LDC STATE TRADING ORGANIZATIONS: STUNTING DEVELOPMENT AND OBSTRUCTING TRADE

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• Original Classification: S
• Document Page Count: 49
• Document Creation Date: December 22, 2016
• Document Release Date: March 29, 2011
• Sequence Number: 1
• Publication Date: June 1, 1986
• Content Type: REPORT

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a3
Directorate of !eft4-
Intelligence
Obstructing Trade
LDC State Trading Organizations:
Stunting Development and
~ecMc_
GI 86-10047
June 1986
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LDC State Trading Organizations:
Stunting Development and
Obstructing Trade
Directorate of Secret
Intelligence
This paper was prepared byl (Office
of Global Issues. Comments and queries are welcome
and may be directed to the Chief, Economics
Division, OGI,
Secret
G186-10047
June 1986
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Obstructing Trade
Stunting Development and
LDC State Trading Organizations:
challenges to the international trading system.
This paper examines the role of parastatals in domestic LDC economies
and the world trading arena. We focus on those parastatals that trade
internationally-what we broadly define as state-trading organizations-
because these are often the largest and most important state-run enter-
prises. Moreover, these organizations pose unique, yet largely overlooked,
Secret
GI 86-10047
June 1986
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Summary
Information available
as of ! May 1986
was used in this report.
Obstructing Trade
LDC State Trading Organizations:
Stunting Development and
on state trading organizations (STOs) to promote development.
American political, economic, and military interests are keenly tied to the
economies of many developing countries. The ability of these LDCs to
repay their debt and maintain stable political systems hinges, in large part,
on the ability of their economies to grow. Our analysis indicates that a crit-
ical factor limiting prospects for growth in the Third World is the reliance
In our judgment, many of these organizations have created numerous
distortions in LDC economies that have derailed the development process
by:
? Creating inefficiency that drives up domestic prices, pulls capital away
from private firms, and saps LDC treasuries of scarce resources.
? Engendering corruption that has drained the state coffers of billions of
dollars. For example, Zaire's President Mobutu has siphoned off at least
$1 billion from SOZACOM, according to local press reports.
? Blocking foreign investment through domestic monopolies and practices
that discourage the inflow of foreign funds, thereby restricting competi-
tion, efficiency, and flow of technology.
? Distorting production incentives by setting artifically low producer prices
that discourage production, especially in the agricultural sector.
STOs also engage in practices that hinder the smooth functioning of the
world trading system. US interests are damaged because these practices
reduce the competitiveness of US companies and are inimical to free trade.
Some of the challenges to free trade that are increased by the existence and
operation of STOs include:
v Secret
GI 86-! 0047
June 1986
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? Unfair export practices, such as subsidies and dumping, that distort the
efficient allocation of global resources and threaten the competitive
position of American firms. The US Commerce Department found that
the majority of US imports from SIDOR, the Venezuelan state-owned
steel enterprise, were subsidized at a rate of 72.6 percent.
? Restricted trade through nontransparent tariff- and quota-like measures.
Paraguay, for example, restricts wheat imports through an STO as part
of its National Wheat Self-Sufficiency Program.
? Countertrade resulting in higher costs, discrimination, and restrictive
trade practices. In one countertrade arrangement, Brazil's CVRD agreed
to supply 30,000 tons of iron ore annually to Malaysia in exchange for
10,000 barrels of oil per day
The United States currently has a unique opportunity to try to limit the
growth and combat the trade-distorting effects of STOs. As a result of
recent developments-LDC debt overhang and the forthcoming GATT
round-we believe there are more opportunities than perhaps ever before to
redress the problems posed by STOs. Moreover, developing countries are
now more receptive to undertaking reform because of their concern over
large STO losses, inefficiency, corruption, blocked foreign investment, the
need to comply with World Bank and IMF programs, and their generally
more pragmatic, less ideological stance. For example, India and Algeria
are reducing the staffs of their STOs and streamlining procedures. Many
other countries-including Argentina, Brazil, Guinea, Mexico, and Paki-
stan-are seeking to privatize or liquidate some STOs.
Despite these pressures for reform, dismantling LDC STOs will meet with
considerable political resistance. STOs often house the vested interests of
many LDC elites. Some LDC leaders siphon off huge sums of money from
STOs for political or personal purposes, thereby making these leaders
unwilling to reduce the role of these organizations in their economy. STOs
also play an important role in maintaining political stability by subsidizing
critical commodities. Moreover, attempts to eliminate STOs could stir
nationalist sentiment, making the disbanding of these organizations politi-
cally difficult. For example, Argentine labor groups opposed President
Alfonsin's February 1986 economic package in part because the scarcity of
domestic capital made it likely that only foreign companies could afford to
buy the state enterprises that were up for sale, according to local press
reports.
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Stunting Development
Creating Inefficiency 4
Engendering Corruption 6
Blocking Foreign Investment 6
Distorting Production Incentives 7
Obstructing Trade 8
Unfair Export Practices 8
Restricted Imports 10
Implications and Opportunities for the United States 14
F. Major STOs: Trade in Key Commodity Markets
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,,DC State Trading Organizations:
Stunting Development and
Obstructing Trade
State trading organizations (STOs)-government or-
ganizations involved in export or import trade-play a
pervasive role in the LDCs. A 1982 UN survey
estimates that there are at least 269 STOs in 66
developing countries.' Most are located in Africa and
Latin America. Of the 269 STOs counted by the
survey, more than 39 percent are in Africa and 25
percent in Latin America. Of the countries surveyed,
Sri Lanka, Cuba, Malawi, the Dominican Republic,
Syria, and India had the most STOs-89 in all.
Our own examination of several LDCs turned up
numerous STOs not accounted for in the UN survey.
This undercounting occurred either because some
countries failed to respond to UN requests or did not
consider certain state firms to be STOs. For example,
according to the UN study, Mexico has one STO-
the food-importing organization CONASUPO-but
we have identified at least five, including the giant oil
monopoly PEMEX. Moreover, the UN reports that
Algeria has no STOs, but,
there are a number of state-run enterprises-
about 466-many of which trade internationally. On
the basis of the information derived from such sam-
plings, we believe the number of LDC STOs is at least
three times the UN total.
STOs control and trade the most economically impor-
tant commodities, such as foodstuffs, industrial in-
puts, and energy resources. Moreover, they dominate
trade in many LDCs; in Peru, Egypt, and Burundi,
STOs account for more than 85 percent of national
exports. In Algeria, Burma, Guinea, Iraq, Syria,
Uganda, and Zaire, foreign trade sectors have become
virtual state monopolies.
' Handbook of State Trading Organizations of Developing Coun-
tries, United Nations Conference on Trade and Development, New
We define STOs in broad terms to include any state-
run organization involved either in export or import
trade. The major types of STOs are:
? Government departments. Agents of the state that
enter into the world market to buy or sell goods on
the nation's behalf.
? Marketing boards. Organizations set up to channel
exportable goods through a single government
body. Domestic producers are usually required to
sell all of their output to the board. The board thus
acts as a monopoly buyer with the power to set
domestic prices. Government marketing boards
largely exist because of the lack of a sophisticated
tax infrastructure-they are one of the few reliable
methods for collecting revenues.
? Public production enterprises. Firms using either
their own trade infrastructure or sales agents
abroad to market their output. The state-owned oil
and steel companies are the most significant exam-
ples of public production enterprises involved in
foreign trade.
? State trading companies. Government-controlled
commercial corporations that are primarily en-
gaged in activities related to international trade
and that are organized and operated for the purpose
of carrying out their entrepot mission.
