When does large-scale public ownership work?

by on June 1, 2010 at 4:47 am in Economics, Political Science | Permalink

Matt and Ezra both comment on my post that most of the largest Chinese firms are state-owned or controlled by state-owned banks.  (Both blogs, by the way, have interesting running coverage of the same China trip.)  How can this be the case in the world's greatest economic growth miracle?  How come it works (sort of, there were lots of privatizations, starting in the 1980s) in France too?

Yet state-owned industries do not have a fantastic record overall; ask England.

In part this is a puzzle but in part France and China have one important feature in common: it's high status to be a ruler.  Very smart Frenchmen often grow up wanting to work for the government.  Hardly anyone in France thinks that is weird and so the French bureaucracy has some of the best talent in the country.

There is also a long-standing tradition of the prestige of the Chinese mandarin.  Furthermore, and perhaps more importantly, the Chinese Communist Party is the ultimate source of control and prestige for the entire society and it too attracts many talented people. 

It's not enough to attract talented people, however.  Unlike in the former communist Soviet Union, the Chinese government is (somewhat) dedicated to improving the nation.  At least at a ten percent rate of growth, this political equilibrium works.  And the state-controlled enterprises have to compete in a commercial environment, again unlike many former socialist experiments with state ownership.  Most of all, China is grabbing the low-hanging fruit by moving smart, hard-working individuals from rural jobs to highly productive jobs and when you are grabbing the low-hanging fruit many things are possible.  A lot of systems work OK until you get near the "you ought to shut down" constraint.

It's also possible that the successes of state ownership "decay" with time, as was arguably the case with the French model before the privatizations and has been the case with NASA in the United States.

The United States is far from having the right pieces to make public ownership work on a widespread basis and of all the major capitalist economies we have experimented with it about the least.  Federalism, a regionalist Congress, separation of powers, and a high proportion of political appointees all militate against successful government ownership.  Plus we are a large economy with relatively little external discipline in the form of international trade.

We could "respect" our bureaucrats much more than we do, yet they still would not have the real status they enjoy in France.  It's simply not built into our culture, which worships wealthy businessmen and also the so-called "common man."

Imagine if everyone wrote a tweet: "Hey guys, over at the Department of Education.  You're awesome. Luv ya!"  It wouldn't much matter because still not many people deeply and sincerely wish to emulate them.

I also prefer to live in a society where the public sector does not have so much prestige.  Very often governmental prestige stifles innovation and implies a series of more general insider, elitist, and sometimes authoritarian attitudes.  It's also worth a quick look at the histories of what France and China had to do to build up so much governmental prestige; not pretty.

We should recognize that the public ownership model has worked for China, but I don't want to see it widely copied.  I don't want to see it in Venezuela, Argentina, Turkey, Pakistan, Sri Lanka, Cuba, India, the Philippines, Nigeria, Central African Republic, or anywhere in Eastern Europe, to name a few other candidate countries.  Do you?

Enda June 1, 2010 at 5:25 am

A very interesting post. Kids in France grow up wanting to work for the government, in part due to the republican ideals held by that country — self-fulfilling socialism?

Justin Kraus June 1, 2010 at 5:42 am

Do I? Well if it works, i.e. produces economic growth in places that heretofore have not had it (Africa) then why not? Why should my preferences (which I share with you) stand in the way of an economic system that might lift millions out of poverty?

trevaskis June 1, 2010 at 6:04 am

Link text says England, but links to nationalization in India.

Jonathan June 1, 2010 at 6:21 am

This seems surprisingly thin logic. Correlation is not necessarily causation.China has big government run companies at a time China is growing a great deal thus big government can be good for the economy if you just get it right.
How about the thesis that China has grown as a consequence of moving away from a harder form of socialism and the wealth that that has generated in terms of more freely arrived at associations outweighs the drag of enormous state run bureaucracies. I find it hard to understand why people go to such lengths to try and look for the exceptions where socialism can be argued to work when anyone who has worked in Asia Pacific can see the spectacular fruits of removing nearly all state interference altogether.

