Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond / by Mark Langevin

  Reinventing State Capitalism

A BrazilWorks Review of:

Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond

Aldo Musacchio and Sergio G. Lazzarini.

Harvard University Press. 2014.

Musacchio and Lazzarini’s Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond is a must read for those who have escaped the Iron Cage of neoliberal economic analysis and are interested in learning about the critical relationships between the state, public finance, and capitalism in the 21st century. The cornerstone of Musacchio and Lazzarini’s conceptualization of state capitalisms and empirical investigations of the Brazilian experience is the retrenchment of state owned enterprises (SOEs) as solely owned and controlled appendages of the developmentalist state and the transition toward the state as majority or minority stockholder. It is this historical pivot that is essential for understanding the recent development of capitalism and the role of public finance and regulation as well as the economic development of Brazil since the transition to democracy.

Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond provides a detailed historiography of the modes of state intervention in economic development by tracing the distinct historical and comparative trajectories of nation-states and their government interventions. Accordingly, Musacchio and Lazzarini recognize that states often acted to insure prominent industrial and financial services firms against failure leading up to the Great Depression of the 1930s. Yet, the plethora of market failures, as both cause and consequence of this global economic downturn, led governments throughout the world to both bailout and seize control of failed private enterprises as well as establish new, wholly owned SOEs. This second stage of state capitalism, featured the state as entreprenuer, served as the dominant form up to the 1980s. This second stage of state capitalism picked up steam in the post World War II period. Accordingly the authors report,

“Thus, in the postwar period, along with the rise of socialism—mostly in the Soviet Union, Eastern Europe, Southeast Asia, and parts of Latin America—there was an ideological shift in the nonsocialist world that led states to increase their participation in the economy by creating large-scale SOEs on a wide scale (page26).”

This second stage also featured, albeit unevenly, increases in the total factor productivity (TFP) of SOEs in Western Europe, which outpaced comparable, private sector firms in the United States. While the authors note that such performance may also be associated with “catching up” after World War II, many of these same SOEs outperformed comparable U.S. firms “during the recessionary 1980s (page31).” For many countries, SOEs worked to activate greater economic development where markets were absent or private investors too disinterested.

Governments throughout the developing world, especially those committed to industrialization, including Brazil, established SOEs in public utilities as well as the extractive and manufacturing sectors to: 1) overcome coordination problems; 2) finance research and development; 3) address market failures; 4) forge alliances with transnational corporations to facilitate the transfer of technology; and 5) to deepen import substitution industrialization (ISI). Of course, this second stage of state capitalism ran its course for decades before its contraction beginning in the 1980s. Musacchio and Lazzarini argue that,

“as a consequence of the oil shocks of the 1970s and the global liquidity crisis of the early 1980s—especially in Europe, Africa and Latin America—state capitalism was at a crossroads. Governments began to rethink the role of SOEs in the state apparatus and to consider not only major structural reforms to those organizations but also a major overhaul of systems of state capitalism (page 41).”

The transition away from this second stage was propelled by “fiscal pressures and punctuated by the wave of “privatizations,” but eventually led increasing numbers of governments to transform the ownership structures of the SOEs so that they could be publicly traded and operate with greater efficiency. The authors conclude that while early privatization schemes often led to the transfer of operational control to the private sector, subsequent developments reflected governments’ decided interests in using privatization to maximize revenues without surrendering the state’s controlling interests (or shares for those SOEs that were transformed into publicly traded corporations). Hence, governments developed “pyramidal ownership structures or state holding companies to manage their ownership in a large number of firms (page 51),” such as BNDESPAR in Brazil.

Today, many SOEs, wherein the state holds a majority-controlling or minority stake, figure into the larger publicly traded equities in Asia, Europe, and Latin America and are pivotal assets in balanced shareholder portfolios. This third and current stage, unfolding around the world and in Brazil, has witnessed the retrenchment of SOEs as the reflection of the “Leviathan as an entrepreneur” and the rise of the state as majority and minority shareholder-exerting variable degrees of influence over such former SOEs, including Petrobras and Vale (formerly the Companhia Vale do Rio Doce) of Brazil. Of course, it make sense for Musacchio and Lazzarini to employ Brazil as a critical case study to both illustrate their conceptions of forms of state capitalism and explain the historical evolution of these forms as they have developed through three discernable stages of state capitalism.

Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond offers cogent and comparatively framed case studies; Petrobras as the case of the state as majority investor and Vale as a Minority Shareholder-in addition to the role of public Finance and Brazil’s national development bank, the BNDES, in coordinating the state’s shareholder participation in former SOEs and other publicly traded companies. Given the challenges and more recent controversies related to the management of Petrobras and government interference, Musacchio and Lazzarini’s comparative analysis of Petrobras alongside Pemex (Mexico) and Statoil (Norway) is as illustrative of the state as majority investor as it is revealing of the critical tradeoffs with respect to public finance and political influence within the management of this state controlled energy giant.

