3 - The Performance of State-Owned Enterprises

Summary

Since the beginning of the 1980s, the World Bank and the International Monetary Fund (IMF) have made great efforts to cajole the governments of developing countries into privatizing state-owned enterprises (SOEs) (Babai 1988, 260–7). This policy has been the result of growing skepticism about the ability of SOEs to achieve optimal economic results (Galal 1991; Kikeri et al. 1992). The performance of SOEs is viewed as abysmal and as having a pernicious effect on the economy as a whole. SOEs have been seen as absorbing government funds because of their huge losses (Short 1984). Policy prescriptions have been to privatize, to deregulate, and to increase and invigorate the role of the private sector. It is often said that history has amply illustrated the limitations and shortcomings of SOEs, which can be a “significant impediment to economic growth” (World Bank 1995, 257). History is also said to have demonstrated the capacity of private enterprises to overcome many of these shortcomings. In fact, however, the empirical evidence is more ambiguous. It lends only limited support to the hypothesis that SOEs are inherently less efficient than private enterprises. Moreover, studies rarely take into account issues such as security of supply or environmental constraints (Fells and Lucas 1992). Further, profit maximization by private-sector enterprises may also lead the managers of these enterprises to “shift their battleground from the level of the firm to the political level. Control of the government may then become the means for establishing ‘control’ of the firm” (Papandreou 1952, 203). The rents granted to private enterprise may exert a drag on growth.