ryan June 1, 2010 at 6:26 am

a) This “worship for the common man”- How is that different from the Chinese attitude towards the laobaixing? The US and China are almost completely alike in their worship of wealthy businessman and the common man- your analysis seems to miss the fact that the wealthy businessman and the CCP cadre are usually one and the same.

b) The you ought to shut down constraint problem still exists- it has just been re-centralised to SASAC rather than the bureaucrats.

c) Your point about not wanting to see this system reproduced elsewhere is highly valid. One thing though- what is often missing in these discussions is an analysis of how using top-down political incentives for economic growth and backing this up with unfunded mandates means that the state really struggles to provide decent public goods (look at the Chinese education, health system for example). Not sure how having “more respected” bureaucrats is going to fix that…

Michael Heller June 1, 2010 at 6:30 am

Tyler, you’ve only been in Europe one week and look what happens. This cultural syncretism is just too much too quick. Or you are teasing us. Have you gone native?

Bill Benzon June 1, 2010 at 7:25 am

A most interesting post, Tyler, most interesting.

The thing is, I’m not so squicked about government as you and not so fond of private ownership. But, while I figure I’m as smart as you, I don’t know THAT literature, whatever it is, nearly as well as you do. So I’m not in a position to debate it with you, nor do I feel particularly comfortable just turning my back and sticking with my own (ideologically inflected) views. What I’d like to see is a debate between you and someone who espouses my ideology (more or less), but who is also both as smart as you and as relevantly knowledgeable.

BTW, on such issues I figure that ideology ALWAYS has the final say. There is no such thing as a naturally ordained uniquely best way to run a world. At some point we’ve just got to make arbitrary choices about how things go, and that applies at every level of organization, not just the individual citizen.

Bill June 1, 2010 at 8:14 am

The issue may not be private versus public ownership, so much as state subsidized business versus privately owned, unsbusidized business.

Is there a difference between a private enterprise that gets state subidized loans or exclusive access to bidding on state contracts, or exclusive access to the country’s telecommunications infrastructure so that it owns or runs the television or telephone systems, or a even a private enterprise that gets a state tax subsidy to develop or open a business in competition with another state.

Is private versus public ownership the only difference when there are financial subsidies. Maybe subsidies is the only issue.

That is at least the way the EU treats partially or fully owned eastern european countries when they compete with private companies–and it is also the way we treat competition issues (such as dumping duties, etc.) when there are trade disputes.

So, perhaps what we need to do is focus on subsidy–and if we focus on subsidy, I have no doubt private ownership will prevail, so long as it is also not subsidized and thereby becomes flabby and somnolent.

not_scottbot June 1, 2010 at 8:21 am

‘I also prefer to live in a society where the public sector does not have so much prestige.’

Speaks a man employed by a public university, with tenure. Why care about prestige when you can get all the benefits of being in the public sector, and still have that frisson of daring to walk the edge by saying you prefer to not live where the public sector is not prestigious.

E. Barandiaran June 1, 2010 at 8:39 am

Tyler, since your post has been motivated by what is going on in China, before you continue discussing SOEs in China and everywhere, I hope you find time to read a paper that I wrote in 1997. To download it, please enter into this web page
http://www.cb.cityu.edu.hk/EF/research/research/workingpapers?year=1997
and look for WP 110.
I have not done any additional work on China since 1998 and I’m not familiar with research work done in the past 12 years. If you have seen any recent publication on how the reform of China’s state enterprises and banks has progressed, please let me know about it.

john personna June 1, 2010 at 9:05 am

State ownership works when workers are powerless?

bbartlog June 1, 2010 at 9:11 am

I’ve seen a claim (can’t recall where) that the advantage of capitalism was not so much in the ordering and/or efficiency of successful enterprises, but simply in the fact that it had a mechanism for allowing the failure of unprofitable ones (money runs out, game over). Given that pseudocapitalist China has yet to face a real contraction I don’t think they’ve been seriously tested in this regard. Of course, it could be argued that we have recently discarded this advantage of capitalism, what with our series of bailouts.

Culture June 1, 2010 at 9:43 am

“We could “respect” our bureaucrats much more than we do, yet they still would not have the real status they enjoy in France.  It’s simply not built into our culture…”

Oh man, when a libertarian economist resort to “culture” to make an argument, I feel like reaching for my pills! What has the world come to?

libert June 1, 2010 at 10:05 am

Two thoughts.

