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IN SEARCH OF NEW STATE : Reflections on New Paths of SOE Management in , , and Turkey

Mustafa Ozgur Bozcaga

Abstract: There is an evolving consensus in today’s world indicating that economic markets need greater state presence and tighter regulation. Such sentiments have naturally followed the implosion of financial markets in the late 2000s. For most of the 20th century, national economies had “ideological blueprints” to sustain economic growth and development. However, the evolving consensus on state presence in national economies does not have an identifiable blueprint. Without a directive format, novel forms of emerge, not similar to the state capitalism of the past, where states had full ownership of numerous major state-owned enterprises (SOEs) operating nearly in all sectors of the domestic economy, and regulated the economy with its “visible hand”. In these new forms, states do not regulate the economy through full ownership of these SOEs. Instead, they either hold majority shares of SOEs following a partial , or they hold minority (but still significant) shares of certain firms. This paper seeks to probe the practices of recently rising new state capitalism through new forms of in SOEs in three distinct developing nations. It will examine the forms and the concentration of state assets in the SOE shares in the aftermath of the neoliberal transformation with a focus on China, the champion of state capitalism in the 21st century, along with the two emerging markets: Brazil and Turkey. It will claim that, starting from the late 1990s, the role of the state in the economy has evolved into a new kind of state capitalism concentrating on majority shareholding in firms operating in the upstream sectors with strategic importance.

I. Introduction: In search of New State the current rise of state capitalism is an Capitalism open threat to liberal capitalism, and that When collapsed, bells toll for the free economy neo-conservative and neo-liberal circles (Bremmer, 2010). Nonetheless, there is proclaimed that it was the end of history, an evolving consensus in today’s world liberal democracy is the “final form of indicating that state presence and tighter human government” (Fukuyama, 1989, regulation of the markets is severely 4) and capitalism prevailed over other needed, following the implosion of forms of economic order. It is ironic that financial markets in the second half of after the 2008 financial crisis, scholars the previous decade. Implications of this from the same intellectual vein posit that emerging consensus are also reflected in

1 government policies for major bank different parts of the developing and bailouts and liquidity injection developed world. Following this, there amounting to billions of dollars to came a neo-liberal wave with the financial and car manufacturing sectors, economic crisis of 1970s. Nearly every which are “too big to fail,” in national economy rushed to deregulate, countries deemed to be the “avatars” of privatize, and shrink the size of the state state capitalism (Acemoglu & Robinson, in order to be more efficient. 2012). Following this trend, major Predominantly, international monetary questions are related to how extensive, institutions like the IMF and the World for how long and in what form should Bank provided blueprints for these state regulation and intervention be policies. And yet, rising state capitalism enacted. does not have a blueprint today. As For most of the 20th century, capitalism garnered certain doubts after national economies had “ideological the crisis and as command economies blueprints” to sustain economic growth have been stigmatized as unfeasible and development. Following the (Przeworski, 1991: 133), there is an financial crisis of the 1930s and the urgent need for an alternative in simultaneous success of the Soviet managing national economies and economy, Western economies were locating the status of the state in this new attracted to the basic tenets of planned picture. Apparently, governments aiming economy in order to sustain economic to increase some degree of state presence growth under dire crisis conditions. in the management of their national Following WWII, newly emerging economies do not have a guide to follow. independent countries of the third world In this regard, the rise of new state were allured by the economic capitalism through varied state performance of developing countries that shareholding and privatization schemes were implementing policies of planned in SOE management comes as an economy and asserting a certain level of alternative answer to the current . and impasse. dirigisme were appealing for poor newly Without a guiding blueprint, state independent nations to attain high levels capitalism comes in novel forms, unlike of modernization without going through the state capitalism of the past in which the painful process that the economically states had full ownership of numerous developed Western countries went major SOEs operating nearly in all through in most of 18th and 19th century. sectors of the domestic economy, and The blueprint for and regulated the economy with its “visible developmental states was generally hand." In these new forms, states do not influenced by the communist central regulate the economy through full command economies, and the variations ownership of these SOEs. Instead, they of this model were implemented in either hold majority shares of SOEs

