The Myth of the Pombero and State-Owned Enterprises

Paraguayan Folklore

It is 7:17 p.m. on a cool spring night. Out in the fields, the foreman, exhausted from a hard day’s work, lights a cigar and pours himself a little sugarcane rum with grapefruit into his glass. Lost in thought, admiring the vastness of the countryside in the darkness, he begins to whistle. Between puffs of tobacco smoke, he reflects, and whistles, with increasing intensity.

A few minutes later, he hears an alarming noise. In the distance, he hears strange footsteps that don’t seem to come from a human—or an animal, for that matter. Perhaps a hybrid of the two species. Frightened, the man assumes a defensive stance. The footsteps grow closer and closer. Suddenly, a peculiar figure appears: a short, hairy goblin. Almost human, almost animal. The foreman, unable to move, feels a cold sweat run down his body. Then, everything goes dark. 

This rural tale is part of the traditional Guaraní mythology that we have inherited from our ancestors, the indigenous landowners of the heart of South America. The legend of the Pombero, over the years, it has affected generations of tribes, families, and individuals connected to the Guaraní culture. And for a long time, it instilled fear and suspicion in the vast rural areas of our country.

Today, given the passage of time and the evolution of our society, it is nothing more than a fanciful myth from the past.

Contemporary Myths

In our contemporary society, myths such as the Pombero, the Kurupí, and the Jasy Jatere have been left behind, and today they are merely part of our cultural and historical heritage, passed down in elementary school classrooms and perhaps in the occasional conservative family.

However, not all myths have disappeared. Some still persist, deeply rooted in our “cultural, political, and economic DNA,” like a kind of Guaraní molecular composition from which we have yet to break free. We still suffer from the belief in a deeply entrenched myth: state-owned enterprises.

Throughout its history, the government has explored a variety of sectors, and it continues to do so. But the result is always the same: inefficiency and a waste of resources. We cannot name a single instance in which the government has provided (or currently provides) a service efficiently that satisfies consumers—and owners—as well as the market.

Faced with this situation—which is distressing on the one hand and exasperating on the other—it’s worth trying to understand: What are the reasons that lead us to this undeniable outcome time and time again?

The first answer that comes to the reader’s mind is, of course, the following: corruption, corruption, and… more corruption. Yes, of course. Without a doubt. But let’s set corruption aside for a minute and see what else is happening, in economic and legal (as well as political) terms. Because state-owned enterprises, with very few exceptions, have failed spectacularly all over the world. This is true in both corrupt societies and more transparent ones.

South Korean economist and author Ha-Joon Chang has identified a key concept that largely explains this almost inevitable fate of state-owned enterprises: incentives.

What do we mean by "incentives" in this context?

The idea is quite simple and intuitive. No government manager is capable of running a company as efficiently as its owner would. The problem would not exist if the owners of public companies (the citizens) could effectively oversee the managers (politicians). It is the traditional problem of lead agent. Now, for the public to evaluate and verify the performance of managers at state-owned enterprises is, therefore, an extremely complex and imperfect task. This contrasts with what happens in private companies, where oversight among shareholders, managers, and executives is maintained within a more orderly, solid, and efficient structure.

In the words of the controversial Lebanese-born author Nassim Nicholas Taleb in one of his most recent works, only those who take risks and “”are risking their lives" They are the ones who, ultimately, should be able to internalize and see the benefits (or losses) resulting from the risks taken. A startup is managed efficiently because those who have made the investment are the ones whose net worth would be directly affected by the company’s success or failure. They're risking their lives. In the case of a state-owned enterprise, on the other hand, the “shareholders” (citizens) do not directly bear the consequences of its success or failure, much less the investment made, nor do they have a direct way to demand accountability. Public “managers” who fail, time and again, in their role of keeping the enterprise afloat are the least affected.

It’s true that a company’s success depends on many factors. But it is primarily this simple—yet essential—idea that makes private initiatives more efficient. After all, there’s a reason why companies like Apple, Amazon, Microsoft, and Alibaba—to name a few—generate more revenue than entire countries such as Portugal, Belgium, Puerto Rico, and, of course, Paraguay.

So, less government. More market, right?

The government’s failures in venturing into the business world have not been entirely in vain. There were historical moments when state-owned enterprises were necessary, when the private sector was unable to provide certain services. Today, however, the state’s primary role in relation to private investment is (or should be) as follows: to provide legal certainty and to arbitrate in cases of market imperfections.

On the one hand, the government should protect private property rights, which ensure that those who take risks can receive dividends and capitalize on profits, as an incentive for continued investment. On the other hand, the government should correct certain market imperfections that lead to undesirable inefficiencies. To name a few: consumer abuses, ensuring competition, and uncompensated externalities; these are imperfections that the government, using resources collected from citizens, can usually resolve more efficiently.

These ideas can be summed up in the phrase coined by former German Chancellor Konrad Adenauer: “As much market as possible, as much government as necessary.”.

With so many lessons learned throughout the world and throughout history—including our own history—the government should focus exclusively on providing a secure platform for entrepreneurs and private investment, in order to avoid falling prey to old folk myths such as the legend of the Pombero, or worse, as in the modern urban myths surrounding public companies.

Cover illustration by Carlos Argüello Sullow.