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Table 1
Profile of Representative STOs
STO Country
Year STO a
Founded Type
Principal Turnover b
Objective (Millions
US $)
BCC, Burundi Burundi
Coffee Company
1975
Marketing
board
Revenue 90
BULOG, Budan Indonesia
Urasan Logistik
1967
Government
agency
Social, secure 1,800
food imports
CONASUPO, Mexico
Compania
Nacional de
Subsistencias
Populares
1965
Government
agency
Social, import 3,670
foodstuffs, and
subsidize price
CVRD, Brazil
Companhia
Vale do Doce
1942
PPE
Export promotion 713
INTERBRAS Brazil
1976
STC
Export promotion 2,874
KPC, Kuwait Kuwait
Petroleum
Corporation
1980
PPE
Revenue 24,332
The Mineral India
and Metals
Trading
Corporation
1963
STC
Control 1,905
a Public Production Enterprise (PPE) and State Trading Company
(STC).
b Turnover periods: BCC 1979/80, BULOG and the Minerals and
Metals Trading Company of India 1981-82, CONASUPO 1981,
CVRD and INTERBRAS 1983, and KPC 1980/81.
Services Major Products
Provided Traded
Financing, forwarding and Coffee exports.
clearing, quality control,
shipping, warehousing.
Domestic distribution, Sugar, wheat,
forwarding and clearing, and rice imports.
quality control, shipping,
and warehousing.
Internal distribution and Beans, corn, sor-
warehousing. ghum, and wheat
imports.
Shipping. Mineral exports,
primarily iron
ore.
Financing, quality control, Diverse range of
shipping, and warehousing. products, the
Also actively engaged in most important
product and market devel- being petroleum
opment. byproducts,
sugar, and
soybeans.
Shipping.
Domestic distribution, Wide range of
financing, and clearing, Metals and min-
quality control, under- erals, usually rep-
writing, and warehousing. resenting 100
percent of India's
trade in the
product.
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Over the years, LDCs, through STOs, introduced the
state into the trading arena for a variety of economic,
political, and social purposes. These include economic
development, export promotion, regulation of trade,
revenue collection, and social restructuring.
Many STOs attempt to promote economic develop-
ment through the coordination of scarce resources.
The STOs' investments are designed to create back-
ward and forward linkages that will foster more rapid
growth. The trading organizations take a long-run
view of the development process, incorporating many
social and employment considerations that are not
accounted for by private firms.
Export promotion involves mobilizing the productive
capacity of domestic firms to increase sales of a
country's products in overseas markets. This is accom-
plished by using the STO's trading expertise to lower
the information barriers that often block domestic
firms from trading their products internationally.
Control of trade in strategic products, such as food,
minerals, energy, and arms, is an important mission of
some STOs. Many LDCs attempt to control trade to
secure a supply of critical commodities, prevent the
undervaluation of exports, or reduce dependence on
other commercial entities-particularly multinational
corporations. Control is also exercised to regulate
trade with particular countries.
LDCs often create STOs to obtain revenue for the
state. This is motivated by a desire both to maintain
the profits from trade within the country and to
spread the benefits in an equitable manner to all
members of society. Revenue collection has become
the principal goal of most marketing boards. The
boards, through their ability to break the connection
between world and domestic prices, are able to earn
large profits. The state oil companies are also princi-
pally operated to generate revenue for the nation.
rn
Figure 1. INTERBRAS. The STO is shown
above loading Brazilian machinery for shipment
Figure 2. Kuwait Petroleum Corporation. KPC
is an oil exporting STO that is operated to
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Figure 3
Mission of State Trading Organizations (STO)
0 Primary mission Secondary mission OTertiary mission
Export
promotion
Revenue and
development
to close down an unprofitable copper mine that
employed more than 1,200 people, the Zimbabwean
Mining Development Corporation (ZMDC) was
instructed by the government to take over the
Social
objectives
Marketing board
0
0
0
0
Government department
0
0?
0
0
State trading company
0
0
0
0
Public production enterprise
0
0
0
0
The achievement of social objectives, such as training
the population, subsidizing certain imports, and stabi-
lizing the incomes of domestic producers, is another
mission of many STOs. For example, the primary
mission of Malaysian STOs, operating within the
context of the New Economic Policy, is to transfer
skills and wealth to indigenous Malays. Alternatively,
CONASUPO, an agency of the Mexican Govern-
ment, imports foodstuffs that it then sells to the
domestic population at subsidized prices.
Although STOs have some positive effects on LDC
economies, they are largely overshadowed by their
negative impacts. Indeed, we believe STOs have
stunted Third World development by causing numer-
ous distortions in LDC domestic economies.
Creating Inefficiency
Many STOs create costly inefficiencies because of
conflicting goals, excessive staffs, and inappropriate
integration:
? LDC governments have imposed conflicting goals,
such as onerous social welfare requirements, that
have impaired the STO's ability to earn a profit. In
Zimbabwe, when a private mining company moved
money-losing enterprise,
Control of
trade
To cover the mine's losses, the
government provides ZMDC with $9 million annu-
ally, costing at least $7,500 per job saved.
? Use of STOs for patronage and politicization have
caused major overstaffing problems, creating a tre-
mendous financial drain on the treasury and foster-
ing redtape. Overstaffing problems can reach very
high levels. For example, the Ghana Cocoa Market-
ing Board employs, according to the US Embassy, a
whopping 105,000 people-equivalent to one bu-
reaucrat per one and a half tons of cocoa exported.
? Many STOs strive to control every aspect of produc-
tion through horizontal and vertical integration.
This penchant for "bigger is better" has led to
oversized, unwieldy enterprises. Mexico's oil monop-
oly PEMEX, for example, performs almost all
exploration, drilling, refining, and distribution of
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Nicaragua: Growth and Inefficiency of the
National Basic Foods Corporation
On seizing power in mid-1979, the Sandinistas cen-
tralized food distribution through the newly created
National Basic Foods Corporation, which was given
sole authority to import, export, and wholesale basic
foodstuffs. Over time,
the organization:
? Took over the previously privately owned super-
markets in Managua.
? Created `people's stores" to supply basic goods at
subsidized prices.
? Furnished priority supplies to some private stores
in exchange for pledges to sell controlled items at
official prices.
? Built marketplaces with stalls for private vendors
in neighborhoods throughout Managua in the ap-
parent hope of closing the Eastern Market, the
capital's bastion of small-scale free enterprise.
? Subsidized foodstuffs and consumer goods by en-
forcing wholesale and retail price ceilings.
growing shortage of foreign exchange limited the flow
of foodstuffs from abroad, leading to frequent short-
ages. In response, Managua set up a rationing system
that supposedly guarantees each family the right to
buy at least a specified amount offoodstufs each
month through government outlets at official prices.
Nonetheless, supplies of these goods have become
increasingly scarce, giving impetus to a prospering
black market.
Shortages are partly caused by inefficient handling
and distribution,
For example, burden-
some import procedures prevent prompt use of donat-
ed goods. Opposition journalists claim incompetence
is hindering distribution of available supplies of
cooking oil and grains. We believe low producer
prices drive many farmers to divert goods to the
black market. a
During the first two years of Sandinista rule, food
imports and donations compensated for the sharp
decline in agricultural production during the revolu-
tion. By 1982, however, a falloff in donations and the
petroleum and petroleum products in Mexico, as
well as some production of petrochemicals.
PEMEX also directs many activities only remotely
related to running the petroleum business, includ-
ing medical care and hospitals, construction of
offices and other facilities, and janitorial services.