2 following a partial privatization or they and increasing through the post-WWII hold minority (but still significant) years, the blueprint provided by shares of certain firms. command economies and influence of This paper will examine the forms Keynesianism induced many Western and the concentration of these state economies to nationalize companies in assets in the SOE shares in the aftermath their utilities sector and also to invest in of the neoliberal transformation with a major manufacturing sectors as an focus on China, the champion of state entrepreneur (Toninelli, 2000). Though capitalism in the 21st century, along with criticized by scholars such as von Mises the two emerging markets: Brazil and as a simple relabeling of socialist Turkey. It will claim that, starting from command economies (Von Mises, 1981: the late 1990s, the role of the state in the 257), state capitalism became the hype economy has evolved into a new kind of in the post-crisis years. Dirigiste state capitalism concentrating on in France, creation of majority shareholding in firms operating SOEs in the coal sector in Britain, and in the upstream sectors with strategic large in Italy and Spain importance. The cases of China and are some examples of this trend among Brazil show that resource-based sectors many others (Hall, 1986; Schmidt, demonstrate a trend towards sustaining 2003). bigger asset concentrations in The idea of state capitalism as a state-owned enterprises (SOEs). The variation between socialist command second strand of my investigation, economies and capitalist minority shareholding, demonstrates economies came under intense varied outcomes in different contexts, intellectual scrutiny with the rise of East which demonstrates the necessity of Asian economies in the 1970s and further research in the area.1 , also known as “Asian Tiger miracle.” However, it must not be II. Brief Introduction on State dismissed that previously some of Max Capitalism in the Past and Today Weber’s work focused on various State capitalism is neither a bureaucratic institutions necessary for recent phenomenon nor a concept complementing free markets at the end confined to explain developmentalist of 19th century (Weber, 1978). In the goals solely of the late-comers in the post World War II years, works by 1960s and 70s. Beginning in the 1930s, Hirschman and Gerschenkron emphasized the role of state presence in 1 It must be noted that this inquiry may the economy as a factor of industrial suffer from selection bias and the highly expansion (Gerschenkron, 1962; descriptive character of the work may gloss over several aspects of the current situation on the Hirschman, 1958). However, state ground. Nonetheless, the objective of this paper capitalism with a development focus, or is a descriptive inference, rather than a causal one and it can help to derive useful conclusions “capitalist developmental state,” is for future research. 3 thoroughly explored initially in Chalmer 1970s and 1980s. Consequently, the rise Johnson’s work on the effect of Ministry of state capitalism and emphasis on of International Trade and Industry creating and investing in SOEs were (MITI) for enabling domestic halted in the 1980s. Higher inflation coordinated economy of Japan in the levels both in developing and developed post World War II period. He explains countries pulled SOE profitability to the Japanese state capitalism model as lower levels, and governments began to neither a socialist command economy subsidize losses of these firms through nor a capitalist , but their respective national budgets. rather a model based on “plan-rational” Increased budget deficits caused acts of the state, allowing the existence subsidization of these low performing of with state guidance firms and were politically and (Johnson, 1982). economically costly for governments. Amsden and Wade further Moreover, IMF and World Bank lending elaborated developmental state initiated privatization of SOEs as a part capitalism, as they emphasize the of their conditional structural adjustment cooperation and joint ventures between policies in the 80s. Privatization of SOEs the state and the private sector (Amsden, started with Britain and France in the 2001; Woo-Cumings, 1999). Both 1980s in the developed world, and then scholars give prominence to the spread into the developing economies in Japanese keiretsu and South Korean the 1990s, as it became the common chaebol systems, exemplifying practice with the coupling of fiscal co-optation between bureaucracy, SOEs constraints of governments and and large industry groups for industrial ideological blueprint of neo-liberalism. development. In a similar vein, Evans’ As the need for transforming contribution came with the introduction corporate governance of SOEs in the of “embedded autonomy.” For Evans, 1980s became pertinent, neoliberal what Johnson described in the case of economic restructuring efforts MITI epitomized embedded autonomy underscored the necessity of full where a state institution is structured as a privatization of SOEs. Critics of state “combination of Weberian bureaucratic capitalism gathered their arguments insulation with intense connection to the against SOEs on three main grounds. surrounding social structure” (Evans, Primarily, poor monitoring is believed to 1995: 47). engender principle-agent problems Connection between private and between governments and SOE public bodies, and the ensuing managers or administrative boards. co-optation (which is also described as Inadequate inclusion of meritocratic crony capitalism) are being labeled as evaluation criteria to the selection inefficient practices following the onset processes of SOE managers and board of the oil and financial crises of the members exacerbated this problem.

