Nummemkamp, P. (1986). State Enterprises in Developing Countries

8/12/2019 Nummemkamp, P. (1986). State Enterprises in Developing Countries

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S t a t e E n t e r p r is e s in D e v e l o p in g o u n t r i e sb y P e t e r N u n n e n k a m p , K i e l *

T h e ro le o f s t a t e - o wn e d e n t e rp r is e s i n t h e d e v e l o p m e n t p ro c es s i n th e T h i rd W o r ld i s t h e s u b j e c t o f s e r i o u scontroversy . This ar tic le a t temp ts to test emp ir ica lly wheth er there is a re la t ionship betwee n the impo rtanceof publ ic produc t ion in deve lop ing countr ies and the i r overa ll eco nom ic performance

A c o n s i d e r a b l e d e g r e e o f s c e p t i c i s m p r e v a i l s w h e ng o v e r n m e n t s a s s u m e t h e m a j o r i t y s h a r e s a n d

c o n t r o l o f b u s i n e s s a c t i v it i e s w h i c h o t h e r w i s e w o u l d b el e ft t o p r i v a t e e n t r e p r e n e u r s . T h i s i s m a i n l y d u e t oe x p e r i e n c e s i n a d v a n c e d W e s t e r n e c o n o m i e s , w h e r ep u b l i c o w n e r s h i p i s f r e q u e n t l y a s s o c i a t e d w i t hi n e f fe c t iv e m a n a g e m e n t , s i g n i f ic a n t b u r d e n s f o r t h et a x p a y e r s a n d a c o n s i d e r a b l e m i s a l l o c a t i o n o fr e s o u r c e s . O n t h e o t h e r h a n d , h i g h e x p e c t a t i o n s a r ep l a c e d o n s t a t e e n t e r p r i s e s . E s p e c i a l ly i n t h e T h i rdW o r l d t h e y a r e c o n s i d e r e d t o s t i m u l a t e e c o n o m i c g r o w t ha n d t o p r o m o t e i n d u s t r ia l i s a t io n . A c c o r d i n g ly , p u b l i ci n v e s t m e n t i s a s s i g n e d a p r o m i n e n t r o l e in t h e i n d u s t r ia ls e c t o r o f m a n y d e v e l o p i n g c o u n t r i e s w h i c h o t h e r w i s ep u r s u e r a t h e r d i ff e r e n t e c o n o m i c p o l i c i e s .

N o t w i t h s t a n d i n g t h a t t h e d e b a t e o n t h e c o n f l i c t i n gh y p o t h e s e s a b o u t t h e r o le o f p u b l ic e n t e r p r i s e s r e s u l t e di n a v a s t a m o u n t o f li t e r a t u r e , e c o n o m i c r e s e a r c h i s s t i lli n a n u n d e r d e v e l o p e d s t a t e i n t h i s f i e l d . V e r y l i t t l e i sk n o w n a b o u t t h e e c o n o m i c i m p a c t o f p u b l ic p r o d u c t io n ,i . e . w h e t h e r s t a t e e n t e r p r i s e s s u c c e e d e d i n c r e a t i n ge m p l o y m e n t a n d i n e n h a n c i n g g r o w t h a n di n d u s t r ia l i s a ti o n . T h e c h o i c e b e t w e e n u s i n g r i g o r o u sm e t h o d s t o g e n e r a t e d e f i n i t e s t a t e m e n t s a b o u t t r i v i a lp r o b l e m s a n d u s i n g s o f t ' in t u i ti v e g r o p i n g ' t o m a k eq u e s t i o n a b l e a s s e r t i o n s a b o u t c r it ic a l i s s u e s '1 t h a t i ss y m p t o m a t i c f o r r e s e a r c h o n p u b l i c e n t e r p r is e s , i sl a r g e l y d u e t o t h e l a c k o f d a t a . V e r y f e w d e v e l o p i n g* I n s t i t u t e o f W o r l d E c o n o m i c s .1 8 6

c o u n t r i e s p r e s e n t d e t a i l e d a n d c o m p r e h e n s i v ea c c o u n t s o n t h e a c t i v i t i e s o f p u b l i c e n t e r p r i s e s . E v e nm o r e o f a p r o b l e m i s t h a t t h e s t a t i s t i c a l i n f o r m a t i o na v a i l a b l e i s n o t f u l l y c o m p a r a b l e b e t w e e n d i f f e r e n tc o u n t r i e s . T h e c o v e r a g e o f s t a t is t i c s d if f e rs b e c a u s e o fi n c o n s i s t e n t d e f i n i ti o n s o f t h e p u b l i c e n t e r p r i s e s e c to r .

A l t h o u g h s h o r t c o m i n g s r e m a i n , t h e d a t a s it u a t i o n h a si m p r o v e d a g r e a t d e a l d u e t o a r e c e n t p u b l ic a t io n . 2 T h u si t s e e m s p r o m i s i n g to f o c u s o n s o m e c r i t ic a l i s s u e sc o n c e r n i n g t h e e c o n o m i c c o s t s a n d b e n e f i t s o f s t a t ee n t e r p r i s e s b y s u b s t i t u t i n g r a t h e r s i m p l e s t a t i s t i c a lp r o c e d u r e s f o r m e r e l y i n t u i t i v e g r o p i n g . A f t e r a s h o r ts u m m a r y o f t h e m a j o r r e a s o n s f o r s ta t e e n t e r p r i s e s a n ds o m e f r e q u e n t l y n e g l e c t e d - d r a w b a c k s p r o b a b l y a r i s i n gf r o m p u b l i c p r o d u c t i o n , a n d a n o v e r v i e w o f t h e r o l e o fs t a t e e n t e r p r i s e s i n th e T h i r d W o r l d i n q u a n t i t a ti v e t e r m s ,t h e f o l l o w i n g a n a l y s i s a t t e m p t s t o s u b j e c t t h ea f o r e m e n t i o n e d c o n f l i c t i n g h y p o t h e s e s o n t h ee c o n o m i c i m p a c t o f s t a t e e n t e r p r i s e s t o a n e m p i r i c a lt e s t . A p p l y i n g c r o s s - c o u n t r y c o r r e l a t i o n a n a l y s i s , i t i sc h e c k e d w h e t h e r e c o n o m i c p e r f o rm a n c e i n t e rm s o fo v e r a l l g r o w t h , g r o s s f i x e d c a p i t a l f o r m a t i o n a n de m p l o y m e n t g e n e r a t i o n w a s r e l a ti v e l y f a v o u r a b l e i nc o u n t r i e s w h e r e s t a t e e n t e r p r i s e s p l a y a p r o m i n e n t r o le .

1 L e ro y P . J o n e s : I n t ro d u c t i o n , i n : L e r o y P . J o n e s e d . ) : P u b l i cE n t e r p r is e i n L e s s - D e v e l o p e d C o u n t r i e s , C a m b r i d g e 1 9 8 2 , p . 1 3.2 R . P . S h o r t : T h e R o l e o f P u b l i c E n t e r p r i s e s : A n I n t e r n a t i o n a lS t a t i s t ic a l C o m p a r i s o n , i n : I n t e r n a t i o n a l M o n e t a r y F u n d : P u b l i cE n t e r p r is e i n M i x e d E c o n o m i e s : S o m e M a c r o e c o n o m i c A s p e c t s ,W a s h i n g t o n 1 9 8 4 .

I N T E R E C O N O M I C S , J u l y / A ug u s t 1 9 8 6


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B y th e s a m e t o k e n , s o m e e v i d e n c e i s p r e s e n t e d o n th ee c o n o m i c c o s t s o f p u b l i c p r o d u c t i o n , f o r e x a m p l e i nt e r m s o f b u d g e t a r y b u r d e n s , i n f la t i o n a n d d e b t c r e a t i o n .

