0.11 States and markets - soes  (Page 7/9)

Thus, many SOE ^s in emerging nations have the worst of both worlds: an excessive labor force (padded payrolls) and marked capital-intensity of their investments. These factors often combine to yield high operating losses.

Both of these factors: mean higher costs of production in SOE ^s , relative to private firms without excess labor and less wastage of capital.

This gives rise to of X-inefficiency , characteristics of many SOE ^s around the world. As we noted in Chapter___ X-Inefficiency means failure to minimize cost. It is not the same thing as allocate inefficiency. “Allocative and X-efficiency in state-owned mining enterprises: Comparisons between Bolivia and Indonesia,” Malcolm Gillis, Journal of Comparative Economics , 1982, Vol. 6(1): 1-23.

Consider reasons why might SOE ^s tend to have a capital-intensive bias in their selection of techniques of production:

1. Many governments provide Capital to SOE ^S at near zero rates. It is almost always the case that equity capital provided by the government-as-owner carries an implicit price of zero. (CITE ONTARIO HYDRO). COMIBOL in Bolivia, GARUDA in Indonesia and dozens of others. But in addition, the government-as-owner very often requires its government owned firms (SOEs in banking) with subsidized loan finance. This is clearly so for China, Brazil, Indonesia and others. Therefore the cost of capital to SOE ^s is often zero or near zero, and certainly much cheaper than the market rate of interest. With low capital costs, the SOE will tend to select capital rather than labor intensive techniques or production.
2. Managers in SOE ^s may prefer capital-intensity, because machines do not go on strike Labor unions are fairly weak in many emerging nations, and fairly strong in others. The latter group would include South Africa, India and most all Latin America nations. and are otherwise easier to supervise than workers. If the SOE manager does not ultimately face a market test he may therefore indulge in capital-intensive choice of technique of production. If a private firm were to indulge in capital-intensive bias, it would run a greater risk of bankruptcy (unless it has a monopoly or oligopoly position in the market). But the government-as-owner can keep the SOE ^s afloat indefinitely, even if the government itself has to continuously run budget deficits of its own to support SOE ^s . And indeed, SOE ^s (other than SOE ^s in oil or minerals mining, or monopoly SOEs) do tend to run losses over several years. And even some SOE ^s in oil and mining have incurred large losses over considerably periods of time (Pertamina in Indonesia 1970’s, Comibol in Bolivia in 70s – 80s). In any case, the SOE ^s sectors as a whole in emerging nations have generally lost money . That is, when one totals up the profits and losses of all the SOE ^s in a country the result is typically a negative number (less likely if there are big state-owned oil and gas firms).

A consistent pattern of losses is somewhat surprising in many where the government owner has given SOE ^s monopoly privileges.

Ordinarily, this should give rise to SOE monopoly rents, higher than the normal return to K. But even with monopoly privileges, the net return to capital can be negative because of X-inefficiency in the SOE ^s .