State-Owned Enterprises and Economic Development in Asia
(Source : Report published by ADB July 2020 , downloaded www.adb.org)
1.1 Introduction
State-owned enterprises (SOEs) make up a significant part of the commercial and policy landscapes of developing economies in Asia. Despite the trend toward privatization and deregulation across the globe over the last 2 decades, SOEs have retained a strong presence in the global economy and play an important role in implementing public policy in many advanced and developing economies. By and large, these institutions have played a typically much larger role in the economic development of developing countries than developed countries.
In many countries, SOEs continue to provide vital infrastructure and public services, such as energy, transportation, water management, and exploration of natural resources. Governments also use them to pursue various economic, social, and political objectives particularly in regions where development has lagged; deliver services to the general population including the urban or rural poor; and address issues of national priority or heightened security.
Although SOEs remain active, the overall trend of state ownership is spiraling downward. State capitalism[i] has pretty much varied in degree and intensity across countries. On average, SOEs account for a higher share of gross domestic product (GDP) in developing countries than in developed countries. For example, in Central Asian countries, SOEs’ share of GDP ranges from 10% to 40% compared with 5% in Organisation for Economic Co-operation and Development (OECD) economies (World Bank Group 2014). In Asia, SOEs account for about 30% of GDP in the People’s Republic of China (PRC), 38% in Viet Nam, and 25% in Thailand. Globally, SOEs account for about 20% of investment and 5% of employment (Kim and Ali 2017).
However, the prevalence of state ownership has also raised concerns about the performance of these enterprises which in certain circumstances may impede competitiveness and growth. For example, SOEs often have access to government support and enjoy soft budget constraint which, when combined with lack of competition and multiple competing objectives, result in low productivity and efficiency compared with private enterprises.
The impact of how well or how poorly these companies perform will inevitably have spillover effects on macroeconomic stability and economy-wide productivity. In many countries, underperforming SOEs have become a fiscal burden and a source of fiscal risk. Loss-making and ineffective SOEs weaken the financial system; and continued lending to unprofitable companies can create contingent liabilities and potentially destabilize the macro economy.
Many countries have taken significant steps to address corporate governance challenges and therefore improve SOE operations. Evidence across countries has shown that better governance and more efficient management lead to lower costs of capital and higher valuation, thus making investments more attractive. Consequently, the efficiency of SOEs and the economy as a whole improves, transactions become more competitive and transparent, and resources are allocated efficiently when the fiscal burden on SOEs is reduced and fiscal risk is managed.