S t a t e e n t e r p r i s e s a r e a s s u m e d t o fu l f il a v a r i e t y o fe c o n o m i c a n d s o c i a l o b j e c t i v e s , s A p a r t f r o m p r o v i d i n gi n f r a s tr u c t u r a l fa c i l it i e s , t h e m a i n e m p h a s i s i s p l a c e d o nt h e i r r o l e i n t h e i n d u s t r i a l s e c t o r :[ ] G o v e r n m e n t a l c o n t r o l o f k e y i n d u s t r i e s( c o m m a n d i n g h e i g h t s ) v i a p u b l ic e n t e r p r i s e s i si n t e n d e d t o r e d u c e t h e i n f l u e n c e o f f o r e i g n c o m p a n i e sa n d t o p r e v e n t p r i v a t e m o n o p o l i e s . F u r t h e r m o r e ,g o v e r n m e n t s w i s h t o f o s t e r i n d u s t r i a l i s a t i o n a n di n f lu e n c e t h e p a t h a n d d i r e c t i o n o f d e v e l o p m e n t .[ ] N o n - c o m p e t i ti v e p r i v a te c o m p a n i e s f a c e d w i thb a n k r u p t c y a r e n a t i o n a l i s e d i n o r d e r t o m a i n t a i n t h ej o b s . In s o m e i n s t a n c e s , d i s a d v a n t a g e d p o p u l a t i o ng r o u p s a r e g i v e n p r e f e r e n t i a l e m p l o y m e n t i n p u b l i ce n t e r p r i s e s ( a s in M a l a y s i a ) , o r r e g i o n a l im b a l a n c e s a r et o b e r e d u c e d .[ ] I t i s e x p e c t e d t h a t p u b l ic e n t e r p r i s e s w i l l i m p r o v e t h es u p p l y o f g o o d s f a l l in g i n t o t h e b a s i c n e e d s c a t e g o r y a ts o c i a l l y a c c e p t a b l e p r i c e s .[ ] P u b l i c e n t e r p r i s e s s h o u l d h e l p t h e u p g r a d i n g o fu n s k i l l e d l a b o u r a n d c o n t r i b u t e t o a b e t t e r s u p p l y o fm a n a g e r i a l s k i ll s , t h e r e b y r e d u c i n g t h e w i d e s p r e a d l a c ko f h u m a n c a p i t a l .[ ] I n t h e f ie l d o f f o r e i g n tr a d e , p u b l i c e n t e r p r i s e s s h o u l di n c r e a s e n a t i o n a l s e l f - s u f f ic i e n c y b y i m p o r t s u b s t i t u ti o na n d p r o m o t e t h e e x p a n s i o n a n d d i v e r s i f i c a t i o n o fn a t i o n a l e x p o r t s .

T h e s e a n d o t h e r o b j e c t i v e s a r e g i v e n d i f fe r e n t w e i g h t si n d i f f e r e n t c o u n t r i e s . H o w e v e r , m o s t d e v e l o p i n ge c o n o m i e s w i t h a s i g n i f i c a n t p u b l i c s h a r e i n t h ei n d u s t r i a l s e c t o r h a v e o n e t h i n g i n c o m m o n : p u b l i ce n t e r p r i s e s a r e a s s i g n e d a p i o n e e r r o l e i n p r o m o t i n gi n d u s t r i a l i s a t i o n a n d g r o w t h . T h e y a r e s u p p o s e d t o p l a ya c e n t r a l r o l e e s p e c i a l l y i n t h o s e a r e a s w h e r e p r i v a t ee n t r e p r e n e u r s a r e s t i l l r e l u c t a n t t o i n v e s t d u e t op e r c e i v e d l i m i t a ti o n s o f th e m a r k e t m e c h a n i s m .

M a r k e t s m a y f a i l i n d i f f e r e n t r e s p e c t s t o p r o d u c ee c o n o m i c a l l y o p t i m a l r e s u lt s . 4 G o v e r n m e n t i n te r v e n t io n

3 For an overviewsee , for exam ple,Armeane M. C h o s k i : StateIntervention n the Indus trializationof DevelopingCountries: SelectedIssues, World Ba nk S taff Working Pap er, No. 341, Wash ington 1979,pp. 6-12.4 For a more deta iled e laborat ion, see Peter N u n n e n k a m p :Market-Failure versu~ Government-Failure:On the Ro le of Pu blicIndustrialEnterprises n DevelopingCoun tries, n: Vierteljahresberichtedes Forsehungsinstituts er Friedrich-Ebert-Stiftung,No. 98, Decem ber1984, pp. 347-359.INTERECONOMICS, July/Augu st 1986

( o f w h i c h p u b l i c p r o d u c t i o n i s o n l y o n e o f m a n yp o s s i b i l i ti e s , t h o u g h c o n s i d e r e d t h e m o s t e f fe c t i v e o n eb y i t s p r o p o n e n t s ) m a y b e r e q u i r e d i n c a s e s o fi n c r e a s i n g r e t u r n s t o s c a l e , p u b l i c g o o d s a n de x t e r n a l i ti e s , a n d m a r k e t i m p e r f e c t i o n s . I f p r o d u c t i o n i ss u b j e c t t o i n c r e a s i n g r e t u r n s t o s c a l e t h r o u g h o u t t h ew h o l e r a n g e o f r e l e v a n t a c t i v i t y le v e l s , a m o n o p o l i s a t i o no f u n r e g u l a te d p r i v a te m a r k e t s m a y b e e x p e c t e d . T h i sw o u l d r e d u c e p r o d u c t io n b e l o w th e m a c r o e c o n o m i c a l l yo p t i m a l l e v e l . It i s a r g u e d t h a t p e r f o r m a n c e w o u l d b ei n e ff ic i e n t i n d y n a m i c t e r m s a s w e l l, b e c a u s ei n c e n t i v e s f o r i n n o v a t i o n w i l l b e w e a k e r t h a n w o u l d l i k e l yp r e v a i l u n d e r a m o r e c o m p e t i t iv e r e g i m e , s

E x t e r n a l i t i e s a r e a s s u m e d t o p l a y a p r o m i n e n t r o l e i nd e v e l o p i n g c o u n t r i e s . 6 E x t e r n a l b e n e f i t s p r e v a i l i n g a t a ne a r l y s t a g e o f d e v e l o p m e n t a r e l a r g e l y o f a p e c u n i a r yn a t u r e , i. e . i n t e r d e p e n d e n c e a m o n g p r o d u c e r s i sm e d i a t e d b y th e p r i c e m e c h a n i s m . I f a l a r g e - s c a l ei n v e s t m e n t r e m o v e s a b o t t l e n e c k , f o r e x a m p l e , t h ei n v e s t o r ' s c u s t o m e r s w i ll d e r i v e b e n e f i t b e c a u s e o f l o w e ri n p u t p r i c e s . B u t t h e s h a r e o f p r o f i t s t h a t e s c a p e t h ei n v e s t o r m a y b e s o h i g h t h a t t h e i n v e s t m e n t w i l l n o t b er e a l i s e d a l t o g e t h e r , i t s m a c r o e c o n o m i c d e s i r a b i l i t yn o t w i t h s t a n d i n g . A c c o r d i n g t o t h e i n f a n t i n d u s t r ya r g u m e n t , p r i v a t e l o s s e s i n c u r r e d a t t h e b e g i n n i n g o fp r o d u c t i o n m a y b e o ff s e t b y s u b s e q u e n t p r i v a t e p r o f it so n l y w i th c o n s i d e r a b l e d e l a y . T h i s m a y r e t a r d e c o n o m i cd e v e l o p m e n t i f p r o d u c e r s a r e a v e r s e t o t a k in g r is k s a n dd o n o t a n t i c i p a t e t h e p r o f i t a b i l it y o f a c t i v i t ie s i n th e l o n g e rr u n . A l t h o u g h t h i s i s n o t a c a s e o f m a r k e t f a i l u r e ,g o v e r n m e n t i n te r v e n t i o n i s f r e q u e n t l y r e q u i re d i n o r d e rt o o v e r c o m e t h e l a c k o f i n n o v a t i v e S c h u m p e t e r i a ne n t r e p r e n e u r s w h i c h i s c o n s i d e r e d c h a r a c t e r i s t i c f o rm a n y T h i rd W o r l d e c o n o m i e s . B y a s s i g n i n g t o th e s t a t et he ro l e o f i nves t i ng i n i n f an t i ndus t r i es i t i s i m p l i c i t l ya s s u m e d t h a t t h e m i d d l e - c l a s s ' v ir t u e s ' f u n d a m e n t a l toe n t r e p r e n e u r i a l d r i v e '7 a r e s i g n i f i c a n t l y s t r o n g e r i n t h epub l i c sec t o r .