4 Second, it is contended that SOEs may firms. Nonetheless, beyond the not be particularly structured to attain efficiency distinction between private high profits; instead, they may have been firms and SOEs, some defenders of the organized to pursue a “double-bottom helping hand view considered that line” and promote certain social aims of problems faced in SOE management the governments. As seen in the may also be encountered in the examples of Japanese and South Korean management of private firms. In terms of cases, these social aims can be diverted, principle-agent issues, minority and SOEs can be used by governments shareholders (as “principles”) investing to strengthen ties between the political in large private firms with dispersed elite and politically connected firms shares may not have the collective action (Krueger, 1990). This criticism is also abilities to monitor the managers reflected in the crony capitalism effectively, and managers may shirk explanations of the East Asian economic away from the optimal level of effort crisis of the 1990s (Haggard, 2004). (Chang, 2007: 14). Concerning the soft Related with the second one, a third budget constraints, it must be criticism for SOEs is the soft budget underscored that private companies are constraint, indicating the low also susceptible to soft budget performance of state-owned firms due to constraints. Though SOEs are more secured financial assistance provided by prone to be effected by this, ownership the state as these firms are “too big and status of a firm is not the sole too important to lose.” State assurance determinant for being “too big/too and possibility for bailing-out in times of important to fail.” Large private firms crisis is pointed out as a reason for with strategic importance can also be irresponsible acts of SOE managers and bailed out with the same pretext (Chang, boards, and lagging SOE performance. 2007: 17). These criticisms posed by the Taking into account the views of “efficiency view” are generally both the efficiency and the helping hand, responded to with a view positing the the course and pace of benevolent role of the state investments were being altered with the adoption of in promoting development as articulated novel practices as privatization process above. This contrasting view asserts that of SOEs in the world reached its zenith the “helping hand” of the state is needed in the 1990s. Privatization during 80s in in order to coordinate resources and developed countries, and the 1990s in assist firms to gain competitive developing countries were characterized capabilities (Chang, 2007). Moreover, by the disposal of public shares of the state investments are needed for the non-performing SOEs from provision of public goods and to attain to the private sector. Privatizations at the social objectives that cannot be possible turn of the 21st century gave priority to under the profit maximization of private the sale of minority shares on stock

5 markets in order to retain a significant All of these state share-retaining portion of the firms’ shares in the public methods aim to reduce economically sector. These second wave privatizations harmful effects of principle-agent gave prime importance to receiving high problems and soft budget constraints in revenues in launches (or handling state presence in firms, and initial public offerings - IPOs) of SOEs simultaneously hold on to the social and while simultaneously holding on to the political purposes of economic activities significant portion of the public shares in of states. Nonetheless, both majority and SOEs. minority shareholding of the state in Three salient ways of retaining firms can stimulate more indirect and significant public share in SOEs became nuanced forms of state influence on noticeable in second wave privatizations. firms and crony capitalism. This can also The first is where the public has the be explained through a path dependence majority share in SOE ownership and interpretation. Since new state capitalism shares of these firms are listed on is established through rules or ties and national or international stock markets ideologies that are already existed, these for public offerings. Private sector and social institutions tend to persist in new individual investors invest in these forms of governance as well. stocks with the confidence of the Privatizations for retaining majority and majority public shareholding due to state minority shares by the state may also be backing over the SOE. Major intended for maintaining existing privatizations with significantly high connections between the state and the revenues in the last decade came with productive sectors, while reducing some this strategy. Recent examples are the inefficient practices hurting the general stock market launches of Rosneft in outlook of the national economy. Moscow SE, and Bank of China and Before moving into the country PetroChina in Hong Kong SE. Secondly, specific cases, it must be underlined that majority shares are transferred to the the purpose of this paper is not to lend private sector through a mixture of block support to these views undergirding sales and IPOs, but at the same time positive effects of state presence in public shares make up a significant enterprises; rather, this paper will try to portion of the total shares, giving an see whether there are specific strategic opportunity for the state to participate aims and motivations for concentrating into the governing of these firms as state presence in certain sectors/firms. minority shareholder. Thirdly, states III. China actively invest in certain firms as China is regarded as the epitome minority shareholder through national of today’s state capitalism. An economy development banks, commercial banks that has a sustained annual growth level and sovereign wealth funds (OECD, well above 7 percent, SOEs cover 80 2005). percent of the stock market

