State-Owned Enterprises and Economic Development in Asia
1.3 Evolving Role of SOEs
The prevailing policy orthodoxies reinforced the important role of SOEs in at least two respects. First, many advanced economies had already very large SOE sectors, especially in continental Europe, where the state generally owned not only the major utilities (power, telecommunication, transport, and so on), but also banks, airlines, and industrial conglomerates. This model bolstered the ideological predisposition of newly independent countries in Asia and the Pacific. Second, this prevailing policy also embraced import substitution—as theorized by the so-called “Prebisch doctrine”[iii] and the related “Prebisch Singer declining terms of trade” hypothesis.
According to this view, an activist industrial policy is required to guide economic actors toward the desired direction. This model employed tariffs and subsidies among others, as well as direct state ownership, especially in cases where the anticipated investments were not forthcoming, even after generous tariff support. In certain circumstances especially in developing countries, state ownership can be the vehicle through which the state plays an active role in economic development. In several emerging markets for instance, governments have helped build much-needed physical infrastructure and bring about stability in times of crisis and across supply chains, thereby promoting social welfare. Development banks, sovereign wealth funds (SWFs), public holding companies, and many other vehicles of government capital have helped achieve developmental objectives. And when confronted with insufficient private capital base, governments have also used SOEs to promote economic development as well as industrial policy.
In addition to the declining trend in state ownership and presence in many emerging economies, there is also a tendency for governments to partially divest. Although this reduces government holdings to the degree that these companies no longer fall under the strict definition of SOEs, it does not necessarily imply a corresponding decrease in the ability of such governments to exert influence over these companies.
Moreover, episodes of financial crises have also led some governments to further expand the role of SOEs. For example, the governments of Iceland, the Netherlands, the United Kingdom, and the United States bailed out financial institutions through capital injections and partial or full nationalization to mitigate the adverse impacts of a crisis. It is, however, important to note that these interventions were mostly temporary in nature rather than permanent takeovers (World Bank Group 2014). Nevertheless, the ensuing episodes of financial crises underscored the importance of effectively managing these institutions and maintaining macroeconomic stability.
Following the global financial crisis, state development banks and development finance institutions in several countries also played a countercyclical role, providing credit to private firms that were unable to access funding through private banks and the capital markets. Such was the case in Malawi, Mozambique, and Serbia, wherein new development banks were established.
Some governments are explicitly pursuing policies to promote SOE internationalization. For example, the PRC’s “Made in China 2025” strategy is designed to help improve the export capability of SOEs and make them more competitive globally. The PRC government has introduced measures such as easing red tape, introducing market practices, and consolidating selected SOEs to create larger and more efficient national champions. These companies are also empowered to make major decisions such as on cross border mergers and overseas acquisitions (PwC 2015).
In 2019, 11 SOEs made it to the top 50 of the Fortune Global 500; of these 11 companies, 8 are from the PRC.[iv] Meanwhile, SOEs have also been listed among the world’s biggest capital markets. To raise capital, impose capital market discipline on these enterprises, and dilute state ownership, some governments have listed large and important financial and nonfinancial SOEs in their respective stock exchanges. As a consequence, the initial public offering of these SOEs increased their contribution to capital market development—in 2014, for example, SOEs accounted for 20% of total market capitalization in India, about 30% in Malaysia and Indonesia; and 45% in the Middle East and North Africa (World Bank Group 2014).