T h e i n d u s t r i a l i s a t i o n p r o c e s s m a y b e n e g a t i v e l ya f f e c t e d b y i m p e r f e c t i o n s i n f a c t o r m a r k e t s a s w e l l . I fl a b o u r i n t h e a g r i c u l t u r a l s e c t o r i s p a i d a c c o r d i n g t o i ts

5 C harles Wo If jr. : A Theory of N onmarket Failure: Framework orImplementation An alysis, n: J ourn al of Law and Econom ics, Vo l. 22(1979), pp. 107-112.The ca se for public production s not very strong,however. A monopolistic posit ion s always hreatened by domestic orforeign potentialcompetitors.Th is constrains h e mon opolist'sabil i ty ocut production and rais e prices and provide s him w ith suff icientincentives or innovations.e See, or example,Marcus F I e m n g : ExternalEconomiesand heDoctrine of Balanced Growth, in: Economic Journal, Vol. 65 (1955),pp. 241-256.7 Deepak La l : Pub l i c Enterpr ises, in: John C od y, HelenH u g h e s, David Wa l l (eds.): Pol icies or Industrial Progress nDevelopingCountries.Oxford 1980, p. 212.

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a v e r a g e ( r a th e r t h a n i ts m a r g i n a l ) p r o d u c t i v it y , d o m e s t i ci n d u s t r i a l p r o d u c t i o n w i l l b e d e p r e s s e d d u e t o a s u b -o p t i m a l l a b o u r m i g r a t io n f r o m a g r i c u l t u r e t o i n d u s t ry .C a p i t a l m a r k e t s i n d e v e l o p i n g c o u n t r i e s o f te n l a c k as u f f i c i e n t l y s o p h i s t i c a t e d i n f ra s t r u c t u r e , s o t h a t t h es u p p l y o f f u n d s f o r i n v e s t m e n t i s e ro d e d b y h o a r d i n g a n dc a p i t a l m o b i l i ty i s r e d u c e d . 8 U n d e r t h e s e c o n d i t io n s i t i sp r o b a b l y m o s t d i f fi c u l t f o r p r iv a t e p r o d u c e r s t o f i n a n c eh i g h - y i e l d i n g b u t r i s k y p i o n e e r p r o je c t s . C o n s e q u e n t l y , i ti s a r g u e d t h a t i n v e s t m e n t s t h a t r e m o v e b a r r i e r s t of u r th e r e c o n o m i c d e v e l o p m e n t , b u t fr e q u e n t l y r e q u ir ec o n s i d e r a b l e a m o u n t s o f c a p i t a l, s h o u l d b e th e p u b l i cs e c t o r s r e s p o n s i b i l i t y .

P o s s i b l e D r a w b a c k sT h e m a r k e t - f a i l u r e d e b a t e i n e c onom i c t h e o r y

c o n t r i b u t e d t o a r e m a r k a b l e e x t e n s i o n o f p u b l i ci n t e r v e n t i o n i n t o p r i v a te m a r k e t s i n g e n e r a l a n d s t a t eo w n e r s h i p i n p a r t ic u l a r . F o r q u i t e s o m e t i m e i t w a s t a k e nf o r g r a n t e d t h a t p o l i t ic i a n s , b u r e a u c r a t s a n d p u b l i cm a n a g e r s w o u l d b e a b l e a n d w i l li n g t o cor rec t m a r k e tf a il u re s i n a w a y t h a t g u a r a n te e d m a c r o e c o n o m i ceffic iency S u b s e q u e n t l y , th i s r a t h e r n a i v e b e l ie f w a scha l l enged b y t h e t h e o r y o f g o v e r n m e n t f a i lu r e . 9 It iss t r i k i n g t h a t m a n y p r o p o n e n t s o f p u b l i c p r o d u c t i o na c t i v i t ie s t e n d t o i g n o r e t h e i r c r it ic s , a l t h o u g h t h e n e wp e r c e p t i o n o f p u b l i c s e c t o r o p e r a t i o n s r e s u l t e d i nh y p o t h e s e s o n t h e e c o n o m i c i m p a c t o f s t a te e n t e r p r is e st h a t s h a r p l y c o n t r a s t w i t h t h e t r a d i t io n a l o n e s .

I t i s m o s t u n r e a l i s t ic to a s s u m e t h a t m a n a g e r s o f s ta t ee n t e r p r i s e s w o u l d a b o v e a l l s t r iv e to i m p r o v e n a t i o n a lw e l f a r e . T h e y c a n , r a th e r , b e e x p e c t e d t o m a x i m i s e t h e i ro w n i n t e r e s t s , j u s t a s p r i v a t e e n t r e p r e n e u r s d o . A s ap r o m i s i n g w a y o f i n c r e a s i n g i n c o m e , p r e s t i g e a n dp o l i ti c a l l e v e r a g e , p u b l i c m a n a g e r s m a y e x p a n d th eo p e r a t i o n s o f t h e e n t e r p r i s e s o f w h i c h t h e y a r e i nc h a r g e . P r o b a b l y , s t a t e e n t e r p r i s e s e x t e n d p r o d u c t i o nb e y o n d m a c r o e c o n o m i c a l ly o p t i m a l l e v e ls . T h ew i d e s p r e a d p r a c t i c e o f c o v e r i n g t h e l o s s e s o f s ta t ee n t e r p r is e s o u t o f th e g o v e r n m e n t b u d g e t a l l o w s th e m t oi n v e s t i n l a r g e - s c a l e p r o j e c t s , e v e n i f t h i s r e s u l t s i nl a s t in g e x c e s s c a p a c i ty . I n a n a t t e m p t t o m a x i m i s ec a p a c i t i e s o r s a l e s , p u b l i c m a n a g e r s m a y a l s o b e

8 In m any cases price distortions n labo ur and capital markets are dueto government ai lure rather than m arket fai lure, however. Minimumwage legislat ion hat raises labour costs beyond equi l ibrium rates ismost common in developingcoun tries. Frequently,pr ivate savers arediscouraged rom depo siting h eir saving swith financial ntermed iariesbecause of officially educ ed nterest ates.9 See , for example, the contr ibut ions n Horst H a n u s c h (ed.) :Anatomy of GovernmentDeficiencies,Berlin 1983.lo WilliamA. N i s k a n e n : Bureau crats nd Politicians, n: Journ alo fLaw and Economics,Vol. 19 (1976), p. 633.1 8 8

i n t e r e s t e d i n c r o w d i n g o u t p r i v a t e a c t i v i ti e s r a t h e r th a nm e r e l y f i l l i n g g a p s i n p r i v a t e i n i t i a t i v e a n d o f f s e t t i n gm a r k e t f a i l u r e . 1 ~