This results in one executive director being respon-
sible for the operation of a large number of differ-
ent activities and creates bottlenecks, communica-
tion problems, and other forms of inefficiency.
Inefficiency is perpetuated because the trading orga-
nizations usually lack domestic competitors and,
therefore, are not driven out of business. Governments
protect STOs from competition by providing special
access to foreign exchange and commercial informa-
tion, financial support, and monopoly trading rights.
For example, private Brazilian traders claim that the
government provides the Brazilian state trading com-
pany INTERBRAS with information on forthcoming
trade deals, allowing the STO to beat out private
competitors. In addition, INTERBRAS receives
benefits from being owned by the Banco do Brasil,
allowing INTERBRAS to easily obtain foreign ex-
change-avoiding the delays experienced by private
traders.
Because of these inefficiencies, STOs usually require
massive government subsidies to stay afloat-costing
LDC taxpayers countless dollars, pulling capital away
from private firms, and adding to the country's debt.
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For example:
? Argentina's state petroleum company, YPF, runs up
some of the biggest corporate losses in the world.
Last year's surpassed $600 million, according to
YPF officials.
? Mexico's food-importing STO, CONASUPO, is
expected to lose about $1.5 billion in 1986-equiva-
lent to 1 percent of GDP,
? CARONI, Trinidad and Tobago's national sugar
enterprise, received government subsidies of more
that $120 million in 1984, according to US Embassy
reporting.
? Revenue earned by SIDERBRAS, the Brazilian
steel company, covered only 51 percent of total
expenditures in 1985, according to US Embassy
reporting.
Engendering Corruption
STOs are often plagued by corruption-an engrained
element of many LDC economies-that compounds
inefficiency and drains state coffers of billions of
dollars. For example, a Brazilian Coffee Institute
(BCI) audit of warehouse records discovered that
nearly 17,000 sacks of coffee worth nearly $900,000
disappeared in March 1985, according to press report-
ing. Moreover, coffee stored in the BCI's warehouses
was found to be an inferior and less expensive type
than purchase records indicated. In another case, 37
members of the Ghana National Trading Corporation
are accused of embezzling $6.2 million, according to
STO corruption sometimes involves officials at the
highest levels of government.
President Mobutu is reported to have siphoned off at
least $1 billion from SOZACOM, Zaire's now dis-
banded mineral trading company, according to press
reports.
Corrupt practices can easily skew an STO's mission.
Employees frequently become more concerned about
enriching themselves rather than fulfilling their cor-
corruption distorts hiring
practices by favoring those who can afford to pur-
chase their jobs.
zations build a constituency for protection.
Blocking Foreign Investment
STOs also slow development by impairing the flow of
foreign investment, thereby reducing competition, ef-
ficiency, and the transfer of technology. With STOs
often granted monopoly rights by governments, for-
eign investment is blocked and countries become
dependent on inefficient enterprises for development.
Reversing the trend is difficult because these organi-
In addition to precluding foreign investment through
outright state monopolies, STOs, in some cases, ham-
per foreign investment by raising the cost or perceived
risk of a project. Some LDCs, for example, limit
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foreign investors to a minority ownership position with
an STO partner. The lack of direct control and
therefore decisionmaking authority reduces the at-
tractiveness of such investments. In Mexico's mining
industry, foreigners can hold no more than a 34-
percent equity position with an STO holding the
majority equity position. Foreign investment in LDC
oil industries is impaired by tight restrictions on
foreign participation that often includes majority con-
trol by the national oil company. Under new Argen-
tine hydrocarbon legislation, YPF has the option to
become a 15- to 50-percent partner on all commer-
cially exploitable petroleum finds. Moreover, STOs
may control a host of factors, such as production
rates, local labor requirements, marketing strategy,
prices, and form of payment, creating further disin-
centives to invest.
Distorting Production Incentives
In our judgment, STOs probably have caused their
most severe distortions in Third World agriculture by
setting artificially low producer prices. Many LDCs,
particularly in Africa, require domestic producers of
important export commodities to sell their products to
state marketing boards, which usually purchase the
commodities at below world market prices. By paying
one price to growers and receiving a higher price for
exports, marketing boards raise revenue for the state.
According to US Embassy reporting:
? Actual receipts by Kenyan farmers are generally
between 75 to 85 percent of the free market price.
? The Nigerian Cotton Marketing Board paid grow-
ers less than half the export price of cotton during
the early 1980s.
? The Ethiopian Government's price for 50 pounds of
barley was $14 last year; the world market price
was $50.
? In Tanzania, the producer price of coffee was $1.42
per kilo while the export price was $3.25 during
February 1986.
Moreover, most marketing boards are also cash
poor-the government takes all the earned revenue-
forcing the boards to delay payments to producers.
In extreme cases, producer prices are below actual
production costs, forcing growers to give up producing
these crops or turn to subsistence farming. For exam-
ple, Tanzania's Sisal Authority has frequently not
paid farmers at all for their crops, according to the
US Embassy. In one of the worst cases of low
producer prices, Indonesian farmers receive so little
for their sugar that they must be coerced into produc-
ing the crop. According to the US Embassy, if a
farmer selected by the government to produce sugar
refuses, access to irrigation water is cut off or, in rare
circumstances, the military may destroy alternative
crops planted in fields designated for sugar produc-
tion.
These policies have caused major declines in agricul-
tural production in many LDCs. For example, Gha-
na-which earns well over 50 percent of its export
revenue from cocoa sales-has experienced a massive
decline in agricultural output largely because of the
ill-conceived policies of the cocoa marketing board.
According to previous analysis, low producer prices
have been the principal cause of the decline in cocoa
production-plummeting from a peak of about
540,000 tons in 1965 to about 158,000 tons in 1984.1
Cocoa experts estimate that about 20,000 tons annu-
ally go unharvested because of low government pro-
ducer prices or transportation problems.
Low producer prices have also encouraged commodity
smuggling.' In turn, government revenues and foreign
exchange have been lost and political tensions with
neighboring countries have been heightened. Some
examples of smuggling
? About 20 percent of Ghanian cocoa and 10 percent
of the Nigerian crop is illegally exported each year.
? Much of Thai mineral production evades official
channels because of artificially low prices. The
official tungsten price, for example, is under a
quarter of the amount received over the border.
? As much as half of The Gambia's and Senegal's
export mainstay-peanuts-may be held back by
farmers or sold on the black market for higher
prices.
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Table 2
STOs' Share of National Trade
in Selected LDCs
e CIA estimates.
b Exports have run as high as 50 percent in recent years because of
crude oil sales that are expected to be a temporary phenomenon.
In addition to its adverse impacts on LDCs' domestic
economies, STOs create many problems in the inter-
national trading system. Their negative impact can be
sizable because of their importance in the world
trading system. Overall STO involvement in interna-
tional trade is estimated by various authorities to
range from 10 to 40 percent. According to open
sources, state trading is especially important in world
commodity markets: more than 20 percent of traded
agricultural goods, bauxite, copper, iron ore, and tin is
supplied through STOs. In addition, one-third of the
world's phosphate supply is controlled by a single
Moroccan STO. STOs are perhaps the most active in
the oil market-handling the petroleum imports and
exports of most LDCs. Although the mere presence of
STOs in international trade is not inherently negative,
some STOs engage in a variety of practices that
obstruct the world trading system.