6 capitalization value in China. Both the planning. Consequently, two phases of size and profitability levels of these economic reforms started: one in 1978 SOEs are quite impressive. Among top and the other in the 1993, and were both 500 Chinese firms, 82 percent of the initiated by subnational governments. profits come from SOEs (Du & Wang, The autonomy of local governments is 2013: 2). More importantly, average enhanced with the motivation caused by profitability of an SOE is more than that inter-regional competition on economic of a privately owned firm or a non-SOE performance (Lawrence J. Lau et al., in today’s China (Li et al., 2012). In the 2000). Region administrators with 1990s, the picture was the reverse and higher economic performance are private sector firms were out-performing generally rewarded with promotion and the SOEs even though growth rates were other benefits. This incentive is the key almost at the same level (Laffont & factor behind regional leaders’ urge for Qian, 1999). In order to better grasp this initiating and implementing economic significant change in SOE efficiency, it reforms in the past three decades. Also, may be useful to understand the nature an important aspect of the economic of economic reform in China. It carries reform incentives for sub-national distinct characteristics, such as governments is the structuring of interregional competition, extensive non-specialized sub-units in China, local autonomy and coexistence of which is denoted as the “M-form model” reforming and non-reforming regions, (Eric Maskin et al., 2000). Contrary to which are not present in other the system where sub-government units developing countries. are specialized (defined as U-form Though various definitions exist, model), units in the M-form model are China can be defined as a regionally politically connected to the central decentralized autocratic regime (Xu, government, but is both self-contained 2011:1078) where political and partially autonomous in its functions centralization is coupled with economic (Xu, 2011: 1086)(Qian & Xu, 1993). decentralization. Although central Horizontal specialization of ministries in planning coordinates the main processes a U-form model needs the coordination of the economy, decentralized sub of a central government for reforms to national governments are primarily be implemented at the local level responsible for initiating and whereas M-form model does not need it coordinating economic reforms. From per se. the onset of the Great Leap Forward, the Although role of central power of the central government in the planning is significant, a central management of productive sectors was authority does not inherently plan transferred to the sub national Chinese economic reforms. Rather, governments, and regional competition certain reform initiatives were allowed gradually replaced central economic to be conducted by the sub-government

7 units, and if successful are transferred in the 1990s. Small scale, local SOEs to other regions. Defined as “dual-track started to be privatized as de facto in the system," coexistence of reforming and early 1990s through the transfer of full non-reforming regions is the core of the shares to local managers or employees of reforms in China. Incentivizing these SOEs. Thirdly, Plena of the 14th sub-government administrators for and 15th CPC Congress allowed reform is sustained by converting them diversified forms of ownership of SOEs into entrepreneur officials striving for including private and local ownership. promotion. Concomitantly, possible Consequently, exiting from negative effects of economic reform are non-profiting SOEs operating in contained while possible opposition for downstream manufacturing sectors such reform is reduced (Xu, 2011: 1115). as textiles, food processing, and Privatization of SOEs in the 1990s is a furniture became the main mode of stark example of this trial-and-error privatization at the end of 1990s in system and the utilization of dual-track China. system as a way of local experiment Contrary to the case in other based reformation (Xu, 2011: 1092). command economies, subnational SOE privatization was preceded governments owned most of the SOEs in with increasing autonomy of SOE China, and the privatization process managers in China. As increased reflected the close informal ties between autonomy enhanced productivity and the owners and the subnational efficiency of SOEs in the 1990s, it was governments, a prevalent characteristic not enough to overcome the of the town-village enterprises. 2 underperformance of SOEs that were Following the implicit privatization heavily subsidized by the central decision of the CPC Congress, the wave government and state banks. One of privatization surged and the pace of solution that was experimented at the privatization at the sub-national level local level was to harden the budgets of increased after 1997. Though data is SOEs through bankruptcy reform, which quite limited concerning these had a positive but limited effect on the privatizations, Gan et al. found that performance of SOEs (Xu, 2011: 1123).