T h e a l l e g e d p o s i t iv e r o l e o f s t a te e n t e r p r i s e s i ne c o n o m i c d e v e l o p m e n t i s f u r th e r c h a l l e n g e d b y t h ec o n c e p t o f X - i n e f f i c i e n c y .11 T h e r e a r e v a r i o u s r e a s o n sw h y p u b l i c p r o d u c t i o n i n p a r t ic u l a r i s li k e l y t o t a k e p l a c eb e l o w t h e p r o d u c t i o n p o s s i b i l i ty c u r v e . F i r s tl y , i n c e n t i v es y s t e m s p r e v a i l in g i n t h e p u b l i c s e c t o r d o n o t r e w a r de f f o r t s t o r e d u c e c o s t s . 12 C o n s e q u e n t l y , o v e r s t a f f i n g i s t ob e e x p e c t e d a n d c o s t - i n t e n s i v e m o d e r n t e c h n o l o g i e sf a v o u r e d b y p u b l i c m a n a g e r s m a y b e i n s t a l l e d ,n o t w i t h s t a n d i n g m a c r o e c o n o m i c i n a p p r o p r i a t e n e s s .S e c o n d ly , t h e e c o n o m i c e n v i r o n m e n t i n w h i c h s t a tee n t e r p r i s e s a r e t y p i c a l ly o p e r a t i n g g i v e s r i s e t o X -i n e f fi c ie n c y . C o m p e t i t i v e p r e s s u r e i s r a t h e r w e a k i n t h ep u b l i c s e c t o r d u e t o o f f i c i a l l y r e s t r i c t e d m a r k e t e n t r y .C o m p e t i t i o n f r o m a b r o a d i s li m i t e d b y i m p o r t r e s t ra i n t s ,p a r t i c u l a r l y i n t h e o f f i c i a l l y f o s t e r e d k e y i n d u s t r i e s , t h a td o n o t c o n f o r m t o t h e c o u n t r y s c o m p a r a t iv ea d v a n t a g e s .

I n d i r e c t l y , p u b l i c p r o d u c t i o n m a y f u r t h e r a d d t oi n e f f ic i e n c i e s . T h e m o r e i n d u s t r i a l is a t i o n i s r e g u l a t e d b yt h e g o v e r n m e n t , t h e m o r e p r i v a t e r e s o u r c e s a r ea b s o r b e d b y r e n t - s e e k i n g a c t i v it i e s . ~3 P r i v a t e e c o n o m i ca g e n t s c o m p e t e i n i n d u c i n g t h e p u b l i c s e c t o r to ta k em e a s u r e s t h a t w o u l d b e f a v o u r a b le t o th e m . S i n c em a r k e t p r i c e s o f p u b l i c l y p r o d u c e d g o o d s f r e q u e n t l y d on o t c o v e r t o t a l c o s t s , c u s t o m e r s o f s ta t e e n t e r p r i s e s w i l lu s e t h e o p p o r t u n i t y o f o b t a i n i n g s u b s i d i s e d i n p u t s t od i v e r t r e s o u r c e s f r o m p r o d u c t i o n t o r e n t- s e e k i n g . T h e s er e s o u rc e s a r e w a s t e d f ro m a m a c r o e c o n o m i cs t a n d p o i n t . E m p i r i c a l e s t i m a t e s i n d i c a t e t h a ti n e f f ic i e n c i e s c a u s e d b y r e n t - s e e k i n g a r e s u b s t a n t i a l .T

Q u a n t i t a t i v e O v e r v i e wT h e q u a n t i t a t i v e i m p o r t a n c e o f s t a t e e n t e r p r is e s i n

d e v e l o p i n g c o u n t r i e s m a y b e i n d i c a t e d b y t h e i rp e r c e n t a g e s h a r e s i n g r o s s d o m e s t i c p r o d u c t ( G D P )a n d g r o s s f i x e d c a p i t a l f o r m a t i o n . 15 I n t h e m i d - 1 9 7 0 s ,

11 Harvey L e i b e n s t e i n : AIIocativeEfficiencyversusX-Efficiency,in: American EconomicReview,Vol. 56 (196 6), pp. 392-415.12 AlanT. P e a c o c k : On he Anatomyof CollectiveFailure, n: PublicFinance,Vol. 35 (1980), pp. 33-43.13 James M. B u c h a n a n : From Pr ivate Preferences to Publ icPhilosophy:The Developmentof Publ ic Choice, n: The Econom ics ofPolitics, Instituteof EconomicAffairs, Readings,Vol. 18, Lond on 1978,pp. 13f.14 Anne O. K r u e g e r : The Political Econom y of the Rent-SeekingSociety, n: AmericanEconom ic Review,Vol. 64 (1974), pp. 2 91-303.is See the da ta given in R. P. S h o r t, op. cit. Average igures areweighted averages o r 1974-77 or the close st period or wh ich data areavailable,unlessotherwise ndicated.

INTERECONOMICS,July/August1986


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s ta te en te rp r i ses accoun ted fo r 8 .6 pe r cen t o f GDP(based on da ta fo r abou t 30 coun t r ies ) and 27 pe r cen to f ove ra l l i n ves tmen ts (abou t 50 coun t r ies ) . Whereasthe ou tpu t sha re was s l igh t ly be low the respec t i ve f igu rein industr ia l countr ies (9 .6 per cent) , the investmentsha re in deve lop ing coun t r ies d rama t ica l ly exc eededthe f igure of 11 pe r ce nt in industria l countries. Incontrast to industr ia l economies, where the re la t ive s izeo f the pub l i c en te rp r i se sec to r d id no t changesign if icant ly in recen t years , there has been aremarkab le increase in the Th i rd Wor ld . B etwe en thela te 1960 s and the end o f the 1970 s the a ve rage o u tpu tand inves tmen t sha res o f s ta te en te rp r i ses inc reased by4.5 and 10.5 perce ntage po in ts respect ive ly.

S ta te en te rp r i ses a re now o f ma jo r quan t i ta t i vesign if icance in m ost o f the coun tr ies fo r wh ic h data areava i lab le . Ave rage ou tpu t and inves tmen t sha res a reb road ly s im i la r in As ia and La t in Am er ica , bu t no t i ceab lyla rger in Afr ica . Ac cord in g to d if fe rent per cap i ta inco meleve ls the p icture sh ow n in Tab le 1 em erges .

A l though s ta te en te rp r i ses a re s t i l l most impo r tan t inthe trad i tiona l f ie lds, i .e . so-ca l led natura l m onop o l iesl ike pub l ic u t i l i t ies, communicat ion and non-roadt ranspo r t , they a re n ow engaged in v i r tua l ly a l l t ypes o feconomic act iv i ty . Typ ica l ly , na tura l resource industr iesa re la rgely ope ra ted by s ta te en te rp r ises . Econo mies o fsca le and h igh r isks, bu t a lso the economic rentsobta inab le in min ing are the pr incipa l r eas ons fo r pub l icdominance . In manu factu ring the pub l i c engag em en tincreased mo st rap id ly in recen t yea rs . Es pec ia l l y inma ny A fr ican and M idd le Ea s te rn coun t r ies , themanu factu ring sec to r i s domina ted by s ta te en te rp r ises .They a re most p rom inen t in heavy indus t r ies such aspe t ro leum re f in ing , chemica ls , t ranspo r t equ ipmen t ,

T a b l eO u t p u t a n d In v e s t m e n t S h a r e s o f S t a t eE n t e r p r i s e s i n D e v e l o p i n g C o u n t r i e s o f D i f fe r e n tI n c o m e L e v e l s

( p e r c e n t )G D P C 1 S H G D P 2 S H I N V 2< 4 0 0 1 0 . 3 ( 1 1 ) 3 0 . 6 ( 1 4 )