Although unfair export practices are not exclusive to
STOs, these organizations make it easy for govern-
ments to engage in such practices to achieve a variety
of political, economic, and social goals. STOs may
practice dumping-pricing exports below their mar-
ginal cost-to boost employment, expand the volume
of goods traded, increase their share of foreign mar-
kets, and earn needed foreign exchange. Dumping
occurs because mismanagement and improper plan-
ning and price incentives often result in overproduc-
tion. STO's may be forced to off-load excess produc-
tion in overseas markets to recover as much of their
costs as possible. In addition, since STOs face little or
no competition at home, they can discriminate be-
tween markets by charging a lower price in foreign
markets. Finally, the organizations may engage in
predatory dumping to capture a commanding share of
a foreign market. Governments encourage such be-
havior because officials seek to diversify exports and
promote industrial development.
Many LDC governments also subsidize STOs in
targeted export industries, which, in turn, allows the
STOs to sell at lower prices. These subsidies can take
many forms:
? Direct financial transfers from the government to
the STO.
? Favorable interest rates.
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Figure 4. Carajas Project, CVRD. The Carajas project is the
world's largest iron ore mine, operated by the Brazilian public
production enterprise CVRD. The resulting iron ore exports could
? Easy access to government funds, permitting large Numerous examples of these practices exist. In Feb-
overdrafts with the central bank. ruary 1985 the Department of Commerce determined
? Subsidized inputs that lower total production costs. that steel wire imports from Saudi Arabia, produced
? Government payment for certain aspects of the by the state Iron and Steel Company (Hadeed), were
organization's activities, such as research and devel- benefiting from grants equivalent to 5.48 percent of
opment and transportation of materials.
? Indirect subsidies, such as the transfer of state-
owned goods and services to the STO, at no, or
substantially, reduced cost.
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.7ca.1 u t
The South Korean Government's direct involvement
in international trade is more limited than that of
most developing countries. Instead of using STOs to
manage trade and promote exports, Seoul relies on
the private sector. Korea's foreign trade is dominated
by its eight general trading companies. These private
firms are modeled after the Japanese soga shoshas-
multinational in scope with diversified operations and
tremendous size. Total sales of these eight companies
were more than $13 billion in 1983, and seven of
them were among the 10 largest corporations in
South Korea. The government encourages the forma-
tion of large trading companies by granting special
incentives to corporations that exceed 2 percent of the
national export goal.
A lack of ownership, however, does not preclude
control. In fact, Seoul exercises considerable influ-
ence through informal channels. A close government-
business relationship exists in which Seoul sets broad
priorities for example, diversification of export
markets-and the general trading companies receive
favors for cooperation,
Government control over credit allocation is
Seoul's primary tool for getting private companies to
comply, but threats of higher taxes are also used.
their value. Those subsidies were said to have included
a government loan, the preferential provision of equip-
ment, and government equity provisions to Hadeed.
The Commerce Department also recently found that
the majority of US imports from Siderugica del
Orinoco (SIDOR), the Venezuelan state-owned steel
enterprise, were subsidized at a rate of 72.6 percent.
Restricted Imports
On the import side, LDC governments often use STOs
as an indirect means of implementing restrictive trade
policies. The lack of transparency allows LDCs to
bear a lower risk of partner-country retaliation. Fur-
thermore, STOs are subject to less international
scrutiny, increasing, in our view, the likelihood that
LDCs will use STOs to circumvent recognized trading
norms. STOs restrict trade by applying taxes, high
markups, and commissions to imported products.
These restrictive policies act as a tariff, reducing the
level of trade and encouraging consumers to purchase
domestically produced substitutes. In addition, STOs
restrict trade through import quotas. Paraguay, for
example, restricts wheat imports through an STO as
part of its National Wheat Self-Sufficiency Program.
Indonesia does the same with sugar in the face of
world prices that are less than one-eighth of the
domestic cost of production, according to the US
Embassy.
STO inefficiencies also lead to restricted trade
through higher cost imports and lengthy, burdensome
administrative procedures.
Countertrade
The governments of many LDCs encourage STOs to
enter into barter arrangements in hopes of increasing
exports, conserving foreign exchange, and improving
the balance of payments. STOs are in an excellent
position to engage in countertrade because they can
justify the added expense as necessary to meet nation-
al goals. Furthermore, governments consume a wide
range of goods, making it easier for STOs to place the
bartered products. This reduces the need for resale,
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lowering the cost of countertrade. Finally, govern-
ments force their trading partners to accept domesti-
cally produced goods in exchange for imports by
exercising their monopsony power-the power an
organization has over sellers when it is the predomi-
nant buyer.
Brazilian STOs are among the most active partici-
pants in countertrade. We estimate that about two-
thirds of Brazil's oil imports are obtained through
countertrade arrangements. In 1982 PETROBRAS,
the state-owned oil company, announced that all
countries exporting oil to Brazil were required to
purchase an offsetting amount of Brazilian goods.
These countries were then directed to identify poten-
tial Brazilian exports and negotiate terms with
INTERBRAS, its trading subsidiary. According to
US Embassy reporting, such deals have been conclud-
ed with Algeria, Iran, Iraq, Malaysia, Mexico, Nige-
ria, and Venezuela.' Brazilian goods and services
being exchanged include motor vehicles, foodstuffs,
chemicals, textiles, and agricultural machinery.
PETROBRAS has curtailed its imports from Kuwait,
Libya, Qatar, and the United Arab Emirates because
these countries were not buying sufficient quantities
of Brazilian goods.
The Future of STOs: Pressure for Reform, But
Political Resistance
affected.
STOs will continue to play an important role in LDC
domestic economies and the world trading system; we
expect the rate of growth to slow from the pace of the
past few decades, however. The slowdown is likely to
occur because many LDCs are beginning to recognize
that corruption, costly subsidies, and inefficiency
plague the organizations. According to open sources,
the president of the Brazilian Coffee Institute recently
stated that the institute can carry out its mission with
only 200 people as opposed to the 4,500 it currently
employs. CARONI, Trinidad and Tobago's sugar
enterprise, intends to reduce its ranks by 4,500 jobs
over the next three years, according to press reports.
In a few cases, LDC governments-Argentina, Brazil,
Guinea, Mexico, and Pakistan, for example-are
seeking to privatize or liquidate some smaller public
enterprises, but the large STOs are not likely to be
Compliance with IMF-backed austerity programs
also is driving some LDCs to reduce public transfers
to STOs and undertake certain structural adjust-
ments. In response to such pressure, Mexico is elimi-
nating its subsidies on most foods. Similarly, the IMF
has pressured Mali to reduce losses of the trading
company SOMIEX by terminating the STO's monop-
oly on the sale of basic foodstuffs. In a tentative
understanding between the IMF and Sierra Leone,
Freetown has agreed to reduce the role of the Precious
Metals Marketing Company, the Gold and Diamond
Office, and the Produce Marketing Board. In fact, the
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Table 3
STO Objectives and Their Negative Effects
on International Trade
Boost employment, exports.
Increase share of foreign markets.
Increase foreign exchange earnings.
Protect domestic producers. Restricted imports
Stem foreign exchange outflow.
Increase exports.
Conserve foreign exchange.
Improve balance of payments.
Undercuts private firms.
Less efficient allocation of global resources.
Injures US firms by providing foreign firms with
unfair trade advantage.
Fewer goods and services exchanged.
Reduced efficiency, consumer choice, and export
competitiveness.
Higher domestic prices.
Raises costs to both STO and partner country.
Reduces foreign exchange earnings.
Increases discrimination and restrictive trade
practices.