The second local experimentation was 2 While large scale SOEs operating in various privatization. Though privatization was economic sectors were already in place, role of officially banned, under the policy of township-village enterprises (TVEs) as non-state actors grew substantially in the 80s. TVEs were “grasp the large, let go the small,” collectively owned firms at the local level and reforming the governance of large and inter-regional competition was the main force for strategically important SOEs, and their high performance in 80s and into 90s. Even though the productivity of TVEs diminished in privatizing the local and small scale mid 90s with the introduction of property rights SOEs predominantly active in the and factor mobility, close informal ties between the subnational governments and managers, a manufacturing sector became a priority main tenet of TVE management, prevailed in the privatization era of 90s (Xu, 2011: 1119). 8 management buyouts (MBOs) were the for downstream sectors. As Li et al. most prevalent way of privatization, asserts, the impressive performance of more effective than share issue the Chinese SOEs is a consequence of privatization and joint venture this duality in the economy (Li et al., privatizations (Gan et al., 2010: 4). 2012). Demand for goods produced by MBOs correspond to full privatization the downstream sectors that utilized while the latter corresponds to majority abundant low wage low skilled labor in and minority shareholding. It can be the domestic market followed after asserted that privatization of those China’s accession to the WTO in 2001. Chinese SOEs, which were already Monopolized upstream sector’s supply inefficient and vulnerable under soft of raw materials and basic services budget constraints, were fully privatized resulted in unprecedented profits and rather than being ameliorated by IPO revenues. However, given the rapid significant state presence as a increase in unskilled labor wages in the shareholder. last decade and intensifying international Following the gradual but competition from countries with impactful privatization of Chinese SOEs geographic proximity to China such as in the downstream sectors, remaining (Fan et al. 2013), position as a SOEs dominated the upstream sectors. majority shareholder in SOEs operating These remaining SOEs are clustered in in the upstream sectors may not be a energy (oil and natural gas extraction sustainable one. Thus, SOE reform and transportation), communication and seems to be a top agenda item for China transportation sectors and have almost in the years to come. The recently absolute monopoly in the sectors they gathered Third Plenum of 18th CCPCC operate (Du & Wang, 2013). These signaled for substantive reforms in the sectors are deemed to be “strategic” management of the economy and a sectors by CPC, and only partial particular provision of the 60-points privatization through stock exchange resolution of the Plenum is the listing is conducted in the previous restructuring of SOE management years. Consequently, the economy is structures (Yongding, 2013). As the divided into two complementary recent World Bank reports on planning segments with contrasting management China’s future indicate, international designs: A non-state sector dominant in organizations prioritize SOEs reform in the downstream manufacturing sectors China. (World Bank, 2013: 36). operating under competition in domestic Future SOE reform will surely and international markets; and a state not oblige overnight changes in the SOE sector dominant in upstream sectors ownership, and monopoly of upstream facing almost zero competition in the SOEs will not be dismantled in a short domestic market, providing input for the instance. Trial and error will also be the basic services, utilities and raw materials way for reformation of state capitalism

9 and Chinese SOEs in the upcoming Major holdings of the era were operating years and the reformers will “cross the in mining, energy and utilities sectors river by feeling every stone” since there but at the same time as part of the ISI is no blueprint for reform. A probable strategy, SOEs in these holdings were solution for future reform may be active in manufacturing sectors, gradually reducing state presence in providing input for economic activities upstream SOEs and moving the Chinese in other sector. Significant state to a more minority investor position breakthroughs for the creation of SOEs where remnants of TVE based cronyism came with the support provided by the can be reduced, and rent-seeking acts of National Bank of Economic managers and bureaucrats can be Development (BNDES) in the 60s. curtailed. However, as Przeworski BNDES started financing the asserts, it is not clear how the establishment of SOE holdings as a Communist Party, SOE management minority shareholder, and eventually boards and SOE supervisory body became majority shareholder in many of (SASAC) interact in the current the SOE holdings as the level of operations of monopolistic SOEs liquidity injection to these holdings in (Przeworski, 2013:12). Thus, switching the form of equity purchases increased from majority to minority investor in overtime due to low profit levels. The these SOEs can have unexpected results pace of these purchases and SOEs but at the same time can be suitable increased significantly during the candidate for local experimentation and military regime in the 1964-1985 period, trial-and-error type reform. and consequently SOEs activities in IV. Brazil 1970s made up 40 percent of Brazil’s The course of state capitalism in GDP (Kohli, 2004: 213). 20th century Brazil resembled that of As ideological neo-liberal wave many other developing countries around surged, increasing inflation together with the world as the Brazilian state had an rising current account deficits hit the ISI active developmentalist role in economies of the developing world at coordinating productive factors utilizing the beginning of 80s. Brazil had nearly SOEs. Specifically, after World War II, 500 federal SOEs and around 1000 the role of SOEs in the Brazilian SOEs run by the regional governments. economy was enhanced with the Most of these SOEs were introduction of import substitution under-performing, even bankrupt and industrialization (ISI) policies. The heavily dependent on government aid or distinct character of Brazilian SOEs on BNDES credits to clear their balance formed after 50s were their pyramidal sheets. When Brazilian government structure, where numerous SOEs in sought help from the IMF for getting out different sectors were linked to a holding of the balance of payment crisis in the company at the top (Trebat, 1983). 80s, part of IMF conditionality was