4 0 0 - 9 9 9 1 4 . 2 ( 6 ) 9 4 . 6 ( 1 4 )1 0 0 0 - 1 5 0 0 1 2 . 3 ( 3 ) 1 9 . 5 ( 1 0 )

> 1 5 0 0 1 0 . 3 ( 6 ) 2 5 . 0 ( 1 1 )1 P e r c a p it a i n c o m e i n U S - $ ( 1 9 8 1 ) .2 U n w e i g h t e d a v e r a g e s h a r e s i n o u t p u t a n d in v e s t m e n t , r e s p e c t i v e ly ; i nm o s t c a s e s f i g u r e s a r e f o r t h e l a t e 1 9 7 0 s . I n p a r e n t h e s e s : n u m b e r o fc o u n t r i e s f o r w h i c h d a t a a r e a v a i l a b l e .S o u r c e : R . P . S h o r f : T h e R o l e o f P u b l i c E n t e r p r i s e s : A n I n t e r n a -t i o n a l S t a ti s ti c a l C o m p a r i s o n , i n : In t e r n a t io n a l M o n e t a r y F u n d : P u b l i cE n t e r p r i s e in M i x e d E c o n o m i e s : S o m e acroeconomic A s p e c t s ,W a s h i n g t o n 1 9 8 4 , T a b l e 1 .

i ron and stee l , tha t a re supposed to p lay a key ro le ineconomic deve lopmen t . S ta te en te rp r i ses a re expec tedto st reng then in ter industr ia l l inkage s and to ma ke use o feconomies o f sca le as we l l . Ave rage p lan t s i zes a red rama t ica l l y h ighe r in the pub l i c sec to r than in thepriv ate sector. 16

S t a t e E n t e r p r i s e s a n d G e n e r a l E c o n o m i cD e v e l o p m e n t

I t i s ex t reme ly d i ff icu lt to asse ss the econom ic im pacto f pub l ic p rodu ct ion empir ica lly . T he fo l lowingcorre la t ion ana lysis m ay provide a fi rst step in th isd i rection . In sub seq uen t research, i t has to besupp lemen ted by more soph is t i ca ted ana lyses tha ta l low the impac t o f s ta te en te rp r i ses to be i so lated f romothe r re levant in f luences. Tw o d i f fe rent coef f ic ien ts we reca lcu la ted: Spe arm an rank corre la t ion coef f ic ien ts andPearson corre la t ion coef f ic ien ts.

Th e resu l ts prese nted in Tab le 2 ind ica te tha t sta teenterprises fai led to fu lf i l their principal role, i .e. toenhanc e ec onom ic deve lopmen t in Th i rd Wor ldcountr ies. Th e re la tive imp ortanc e o f sta te enterpr is es indeve lop ing countr ies is re f lected by the i r ou tput andinves tmen t sha res (SHG DP, SH INV) . In v iew o f theabove -m en t ioned hypo theses ra ised by the p roponen tsof pub l ic p roduct ion , the fo llowing var iab les werese lec ted as ind ica to rs o f the coun t r ies gene ra leconom ic pe r fo rmance : rea l g row th in GD P and g rossf i xe d i n ve s t m e n t ( G R O G D P a n d G R O I N V ,respect ive ly) , the industr ia l isa t ion leve l ( IND LE V) andg row th in emp loyme n t (GR OE MP ) . Consequen t ly , 16coef f ic ien ts we re est imated. Jus t one out o f thes e iss ign i f i can t a t the 10 pe r cen t leve l o f con f idence(Pea rson - i n con t ras t to Spea rman - shows a pos i t i veco r re lat ion be tween the sha re o f s ta te en te rp r i ses inG D P and the industria l isation level). In al l rema iningcases no s ign i f i can t re la t ionsh ip emerged be tween thequan t i ta t ive impo r tance o f s ta te en te rp r i ses and gene ra lecono mic pe r fo rmance . In sha rp con t ras t to w idesp rea dexpecta t ions , the coe f f ic ien ts seem to be ra the rn e g a t ive f o r b o th G R O G D P a n d G R O I N V .

The ev idence i s d isappo in t ing as we l l, i f the p rog ressmade in emp loymen t gene ra t ion i s cons ide red . Thesha re o f s ta te en te rp r i ses in ove ra l l emp loymen t i s

16 F o r t h e I n d i a n e x a m p l e , s e e P e t e r N u n n e n k a m p : D i e R o l l e 5 f -f e n t li c h e r I n d u s t r i e u n t e r n e h m e n i m E x p o r t s e k t o r I n d i e n s , S c h r i f t e n d e sZ e n t r u m s f Q r r e g i o n a le E n t w i c k l u n g s f o r s c h u n g d e r J u s t u s - L ie b i g - U n i -v e r s i t ~ it G i e B e n , V o l . 3 0 , H a m b u r g 1 9 8 5 , T a b le 5 .1~ S e e R . E S h o r t , o p . c it . , p p . 2 7 f . ; M a l c o l m G i I I i s : T h e R o l eo f S t a t e E n t e r p r is e s i n E c o n o m i c D e v e l o p m e n t , H a r v a r d I n s t it u t e f o rI n t e r n a ti o n a l D e v e l o p m e n t , D e v e l o p m e n t D i s c u s s i o n P a p e r , N o . 83 ,C a m b r i d g e 1 9 8 0 , pp . 2 8 ff .

I N T E R E C O N O M I C S , J u ly / A u g us t 1 9 8 6 189


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gene ra l l y cons ide rab ly less than tha t in GDP . 7 Themiss ing l i nk be tween h igh pub l i c inves tmen ts andGROEMP has to be a t t r ibu ted to the ex t reme ly h ighcap i ta l in tensi ty typ ica l ly p reva i l ing in sta te enterpr ises'opera t ions. Th is pa r t ly re f lects th e industr ia l d ist ribu tionof pub l ic p roduct ion , i .e . i ts p rom inence in sec tors tha tare inherent ly cap i ta l - in tensive . However, the Ind ianexam p le a lso po in ts to d ras t i c in t ra - indus t ry d i ffe rencesin fac to r p ropo r t ions be tween pub l i c and p r i va teenterp r ises. 18 As in ind ia , th e c ost o f cap i ta l to sta teen te rp r i ses i s lowe r than tha t to p r i va te p roduce rs inma ny deve lop ing coun t r ies , so tha t the sam e s i tua t ion i sl ike ly to preva i l e lsewhe re .

Thu s a p rom inen t ro le by s ta te en te rp r i ses in theecon om y doe s no t seem to be a su f fi c ien t cond i t ion (no ra necessa ry one ) fo r a more favou rab le deve lopmen treco rd . In som e ins tances , gove rnme n t fa ilure (such asof f ic ia lly induced pr ice d istor t ions in factor ma rkets)ra ther than m arket fa i lu re m ust be b lam ed for insuf fic ien te co n o m i c su cce ss .

W o r l d M a r k e t O r i e n t a t io nTh ings look even wo rse i f the s ta te en te rp r i ses ' ro le in

ex te rna l t rade i s cons ide red (see Tab le 3 ). Som e t imes i ti s a rgued tha t pub l i c p roduc t ion may imp rove thedeve lopm en t p rosp ec ts o f Th i rd Wor ld econom ies byreducing curre nt acc oun t de f ic i ts . S ta te enterpr ise s aresupposed to acce le ra te the g row th in expo r ts and tod ive rs i f y the coun t ry 's expo r t baske t by supp ly ing non

18 See P eter N u n n e n k a m p : Die Rolle 8ffent l icher Industrieunter-nehme n im Ex ports ekto r Indiens, op. cit ., p. 106.

t rad it iona l exp ort items. O n the o ther hand, they sho u ldimprove on import -subst i tu t ion po l ic ies.