Sierra Leone Minister for Development and Econom-
ic Planning stated in early March that "we cannot
and will not revert back to the use of entities such as
the marketing board. We can't afford the marketing
board's efficiency when it comes to something as
sensitive as rice," according to the US Embassy.
Austerity is also forcing some governments to squeeze
the budget of profitable STOs to service large public
debts-causing declines in investment that may result
in lower production in the future.
In another move to reduce the role of STOs, some
governments are opening up certain sectors of the
economy to private competition, reducing the size of
the organizations' bureaucracy, and streamlining pro-
cedures. Algiers, for example, has decentralized its
import monopoly and now permits private firms to
import certain goods-bypassing STOs. New Delhi
has reduced its licensing requirements, making it
easier to obtain imports. The new government of
Tanzania is also moving in this direction with plans to
streamline its many public enterprises, although
progress to date has been minimal.
LDC governments are also likely to attack corruption
in STOs as part of their effort to reduce public-sector
expenditures. Such attacks, however, have dim pros-
pects in many LDCs, where corruption is a way of life
and often involves regime members and families at
the highest levels.
Many LDCs are also likely to undertake agricultural
reform. Backed by the World Bank, the gross ineffi-
ciency and poorly conceived policies of producer
marketing boards will be reduced. Ghana, for exam-
ple, has announced that it will reduce the size of the
cocoa board by 19,000 positions. In addition, the
government has recently boosted price incentives by
50 percent to encourage production. These efforts,
according to the US Embassy, appear to have at least
halted the 20-year decline in Ghanian cocoa produc-
tion. Zambia has also made recent efforts to reform
its agricultural marketing board, NAMBOARD.
On 17 January, President Kaunda announced that
NAMBOARD will no longer have monopoly status
for the marketing of maize and fertilizer. By no
means, however, are a large number of LDCs likely to
disband their marketing boards or relinquish the use
of the boards as instruments of taxation. LDCs will
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Many LDCs use STOs to influence their relations
with other nations. STO officials frequently visit
foreign capitals as representatives of their govern-
ment. These contacts often stimulate stronger com-
mercial ties, enhancing political relations. Many
LDCs, for instance, use their STOs to increase the
level of trade with Eastern Bloc countries. One
purpose behind such policies is to strengthen South-
East ties to reduce the LDCs' dependence on the
West.
LDC governments also use STOs to establish contact
with certain countries as a first step in creating
stronger political relations. Alternatively, some LDCs
instruct their trading organizations not to undertake
certain commercial decisions because they may have
mercial ties with competing countries so their
continue to set low producer prices-restraining out-
put and causing smuggling-because the LDCs have
few alternative means of collecting scarce revenue.
Despite these pressures for reform, dismantling LDC
STOs will meet considerable political resistance:
STOs house the vested interests of many LDC elites,
play an important role in maintaining social stability,
and respond to popular feelings of nationalism. Some
LDC leaders and their political backers siphon off
huge sums of money from STOs, making them unwill-
ing to reduce the role of these organizations in their
economy. STOs also provide LDC leaders with the
power to distribute government positions to loyal
supporters, family members, or co-opted rivals. For
example, Indonesian President Suharto has placed
family members and close associates in charge of the
country's trading organizations. In Somalia, Mogadi-
shu continues to avoid taking effective steps to reform
government-owned businesses, despite IMF pressure
governments can maintain political influence in both.
For example, some Brazilian STOs balance their
trade with such rivals as Pakistan and India, or Iran
and Iraq,
In addition to these more or less routine uses of
STOs as tools of foreign policy, LDCs may use their
trading organizations to undertake specific foreign
to do so. According to the US Embassy, the Somalis
dragged their feet on instituting reforms-probably
fearing losses of patronage and control-and are
attempting to keep in the public sector all businesses
that benefit top Somali officials and their friends and
relatives.
Many LDC governments also use STO subsidies for
critical commodities to enhance political stability
among key groups of society. Morocco subsidizes
consumer prices of flour, sugar, and vegetable oil,
according to the US Embassy. In Jamaica, there were
riots following PETROJAM's effort to raise the price
of gas. Moreover, some marketing boards set low
producer prices and in turn sell these inexpensive
agricultural products to urban consumers. This trans-
fer of income is designed to maintain political support
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among the much more politically threatening city
dwellers at the expense of the dispersed farming
Several avenues exist through which the United
States can encourage reform:
community.
Finally, attempts to eliminate STOs could stir nation-
alist sentiment, making the disbanding of these orga-
nizations politically impossible. Such sentiment is
likely to be especially strong if some of the STOs'
business is turned over to foreign multinational corpo-
rations. For example, Argentine labor groups opposed
President Alfonsin's February 1986 economic pack-
age, in part because the scarcity of domestic capital
made it likely that only foreign companies could
afford to buy the state enterprises that were up for
sale, according to local press reports.
The United States has a considerable stake in the
outcome of STO reform. The dismantling of these
organizations would help US Government efforts
under the Baker Plan to promote structural adjust-
ment in the Third World, thus helping to reduce the
burden of large LDC debts. Improved adjustment
performance would also reduce LDC needs for in-
creased economic aid and other concessions. In the
long run, reform would support US interests in en-
hancing political stability by reducing domestic eco-
nomic frustration resulting from low economic
growth. Finally, reform could reduce political
strains-stemming from growing economic dispari-
ties-between LDCs and industrialized countries.
On the commercial side, reform would enhance oppor-
tunities for US business by reducing the scope of STO
involvement in LDC economies. American firms
would gain from an improved investment climate;
greater access to LDC markets; and a reduction in
countertrade, dumping, and subsidies. Moreover, US
financial institutions that have lent abroad would
benefit from an increased likelihood that the interest
and principal on their Third World loans will be paid.
? GATT. Article XVII of the GATT-the primary
provision dealing with STOs-attempts to ensure
that the trading organizations operate solely in
accordance with commercial considerations, behave
in a nondiscriminatory manner, and refrain from
imposing quantitative restrictions on traded goods.
The provision, however, has been largely ineffective
in controlling the excesses of STOs. The rules have
been subject to widely divergent interpretations, few
cases have been raised for examination, and mem-
ber countries have not provided information on their
operations-failing to meet their duty of notifica-
tion. In the forthcoming trade round, the United
States could strongly support the Chilean initiative
to reform GATT state trading rules. The United
States could also attempt to develop a code for state
trading that would reduce restrictive and discrimi-
natory practices.
? Bilateral Negotiations. Through bilateral talks,
LDCs could be reminded of the various negative
effects of STOs-particularly lower production in-
centives and blocked foreign investment. The high
costs of inefficient organizations such as increased
consumer prices and expensive government subsi-
dies may also be emphasized. LDCs could be en-
couraged to privatize STOs as a means of solving
some of these problems.
? IMF/World Bank. The IMF and the World Bank
could be encouraged to crack down on costly gov-
ernment subsidies to STOs, refuse to lend to ineffi-
cient organizations, and assist in restructuring mis-
directed agricultural policies. The two sister
organizations could also take into fuller account the
real costs-preferential interest rates and low-
priced inputs-of certain benefits provided to STOs
that LDCs usually do not take into consideration.
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? Other International Bodies. The Organization for
Economic Cooperation and Development (OECD)
could study STOs and combine the study with
political action noting disapproval of their effects.
Also, UNCTAD, a traditional supporter of STOs,
could be requested to examine the problems of
inefficiency and price distortions associated with
STOs. Although UNCTAD has refused to under-
take such studies in the past, the new more market-
oriented leadership may now be willing to examine
the issue. Finally, the United Nations Transnational
Center could develop a code of conduct for STOs as
well as for Western multinationals.