10 related with curtailing the losses to be implemented under the title incurred from the operations of SOEs, National Privatization Program (PND). and also privatizing heavily indebted and In this second period between 1990 and non-performing SOEs. Moreover, 1994, with the purpose of overcoming returning to democracy and the adoption balance-of-payments crisis and liquidity of the Constitution in the latter part of deficiencies, relatively productive and the 80s (Limongi, 2007), Brazilian profiting SOEs in strategic sectors such federal government had to transfer more as steel and petrochemicals started to be funds to local governments and social privatized under the oversight of the spending (Baer, 2008: 121). These BNDES. This second period paved the obligatory transfers deteriorated the path for more sweeping privatizations economic conditions even more, and between 1994-2002 under President Brazilian governments were forced to Cardoso, which can be named as the implement stabilization packages at the third period. In the third period, Brazil beginning of 90s. Some of these went through its most comprehensive packages failed to cure the ills of the de- process in history. Brazilian economy but nonetheless, they The Cardoso governments either all had privatization as a top priority. completely sold or transferred the Eventually, SOE privatization became control of public utilities and firms in an indispensable agenda item in the strategic sectors like electricity and restructuring of the Brazilian economy. telecommunications. Also operation of Pinheiro, and Musacchio and airports, seaports, highways and Lazzarini divide privatization of sanitation services was transferred to Brazilian SOEs into three periods private sector, and monopoly of the (Musacchio & Lazzarini, Forthcoming; public sector in infrastructure was Pinheiro, 2002). The first period is reduced. Moreover, highly strategic characterized with the dismantling of firms like Vale in the mining sector and small and less impactful SOEs before Telebras in the telecommunication sector transition to democracy in the 1980s. As was partially privatized through block privatization meant de-nationalization sales. This period is characterized with for the general public and in some the highest privatization revenues enclaves of the militarist state collected, with more than $75 billion in bureaucracy, comprehensive cash. privatization of SOEs was not possible In this rapid and substantive during this era. Nonetheless, with the privatization period, BNDES acted both onset of the financial crisis, surge of as a mediator in the privatization process neo-liberal approach to economic for attracting investors and as a minority management and the adoption of shareholding investor (Anuatti-Neto et democratic constitution, a more al., 2003: 21). BNDES either owned extensive privatization program started some shares of the privatized firm or had

