Since its foundation, this company used satellites forinternational and domestic communication, and since 1985 it has had its ownsatellites. It was a pioneer in developing a huge optical fibre network in LatinAmerica. The rapid growth of the Internet in Brazil was only possible because Embrateldeveloped the infrastructure in Latin America. Their engineering also had astrategic role in the development of the Internet network and data transmissionin Brazil. The new owner, WorldCom, does not seem to be a well-run company, asits recent financial problems have shown. What efficiency gains could this newowner have brought to a firm that had been one of the most professionally runand strategically capable Brazilian public companies?

Electricpower and transmission companies have been only partially privatised.Privatisation is complete for public electricity distribution companies, most ofwhich were state (province) owned. The performance of those companies afterprivatisation was mediocre, the quality of services was inconsistent, and theprice charged for services increased enormously. Between 1996 and 1998, PNDaccomplished 18 of the 22 privatisation bids of electrical companies. Duringthese years, average electrical tariffs increased 45%. Residential consumers gotthe largest increase of 65%, while tariffs to industries, the commercial sectorand rural consumers increased respectively 30%, 31% and 25%.[4]These increases were much higher than inflation in the same period.

Lackof public investment and overconfidence in the privatisation programme led alsoto the 2001 energy crises, which forced the country to go into an electricityrationing programme. The imbalance of supply and demand in this industry showsthat the groups that bought the electric companies have not been investingenough. The electric system is based on hydroelectric power and depends ontransmission over long distances. Consumers (about 47.2 million units) areconcentrated in the industrialised Southeast States. The electric system mustbalance changes in generator power due to rainy seasons with the needs of thedifferent regions. Because electricity demand has been growing faster than GNP,it takes a huge annual investment (BRL 6-7 billion per year – USD 2-2,34billion) to keep pace with consumption. The level of investment in the electricsystem as a whole, that is, including generator, transmission and distribution,was for 1994 only half the average level of investment of the 1980s. From 1980to 1989 the annual investment in this sector was USD 12.6 billion. From 1990 to1993 this was reduced to USD 8.1 billion. From 1994 on, it was USD 5.5 billionor less.[5]

Insocial terms privatisation has been a failure. The new owners laid off a hugenumber of workers. During the1990s employment in the public sector was reduced by 43.9%.[6]The group of companies originally owned by the state sector lost 546,000 jobs onall levels, from 1989 to 1999.[7]Many experienced engineers and technicians were replaced by workers from(foreign) headquarters or from contract firms.[8]Payroll expenditures were also reduced but at the same time the company began topay much higher salaries for their foreign executives and advisers. Theconservative argument that Brazil’s well-trained workers would trade off lowwage public jobs for well paid private ones was shown to be absolutely false.During the 1990s 48% of the new jobs created belonged to just three occupations:domestic employees, salesmen, and building construction workers. The growth ofunemployment for people with eight or more years of education grew 620%, muchmore than the unemployment rate of people with less than one year of education,which grew 189%.[9]

Norwas the objective of using privatisation revenue to decrease governmentexpenditure accomplished. Despite the fact that the government did not have toinvest in privatised companies, the government’s debt increased dramaticallyafter 1994. Between 1994 and 2001 the domestic public debt grew 330%, from BRL153 billion in 1994 to BRL 661 billion in 2001.[10]This was caused mainly by high interest being paid to attract foreign capital,but also by the sterilisation of monetary supply increases, through a policy ofreserve accumulation, which was needed to guarantee capital accountliberalisation.[11]

Theexternal debt grew from USD 148 billion in 1994 to USD 226 billion in 2001, andgovernment expenditure with payment of interests reached about 10% of GNP during1999-2001. That is, resources from privatisation were too small (in view of theincreased government expenditure required to pay the necessary interest, due tothe large current account deficit) to keep a low exchange rate up to 1998.Finally, even though Brazil was compelled to change its exchange rate policy in1999 after a financial crisis, exchange rate instability has persisted and thecountry now faces the prospect of another crisis.


Theconservative patrimonial reform did not deliver promised benefits. A decadeafter the programme started, the results are mixed in economic terms, while insocial terms – employment impacts and the costs for households and smallbusinesses – they were negative. Except among entrepreneurs and the press,privatisation was never widely supported in Brazil. However, because thegovernment was able to link the PND with its successful policies to controlinflation, it was considered a legitimate economic policy. During the 1990s, andparticularly up to the end of Cardoso’s first term, public opinion was notstrongly against privatisation. This began to change during his second term. Theconservative economic plan was under strong criticism and public opinion wasgrowing sceptical of mainstream economists’ explanations for the failure ofBrazilian economic development. Finally, the economic and financial crisis ofthe last two years has definitively discredited the conservative project. Allpresidential candidates in 2002 stated, in different degrees, that Brazil’seconomic model should be changed.


[1] There is some controversy about social expenditure in Brazil. See Sonia Draibe, “As Políticas Sociais nos Anos 1990”, in Renato Bauman, Brasil: Uma Década em Transição, ECLAC, Campus, 2000.

[2] Data from BNDES.

[3] Ibid.

[4] Data from ANEEL (Electric Energy National Agency).

[5] Data from Eletrobras.

[6] Marcio Pochman, A Década dos Mitos, Sao Paulo: Editora Contexto, 2001.

[7] Ibid., p. 30. According to Pochman from 1989 to 1999 the unemployment rate in Brazil grew from 3% to 9.6% of the labor force. That is, the number of people looking for a job jumped from 1.8 million in 1989 to 7.6 million in 1999.

[8] Ibid., p. 74 for a comparison between occupations, years of education and remuneration.

[9] Ibid., pp. 73-74.

[10] Data from Banco Central do Brasil. Nevertheless, according to Castelar Pinheiro Public Debt was smaller than it would be without privatisation. See Armando Castelar Pinheiro, A Experiência Brasileira de Privatização, BNDES, Texto para Discussão 82, Rio de Janeiro, 2001.

[11] “Sterilisation” neutralises the monetary expansion caused by increased capital inflows. Up to 1996 Brazilian Reserves of foreign currency grew. If all this increase were to be exchange for reals, (and so increase the domestic monetary supply) this could have some nasty effects on the inflation rate. So the government offered public bonds with high interests rate to contract the domestic money supply.

Luiz Carlos Delorme Prado, Associate Professor of Economics, Federal University of Rio de Janeiro; IBASE’s consultant. Leonardo Weller, Research Assistant and M.SC student at Federal University of Rio de Janeiro.