Voyevodins' Library _ "International Business: Competing in the Global Marketplace" / Charles W.L. Hill ... Chapter 2 ... absolute advantage, ad valorem tariff, administrative trade policies, Andean Pact, antidumping policies, antidumping regulations, arbitrage, ASEAN (Association of South East Asian Nations), balance-of-payments accounts, banking crisis, barriers to entry, barter, basic research centers, bilateral netting, bill of exchange, bill of lading (or draft), Bretton Woods, bureaucratic controls, capital account, capital controls, CARICOM, caste system, centralized depository, channel length, civil law system, class consciousness, class system, collectivism, COMECON, command economy, common law system, common market, communist totalitarianism, communists, comparative advantage, competition policy, constant returns to specialization, controlling interest, copyright, core competence, counterpurchase, countertrade, cross-cultural literacy, cross-licensing agreement, cultural controls, culture, currency board, currency crisis

Voyevodins' Library _ "International Business: Competing in the Global Marketplace" / Charles W.L. Hill ... Chapter 2 ... absolute advantage, ad valorem tariff, administrative trade policies, Andean Pact, antidumping policies, antidumping regulations, arbitrage, ASEAN (Association of South East Asian Nations), balance-of-payments accounts, banking crisis, barriers to entry, barter, basic research centers, bilateral netting, bill of exchange, bill of lading (or draft), Bretton Woods, bureaucratic controls, capital account, capital controls, CARICOM, caste system, centralized depository, channel length, civil law system, class consciousness, class system, collectivism, COMECON, command economy, common law system, common market, communist totalitarianism, communists, comparative advantage, competition policy, constant returns to specialization, controlling interest, copyright, core competence, counterpurchase, countertrade, cross-cultural literacy, cross-licensing agreement, cultural controls, culture, currency board, currency crisis Voevodin's Library: absolute advantage, ad valorem tariff, administrative trade policies, Andean Pact, antidumping policies, antidumping regulations, arbitrage, ASEAN (Association of South East Asian Nations), balance-of-payments accounts, banking crisis, barriers to entry, barter, basic research centers, bilateral netting, bill of exchange, bill of lading (or draft), Bretton Woods, bureaucratic controls, capital account, capital controls, CARICOM, caste system, centralized depository, channel length, civil law system, class consciousness, class system, collectivism, COMECON, command economy, common law system, common market, communist totalitarianism, communists, comparative advantage, competition policy, constant returns to specialization, controlling interest, copyright, core competence, counterpurchase, countertrade, cross-cultural literacy, cross-licensing agreement, cultural controls, culture, currency board, currency crisis

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Chapter 2 Outline

Brazilian Privatization

In the middle years of the 20th century, many Latin American governments took a large number of private companies into state ownership. This wave of nationalizations reflected a populist ideology that was interlaced with socialist, nationalist, and, on occasion, fascist rhetoric. Supported by strong trade unions, particularly in Argentina and to some extent Brazil, many politicians advocated taking private enterprises into public ownership so they could be run "for the benefit of the state and its citizens, rather than the enrichment of a small capitalist elite."

However, by the early 1990s, inefficient management, political manipulation, and corruption had turned many state-owned enterprises into national liabilities. An example was Brazil's Embraer, the only manufacturer of jet aircraft in Latin America. Founded by a military regime in 1969, Embraer developed a reputation for solid engineering. Unfortunately, protected by public ownership from the need to account for its performance to private investors, no one at Embraer seemed to care about costs or customers. As a result, in 1994 Embraer lost $310 million on sales of only $253 million.

At the same time, the winds of change were also blowing through many other economies. Communism was collapsing in Eastern Europe, socialism was in retreat throughout much of the rest of the world, and free market economics was clearly on the ascendancy. Against this

background, during the early 1990s there was a sharp move among the Latin American political establishment toward free market economics. This shift in political and economic ideology expressed itself through adoption of programs and plans to privatize many state-owned enterprises.

In Brazil, the privatization program began slowly and quietly but has recently accelerated. Around 70 state-owned enterprises were sold to private investors between 1990 and 1996 for a total take of $14.9 billion. In 1997, Brazil sold over $20 billion of state-owned assets, including Companhia Vale do Rio Doce (CVRD), the world's largest iron ore producer. Plans called for sales of a further $30 billion worth of state assets in 1998, including the sale of Telebras, Brazil's telecommunications company, which was to be broken up into four companies.

Early evidence suggests these privatizations are having the desired effects on the companies involved. Following its privatization in December 1994, Embraer reduced its payroll from 12,700 to 3,600 in 1996 as the new management team struggled to turn the company around. Today new orders are flowing in; production, sales, and profits are all projected to increase, and in 1997 the company added 1,100 employees to handle increased sales. Another example concerns Brazil's formerly state-owned steel industry, which between 1991 and 1993 was sold as six separate companies for a total of $8.2 billion. In 1990 the state-owned monopoly employed 115,000 people and produced 22.6 million tons of steel, or 196 tons per employee. In 1996 the six successor private companies produced 25.2 million tons of steel with only 65,000 employees, or 388 tons per employee, a striking increase in employee productivity. Along similar lines, the new private owners of CVRD think they can cut operating costs by at least 20 percent over the next few years.

The benefits of privatization are not limited to improved efficiency of former state-owned enterprises, important as that is. The Brazilian government is also opening the sale of state-owned assets to foreign investors and allowing foreign companies to set up enterprises in industries formerly controlled by state monopolies, such as steel, electric power generation, and telecommunications. The result has been a surge in private investment, much from foreign sources and much of it targeted toward basic infrastructure. Excluding telecommunications, infrastructure projects worth $190 billion were planned between 1997 and 2000. This compares to total spending of only $10 billion between 1993 and 1996. If this investment is made, it will have a significant impact on the growth rate of Brazil's economy.^*

http://www.cvrd.com.br

^*"Let the Party Begin," The Economist, April 26, 1997, pp. 57 - 58, and "A Very Big Deal. A Survey of Business in Latin America," The Economist, December 6, 1997, pp. S9 - S12.

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