1) The Soviet Union also “[grabbed] the low-hanging fruit by moving smart, hard-working individuals from rural jobs to highly productive jobs,” and that is why it had such enormous economic growth in the first half of the 20th century. That economy failed in the subsequent decades because the low-hanging fruit had been picked and they got stuck in a Solowian steady-state. Gosplan and its successors failed to generate the innovation that might have led them out of that steady-state. Could China be in for the same fate? Maybe, which leads me to my second thought:

2) In a globalized economy, China really does have to do business in a competitive market, whether it wants to or not. That gives the government a much stronger incentive to eliminate inefficiencies and innovate. The Soviet Union didn’t really have ties to outside economies like China does. Maybe this will help China avoid the Soviet Union’s fate, but I’m not so sure.

Yancey Ward June 1, 2010 at 10:25 am

One must always remember that “large” is not synonymous with “successful” when it comes to businesses. With clear, unambiguous accounting, one might determine whether the latter applies to the state-owned Chinese businesses, but do we have that? I don’t think so. The USPS is one of the largest employers in the US. General Motors has been one of the five largest US firms for decades on a revenue basis. Are they successful businesses?

John Dewey June 1, 2010 at 11:00 am

More comments about the “successful” government-owned companies in France:

The 2 billion Euros, government-collected “license fees† provided to France Television cannot be described as anything other than government-imposed subsidy. Yet even that has proven to be not enough subsidy to implement the plans of Sarkozy. Is government subsidization at the expense of taxpayers what we mean when we answer the questions “When does large-scale public ownership work’?

Électricité de France may be the largest electric utility in the world, but that’s only because it held a monopoly on the distribution of electricity within France from 1946 through 1999. It remains to be seen whether EDF will continue to be successful now that the European Union is forcing it to become a public company.

maharbbal June 1, 2010 at 11:10 am

Hi

Dan Bogart, in an article devoted to railways from 1880 to 1914, put forward this argument: state-ownership seem to work well when the company was created from scratch by the state but not that well when it was nationalized after having been created by private actors. Most of it applies to France (which had to pull out of nationalized companies (Renault) but remain quite efficient when it comes to companies created by the state (SNCF).

M

Max June 1, 2010 at 11:23 am

Well, wrong and right at the same time. It is true that if you are bright enough to attend the Grand Ecole, than you will be a good government worker and have a shot at top positions. However, there is no big respect for government workers in the common populace, actually, the higher you are in this hierachy, the more hated you become.

The French tolerate this as long as the politicians preserve the status quo. If anyone of those “bright” government workers would start to change things, then they take to the streets and protest against it until it is forgotten. It is also not true that French government-run companies are doing good, especially not French banks (who are the biggest debt-holder to Greece). There are clusters of excellence (EDF – monopolist 1, SNCF – public transportation) that pretty much survive because there is no competition and the government gives a lot of money. The other businesses, especially the small ones, are successful because of French culture, meaning to shop for local products. The Third Cluster of “excellence would be agriculture which is only working because the rest of Europe pays for it.

Well, you can conclude that the french have excellent politicians who know how to smooch euros from the EU, but I doubt this should be called good governance or be supported.

China of course is totally different, because they are successful by being weak statists in economic decisions but strong statists on social issues. They also are bad on IP and patent rights, which is actually a good thing for the market (though not for western enterprises).

josh June 1, 2010 at 11:32 am

You can get very good people, but there is practically no management. No department is ever shut down, nobody gets laid off, its impossible to fire people. Eventually you get a giant bureaucratic mess incapable of solving any problem. Worse, problem solvers don’t grow, while unsuccessful departments always need more resources. Worse, they can even create problems in order to solve them, or (with the help of their eternal friends, the professors) make up problems that nobody ever thought were problems before.

Floccina June 1, 2010 at 12:35 pm

Isn’t it the delta that matters in China, I consider the communist party keep China poor for so long one of the economic wonders of the world.