As a result of recent developments-LDC debt over-
hang and the forthcoming GATT round-there are
more opportunities than perhaps ever before to redress
the problems posed by STOs. Moreover, large STO
losses, inefficiency, blocked foreign investment, cor-
ruption, the need to comply with World Bank and
IMF programs, and in general a more pragmatic, less
ideological stance on the part of most LDCs make the
developing countries somewhat more receptive to un-
dertake reform. Despite many political obstacles,
these conditions increase the likelihood that US initia-
tives can reduce the growth of STOs and perhaps
scale them back in some countries.
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Appendix A'
Brasilia owns some of the largest and most important
STOs in the Third World. They handle approximately
two-thirds of Brazil's imports and one-third of all
exports. Brazilian STOs engage in a wide range of
trading activities. Some of the trading organiza-
tions-PETRO BRAS, CVRD, and SIDERBRAS-
are large public production enterprises trading petro-
leum, metals, and steel, respectively. These enter-
prises are primarily geared toward promoting national
development either through the exploitation of Bra-
zil's vast natural resources or through the creation of
a modern infrastructure that will foster growth. Some
STOs, such as INTERBRAS-an affiliate of
PETROBRAS-and COBEC are trading companies
that are operated to promote Brazilian exports.
Companhia a Vale do Rio Doce (CVRD) is an
integrated mineral-producing and -exporting compa-
ny. The STO's activities have expanded from its
original focus on iron ore to a whole range of miner-
als. The STO has also moved into all aspects of
mineral trade-shipping, processing, marketing, re-
search, and upstream production. Through CVRD,
Brasilia is able to maintain control over a large share
of the production and export of Brazil's mineral
resources. Iron ore and pellet exports by CVRD and
its subsidiaries, for instance, account for approximate-
ly 75 percent of Brazil's iron ore and pellet sales.
The Carajas project is CVRD's most important ven-
ture. Carajas is a $4.9 billion mining operation con-
taining the largest iron ore deposits in the world. The
project includes the development of a mine, railroad,
processing plant, and deepwater port. When the com-
plex is completed in 1987, the state mining company
expects its annual production of iron ore to increase
by one-third, reaching 35 million metric tons. The US
Embassy reports that the first shipment from the
project-to Japan-took place in May 1985. In the
coming years, the government may reduce its equity
position in CVRD-selling off some of the company's
stock as a means of building up its capital base for
future investments.
CVRD has been involved in a number of countertrade
arrangements, mainly with Communist countries. The
STO uses a clearing account system with Romania,
Czechoslovakia, and Poland. In a 10-year arrange-
ment with Poland, CVRD swapped iron ore for coal
that, in turn, was sold to SIDERBRAS, the public
Brazilian steel production enterprise. In a deal with
Czechoslovakia, guidelines were established for the
sale of Brazilian iron ore for a variety of Czechoslovak
products. Countertrade arrangements with non-Com-
munist countries include an October 1983 arrange-
ment to supply 300,000 tons of iron ore annually to
Malaysia in exchange for 10,000 barrels of oil per
day.
PETROBRAS, the national oil company of Brazil,
develops the country's petroleum resources and regu-
lates all crude oil imports. PETROBRAS has the
most sales of any Brazilian firm-almost $8.8 billion
in 1984-and is one of the largest companies in the
developing world. In 1982 the STO employed more
than 50,000 people.
INTERBRAS is the petroleum company's foreign-
trading arm whose main objective is to promote
Brazilian exports. Because of this function,
INTERBRAS is the principal focus of countertrade
activity in Brazil. The STO has concluded numerous
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Figure 5
INTERBRAS Sales
Percent of
Million US $ Brazilian exports
1?f-I-1~ I l o
0 1976 1978 1980 1982 1984 0
countertrade deals, most linked to the purchase of oil
by PETROBRAS. This became a matter of policy in
1982 when PETROBRAS announced that all coun-
tries exporting oil to Brazil must purchase an offset-
ting amount of Brazilian goods. The oil-exporting
LDCs were directed to identify potential Brazilian
exports and negotiate terms with INTERBRAS. Con-
sequently, INTERBRAS entered into countertrade
arrangements with Algeria, Iran, Iraq, Malaysia,
Mexico, Nigeria, and Venezuela. The Malaysian ar-
rangement-a $100 million deal-traded Malaysian
rubber and oil for Brazilian steel, iron ore, and paper.
PETROBRAS reportedly curtailed oil imports from
countries that refused to offset their oil sales with
purchases of Brazilian products.
In addition to using oil countertrade arrangements
as a means of promoting Brazilian exports,
INTERBRAS provides small- and medium-size firms
with a variety of services, including financing, quality
control, shipping, and warehousing. Developing brand
recognition for certain products in overseas markets is
one important service that INTERBRAS provides.
The development of "Hippopotamus" shoes for sale in
the United States is one successful example of this
export promotion service. To promote Brazilian shoes,
the trading company established a network of agents
and retailers in the United States and invested exten-
sively in advertising-spending an average of nearly
$3 million per year. INTERBRAS also assists 21 shoe
factories in Brazil by providing financing, helping
design shoes to meet current market tastes, and
monitoring production to ensure a high level of quali-
ty. The product promotion drive has been very suc-
cessful. INTERBRAS's shoe sales grew from $8
million in 1980 to $39 million in 1983.
INTERBRAS has grown rapidly with sales rising
more than 285 percent in the past 10 years. The
organization has also expanded its trading operations
by both country and product. Part of INTERBRAS's
growth, however, has come at the expense of private
Brazilian traders. The trading company captures lu-
crative contracts by offering lower prices or more
attractive terms. For example, it was reported that
INTERBRAS once went to US purchasers of Brazil-
ian candy and offered them a better price. The
company then bought significant quantities of candy
production and undercut other private Brazilian
traders. The STO's competitive edge is partly
derived from the low-cost credit it receives from
PETROBRAS and a reduced pressure to show a
profit.
Companhia Brasileira de Entrepostos e Comercio
(COBEC) is a state trading and warehousing company
founded in 1972 primarily to promote Brazilian ex-
ports. During the course of its first year, the company
hastily expanded its trading activities both in terms of
product and geographical coverage. In recent years
COBEC has encountered financial difficulties result-
ing from substantial trading losses and mismanage-
ment. The overly rapid expansion of the STO's trad-
ing operation created a large and costly
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Figure 6
COBEC Sales
infrastructure-such as offices and warehousing facil-
ities abroad. This siphoned capital away from the
STO's trading operations and into unproductive over-
head. The STO was also highly vulnerable to changes
in the business environment because most of the
organization's profits were earned from two agricul-
tural commodities-soya and corn. After a few years,
soya producers acquired the necessary knowledge and
grew to a sufficient size to trade directly with end
users-bypassing the STO. The company also suf-
fered from mismanagement that resulted in signifi-
cant commodity trading losses. For example, 0
COBEC recently lost $30
million in a soya trade deal with India.
The STO has been able to survive these business
shocks partly because COBEC receives preferential
treatment, such as subsidized credit from the govern-
ment through the Banco do Brazil. Furthermore,
private traders allege that Brasilia extends specific
trade opportunities to COBEC to keep the STO
afloat. In 1983, for example, responsibility for import-
ing certain agricultural products was given to
COBEC instead of opening the trade up to private
firms. In response to its many financial difficulties,
the STO has been moving to diversify its trading
operations to reduce the risk of future commodity
losses. The organization is also attempting to upgrade
its management skills, improve efficiency, and take a
less risky position in its dealings.
