Myth And Reality: The Curious
Relationship of Government and
Public Enterprise
Ken Rasmussen
February 4, 2004
The Myth and Realities
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It is possible to maximize efficiency under any type of
ownership?
Great deal of difference between what is theoretically
feasible and what typically happens.
If government allows financial discipline to relax by
paying subsidies, management many not try very
hard to secure change
Hard for a PE to close down unprofitable plants to
adjust manufacturing standards, or to introduce
labour saving techniques in the face of political
pressure
The Myth and Realities
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The government is the final arbitrators on all matters of policy
and is expected, in theory to give management clear direction
and objectives
But those in government may disagree about provincial or
national objective or find it politically expedient to not articulate
these disagreements
Clearly when government is in business the pictures is
complex.
Many opinions about the value of Public Enterprise are based
on preconceptions and myths
Folklore is often mistaken for fact, and the experience of one
country is often generalised as if all countries are the same.
Myth 1: The End of Capitalism
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Public enterprise is ideological
State ownership of the “means of production” is a goal in itself.
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legal status of property was a crucial determinant of the use of that
property
Transfer of means of production believed to create a just economic
system and ideal society based on co-operation, equality and
mutual collaboration
transfer wealth producing assets from the private to the public
sector, and the move would lead to a revolution in industrial
democracy,reduce the reduce the cost to the consumers and
create greater equity among individuals.
Reality was different, and the anticipation that state ownership
will wipe out all problems crated by the greed of capitalism were
exaggerated
Myth 1: The End of Capitalism
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The dream that that nationalisation would
redistribute property was not realised. Why?
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Compensation had to be paid to existing owners.
Many of the nationalisation’s put lame ducks in the hands of
the government (welcomed by private owners)
Does not really distribute income.
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subsidies of electricity, food, water, bus transportation are
are enjoyed by the rich as well.
Worker relations are not much better that in other firms
Worker alienation is centrally not reduced by state
ownership
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very unpleasant confrontations between government,
management and workers take place in public enterprises
replace one set of professional mangers with another
No better environmental safety
Does not resolve issue of social responsibility
Myth 2: State ownership means
creeping socialism
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PEs are inefficient by definition and encroach on the
freedom of the business
Large scale ownership creates centralised power,
monolithic society
Yet it is difficult to generalise that PEs are inherently
less efficient
Indeed many firms find themselves PE by the poor
decision of private sector managers.
We know that the countless US firms and Canadian
firms, have failed to maintain any form of competitive
advantage
Myth 3: State ownership is based
on ideology
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While ideologically beliefs have been
important, in creating Public enterprise,
all countries have PE
Outside the declining communist world,
PEs exist in similar percentages.
In Canada Conservative parties have
created more Public enterprise that
than socialist ones.
Myth 4: Public enterprise cannot
reduce the size of their workforce
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The evidence is clear on this: PE have over
the years shed tremendous number of
workers
The hypotheses that Public Enterprise
managers are trying to maximise growth and
employment is not proven
Left governments of course do find it difficult
to allow massive reductions in the labour
force
Myth 5: Public enterprise are rational
actor serving the interests of the country
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PEs are often portrayed as docile rational organisations attempting to
achieve pre-determined ends set up by the government that controls
them completely
The reality is more complex
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No consensus on national or provincial objectives.
Many conflicts between government and PEs
Behaviour of PEs is best explained as a result of contests for control over
resources, rather than as an outcome of pressures for efficient attainment of
national or provincial objectives
Government’s feel that Public Enterprises are instrument of the state and can
be used to reach all sorts of short-term goals
Government interfere because they think in political terms
Boards are to prevent this but often they are friendly, public servants, or
cabinet ministers.
Myth 6: Public Enterprise gets
Special Treatment from Government
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Said to have an unfair position of
competition
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they are not required to earn profits, they pay
lower or not taxes, they receive purchasing and
sales preferences , and are favoured by
international information reporting, trade and
burden of proof regulations
The opposite may be true
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subject to many more controls, they have to
revel business secrets to competitors as part of
parliamentary accountability, they are subject to
many audit
Myth 7: Managers have job security
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Do managers live forever?
It is difficult to establish managerial failure
They are risk adverse according to property
rights theorists
But there are many officials that feel anything
but secure
Myth 8: Alternative to Public
Enterprise is a Free Market
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If there is no PE will markets flourish
The real alternative to Public Enterprise is not
lots of competition, but a monopoly, and
oligopoly, cartel or government subsidised
and heavily protected privately owned firm
Societies are dominated by giant firms,
managed by professional managers, and
owned by passive shareholders.
Myth 9: Cannot Attract
Innovative Managers
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contradiction between creativity and innovation public sector
enterprise on the other hand.
Innovation and creativity need flexibility and organic
organisation but public enterprise stable and predictable.
A private firms can work on new programs in relatively
completes secrecy, while the work of the public sector is carried
out in the glare of the press.
Accountability may dampen creativity and innovation
Even though there receive lower incomes many stay when
1) some derive satisfaction form serving the public
2) many want to run large more capital intensive enterprise,
which are mainly state owned in some countries
Conclusions: The case of
public ownership
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To
To
To
To
To
To
To
achieve re-distributive goals
ensure adequate investment
prevent monopolization
facilitate coordination
ensure safety or security
reduce financial cost
allow more macro-economic stabilization
Conclusions: The case for
private ownership
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Markets are good at allocating property rights
Bureaucrats are bad at running business
Explicit regulation can be more effective than
oversight of a public corporation
Private ownership increases cost of disruptive
government intervention
Private ownership reduces the influence of
interest groups
Conclusions
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Public ownership may be best for local
monopolies were contracting and monitoring
are difficult
Give private firms the wrong incentives to
underpay for inputs, overpay for outputs and
bribe politicians
Local transpiration is an example
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Private provider might lobby to get rights of way
for free, lobby for subsidies on unprofitable routes,
demand high prices etc.
Best to leave it a municipal function