Myth And Reality: The Curious Relationship of Government and Public Enterprise

Ken RasmussenFebruary 4, 2004

The Myth and Realities 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 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 Public enterprise is ideological State ownership of the “means of production” is a goal

in itself. 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

The dream that that nationalisation would redistribute property was not realised. Why?

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.

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 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 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  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 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

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 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 Said to have an unfair position of

competition 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 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

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

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 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 To achieve re-distributive goals To ensure adequate investment To prevent monopolization To facilitate coordination To ensure safety or security To reduce financial cost To allow more macro-economic

stabilization

Conclusions: The case for private ownership 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 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 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