Th e corre la tion coef f ic ien ts prese nted in Tab le 3ind ica te comple te fa i lu re in a l l th ree respects:[ ] H igh ou tpu t and inves tmen t sh a res by s ta teenterp r ises w ere re la ted to low, ra ther than h igh, g rowthin rea l ex por ts (GR O EX P); a l l four coef f ic ien ts aresign if icantly negat ive (a t a 4 per cent leve l o f con f idenceor better).[ ] The more p rom inen t s ta te en te rp r i ses f igu re in theeconomy, the less d ivers if ied are the country 's exp orts,i f the sha re o f th ree ma jo r commod i t ies in to ta l wo r ldmarke t sa les i s taken as an ind ica to r o f expo r tco n ce n t r a t i o n ( C O M C O N ) .[ ] As rega rds g row th in rea l impo r ts (GROIMP) , thecoef f ic ien ts remained insign i ficant ; moreover, they havewrong s igns , so tha t s ta te en te rp r i ses seem to havespeede d up impo r t g row th ra the r than reduced i t.

An in -depth s tudy o f the expo r t pe r fo rma nce o f s ta teen te rp r i ses in Ind ia ind ica ted tha t the i r sha re o findustria l p roduct ion (abou t 20 per cent in the 1970 's)and emp loymen t (abou t 15 pe r cent ) exce eded the i rsha re o f expo r ts (5 -6 pe r cen t ) by 150 -300 pe r cen t .No tw i ths tand ing the ra the r weak wo r ld marke to r ien ta t ion o f the ind ian p r i va te sec to r , s ta te en te rp r i seslagged fur ther beh ind: in the 1970 's on ly 3 .3 per cent o fpub l ic industr ia l p roduct ion wa s exported . Wor ldmarke ts se rved as a tempora ry ou t le t fo r excess pub l i cproduct ion a t t ime s o f insuff ic ien t dom est ic dem and an dwere neg lec ted as soon as dom est i c deman d p rov idedfor sa t isfactory capaci ty u t i l isa t ion . The sta te

T a b l e 2S t a t e E n t e r p ri s e s a n d E c o n o m i c D e v e l o p m e n t : C o r r e la t i o n R e s u l ts 1

Spearman Pearson

SHGDP SH I NV SHGDP SHI NVcoeff, sig. (N) coeff, sig. (N) coeff, sig. (N) coeff, sig. (N)GRO GDP -0 . 18 0 . 19 -0 . 11 0 . 23 -0 . 21 0 .16 -0 . 13 0 . 19

(25) (44) (25) (44)INDLEV 0.10 0.34 0.04 0.41 0.30 0.10 0.16 0.18

(21) (37) (21) (37)GRO I NV -0 . 11 0 . 32 -0 . 09 0 . 29 -0 . 01 0 .48 -0 . 09 0 . 29

(21) (41) (21) (41)GRO EMP 0.02 0.46 -0.01 0.47 0.15 0.24 0.05 0.37

(24) (41) (24) (41)1 S pearman rank correlat ion coeff ic ients and Pearson correlat ion coeff ic ients, respect ively; besides the coeffic ients, the second column presents thelevel of s ignif icance (one-tai led test) and the number of observations on which the calculat ion is based (in parentheses). Variables: S HG DP = shar eof state enterprises in GDP ; SH INV = share of state enterprises in gross f ixed investment (SH GDP and SH INV are most ly for the late 1970 s);GRO GD P = average annual grow th in real GDP, 1970-81 ; INDLE V = industr ia lisation level, i .e . share of indust ry in GD P in 1981 ; GR OIN V = averageannual g rowth in gross f ixed capital formation at constant prices, 1970 -81 ; G ROE MP = ave rage annual growth in employment, 1970-81.S o u r c e : R .P. S h o r t , see Table 1 W orld Bank: World Developm ent Report ; IMF: Internat ional Financial Stat istics; own calculations.190 INTERECONOMICS, July /August 1986


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enterp r ises' ro le in d ivers ify ing Ind ia 's expor ts wa sneglig ible. P ublic production wa s ne ither suff icient no rnecessa ry to open up new ove rseas marke ts by non -tradit ional exports.

Even in the case o f homogeneous p roduc ts ands tanda rd ised p roduct ion p rocesse s s ta te en te rp r i sesfa i led to su rpass the p r i va te sec to r 's expo r tper formance. A mo re favoura b le p icture w as mo st l ike lyto be expec ted in th i s a rea . S ta te en te rp r i ses tha tope ra ted on a mode ra te ly la rge r sca le than p r i va tep roduce rs had the oppo r tun i ty o f mak ing use o fincreasing re turns to sca le . Moreover, the market ing o fh o m o g e n e o u s a n d s t a n d ar d ise d g o o d s w a s r a t h e r e a syand requ ired less flexib i li ty , thereb y reducing the pub l icsec to r 's compara t i ve d isadvan tages a r i s ing f romburea ucra t ic decis ion-making. 19 Apparent ly, thes efactors we re o ffse t by exp ort - re tard ing e f fects. Ap artf rom cons iderab le X- ine ff ic iencies, the gov ernm ent-induced h igh cap ita l in ten si ty in the pub l ic sector and thepr io r i ty g iven to heavy industr ies (such as stee l ,mach ine ry and t ranspo r t equ ipmen t ) have p robab lyimpeded a more favou rab le expo r t pe r fo rmance bys ta te en te rp r i ses . The ro le o f s ta te en te rp r i ses w i th in thef ramework o f Ind ia 's deve lopmen t p lans comp le te lyneg lec ted the coun t ry 's compara t i ve advan tages inin ternat iona l markets. A s imi la r pa t te rn o f pub l icproduct ion is typ ica l fo r m any o ther deve lop ingcountr ies, so tha t the Ind ian exp er ienc e is like ly to berepeated e lsewhere .

Finan cing the D ef ic i ts of Sta te EnterprisesThough the re i s ha rd ly any ev idence o f economic

benef its tha t may be a tt r ibu ted to sta te enterpr ise s, theymay have g iven r i se to cons ide rab le econom ic cos ts , X -ine ff ic iencies, misc once ived industr ia l isa t ion po l ic iesand h igh ly cap i ta l- in tensive produ ct ion proce sse s in thepub l i c sec to r can be p resumed to abso rb economicresou rces tha t cou ld have been emp loyed moreproduct ive ly in the pr iva te sector . Accord ing toin format ion on the overa ll ba lance s o f sta te enterpr ise sp resen ted by Sho rt , the re tu rn on pub li c inve s tmen t wa sra the r low in commerc ia l te rms. Exc lud ing the rece ip tso f current gove rnm ent t ransfers, the se l f -f inancing ra t ioo f s ta te en te rp r i ses amoun ted to on ly 10 pe r cen t inthose deve lop ing coun t r ies fo r wh ich da ta we reavailable.

