Public sector enterprises absorb huge investments, depreciate the quality of life and are usually a drag on the economy.
PSEs remain capital-wasting, energy-guzzling, environment-unfriendly monoliths which sit on huge prime resources and have organised vested interests that are immune to repair. Today, even after pristine communism has been given its due elegy all across the globe, governments remain in the business of business.
Like most World Bank policy research projects, Bureaucrats in Business: The Economics and Politics of Government Ownership (World Bank-OUP, 347 pages, $19.95) is one of the most comprehensive studies of PSEs. It argues that while operating casinos, baking cookies, and bottling cooking oil, PSEs ruin their national economies. They absorb huge investments, which often yield little or no return and thereby silt all future channels of investment. They capture a disproportionately high share of credit, thereby crowding out more productive private investment. They often pollute more and depreciate the quality of life and usually are a general drag on the economy.
It correctly argues that bureaucrats perform poorly in business not because they are incompetent, but because they face multiple, contradictory goals and dysfunctional incentive structures, which are beyond the measuring rod of money. If one were to look at the 'real' balance sheets of some of the state-run road transport corporations, even those who appear salubrious may begin to look jaundiced. Add factors like accident claims and the actual mileage covered by buses against the projected figures per annum, and most of the road transport corporations would be in the red.
The question often asked is that if they are so bad for the economy, why not get rid of them. The answer is that contemporary PSEs harbour some of the well-organised interest groups which demand and receive patronage and protection. Further, social objectives in most democracies force governments to use them as instruments for fulfilling them. In the bargain, there is often a crisis of confidence of both objectives and instruments. Therefore, One finds islands of non-competitive, technology-retarded firms which refuse to live and let the economy live.
Critics will find the familiar Fund-Bank line echoing through the book, but a closer scrutiny reveals hard-nosed economic analysis. The book goes beyond all numbers and presents the analysis in a lucid and readable style. The other interesting aspect is its incisive analysis of contracts. It identifies three kinds of contracts: performance, management and regulatory. It demonstrates why performance contracts often fail due to their inability to reduce the asymmetric information advantage of managers, lack of a proper rewards-and-sanctions framework and poor commitment on the government's part. It views the conditions under which management and regulatory contracts work and concludes by looking at the necessary and sufficient conditions for reforming PSEs.
The principal factors responsible for the successful reform of the PSEs are huge initial divesting, hard budget constraints, increased competition, financial sector reform, improved incentive structures and political will. The book argues that without these, no economy can ever successfully reform its statist enterprises.
As the caravan of reform moves ahead, PSE reform remains one of the key cornerstones of success. Not only would it free enormous resources which can be used for productive purposes, but it would also carry with it a huge signalling effect which would enhance the credibility of government. For reformers who grope about the uncharted path of reform, this book is a valuable instruction manual.