The authors point out that the fiscal regimes of both Petrobras and Statoil are comparable. Accordingly,

“The government takes between 25 and 28 percent in taxes on revenues and then gets dividends according to cash-flow rights of its shares (28.7 percent in Petrobras and 67 percent in Statoil) (page184).”

Musacchio and Lazzarini conclude that while the Brazilian government may provide greater financial autonomy to Petrobras than Norway extends to Statoil, the appointment of the CEO and Board of Directors closely represents government preferences in the case of Brazil while Statoil’s board does not include any government officials. Moreover, the Brazilian government often supersedes the interests of minority shareholders by moving the Petrobras management and board of directors to take actions that undermine corporate governance and the interests of minority owners, including the 2010 gigantic public offering (page 190). More importantly, the Brazilian government controls the prices of transportation fuels, depressing the expected revenue of the company while it implements an ambitious investment plan based on accumulating debt.[1] The author’s conclude that,

“the Leviathan as majority investor model gave the government of Brazil a license to expropriate minority stockholders and use Petrobras for social and political purposes (page 192).”

With respect to the state as minority stockholder, Musacchio and Lazzarini argue that in the past decades Brazil’s stock market capitalization to GDP was relatively low at an annual average of 43.1 percent (between 1995-2009) and thereby constrained private firms seeking equity financing for much of this period. However, in recent years this ratio “jumped” to 73 percent by 2009, revealing the increasing role of public finance, primarily through the BNDES and its equity holding entity, BNDESPAR, to “promote capital expenditures of firms with constrained opportunities (page 207).” Moreover, the authors find in the case of BNDESPAR that the Brazilian government’s industrial policy was largely successful in improving the performance of stand-alone firms, but that public investments in pyramidal ownership groups are less effective and fraught with poor governance as a result of “tunneling (page 216).”

Musacchio and Lazzarini conclude their study by suggesting that

“governments should act selectively, aligning each model of state organization to particular conditions in order to increase its performance… (page 290).”

Also, these authors posit that each of these models or forms of state capitalism is not mutually exclusive, but could be managed to maximize economic development and minimize the fiscal burden. They propose a research agenda, concurrent with the relevant policy challenges, focused upon the identification of “the conditions under which each model is most likely to be profitable, productive, and contribute to a nation’s welfare (page 293).”

Overall, Musacchio and Lazzarini provide a critical piece or two of the puzzle that is Brazil, the state and economic development. The comparative framework strengthens the conceptual foundation for investigation of the stages of state capitalism and the respective models presented and applied in the book. Chapter 3 provides a conceptually clear and straightforward treatment of the “views” on state capitalism and the role of the state in economic development, but does not offer any discussion of the theory of the state or the implications of the “path-dependent” view wherein the international division of labor places developing countries, including Brazil, in a precarious position with respect to capital and labor markets, technology and the sustainable use of ample natural resources and the ensuing comparative advantages. On the other side of the coin, Musacchio and Lazzarini avoid the foam and froth of economic history and the more recent, neoliberal minded interpretations that ignore the international division of labor and the measurable exogenous obstacles and limits to Brazilian economic development under democracy.[2]

Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond provides an accessible conceptual framework for studying state capitalism around the world as well as deepening an empirical examination of the Brazilian version as it unfolds under democracy and is now front and center in the presidential election debate. Yes, the comparable and quantitative methodologies are sufficient to verify many of the hypotheses suggested by Musacchio and Lazzarini, but they can be modified and improved as we proceed to apply their conceptual framework to observations. More importantly, the study of the conditions under which states choose to maximize profitability, productivity, and welfare through public investments in publicly sold companies needs greater attention to increase the numbers of case studies as well as further develop a theory of state behavior, whether as majority owner or minority investor.

This book is special because it invites the possibility of coupling academic research to the formation of public policies that overcome the dogma of both market and state based development ideologies and holds out the potential to guide public policymaking geared to rooting out public corruption and private rent seeking in the coming decades. It is increasingly obvious that Brazilians, preparing to vote in the upcoming presidential and general elections, are indeed interested in this line of reasoning and stand to learn a lot from Musacchio and Lazzarini.

[1] For more on Petrobras’ debt structure see “The Petrobras Debt Challenge.” A Summary Analysis of “O Endividamento da Petrobras com o BNDES no Período Pós-2008 e Impactos Contábeis e Econômico-Financeiros.” FGV/IBRE Discussion Paper #36. November 2013. Paula Barbosa. A BrazilWorks Briefing Paper. January 2014. Summarized by Mark S. Langevin, Ph.D., Director of BrazilWorks and available at:

[2] Such as Michael Reid’s Brazil: The Troubled Rise of a Global Power.. Yale University Press. 2014. Reid’s observations and analysis are very interesting, but closely framed around those neoliberal concepts and policy prescriptions advanced through his employer, The Economist magazine. Reid explains a narrative wherein Brazil’s failure to adopt the panoply of neoliberal policy prescriptions causes underdevelopment and the problems related to corruption, insufficient infrastructure, and poorly delivered public services.