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Appendix B
Malaysia
The Malaysian STOs were created primarily to pro-
mote social restructuring under Kuala Lumpur's New
Economic Policy (NEP). Traditionally, the nation's
wealth has been concentrated among both foreigners
and resident Chinese. In 1971 the Malay-dominated
government introduced the NEP to reduce Chinese
and foreign control of businesses. In accordance with
the NEP, Kuala Lumpur created a series of STOs
designed to transfer wealth and skills to the indige-
nous Malay or Bumiputra population.
The Pernas Group is a Malaysian public holding
company that owns numerous subsidiaries-more
than 100 in 1981-engaged in a variety of commer-
cial activities. Many of these subsidiaries are wholly
owned by Pernas, but several are joint ventures with
foreign partners. The subsidiaries of Pernas have
traded with Brazilian and Indian STOs, contracted
government-to-government deals, and entered into
some countertrade arrangements. Pernas seeks to
employ indigenous Malays in its many operations,
thus transferring skills and management expertise to
the Bumiputras.
Pernas Trading, among the largest subsidiaries in the
group, was founded as a vehicle to control trade with
China. The government provides the STO with over-
sight authority on Chinese import trade, allowing the
organization to charge a 1- to 1.5-percent commission
on all transactions. This trade mainly consists of
foodstuffs and light industrial goods. Pernas Trading
also acts as a conduit for advanced technology imports
from the West. In the past year, Pernas Trading has
moved into export trade, but the volume of sales
The Federal Land Development Authority (FELDA)
is the Malaysian Government's agency responsible for
expanding the cultivation of various agricultural com-
modities and the resettlement of the Malaysian rural
poor. FELDA's commercial operations are designed
to provide rural producers with an integrated range of
services necessary to ensure the processing, market-
ing, and exporting of agricultural commodities.
FELMA, the foreign trade arm of the agency, handles
the export of 35 percent of the country's palm oil
along with the sale of palm kernel, rubber, cocoa, and
certain petroleum products. The foreign purchasers
are often STOs in other developing countries responsi-
ble for the import of edible oils. FELMA offers a
range of export services, including quality control,
forwarding, clearing, shipping, warehousing, and
commodity and currency hedging.
Like FELDA, the Malaysian Rubber Development
Corporation (MARDEC) is an agency designed to
increase agricultural output and foster social restruc-
turing. MARDEC specializes in assisting small rub-
ber farmers to improve the processing of Malaysian
rubber to obtain higher prices. MARDEC handles
approximately a quarter of Malaysia's rubber exports.
The STO attempts to stabilize producer incomes by
fixing the price of rubber. The existence of private
rubber traders, however, keeps the fixed price from
becoming too distorted.
remains small.
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Appendix C
STOs in Mexico vary greatly in size and scope of
activity. Some of the STOs-principally PEMEX and
CONASUPO-are large, vertically and horizontally
integrated organizations that dominate their respec-
tive economic sectors. Other STOs are relatively
small-a few of these are being liquidated in the
current effort to privatize public enterprises. We
estimate that Mexican STOs account for 75 percent
of national exports and more than 40 percent of
imports.
Mexico controls all petroleum-related activities
through the state-owned petroleum company
PEMEX. PEMEX's operations include exploration
and production of crude oil and gas, refining, trans-
portation, marketing, and the production of petro-
chemicals. PEMEX produces about 1 billion barrels
of petroleum and 13 million tons of petrochemicals
annually. PEMEX has experienced financial prob-
lems in recent years caused by declining oil prices and
Mexico's debt overhang.
This giant STO is Mexico's largest foreign-exchange
earner. PEMEX's profits are either transferred to the
government or plowed back into new investments.
Between 1979 and 1983 PEMEX provided the federal
government with revenues averaging the equivalent of
4 percent of gross domestic product (GDP). In recent
years, the de la Madrid administration has squeezed
PEMEX's operating costs to raise government reve-
nues. This has caused PEMEX to fall short of critical
maintenance, development, and exploration targets
needed to sustain present petroleum production levels.
The National Company for Popular Subsistence
(CONASUPO) is the pricing, marketing, and trading
agency for Mexican agricultural commodities. The
principal function of CONASUPO is to supply basic
agricultural products at low and stable prices to the
Mexican population. To achieve this end, the govern-
ment agency administers official support prices, im-
ports agricultural products, manages storage facili-
ties, processes commodities into finished food
products, and distributes the food-at subsidized
prices-through wholesale and retail outlets.
CONASUPO is the largest importer in Mexico with a
near monopoly on food imports. CONASUPO's for-
eign purchases totaled $1.5 billion in 1984-approxi-
mately 20 percent of national imports. The STO
purchases agricultural products-primarily beans,
corn, sorghum, and wheat-through public tenders to
offset domestic production shortfalls. This has become
an increasingly important aspect of the organization's
activities as Mexican food demand has outstripped
supply in the past decade. CONASUPO also attempts
to use the enormous size of its grain purchases to
obtain better prices and financing in world markets.
CONASUPO has suffered from gross inefficiency
and corruption. Planning and storage errors raise food
costs. The STO has inaccurately estimated demand in
certain areas, resulting in shortages of agricultural
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Figure 7
CONASUPO: Operating Losses
Billion US $ and percent of GDP
0
-1
Percent
of GDP
-2
-3
1
-4 1980 1981 1982 1983 1984 19858 1986b
a Estimate.
b Projected.
CONASUPO's inefficiency has been very costly to
Mexico. The STO has incurred large operating losses
in recent years. In 1986, for example, CONASUPO's
losses are projected to be equivalent to about 1
percent of Mexican GDP. In addition, corruption is a
major problem. Officials of CONASUPO have been
accused of misappropriating funds, altering purchase
records, and misdirecting food supplies.
In an attempt to redress these problems, the de la
Madrid administration is sharply cutting back on food
subsidies and reducing the role of CONASUPO. This
year, the STO's budget was reduced by approximately
35 percent in real terms. To take up the slack, Mexico
City is permitting private traders to purchase imports
if they can obtain a better price than CONASUPO.
The government is also trying to crack down on graft
and corruption. Some employees have recently been
arrested for stealing grain.
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Appendix D
Singapore
Singapore's STOs, unlike those of most other develop-
ing countries, are operated almost exclusively for one
purpose-profit. The STOs are large money earners,
with skilled management directing the organizations'
varied trading functions. In this sense, the STOs are
like private firms-making decisions principally on a
commercial basis with minimal government interfer-
ence. In recent years, many of the STOs have become
heavily oriented toward export promotion.
Government ownership of the STOs is exercised
through four public holding companies-Temasek,
Sheng-Li, MND, and Helicon. Through these holding
companies the government maintains a very large
stake in the nation's economy-fully owning at least
68 companies, with controlling interests in 119 others.
Sheng-Li, for example, is the public holding company
associated with the Ministry of Defense. The compa-
ny owns many subsidiaries that produce defense and
other sensitive items. The products produced by these
public companies are sold to foreign countries by the
STO Unicorn-the trading and marketing arm of the
Defense Ministry.
The International Trading Corporation (INTRACO)
is one of the most important STOs in Singapore. The
company was originally founded in 1968 to control
trade with the Communist Bloc and promote exports.
Since then, private firms have been permitted to trade
with Communist countries, causing INTRACO's fo-
cus to shift to export promotion and securing raw
materials to be used in manufacturing. The organiza-
tion has become a diversified international trading
organization with a sales volume of approximately
$120 million in 1983.