11 stakes indirectly in these firms through general. Only 5 percent of the federal acquiring shares of other firms in the SOEs in Brazil are listed in the domestic same holding group of the privatized or international stock markets. firm. Pyramidal structure of the Moreover, external checks and auditing Brazilian SOEs enabled this way of practices for federal SOEs are not minority shareholding. Privatization of ingrained, making them vulnerable to the mining giant Vale is an example of crony practices and at the same time this where shares of the state is sold to a increasing the flexibility of the political consortium including investors carrying agents for utilizing SOEs in attaining shares of Banco de Brasil and state oil political and social aims. firm governed by BNDES It can be asserted that the main (Musacchio & Lazzarini, forthcoming: characteristic of Brazilian state 151). capitalism is the prevalent minority Along with prevalent minority investor positions of BNDES in formerly shareholding positions of BNDES, the privatized SOEs, along with the mix of federal state still held its majority shares majority shareholding positions in in flagship SOEs following the “national champions” and full ownership privatization period. There are two main in great number of SOEs at federal and reasons behind the majority regional level. There is evidence on shareholding: the first is to create enhanced performance of partially “national champions” in strategic sectors privatized SOEs with state as the such as Petrobras in oil and energy majority shareholder (Gupta, 2005), distribution and in electricity though this must be acknowledged with generation; the second is to control reference to the presence of these SOEs credit availability and liquidity flows by in highly lucrative sectors of energy, holding almost all shares in state banks telecommunications and finance, similar such as Banco de Brasil (Baer, 2008). to the case in China. The salient practice Nonetheless, it must be underlined that of state capitalism in Brazil, and the these national champions are listed in minority shareholding position of the national and international stock markets, state in privatized SOEs, is not a making their boards responsible to thoroughly researched area and the minority investors and reducing the results are mixed concerning its possibility of direct political influence. effectiveness. Also, as in the case of Chinese SOE V. Turkey3 IPOs, due to state presence in these firms, revenue generation in public 3 As Lin and Milhaupt (2013) indicates, “SOEs offerings was massive. However, the are surprisingly understudied in terms of urge to protect some of these political economy”. However during this strategically important SOEs is reflected research it was still startling for me to find out that academic studies concerning SOEs in in the stock exchange listing decisions in Turkey are almost non-existent, except the literature covering the recent trends of 12 Similar to the case in Brazil, indebted and almost bankrupt SOEs in from 30s into the post-World War II the manufacturing sector along with period, the Turkish economy was SOEs holding high revenue generating structured in a statist fashion with high prospect in heavy industries and energy emphasis on the central role of SOEs in sector. However, privatization in Turkey the national economy. Starting from its did not live up to its expectations in the inception, the Turkish Republic gave 80s and 90s. Between the period from prime importance to the establishment of 1985 to 2000, the Turkish state could SOEs nearly in all productive sectors raise less than $5 billion (less than $500 with industrialist and developmentalist million annually) from privatization of aims. By the year 1960, SOEs in Turkey SOEs, and privatization was confined to had 60 percent of the manufacturing SOEs in the manufacturing sector with sector output (Okten, 2006: 232). In the very low profit margins and low 1960s, with the introduction of planned privatization revenues with the exception economy and ISI policies, the of partial privatization of Isbank through importance of SOEs expanded. public offering. In this sense, Turkey can However, contrary to the case in Brazil, be identified as one of the latest comers Turkey did not experience a favorable to the SOE privatizations process due to economic growth in 1960s and 70s due extremely negative perception of to political turmoil in these decades, and privatization in the general public the performance of SOEs deteriorated opinion, inadequate legal framework, even before the current-account deficits and wavering political interest in of the era of the 80s. privatization due to strong opposition As the country moved into the from enclaves of bureaucracy and 1980s following the brutal 1980 military workers’ unions. coup, liberalization and privatization Following the lost decade of 90s, have been given precedence by the 1999 IMF stand-by agreements democratically elected governments as signaled major privatizations with the part of the economic restructuring establishment of a robust legal programs. First tangible efforts for framework that was necessary to privatization started in 1985 with Prime overcome vague privatization practices Minister Ozal’s economic restructuring and possible Constitutional Court or program and the formation of Council of State decisions against Privatization Authority (PA). The privatization tenders. Two major Turkish case of privatization is similar to privatizations in 2000 were the block the case of Brazil in terms of its sales of national energy distribution inception, as it aimed to privatize highly company POAS and biggest oil refinery in Turkey, TUPRAS. Both of these privatization. Due to the lack of academic SOEs were closing their book balances studies in this area, the focus of this chapter will be more on privatization of SOEs in the with high profits and had absolute last three decades in Turkey. 13 monopoly status in the sectors they were with secured control rights, without operating. The block sale of the majority dispersion of control among minority shares of these two SOEs were driven investors. with the urge of the coalition In terms of state shareholding government of the time to raise high patterns, ten-year-long privatization revenues and cover the budget deficits as practices of AKP governments can be a part of the IMF restructuring program divided into two distinct periods. In the (Ercan & Onis, 2001; Okten, 2006). first half of this period (that is until The pace of privatization 2007), the aim was to dismantle almost increased after the economic crisis in all state shares in SOEs that are listed in 2000 and 2001. Following the crisis, the portfolio of the Privatization AKP (Justice and Development Party) Authority. Through this practice, by the won a landslide victory in the general year 2007, the Turkish state had elections of 2002 and formed the first completely withdrawn from major single party government after more than manufacturing (textiles, forest products, a decade of coalition governments. As cement), agriculture and food processing an extension of privatization aims of the sectors and had very small shares in oil previous coalition government, AKP refining, energy distribution and government continued the campaign of petrochemicals. In the second period mass privatization of SOEs with high starting from 2007, the Turkish state profits, operating in lucrative sectors, conducted privatizations of three giant even though those SOEs had strategic SOEs, namely Turkish Airlines in the importance (Onis, 2011). AKP transportation sector, Turk Telekom in governments also had a clear preference the telecommunications sector and of block sales for SOE privatizations. In Halkbank in the commercial banking the post-2002 era, 53 percent of the SOE sector. Block sale was not the common privatizations were conducted in the practice in these privatizations; instead, a form of block sales and 24 percent in the mix of public offerings and block sales form of public offering (Privatization was conducted. However, a common Authority of Turkey, 2012). The feature of all three privatizations was preference for block sale privatization of that the Turkish state retained a SOEs with high profits clearly shows significant portion of the shares in all that AKP governments aimed revenue three SOEs. Despite negative effects of maximization and rapid results to be the global financial crisis on the public derived from these privatizations. budget and on GDP levels, holding a Moreover, traces of crony capitalism portion of the privatized SOE share by may be observed in the block share sales the state became a salient practice and of SOEs in this era. As government deviance from the former practice of wanted to raise high revenues, it also transferring total control and ownership desired strategic investors to be present of the privatized firms became evident.

