Government Inefficiency, Inherent

A government’s view of the economy can often be summed up in a few short phrases If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it. The quote, attributed to Ronald Reagan, the 40th president of US, came to mind when thinking about what makes an economy soar or stagnate, and about the role of the state in running commercially oriented companies. Most of the time, governments are lousy entrepreneurs. History has shown that private ownership is a crucial source of efficiency and incentive to innovate, and that state owned enterprises are rarely, if ever, leaders in their field. In addition, companies owned by the state often capture a disproportionate share of credit, squeezing out private sector borrowing. Many survive by charging rent seeking tariffs when they hold monopoly power; or by letting the assets they operate run down when their lack of productivity and controlled tariffs does not allow them to invest. Thus, ultimately, offering poor services to their captive consumers for years until they have to go back to the state to beg for resources for capital investment; or by absorbing large amounts of public funds that could be better spent on the type of infrastructure that, for the time being, does not attract private capital or on basic social services, such as education or health.  Still, it is often proving very hard to “let go” through privatisation of the state enterprises, or by forcing state enterprises to compete on a level playing field with private firms. This requires the elimination of barriers to enter a market, and to ease the multiple bureaucratic regulatory impediments that offer protection to the state firm against private competitors, although such policies are often cloaked in the argument of consumer protection, or in the interest of society at large. For example, the revolution in telecommunications brought to light huge benefits of private ownership of phone companies from the perspective of creation and adoption of new technologies. In industries where innovation is crucial, the case for government provision is extremely farfetched. And yet, despite universal consensus that governments do not perform as well as the private sector, state owned companies still account for a significant share of economies. There may be several reasons why it often proves hard to “let go” of public enterprises. One may be economic “jingoism” that in some societies is still very much ingrained in the psyche of many that look to state enterprises to proudly “carry the flag,” whatever the real cost to consumers or the economy. For decades, a good example was the support and emotional attachment to national airline companies, in spite of the fact that they absorbed very significant subsidies, ultimately paid for by many taxpayers that would never fly in them. It is questionable whether the consumers of air travel are less served by private companies offering convenient services at more reduced prices, although they do not advertise the national flag on the fuselage of their planes. Society, however, should be able to derive as much national pride in successful private enterprises. A second reason may lie in the resistance of powerful interest groups, particularly when, contrary to objective evidence, they seem to be able to convince society that they fight their corporatist battles for the benefit of all. The first such constituency are often the employees of the state enterprise and their unions. Indeed, privatisation usually reduces labour benefits and increases anxiety about possible lay-offs since state enterprises are very often grossly overstaffed. Strangely enough, in many countries the workers of public companies are among the most shielded ones, and they often manage to elicit sympathy for the maintenance of their privileged status from far more disenfranchised groups in society. Another group which has vested interests in the status quo is the network of suppliers of goods and services to public companies. Worldwide research has found that sometimes political parties also use public companies to pursue their own agenda; be it as a source of patronage, influence or funding. However, the crucial point here is not to protect the interest of a few tens of thousands, but that of millions. Better and cheaper service is in the interest of the whole society. It leads to the creation of greater wealth and saves scarce resources that can be invested, by individuals and the state, in other priorities. Acting in the name of the public interest, it is the responsibility of governments to change the political economy, so as to secure a broad enough constituency for reform. This is an effort well worth rallying the support of all. BY LOUP BREFORT Loup Brefort is country manager for the World Bank Group (WBG) in Serbia. He has also served as public sector management specialist in Africa.