0.11 States and markets - soes  (Page 6/9)

For China , the average return on equity in 2010 for companies wholly or partly owned by the state was only 4% (in spite of the fact that these firms receive cheap credit from Chinese SOE ^s in banking).

The profit performance of Chinese SOE ^s has been abysmal. James McGregor, p Properly interpreted, the real return on equity invested in Chinese SOE ^s was a negative 6.3% from 2001-09 (considering reported SOE ^s profits minus subsidies to SOE ^s ).

Another estimate for 2011 revealed that while the average SOE reported return on equity was 8.2%, the real return was a minus 1.5% The Economist , June 25, 2011. (factoring in the subsidized borrowing of SOE ^s from state SOE ^s in banking and their access to land at below market prices).

What is the meaning of a negative real return on equity? It means that, in effect many SOE ^s in China are destroying capital.

India has 217 SOE ^s owned by central government. And then there are the 850 SOE ^s owned by regional governments. Central government enterprises, 59 made losses (21% of firms. Some very large SOE ^s made huge loss in India). The combined losses of two very large SOE ^s – Air India and MTNL (Telecom) - was $2 billion in 2010. Even so, the government of India claims that the rate of return on equity invested in their SOE ^s is 14-15%.

Employment issues, efficiency issues

Employment

This conclusion has been borne out in numerous studies over the last thirty years, including some of my own. Recent studies reveal similar patterns. To illustrate, a very large World Bank study in 2009, 926 SOE ^s and 301 private sector firms around the world in electricity distribution and water supply and sanitation (1200 firms) clearly showed significant overstaffing in the SOE ^s relative to the private firms. IBRD - Cite Regarding employment in water and electric enterprises, the study revealed clearly that SOE ^s used 23% more employees that comparable private firms.

This marked tendency for many SOE ^s to use more labor than needed is particularly problematic given this fact: Investment patterns in SOE ^s all over the world tend to be more capital intensive relative to private firms in the same industry. Why? One reason is that SOE ^S in Banking often provide the other SOE ^S with cheap credit, making capital cheap, thereby biasing choice of technique or production toward capital intensive methods of production.

This pattern of marked capital intensity in SOE ^s has been observed in South Korea, Ghana, Canada, India, Bolivia, Indonesia, Columbia and Brazil, among others. In China, one consequence of the bias toward capital intensity has been a sharp decline in labor’s share in national income “The Global Decline of the Labor Share,” Loukas Karabarbounis&Brent Neiman, NBER Working Paper No. 19136, June 2013. over the years 1992-2009. Labor’s share in N.I. fell from 45% to 37% - the lowest share for labor in any county (c.f. U.S. and Germany – 60%).