Although the company operates largely as a private
concern, government ownership does provide some
benefits. The STO is included in most governmental
trade delegations, especially to Communist countries.
arrangements with Burma.
This gives the STO an advantage over private trading
companies. For a time, INTRACO was also given the
privilege to collect a one-half-percent duty on the
value of business transactions with China, Laos,
Albania, Vietnam, Mongolia, and East Germany.
INTRACO is also the government's principal means
of handling countertrade transactions in the civilian
sector. INTRACO has concluded arrangements with
Indonesia and Malaysia, and has discussed similar
In exchange for these benefits, Singapore delegates
certain price stabilization responsibilities to
INTRACO. For instance, the organization operates
the government's rice stockpile, importing rice and
selling it to domestic distributors at the government's
direction. INTRACO assumed this role after rice
prices shot up in the early 1970s. The Office of
Domestic Trade and External Trade Policy directs the
STO when to sell the rice and specifies a market
price. Similarly, in the late 1970s cement prices in
Singapore soared because some importers were trying
to make a quick profit by cornering the market. At
the time, INTRACO was not importing cement, but
at the government's request it located foreign sources
of supply and began importing the product to break
the local importers' stranglehold on the market.
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Appendix E
In Algeria all imports and exports must pass through
an STO. The regulations aim to save foreign ex-
change, protect domestic producers, ensure that ex-
port quotas are not exceeded, and require producers to
repatriate export earnings. Public enterprises are giv-
en first priority in most trade matters, causing hard-
ship for private firms. Algerian STOs' strict control of
foreign trade creates many economic problems. Pri-
vate companies suffer from poor-quality imports and
uncertain delivery schedules, which make planning
difficult. The STOs are also inefficient, resulting in
higher costs and long transaction delays. Consequent-
ly, agricultural machinery ordered by private produc-
ers may be on the dock while the commodity is in the
field ready for harvest.
Algiers is undertaking some modest reform to im-
prove the distribution of import goods and to simplify
import procedures. In 1982 private firms were permit-
ted to import low-value components and spare parts-
bypassing the STOs. The import monopoly has also
been decentralized-expanding the number of these
STOs more than threefold.
Indian STOs dominate the nation's foreign trade and
have exclusive control of several major commodities.
The STOs are particularly important in the export of
cotton, fuels, minerals, and handicrafts. On the im-
port side, the trading organizations handle fertilizer,
food, metals, and petroleum. We estimate that the
trading organizations account for approximately 60
percent of national imports and 20 percent of exports.
The high share of imports reflects the importance of a
few bulk commodities in India's trade. The STO share
of exports has run as high as 50 percent in recent
years because of foreign oil sales from newly devel-
oped fields. The overseas sale of oil, however, is
expected to cease once India develops sufficient do-
In April 1985 the Gandhi administration adopted a
trade policy that further eased import licensing con-
trols and streamlined procedures. Under the policy, 53
items will no longer be channeled through state-
owned enterprises. Moreover, the responsibility for
import decisions has been shifted away from produc-
ers of certain products to other government agencies
to eliminate the perception of price manipulation by
certain STOs.
Morocco's top three companies are STOs. The larg-
est-employing 25,000 people-is the state phosphate
monopoly, the Office Cherifien des Phosphates (OCP).
The STO accounts for more than 40 percent of
Morocco's total export earnings and creates about 8
percent of GDP. The company exploits the most
extensive phosphate mines in the world and supplies
about one-third of all phosphate traded international-
ly.
mestic refinery capacity.
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Appendix F
Major STOs: Trade in
Key Commodity Markets
Commodity Country STO Basic Function
Guinea Kinda Project Mining company
Compaynie des Bauxites de Guinee Develop bauxite deposits, calcined
bauxite
Bolivia
Corporacion Minera de Bolivia
Mining
Chile
Corporacion Nacional de Cobre Chile
(CODELCO)
Mining and smelting
Compania Minera Andina
Mining and smelting
Empresa Nacional De Minera (ENAMI)
Mining
Iran
Sar Cheshmen Copper Mining Company
Copper mining
Peru
Empresa Minera del Peru (Minero-Peru)
All phases of mining production,
refining, marketing
La Generale des Carrieres et des Mines
du Zaire (Gecamines)
Mining
Grain
Algeria
Office Algerien Interprofessionel
des Cereales (OAIC)
Angola
Instituto dos Cereais de Angola (ICA)
Bangladesh
Ministry of Food and Civil Supplies of the
Government of the People's Republic
of Bangladesh
Brazil
Superintendencia Nacional
do Abastecimento (SUNAB)
Chile
Empresa de Comercio Agricola (ECA)
Colombia
Instituto de Mercadeo Agropenano (IDEMA)
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Major STOs: Trade in Key
Commodity Markets (continued)
India Food Corporation of India and
Department of Food
Korea, North Korea Cereals and Foodstuffs Export and
Import Corporation
Lebanon Cereals and Sugarbeets Office-Ministry of
National Economy
Libya National Supply Corporation (NSC)
Malaysia National Padi and Rice Authority
Mexico Compania Nacional de Subsistancias
Populares (CONASUPO)
Morocco Office National Interprofessionel des Cereales
et des Legumineuics (ONICL)
Nigeria Nigerian National Supply Company (NNSC)
Pakistan Ministry of Food and Agriculture,
Government of Pakistan
Sri Lanka State Flour Milling Corporation
under authorization from the Food Commis-
sion
General Establishment for Cereal Processing
and Trade
Venezuela Corporacion de Mercadeo
(CORPOMERCADEO)
Iron ore Argentina Mierro Patagonico de Sierra Grande SA (MI-Steel company
PASAM)
Companhia Vale do Rio Doce (CVRD)
Mines, railroads, pelletizing plants
Companhia Siderurgica Nacional (CSN)
Steel products
Compania de Acero del Pacifico (CAP)
Iron mining
India
Minerals and Metals Trading Corporation
Trading in minerals, iron, steel,
and fertilizer
National Iranian Steel Industries
Corporation (NISIC)
Smelting company
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Major STOs: Trade in Key
Commodity Markets (continued)
Commodity
Country
STO
Basic Function
Corporation, Ltd. (ISCOR)
Orinco Mining Company and Iron
Mines Company
Iron mining
Oil
Algeria
National Company for Hydrocarbon
Transport and Trade (SONATRACH)
Bahrain
Bahrain Petroleum Corporation (BAPCO)
Bolivia
Yacementos Petroliferos Fiscales Bolivianos
(YPFB)
Egypt
Egyptian General Petroleum Corporation
India
Indian Oil Corporation, Ltd.
Iran
National Iranian Oil Company (NIOC)
Iraq
Iraqi National Oil Company (INOC)
Pakistan
Oil and Gas Development Corporation
(OGDC)
Tin
Bolivia
Corporacion Mineria de Bolivia
(COMIBOL)
Mining company
Perusaman Negara Tambang Timah
(P. N. Timah)
Exploration, mining, processing,
and smelting
Malaysia
Perbadanan Nasional Bhd
Tin prospecting and mining
operations
Pernas Mining Sdn. Bhd
Tin prospecting and mining
operations
Nigerian Mining Corporation
Mining, processing, and marketing
London Tin Sdn. Bhd (LIMB)
Mining company
New Tradewinds Sdn. Bhd
Mining company
Societe de Mines de Rwanda
Cassitevite, ferberite, and colum-
bite production
Compagnie Geomines
Cassitevite and tautalite
concentrates
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