Transcript Organizations in Economy and Society

Organizations in
Economy and Society
Lecture 14: Firms and The State
Saul Estrin
Why Does The State Own Firms?
1.
“Market Failures”
• Public good/externalities
• “natural monopolies”
• Failures of information
e.g. Atkinson and Stiglitz, “Public Economies”
Note: Framework assumes state is “neutral” actor –
seeking to maximise social welfare
Why Does The State Own Firms?
2. “Marxist View”
Social ownership of the means of production –
to negate private ownership (exploitation)
and to facilitate socialist planning
e.g. Gregory and Stuart,
“Comparing Economic Systems in the 21st Century”
Note: probably dominant current view. Derived on
approach of Buchanan, Tullock. Drives perspective of
World Bank/IMF
Why Does The State Own Firms?
3. “Grabbing Hand”
State as mechanism for appropriating rents from
private agents. Rules of State formulated to
maximise rent generation.
e.g. Shleifer and Vishny “The Grabbing Hand”
Evidence on the Impact of the
State Sector
Size of State Sector (share of GDP) and
economic Growth

i.
Scully (1989) – growth reduced as state
share increases – rent seeking explanation.
In democracies, politicians redistribute
income to groups that elect them – leads to
expansion of public sector, decline of private
investment. In non-democracies, ruling
classes use state to extract rents.
Evidence on the Impact of the
State Sector
ii. Barro (1990) – growth rate has inverted
U-shape with respect to government
share, reaching a maximum at around
20% GDP
Barro (1991) – coefficient on government
share in growth model is - 0.12 (0.03)
GDP = -4.262 + 0.115 PRIVSECT
(-1.36) (1.73)
Figure 1. GDP Growth and Private Sector Development
30
20
GDP GROWTH
10
0
0
10
20
30
40
50
60
70
80
90
-10
GDP GROWTH
Log. (GDP GROWTH)
-20
-30
-40
-50
PRIVATE SECTOR AS SHARE OF GDP
y =7.0426Ln(x) - 26.049
Privatization

Size of State Owned Sector in 1989 (%GDP)
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
OECD Economies – between 3 and 25% (US to
Austria). Average approximately 9% GDP
Developing economies – average approximately
15% (Megginson, 2005)
Transition economies – 70% (Poland and Hungary)
to 97% (Soviet Union, Czechoslovakia)
Privatization has reduced OECD average to 5% and
developing to 8%
Private sector share in GDP and employment in Eastern Europe, 1991-2002
Albania
Armenia
Azerbaijan
Belarus
Bosnia and Herzegovina
Bulgaria
Croatia
Czech Republic
Estonia
FYR Macedonia
Georgia
Hungary
Kazakhstan
Kyrgyz Republic
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Serbia and Montenegro
Slovak Republic
Slovenia
Tajikistan
Turkmenistan
Ukraine
Uzbekistan
In GDP
1991
24
..
..
7
..
17
25
17
18
..
27
33
12
..
..
15
..
45
24
10
..
..
16
..
..
8
..
1995
60
45
25
15
..
50
40
70
65
40
30
60
25
40
55
65
30
60
45
55
..
60
50
25
15
45
30
2002
75
70
60
25
45
75
60
80
80
60
65
80
65
65
70
75
50
75
65
70
45
80
65
50
25
65
45
Sources: EBRD Transition Report 1999, 2003;
In Employment
1991
1995
..
74
29
49
..
43
2
7
..
..
10
41
22
48
19
57
11
..
..
..
25
..
…
71
5
..
..
69
12
60
16
…
36
..
51
61
34
51
5
..
..
..
13
60
18
48
..
53
..
..
..
..
..
..
2001
82
..
..
..
..
81
..
70
..
..
..
…
75
79
73
…
..
72
75
..
..
75
..
63
..
..
..
Privatization