14 An important enabling feature of this facilities can provide an explanation to period was the relaxing of extreme the diversion from previous privatization Washington Consensus oriented practices. conditionality of the IMF programs. As a The case of Turkish state late-comer to privatization process, capitalism and SOEs is a matter of Turkey had more flexibility in retaining mixed practices, especially due to considerable shares in major SOE post-2007 privatizations. New state privatizations conducted in the second capitalism is not clearly observable as in part of 2000s. the cases of China and Brazil, but given Aside from partially privatized the developmentalist state capitalism SOEs, fully state-owned SOEs also seem practices of the previous decades, links to perform better when compared with between the government, state the SOE performance of the previous bureaucracy and the new private decades in Turkey (Treasury of the shareholders of the privatized firms are Republic of Turkey, 2013). Stark evident. It must be emphasized that in examples of the case are Turkish majority of the privatizations in Turkey, Petroleum (TPC) and the winning consortium is either Turkish State Railways (TCDD). Even composed of a mix of foreign and though Turkey privatized its own oil Turkish capital or solely Turkish private refining and energy distribution SOEs in firms. 4 When this is coupled with the first half of 2000s, after the recently appearing minority completion of Baku-Tblisi-Ceyhan shareholding positions of the state in pipeline in 2005, TPC started to become strategic firms, it can be inferred that a major actor in the energy market in state capitalism persists in novel forms Turkey. In 2013, TPC’s legal status was in Turkey. restructured and initiating an IPO for the VI. Conclusion firm entered into the agenda of the This paper sought to probe the Turkish Parliament (Dunya Newspaper, practices of recently rising new state 2013). Along with Turkish Airlines, PA capitalism through new forms of state also holds TCDD, the giant ownership in SOEs in three distinct transportation SOE, in its privatization developing nations. However, it must be portfolio. Notwithstanding this fact, the admitted that due to inadequacy of the company now seems to be concentrated literature on SOEs, the focus tilted at on the high-speed railway projects, financially managed much better than 4 An interesting incident is the privatization previous periods and eventually became of steel manufacturing SOE, Erdemir. The privatization of the company became an issue a showcase for the AKP government’s of national pride in the first half of 2000s and populist aims. Emphasis of the AKP consequently majority shares are being sold government on improving the to the consortium led by a holding named OYAK, which is essentially established on the infrastructure and transportation pension funds of officers in Turkish Armed Forces. 15 times on the privatization processes of converging practices of SOE the last three decades and the situation in management in developing countries. the post-privatization period. Among the three cases Nonetheless, it can be concluded that compared, state as a majority investor in there are clear similarities in practices SOEs is best practiced in China where related with privatizing and managing “national champions” that are listed in SOEs in the recent period following national and international stock markets rapid privatizations of 1980s and 90s. are climbing to higher ranks in Fortune All of the three developing 500 lists and reaching high profit levels. countries had distinct characteristics: However, monopoly rents of SOEs that China as a , having are highly clustered in upstream sectors high emphasis of centrally and locally may not be sustainable. New state owned SOEs in its high economic capitalism as a minority investor is much development; Brazil as a resources rich better pulled out in the Brazilian case. country with an emphasis on holding its As the Brazilian development bank shares in oil and energy distribution BNDES was holding minority shares in companies; and Turkey as a developing partially privatized SOEs and indirectly country caught up with rapid controlling the policies of these firms, privatization at a rather late period, the state abstained from bearing full during the turn of the 21st century, and operation costs of the SOEs. Turkey as a aiming to hold minority and majority late-comer to the privatization period shareholdings in remaining strategic was not rushed by IMF conditionality in sectors. Despite their distinct political the 80s and 90s, not as a result of the and historical backgrounds, these good performance of the SOEs but as a countries experienced or intended to result of setbacks in domestic political conduct sweeping privatizations in the and legal structure. Consequently, 90s, and they all experienced a halt or a following a fast liberalization in the first gradual decrease in their SOE part of 2000s, Turkey succeeded in privatization to a certain degree in the creating a mix of minority and majority first decade of the 21st century. Parallel shareholding in SOEs, especially after to the decrease in SOE privatization, 2007. these countries devised novel yet similar New state capitalism through ways to utilize their presence in the novel ways of SOE management has management of SOEs in order to common features in the three countries improve their level of economic examined. First, in all three cases, development and protect themselves majority of the SOEs in downstream from the fluctuations of the further sectors are dismantled at the initial global economic crisis. New state phases of the privatization period. capitalism is crystallized in these Second, oil exploration, energy, telecommunication and commercial

16 banking are deemed as “strategic As a final note, it must be sectors” and SOEs operating in these emphasized that there is a need for a new sectors are perceived as “national body of research on the performance of champions”. Third, a new trend in the SOEs under different shareholding management of these “national patterns. New studies in this area must champions” is the process of conducting go beyond previous studies on partial privatization through public privatization and explore patterns of offerings in national and international state ownership in SOEs in developing stock exchanges. Through these IPOs, countries, and also in developed states aim to raise higher revenues from countries following the 2008 crisis. privatizations without transferring full Effects of states’ majority and minority ownership or control rights, and shareholdings, IPOs, and domestic and simultaneously overcome prevalent international stock exchange listings on SOEs problems related with political the management of SOEs can be covered manipulation and principle-agent under this new body of research. problems.

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