In the m id-1970 's, the overa l l de f ic its o f sta teen te rp r i ses in deve lop ing coun t r ies ave raged a lmost 4pe r cen t o f GDP.2~ Tab le 4 ind ica tes tha t h igh pub l icinves tmen t sha res we re s t rong ly co r re la ted w i th h ighdef ic its o f sta te enterpr is es (D EFO V). Def ic i ts had to bef inanced e i the r by bo r row ing by s ta te en te rp r i ses inI N T E R E C O N O M I C S , J u l y / A u g u s t 1 9 8 6

dom est ic and in ternationa l f inancia l ma rkets or bycap i ta l in fusions by the gov ernm ent. Var ious draw back smay a r i se f rom these op t ions :[ ] Bo r row ing f rom dome st i c comm erc ia l banks i s l ike lyto crowd o ut p r iva te inv estors beca use o f cred i t ra t ion ingor r is ing cap i ta l costs. The same app l ies i f s ta teen te rp r i ses sh i f t the i r de fi c it s to the gove rnm en t budge tand gove rnm en ts re finance by bor row ing in dom est i ccapital markets.[ ] The m oney sup p ly i s a f fec ted i f s ta te en te rp r iseshave d i rect acc ess to borrowing f rom the centra l ban k(th is is the case in severa l deve lop ing coun tr ies) o r i fgove rnme n ts re f inance by mone y c rea tion. Mos tprobab ly, th is wou ld res u l t in h igher in f la tion ra tes. Tab le4 p rov ides some ev idence tha t h igh pub l i c inves tmen tsha res ( in case o f bo th Spea rman and Pea rsoncorre la t ions ) and h igh def ic i ts o f sta te enterpr ise s( D E F O V a n d D E F C O R i n ca se o f S p e a r m a ncorre la t ions) were s ign i f icant ly re la ted to h ighgove rnmen t budge t de f i c i t s . Howeve r , co r re la t ionsbetw een s ta te enterpr ises' de f ic i ts an d the in fla t ion ra teremained insign i ficant ( the 10 per cent leve l o fcon f idence i s cons ide red as a m in imum s tanda rd ) .Moreover, a ll coef f ic ien ts have wro ng s igns in v iew o fwha t m igh t have been expec ted .[ ] Th e in ternat iona l deb t s itua t ion o f deve lop ingcoun t r ies i s nega t i ve ly a f fec ted i f s ta te en te rp r i ses s tepup the i r fo re ign borrowing or i f cred i ts ra ised inin ternat iona l ma rkets in order to f inance the i r de fic its a rechanne l led th rough cen t ra l gove rnmen t accoun ts . Asd iscussed be low , th i s may t r igge r deb t se rv ic ingdifficulties.

T h e I n t e rn a ti o n a l De b t u rd e nIn the mid-1970 's, fo r those countr ies provid ing a

com p le te b reakdow n o f sou rces o f fi nance , abou t 25 pe rcen t o f the s ta te en te rp r i ses ' de f i c i t s we re cove red bydirect foreign borrowing. 21 Th e sh are of internationallend ing wou ld pro bab ly h ave been m uch la rg er if ind irectfo re ign borrowing by sta te enterpr ise s were taken in toaccount , i .e . fo re ign loans cha nne l led th rou ghgove rnme n t a ccoun ts . Th e obse rva t ion tha t the def ic i tso f s ta te en te rp r i ses we re s ign i f i can t l y re la ted to

1 9 F o r a d d in g ma rke t i n g a n d i n s t i t u t i o n a l a sp e c t s t o t h e co n ce p t o fc o m p a r a t i v e a d v a n t a g e , s e e L e r o y P . J o n e s , L a w r e n c e H .W o r t z e l : P u b li c E n te r p r is e a n d M a n u f a c t u r e d E x p o r t s i n L e s s -D e v e lo p e d C o u n t r i e s : I n s ti tu t io n a l a n d M a rke t F a c t o r s D e t e rm in in gCom para t ive Ad van tage , in : Le roy P. J o n e s ed . ) : Pub l ic En te rp r is ein L e ss -D e ve lo p e d C o u n t r ie s , C a m b r id g e 1 9 8 2 , p p . 2 1 7 -2 4 2 .2 o T h e e x c lu s io n o f cu r re n t g o ve rn m e n t t r a n s f e r s i n c re a se d t h e d e f i c i t sby ano the r pe rc en ta ge po in t ; see R . P. S h o r t , op . c it . , pp . 29 f f.2~ Se e R. P. S h o r t , op. cit ., pp. 45ff .

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DEVELOPMENT P O L I C Y

T a b l e 3S t a t e En t e r p r i ses a nd Ex t e r na l T r ade : C o r r e l a t ion R esu l t s 1

Spearman Pearson

S H G D P S H I N V S H G D P S H I N Vcoeff, sig. (N) coeff, sig. (N) coeff, sig. (N) coeff, sig. (N)

GRO EXP -0 . 44 0 .02 -0 . 40 0 .01 -0 . 41 0 . 03 -0 . 29 0 .04(21) (38) (21) (38)

COM CON 0.29 0.08 0.24 0.06 0.34 0.05 0.37 0.01(24) (46) (24) (46)

GR OIM P 0.12 0.30 0.07 0.33 0.26 0.13 0.05 0.38(21) (38) (21) (38)

See footno te to Table 2; addi tional var iables : GROEXP , GR OIM P = average annual growth in expor ts and imports respect ively, at constant pr ices ,1970-81 ; COM CON = com mo dity concentrat ion, i .e. share of 3 major commodit ies in total merchandise e xpo rts in 1981.S o u r c e s : Se e Table 2; World Ban k: World Tables; ow n calculat ions.

T a b l e 4S t a t e En t e r p r i ses G ov er nm ent B ud ge t D e f i c i ts and In f l a ti on : C or r e l a t i on R esu l t s 1

Spearman Pearson

D E F O V G O V D E F I N F L D E F O V G O V D E F I N F Lcoeff , s ig.(N) coeff , s ig.(N) coeff , s ig.(N) coeff , s ig.(N) coeff , s ig.(N) coeff , s ig.(N)

SHGD P -0 . 17 0 . 26 0 .04 0 .44 -0 . 24 0 . 12 -0 . 26 0 .15 -0 . 32 0 . 11 -0 . 11 0 .31(18) (17) (25) (18) (17) (25)

SH I NV -0 . 66 0 . 0 0 1 -0 . 42 0 . 01 -0 . 17 0 . 13 -0 . 67 0 .000 -0 . 46 0 . 004 -0 . 18 0 .11(35) (32) (48) (35) (32) (48)

DEF OV - - 0.28 0.10 0.20 0.12 - -0.0 2 0.46 0.19 0.13(22) (36) (22) (36)DEFC OR - - 0.45 0.03 0.07 0.38 - - 0.15 0.27 0.24 0.13(19) (23) (19) (23)

See foo tnote to Table 2; addi t ional var iables : DEF OV = overall def ic it of s tate enterprises as a share of GDP (surplus : + ) ; DE FCOR = correc teddef ic it of state enterprises a s a share of GDP, i .e. overall def icits minus current gov ernm ent t ransfers to state enterprises (surplus: + ); GO VD EF =govern men t budget def ic i t as a share of GPD (surplus : + ) ; DEFO V, DE FCOR and GO VDE F are mostly for the late 1970 s; IN FL = average annualrate of inf lat ion (consumer prices), 1970-81.S o u r c e s : S e e T a b le 2 .T a b l e 5

S t a t e En t e r p r i ses and For e i gn D eb t : C or r e l a t i on R esu l t sSpearman Pearson

DEBGNP DSR DEBGNP DSRcoeff, sig. (N) coeff, sig. (N) coeff, sig. (N) coeff, sig. (N)

SHG DP 0.55 0.002 0.39 0.03 0.63 0,000 0.28 0.10(25) (23) (25) (23)

SH INV 0.44 0.001 0.37 0.01 0.31 0.02 0.33 0.01(46) (45) (46) (45)

DEFO V -0 . 40 0 .01 -0 . 14 0 . 22 -0 . 37 0 . 02 -0 , 14 0 . 22(34) (32) (34) (32)

FO RB OR 0.30 0.08 0.48 0.01 0.10 0.31 0.41 0.03(24) (23) (24) (23)