Scale of Privatization
 $1.5 trillion revenues raised, 1990 – 2000
 50% in Western Europe, 15% each in Latin
America and Asia
 Only 5% raised in transition economies
 2% in Africa
 Associated with global wave of foreign direct
investment
Reasons for Privatization
1.
Problems with State Ownership
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2.
Non – profit objectives (Estrin and Perotin, 1991)
Poor management incentives (Vickers and Yarrow, 1985)
Soft budget constraints (Kornai, 1988)
Private Sector Ownership
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Constraints on managerial discretion – “superior
governance” (Megginson, 2005)
External constraints – market for corporate control,
bancrupcy, managerial markets – Anglo – Saxon capital
markets
Internal Constraints – direct owner representation on
boards; German – Japanese governance systems
Implies
Privately owned firms will be more efficient
than state owned ones
Additional Reasons for Privatization
in Transition Economies
 Revenues
for the state (Barr, 1993)
 State ownership implies insider control
 High levels of inefficiency (labor hoarding
 Rent-seeking behaviour e.g. tunelling
 Strong ideological reasons for rapid large
scale privatization (Estrin, 2002)
Methods of Privatization
 Developed
economies and less developed
market economies
– auction or public tender
 Transition
economies
– Restitution, MEBO, “mass privatization”
Mass privatization is forced distribution of
ownership shares to the population as a whole,
either equally or disproportionably to managers
and workers
Methods of Privatization
Mass privatization – dominant method in the
majority of transition economies
 Mass privatization chosen because legacy of
socialism was that private sector did not have
resources to purchase state owned firms quickly
enough for reformers. Therefore had to sell to
foreigners (FDI), mass privatize or wait

Measuring Effects of Privatization
 Compare
“performance” of state owned
and private firms (e.g. Boadman and
Vining, 1989)
 Compare performance of state owned
firms over time as privatization occurs
Issues
Measuring performance – profitability (ROE?),
TFP, productivity.
 Controlling for other factors – demand, location,
quality of infrastructure etc.
 Endogeneity – do privatized firms perform better
because the governments select better firms for
privatization?
 How to define “private” and “state” ownership –
100%, 51% etc.
 Role of ownership concentration
 Role of insider ownership

Measuring Performance

Most studies use augmented production
functions to capture TFP.
e.g. X = f(L,K,Z,O)
Where X = value added
L = employment
K = capital
Z = vector of other factors (demand,
market structure etc.)
O = ownership (state, private etc.)
Measuring Performance
X = f(L,K,Z,O)
O is usually defined as a dummy variable for
state (100 or 50%) ownership. Sometimes
quadratic in state shareholding.
Private ownership can be subdivided into
insider and outsider; insider into workers
and managers.
State Shareholding and Corporate Value
2.7
2.6
Q
2.5
2.4
2.3
2.2
2.1
2
0
10
20
30
40
50
State Shareholding
60
70
80
Findings from the Literature on
Effects of Privatization
1.
Developed Economies
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–
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Private firms more efficient and profitable than state
owned firms (Megginson and Netter, 2001)
Privatization usually “works” e.g. privatized firms
more efficient, more profitable, stronger financially
and usually investing more
Impact of privatization ambiguous
Governments usually under price shares in IPO’s
Governments often retain “golden shares”, with not
obvious effects on productivity
Large privatization programme often helps to
stimulate local financial sector, especially stock
market
Findings from the Literature on
Effects of Privatization
2.
Developing Economies
Results more mixed.
– Strong positive effects noted in Megginson and
Netter survey. See also e.g La Porta et. al. on
Mexico
– But impact depends on institutional environment,
and privatization does not work where this is weak.
(Porter and Kirkpatrick, 2003)
– Plane, 1997: implementation of substantial
privatization programme contributes to GDP growth.
Effects strongest for privatization of industry or
infrastructure
– Kikeric and Kolo, 2005: privatization more
successful in competitive sectors
Findings from the Literature on
Effects of Privatization
3.
Transition Economies
Djankov and Murrell, 2002.
– Impact often positive in early years in Central
Europe
– Impact zero or even negative in former Soviet Union
– Possible explanations:
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Too early for conclusions (many papers on which metaanalysis was undertaken were written in mid 90’s, using
survey samples
Central Europe privatized to “better owners” – outsiders,
foreigners, more concentrated (“strategic”) owners.
Central Europe has better “institutions” than former Soviet
Union
Conclusions
Pendulum has swung decisively away from state
to private ownership in developed, developing
and especially transition economies.
 Strong evidence privatization improves company
performance in developed economies. Results
for latter two groups depends on “institutional
quality”
 Points attention to relationship between
company performance and institutional
environment
