Private firms know that they will be able to take advantage of soft budget constraints if they are important enough, and they are not shy about exploiting the opportunity to the full. As one foreign banker reportedly told the Wall Street Journal in the middle of the 1980s Third World debt crisis, ‘[w]e foreign bankers are for the free market when we’re out to make a buck and believe in the state when we are about to lose a buck’.[4]
Indeed, many state bail-outs of large private sector firms have been made by avowedly free-market governments. In the late 1970s, the bankrupt Swedish shipbuilding industry was rescued through nationalization by the country’s first right-wing government in 44 years, despite the fact that it had come to power with a pledge to reduce the size of the state. In the early 1980s, the troubled US car maker Chrysler was rescued by the Republican administration under Ronald Reagan, which was in the vanguard of neo-liberal market reforms at the time. Faced with the financial crisis in 1982, following its premature and poorly designed financial liberalization, the Chilean government rescued the entire banking sector with public money. This was General Pinochet’s government, which had seized power in a bloody coup in the name of defending the free market and private ownership.
The neo-liberal case against state-owned enterprises is further undermined by the fact that there are numerous well-functioning SOEs in real life. Many of them are actually world-class firms. Let me tell you about some of the more important ones.
Singapore Airlines is one of the most highly regarded airlines in the world. Often voted the world’s favourite airline, it is efficient and friendly. Unlike most other carriers, it has never made a financial loss in its 35-year history.
The airline is a state-owned enterprise, 57% controlled by Temasek, the holding company whose sole shareholder is Singapore’s Ministry of Finance. Temasek Holdings owns controlling stakes* (usually the majority share) in a host of other highly efficient and profitable enterprises, called GLCs (government-linked companies). The GLCs do not just operate in the usual public ‘utility’ industries, such as telecommunications, power and transport. They also operate in areas that are owned by the private sector in most other countries, such as semiconductors, shipbuilding, engineering, shipping and banking.[5] The Singapore government also runs the so-called Statutory Boards that provide certain vital goods and services. Virtually all land in the country is publicly owned and around 85% of housing is provided by the Housing and Development Board. The Economic Development Board develops industrial estates, incubates new firms and provides business consulting services.
Singapore’s SOE sector is twice as big as that of Korea, when measured in terms of its contribution to national output.When measured in terms of its contribution to total national investment, it is nearly three times bigger.[6] Korea’s SOE sector is, in turn, about twice as large as that of Argentina and five times bigger than that of the Philippines, in terms of its share in national income.[7] Yet both Argentina and the Philippines are popularly believed to have failed because of an overextended state, while Korea and Singapore are often hailed as success stories of private-sector-driven economic development.
Korea also provides another dramatic example of a successful public enterprise in the form of the (now privatized) steel maker, POSCO (Pohang Iron and Steel Company).[8] The Korean government made an application to the World Bank in the late 1960s for a loan to build its first modern steel mill. The bank rejected it on the grounds that the project was not viable. Not an unreasonable decision. The country’s biggest export items at the time were fish, cheap apparel, wigs and plywood. Korea didn’t possess deposits of either of the two key raw materials – iron ore and coking coal. Furthermore, the Cold War meant it could not even import them from nearby communist China. They had to be brought all the way from Australia. And to cap it all, the Korean government proposed to run the venture as an SOE.What more perfect recipe for disaster? Yet within ten years of starting production in 1973 (the project was financed by Japanese banks), the company became one of the most efficient steel-producers on the planet and is now the world’s third largest.
Taiwan’s experience with state-owned enterprises has been eve more remarkable.[9] Taiwan’s official economic ideology is the so-called ‘Three People’s Principles’ of Dr Sun Yat-Sen, the founder of the Nationalist Party (Kuomintang) that engineered the Taiwanese economic miracle.[10] These principles dictate that the key industries should be owned by the state. Accordingly, Taiwan has had a very large SOE sector. Throughout the 1960s and the 1970s, it accounted for over 16% of national output. Little of it was privatized until 1996. Even after the ‘privatization’ of 18 (of many) state-owned enterprises in 1996, the Taiwanese government still retains a controlling stake in them (averaging 35.5%) and appoints 60% of the directors to their boardrooms. Taiwan’s strategy has been to let the private sector grow by creating a good economic environment (including, importantly, the supply of cheap, high-quality inputs by public enterprises) and not bothering about privatization very much.
In the past three decades of its economic ascendancy, China has used a strategy similar to that of Taiwan. All Chinese industrial enterprises had been owned by the state under Maoist communism. Now China’s SOE sector only accounts for around 40% of industrial output.[11] Over the past 30 years of economic reform, some smaller state-owned enterprises have been privatized under the slogan of zhuada fangxiao (grabbing the big, letting go of the small). But the fall in the share of state ownership has been mainly due to the growth of the private sector. The Chinese have also come up with a unique type of enterprise based on a hybrid form of ownership, called TVEs (township and village enterprises). These enterprises are formally owned by local authorities, but usually operate as if they were privately owned by powerful local political figures.
It is not only in East Asia that we can find good public enterprises. The economic successes of many European economies, such as Austria, Finland, France, Norway and Italy after the Second World War, were achieved with very large SOE sectors at least until the 1980s. In Finland and France especially, the SOE sector was at the forefront of technological modernization. In Finland, public enterprises led technological modernization in forestry, mining, steel, transport equipment, paper machinery and chemical industries.[12] The Finnish government gave up its controlling stake in only a few of these enterprises even after recent privatizations. In the case of France, the reader may be surprised to learn that many French household names, like Renault (automobiles), Alcatel (telecommunications equipment), St Gobain (glass and other building materials), Usinor (steel; merged into Arcelor, which is now part of Arcelor-Mittal, the biggest steel-maker in the world), Thomson (electronics), Thales (defence electronics), Elf Aquitaine (oil and gas), Rhone-Poulenc (pharmaceuticals; merged with the German company Hoechst to form Aventis, which is now part of Sanofi-Aventis), all used to be SOEs.[13] These firms led the country’s technological modernization and industrial development under state ownership until their privatization at various points between 1986 and 2000.[14]
4
*
There is no agreed definition of what is a controlling stake in an enterprise’s shares. A holding of as little as 15% could give the shareholder effective control over an enterprise, depending on the holding structure. But, typically, a holding of around 30% is considered a controlling stake.