State-Owned Enterprises and Economic Development in Asia
Understanding governance challenges and addressing them is essential in boosting economy-wide productivity and growth. An SOE performs better if it is able to communicate its purpose and objectives and build its capacity to steer and manage resources efficiently. To enhance the delivery of public services and allocation of resources, the government must professionally manage SOEs on commercial terms and steer them away from markets where the private sector is better able to provide services more effectively.
This study explores the abovementioned issues in detail and addresses the policy questions on SOE reforms. It highlights the corporate governance framework of SOEs in selected countries, assesses SOE performance, and examines the implications for each country’s productivity and growth over the long term. The study posits that SOEs will continue to make a significant contribution to economic development in developing countries. But their performance is crucial to economy-wide productivity and innovation driven growth especially as Asia transitions from middle-income to high-income status.
1.2 Definition and Origin of SOEs
There is no universally agreed definition of an SOE.[ii] However, a working definition is that an SOE is any commercial entity in which the government has significant control through direct and indirect ownership. An enterprise that is 100% government-owned is obviously categorized as an SOE. But other enterprises may also qualify as SOEs, such as (1) those in which the government has a majority equity stake; and (2) those in which the government owns a minority stake, but the government retains a controlling vote in major financial and management decisions—as is commonly the case. A variety of other organization models within the SOE sector also includes corporate and noncorporate structures.
SOEs have a diverse and expansive origin. Initially, SOEs were established to address market failure and capital shortfalls, promote economic development, provide public services, and/or ensure government control over the overall direction of the economy by infusing capital and technology into strategic areas or in areas lacking private sector capacity or interest (Chang 2007).
It is important to stress that SOEs basically reflect, and are deeply enmeshed in, the institutions, political history and ideology, commercial landscape, and technological trajectory of a country. These parameters dictate the political economy of SOE reforms. For example, in the centrally planned economy, the state owns not only the dominant or leading enterprises but also those in other sectors, including agriculture. In transition economies where the government plays a relatively dominant role, such as in the PRC, the SOE sector’s symbiotic relationship with the government explains why the sector has remained unusually large. In addition, the perceived failure of privatization has caused many Asian economies to retain large state-owned sectors.
In countries where state-owned banks dominate the formal finance sector, as they typically do in many transition economies, the state directs much of private sector investment, and thus has a considerably wider reach than official statistics suggest. In many countries, subnational governments also own SOEs, which may be only partially recorded in national statistics.
Outside the transition economies, many countries have also favored a large SOE sector at the onset of their independence, for various reasons: (i) distrust of markets and capitalism (in India, for example); (ii) nationalization of assets owned by companies under the former colonial power (in Indonesia); or (iii) concerns that indigenous capitalists are unable to undertake large scale investments (in Singapore). In some cases, regional (subnational) development objectives also provided the impetus for SOE projects (in the PRC and Indonesia). In others, state ownership is the result of the historical processes and inherited institutional conditions of a country. For example, it has been argued that poorly developed financial markets severely constrain investment. Often governments establish SOEs to build basic physical infrastructure; provide essential services such as finance, water, and electricity; generate revenue; control natural resources; address market failures; and curtail oligopolistic behavior. Public enterprises also purposefully promote social objectives— generating employment, enhancing regional development, and benefiting economically and socially disadvantaged groups of society.