Domestically I often wonder if committed greenies would be willing to take jobs in sanitation (for which many are greatly overqualified) and work very hard and do such a good job as to really clean things up. Sanitation departments should recruit committed greens

Biagio Mazzi June 1, 2010 at 2:06 pm

I think what you say is very true, after all respect from society and prestige are very important forms of reward and motivation. I do not agree however that state intervention necessarily stifles innovation. France predilection for public works helped create a tradition of mathematically minded engineers which is unequalled in the world. I used to be a fluid dynamicist and I remember at a conference someone from SNCF, the french rail system, presenting a paper on turbulence. Can anyone imagine British Rail or Ferrovie di Stato sponsoring high level research? Of course it is a different type of innovation from Google but the world needs both.

John Dewey June 1, 2010 at 3:29 pm

fh: “A sense of entitlement is something I associate with the US elites”

That is an odd observation. I really have no idea what you mean by “US elites”. Certainly there have been dynasties in America in the past, such as the Fords, the Hunts, and the Rockefellers. But most such dynasties today exist in the political realm, not in the business sector. I doubt that American corporate giants such as Sam Walton, Herb Kelleher, Steven Jobs, Michael Dell, Larry Ellison, and George Soros had any sense of entitlement, and family connections played almost no role in their successes. My guess is that the majority of today’s corporate leaders came from modest backgrounds and simply worked their way to the top.

John Dewey June 1, 2010 at 6:55 pm

“Looks to me like Renault was dead in the water until the French government nationalized the company.”

Renault was nationalized in 1945. Wasn’t industry in Europe generally just about dead in the water following a decade-long global depression and a massively destructive world war? Not sure I understand your point.

Tom Waye June 1, 2010 at 11:18 pm

check out yasheng huang’s capitalism with chinese characteristics for a more critical view on the soes and the progress of the reforms.

AlanDownunder June 2, 2010 at 4:38 am

I’m mystified by the generalised respect accorded to amassment of wealth by so broad a streak of US society and lesser proportions of other countries. Attributing all wealth amassment to myopic and sociopathic character flaws is also a suspect generalisation, but one with more of an observable basis in reality.

As a meritocracy, the US and its multinational extensions are in serious decline. Wall Street’s GFC and BP’s current atrocity in the gulf are sufficient testament to that. Excessive respect for capital and insufficient respect for government guarantees regulatory capture. The innovative free enterprise baby is drowning in a lot of very dirty and smelly bath water. Its only conceivable champion is a government that will un-rig the travesties that markets have become in the hands of their self-professed champions.

John Dewey June 2, 2010 at 9:29 am

Alexdownunder: “As a meritocracy, the US and its multinational extensions are in serious decline.”

Right. The U.S. with 5% of the world’s population still produces over 20% of the world’s GDP. The U.S. per capita GDP is about 20% higher than that of Australia, and more than 33% higher than the per capita GDP of France, Germany, UK, or Japan. The U.S. is still by far the leading manufacturing nation in the world. Prior to the current global economic slowdown, U.S. exports were at an all time high in 2005, then again in 2006, once agaoin in 2007, and also in 2008. 16 of the top 50 largest corporations in the world are U.S. corporations. None of those facts indicate anything at all about the U.S. being “in serious decline”.

What evidence do you offer?

Alexdownunder: “BP’s current atrocity in the gulf”

Not sure what a drilling accident has to do with the U.S. being in decline. Of course, BP is a British corporation, so its hardly an example of tyhe serious decline of America’s “multinational extensions”.

John Dewey June 2, 2010 at 12:15 pm

“the process of building up the prestige of american business and enterprise was not so pretty either”

Very few of today’s large U.S. corporations were “given” land by the U.S. government. By the time GM, AT&T, GE, IBM, 3M, Apple, FedEx, and Google came into existence, the land had already been given to someone else. One could speculate that Apple would not exist today had Union Pacific not been given huge amounts of land, but who cares?

http://www.nicecoachhandbags.com August 5, 2010 at 11:55 pm

The author sounds interesting. The book rather less so? I wonder why the English are buying it. Do you think sales of this book might have something to do with England’s worry about hyperinflation and riots? Anyway this will be a fascinating time to live in Germany for a while. I heard an editor of a big German newspaper speaking about the Greeks and he sounded like an editor of the Daily Mail or Sun during the Falklands war…

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