Leviathan Evolving: New Varieties of State Capitalism in Brazil and Beyond

by Aldo Musacchio and Sergio G. Lazzarini



In this book we study the evolution of corporate governance arrangements that governments have adopted for their state-owned enterprises (SOEs) in the last 20 years. We show that the process of privatization and liberalization of the 1990s and early 2000s created two new forms of state capitalism, in which Leviathan acts a majority or minority investor in publicly-listed corporations. We then argue that governments have transformed the governance of flagship SOEs in a way that has mitigated many of the agency and political problems that were pervasive in these firms throughout the twentieth century. The book describes how this transformation of state capitalism occurred globally and then performs statistical tests of the implications of these new forms of state capitalism in Brazil.

When governments act as majority shareholders in publicly traded firms, we find that they have reduced agency and political problems commonly associated with SOEs. Large SOEs, we find, tend to have either pay for performance or other mechanisms to incentivize managers; they have boards of directors, sometimes with external members; they follow international accounting standards and report financials often (usually quarterly); they also have large institutional investors as shareholders, which are effective in monitoring managers; and these firms are commonly rated by credit rating agencies. In the Leviathan-as-a-minority-shareholder model, which is also increasingly common, agency problems associated with state ownership have been tamed. Through this minority ownership model, governments around the world keep cash-flow rights in key industries, they play the role of large shareholders monitoring management, often having a seat on the board, but they do not run the companies themselves.

The book also emphasizes the fact that governments use development banks to prop up selected firms, the so-called “national champions.” For instance, in Brazil the government uses the national development bank invests in equity and provides subsidized loans to companies. In the book we use detailed data on loans of Brazil’s National Development Bank, known as BNDES, to over 200 publicly listed corporations and find that since 2002 most firms are not using the loans they get from this bank to increase capital expenditures or for projects that increase profitability. 

We do not argue that the new models of state capitalism have solved all of the agency and political problems of the old forms of state capitalism. The argument is that while these new models have partially mitigated agency conflicts, there are still obstacles and political temptations to intervene in SOEs or in private firms where the state is a minority shareholder or lender. That is, these new models of state capitalism are perhaps a second best solution, yet a solution that is the product of the complex political economy of emerging and developed markets.





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