![Sample our Politics & International Relations journals, sign in here to start your FREE access for 14 days]({"type":"image" , "src" : "/sda/5947/TOC-Subject-Sample-2021-Politics-International-Relations.jpg"})
Abstract
State-owned enterprises (SOEs) account for a substantial proportion of gross domestic product, employment, and assets in many countries. Based on a review of the theory and empirical evidence, we develop a novel five-step framework that can guide policymakers and economic advisors in making decisions about maintaining and/or creating SOEs. The framework suggests that the use of SOEs should be limited to circumstances in which a market failure exists, less invasive forms of intervention such as regulation/taxes/subsidies and private-sector contracting are ineffective or not possible, and the welfare loss of the market failure exceeds the costs, distortions, and inefficiencies of SOEs.
Notes
1 Print edition, January 21, Citation2012.
2 An economy is Pareto efficient if it is not possible to make at least one person better off without making someone else worse off. A change that makes at least one person better off without making anyone worse off (a Pareto improvement) unambiguously increases social welfare, whereas a change that makes some people better off but at least one other person worse off is not a Pareto improvement.
3 Strictly speaking, with the assumption of a mechanism for redistribution, our analysis makes use of Kaldor–Hicks efficiency, which is closely related to Pareto efficiency, but somewhat less stringent. Under Kaldor–Hicks efficiency, an outcome is considered more efficient if a Pareto efficient outcome can be reached by arranging sufficient compensation from those that are made better off to those that are made worse off so that no one ends up worse off.
4 For example, suppose a country has 40 schools and 60 hospitals and that running the 40th school and the 60th hospital requires the same amount of resources (they have the same marginal social cost). If society values having another school more than they value having the 60th hospital then the economy is not producing an efficient mix of goods because by closing down the 60th hospital and using the freed up resources to run an additional school makes society better off in aggregate. This change in the mix of goods produced, under some conditions, occurs naturally in a competitive market: if the higher value to society of the 41st school relative to the 60th hospital would be reflected in a higher willingness to pay for the services of the 41st school, then some entrepreneurs would be induced to switch their production to reap the higher profits.
5 For example, consider an economy that produces 1000 units of a good. Suppose that the social benefit of an additional unit (the highest price anyone in the economy is willing to pay for the additional unit) is $10. Suppose that the social benefit of an additional unit, the highest price anyone in the economy is willing to pay for the additional unit is $10. The 1001st unit would be produced because it is profitable to do so (it would earn profits in excess of fair compensation) and society would gain welfare equivalent to $5—the amount by which marginal social benefit exceeds the marginal social cost. In fact, competing, profit-seeking entrepreneurs would keep producing more units up until the price that could be received would only just cover the costs of producing them (including a fair profit for the entrepreneur). At this point, the marginal social benefit (the best price that could be obtained for an additional unit) equals the marginal social cost (the production costs for the entrepreneur that produces the marginal unit), which equals the price of the good.
6 Goods that for whatever reasons are provided by the government are sometimes colloquially referred to as “public goods.” This usage of the term is not consistent with the economic definition provided above and is not based on any rationale of when government provision of goods can increase social welfare.
7 Pesche (Citation2008) argues that in addition to market failures, a second set of roles for the state emerges from political theory and including providing an institutional structure that allows people to identify themselves as part of a community. See also Pierre (Citation2011) for a discussion of additional roles of the state including legality, due process, and legal security.
8 Similar problems can arise in regulating private-sector activities. For example, a regulated-price privately operated utilities monopoly might cut costs by reducing customer service or saving on maintenance at the expense of more frequent service outages.
9 See Wettenhall (Citation2001, Citation2003a) for a discussion of the various forms of public-sector organizations and the challenges in constructing a taxonomy of such organizations. For an overview of the circumstances in which agencies and nondepartmental organizations are typically created, trends in their use, and a discussion of their characteristics, see Wettenhall (Citation2004, Citation2005) and Thynne (Citation2006, Citation2011, Citation2013).
10 For a discussion of the different approaches to ownership and governance structures in SOEs, see MacCarthaigh (Citation2011).