1 Se e footnote to Table 2; addi tional var iables : DEF OV = overall def ici t of s tate enterpr ises as a share of GDP (surplus: + ) ; FOR BO R = fore ignborrowing by s tate enterpr ises as a share of GDP (D EFO V and FO RBO R are most ly for the late 1970 s) ; DEB GNP = publ ic and publ ic ly guaranteeddeb t as a share of gross nat ional product, 1980-82; DS R = de bt service rat io, i .e. debt service on public and public ly guaranteed deb t as a share ofexports, 1980-82.S o u r c e s : Se e Table 2; World Bank: World Debt Tables; ow n calculat ions.92 INTERECONOMICS, July /August 1986


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DEVELOPMENTPOM Y

government def ic i ts bu t no t to domest ic in f la t ionind ica tes tha t government budget de f ic i ts were la rge lyf inanced in in ternat iona l cap i ta l mark ets, ra ther than bydom est ic mo ney creat ion . 22 In the per iod 1976-78, sta teenterpr ises accounted fo r one th i rd o f a l l in te rnat iona lborrowing by developing countries. 23

Aga ins t th i s backg round i t m igh t be suppose d tha tsta te enterpr ise s contribu ted to the deter io ra t ing debts i tua tion o f m any deve lop ing cou ntr ies in the ear ly1980 s. Th is v iew is suppo rted by the corre la t ion resu l tsp resen ted in Tab le 5 . The ana lys is con s ide rs tw o o f them ost f requent ly used deb t ind ica tors, the ra t io o f fo re igndeb t ou ts tand ing to g ross na t iona l p roduc t (DEBGNP)and the ra t io o f in terest and amort isa t ion payments onex te rna l l iab il it ie s to the coun t ry s expo r ts (deb t se rv icera tio , DS R) as a measu re o f the deb t se rv ice bu rden o fdeve lop ing countr ies. A l l coef f ic ien ts have the expec tedsigns and a l l bu t th ree are s ign i ficant a t the 10 per centleve l o f conf idence or be t te r . H igh def ic i ts o f sta teen te rp r i ses a re assoc ia ted w i th la rge amoun ts o faccumula ted deb t re la t ive to GNP. With increasing d i rectborrowing by sta te enterp r ises in in ternationa l cap i ta lma rke ts the deb t se rv ice ra tio inc reases . Bo th DEB GN Pand DSR show a s t rong ly pos it ive re la t ion to the ou tpu tand inves tm en t sha res o f s ta te en te rp r ises . Mo reove r, alook a t those 23 deve lop ing coun t r ies tha t p rov ide da taon the ad jus ted de f ic i ts o f s ta te en te rp r i ses (DE FC OR ,i .e . DEFOV m inus cu r ren t gove rnmen t t rans fe rs )revea ls tha t the probab il ity o f reschedu l ing increas ed forcou ntr ies w i th a re la tive ly h igh DEF CO R. For the n inecountr ies tha t d id not reschedu le part o f the i r fo re igndeb t w i th in the pe r iod 1975 -84 , DEFCOR ave raged 2 .5per cent . Th e respect ive f igure am oun ted to 3 .2 per cent(3 .6 per cent) fo r countr ies w i th one (more than one)reschedu l ing agreement.

S ummaryIn the above, the hy pothe sis o f a posi t ive ro le fo r sta te

en te rp r i ses in the econ omic deve lopm en t o f Th i rd Wor ldcoun t r ies wa s sub jec ted to s imp le emp i r i ca l tes ts . The reis hard ly any evidence tha t sta te enterpr ises fu l f i l led theassumed p ionee r ro le w i th in the f ramework o findustria lisa t ion p lans in a wa y tha t wou ld ha vebene fi tted deve lop ing coun t r ies econom ies . In con t ras tto w idesp read expec ta t ions , a p rom inen t ro le by pub l i cp roduc t ion w i th in the economy was ne i the r assoc ia ted

22 According to World Bank estimates (World Development Report1985, Wa shington 1985, p. 62), a significant pos itive relationshipprevailed betweengrowinggovernmentdefic{ts and he accum ulationofforeign debt.z3 See W orld Bank: Borrowing n International Cap ital Markets: ThirdQuarter 1979,Washington 1980.INTERECONOMICS, uly/August 1986

wi th re la t ive ly favourab le growth and industr ia l isa t ionrecords, nor w i th h igh emp loym ent genera t ion . In thef ie ld o f fo re ign t rade, sta te enterpr ises seem , ra ther, tohave added to tl~e econom ic p rob lems o f deve lop ingcoun tr ies . H igh ou tpu t and inves tmen t sh a res by s ta teenterpr ises were re la ted to poor overa l l exportpe r fo rmanc e and h igh expo r t concen t ra t ion on a fewtrad i t iona l commodi t ies. Th is may have contr ibu tedsign i f icant ly to ba lance o f paym ents d i f ficu lt ies in ma nydeveloping countries.

I t goe s wi thout saying tha t the corre la tion ana lysisp resen ted above p rov ides a ra the r weak emp i r ica l test .Subsequen t resea rch shou ld supp lemen t th i s by moresoph is t i ca ted p rocedu res in o rde r to i so la te the e ffec tso f pub l i c p roduc t ion on economic deve lopmen t f romother re levant factors. Th is ar t ic le can there fore on lyserve as a f i rst step towards reach ing def in i teconc lus ions . Howeve r , i t s t rong ly ques t ions the ra the rna ive be l ie f tha t pub l ic p roduct ion per se wi l l remove thebot t lenecks to economic growth and industr ia l isa t ion .

A reapp ra isa l o f wha t s ta te en te rp r i ses can ach ievehas to cons ide r the eco nom ic cos ts o f pub l i c p roduc t ionas we l l . Market fa i lu re is a necessary ra ther than asuf f ic ien t cond i t ion fo r sta te in tervent ion . In te rm s o feco nom ic we l fa re , pub l ic p roduct ion act iv it ies can on lybe just if ied wh ere we l fa re-increasing e f fects d ue to thecorrect ion o f market fa i lu re ex cee d wel fa re losse s due togov ernm ent fa i lu re . Th e corre la t ion ana lysis ind ica testha t the economic cos ts o f s ta te en te rp r i ses we re fa rf rom neg l ig ib le . Th e str ik ing def ic i ts o f sta te enterpr ise sin many deve lop ing coun t r ies rep resen ted a ma jo rreason for h igh and r is ing government def ic i ts . There isno evidence o f in f la t ionary e f fects ar is ing f rom pub l icp roduc t ion . Howeve r , c rowd ing -ou t o f p r i va te econom icact iv i t ies is like ly to have occurred. Moreover, the lack o fpr iva te in i t ia t ive in indus tr ies tha t a re typ ica l ly g iven h ighpr io r i ty in government p lann ing cannot be a t t r ibu tedsimply to market fa i lu re and pr iva te r isk aversion . Boththeore tica l con sidera t ions an d empir ica l f ind ings te ll us,fo r examp le , tha t fo r most deve lop ing coun t r ies i t doesno t make s ense to inves t in cap ita l - in tens ive indus t r iesb e ca u se o f co m p a r a t i ve d i sa d va n t a g e s . T h e e co n o m i cbene fi ts o f s ta te en te rp r i ses engag ed in these indus t r iesare h igh ly debatab le . Pub l ic p roduc t ion m ay , ra ther,have resu l ted in a sub stant ia l m isa llocat ion o fresources. F ina l ly , sta te enterp r ises see m to haveadded s ign i f i can t l y to one o f the most seve re p rob lemsma ny Th i rd Wor ld econ omies a re s t rugg l ing w i th today .Th e f inancing o f the sta te ente rpr ise s def ic i ts hascon t r ibu ted c ons ide rab ly to the accum u la t ion o f fore igndeb t and has inc reased the p robab i l it y o f deb t se rv ic ingdifficulties.

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Documents

Nummemkamp, P. (1986). State Enterprises in Developing Countries