Reappraising State-Owned Enterprise

A Comparison of the UK and Italy

Franco Amatori, Robert Millward, Pier Angelo Toninelli

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136738296
• Edition: 1
• Topic: Business
• Subtopic: Business History
• Index: Business

After a quarter century of almost general condemnation and rebuttal of the entire nationalization experience, it appears that there are second thoughts about governmental direct intervention in the economy. Reappraising State-Owned Enterprise deals with a topic often undervalued in the past decade but which now, with the crisis of 2008-2009, calls for greater attention: the direct intervention of the State as Entrepreneur.

The collection of essays in this volume – prepared by some of the leading authorities in the field – offers a contribution to this debate by providing a balanced assessment of two of the most relevant experiences of mixed economies, the United Kingdom and Italy. In this respect, a comparison between these two countries is very much appropriate since in both nations the State played an important role as "Entrepreneur" starting in the early 20th century. In Great Britain and Italy, the heyday of the "State as Entrepreneur" was in the years right after WWII when it was used as a tool for promoting a modern society in which citizens acquired a stronger sense of belonging to their nations.

The UK and Italy saw the State take on a too-pervasive role in the 70s; the two nations responded in different ways. In the 1980s Great Britain embarked on a harsh process of privatizations while Italians struggled on until finally submitting to privatizations in their nation in the following decade. The deep crisis of the final years of the 21st century forced both nations to reconsider State interventions as an appropriate tool in order to protect the wellbeing of the national economy.

Part I

Policies, Outcomes, and Funding

1

Introduction

Franco Amatori, Robert Millward, and Pier Angelo Toninelli

AN ECONOMIC ACTOR DISCARDED TOO EARLY INTO THE WASTEBIN OF HISTORY

A reappraisal of state-owned enterprises (SOEs) is warranted in the light of the recent renewed interest in state intervention, the limited current literature, and the significant role played by SOEs in the 20th century. After a quarter century of almost general condemnation and rebuttal of the entire nationalization experience, second thoughts about governmental direct intervention in the economy are surfacing. Such a change was induced by the increasingly critical reflection about the globalization paradigm, which has strongly influenced Western culture and society since the 1980s. This in turn grew out of different converging factors: the vanishing of what had previously appeared to be the only socioeconomic model alternative to the capitalistic one, that is, the planned economy; the political overthrow of the states following that model, after the collapse of the Berlin wall; and the new industrial revolution stimulated by the new information and communication technologies. The drive to privatization was actually one of the pillars of the economic and ideological approach dominating the final decades of the last century, an approach soon identified with the prescriptions of the International Monetary Fund and the World Trade Organization or, in other words, with the “Washington Consensus.”

Today, the consensus is no longer so clear, a consequence of disillusionment with some of the outcomes of privatization of infrastructure and related industrial sectors and, mostly, of the recent frequent market failures followed by several state rescue acts during the 2008–2010 recession. These include, for instance, the nationalization of the Northern Rock bank in the United Kingdom as well as state support to the Royal Bank of Scotland. Moreover, a recent report of the Commission on Growth and Development (2008) shows that after WWII, the countries which attained sustained economic growth for more than 25 years were precisely the ones that, among the recommendations suggested by the “Washington Consensus,” neglected privatization.

Therefore, although the free-market economy no longer exists as a universal panacea, the Western model seems once more to face new ideological, institutional, and cultural challenges. Hence questions come up which increasingly challenge the direction so far followed. Does public enterprise still have a future? Is any specific sector still in need of the visible hand of government? Or, whatever the economic destiny of Western civilization will be, have SOEs been put to rest forever? If so, where will the pendulum of state intervention next swing? This book attempts to provide an unprejudiced assessment of the historical record of state-owned enterprises in two nations: Italy and the United Kingdom. It seems the right time now that some 20 years have elapsed since the sharp decline in the role of SOEs and given also the limited amount of current literature on this topic. The older rich literature on SOEs offered only a scattered collection of comparative case studies that were often narrowly analyzed and that provided only an outline of their basic tendencies. To our knowledge, no specific two-nation comparison is available, offering analysis into detailed, distinguishing aspects: size, performance, and strategies.

It has to be stressed that the two countries examined are very different in history and geography, and, in particular, in their economic evolution: the timing, pace, and pattern of industrialization, the institutional settings, the position on the international market. A few fundamental points should at least be mentioned. From the 17th century, Britain was a well-defined nation; it was the first industrial nation, and it opened the way to the launching of the Western world toward growth and modernization. Only in 1861 was Italy politically unified. It was predominantly agricultural and succeeded in joining the industrialized world only in the 20th century. These differences had an impact, of course, on mentality, values, judicial systems, patterns of innovation, entrepreneurship, and economic policies. The political degeneration of Italy in the interwar period is also relevant even though nationalism, isolation, and power politics were not an Italian peculiarity.

But was the first great insurgence of SOEs in Italy during the interwar period to be entirely ascribed to the specific policy of the fascist regime, or did it have more ancient roots? It should not be forgotten that Italy enjoyed a long tradition of rescue by the state. In 1887, it bailed out a company, Terni (steel), which was, at the time, the major industrial company in the country. In 1911, the same happened to the entire steel sector. A little more than a decade later (1922), the industrial activities linked to the two major banks, Banca Italiana di Sconto and Banco di Roma, were rescued. The procedure was always the same: the national bank printed bank notes in order to accomplish the goal.

As different as the two countries were, a comparison between the ways in which the state enterprises originated and evolved in Italy and the UK can nevertheless offer important insights. In the 20th century, the position (both qualitatively and quantitatively) of SOEs in each country was significant. In the UK, the nationalized industries never accounted for more than 10% of gross domestic product (GDP), but they were located in very capital-intensive sectors, so much so that their annual investment programs accounted for some 20% of the UK total in the 1950s. They provided key intermediate inputs for industry and some basic items of household budgets (e.g., transport, energy, telecoms), and, along with the National Health Service, were leading lights in the public sector of the economy, accounting for one half of total capital formation. In Italy, a government presence in these sectors originated in state activity in railways and telecoms in the late 19th century as well as in oil and electricity in the 20th century. Perhaps even more significant was the emergence from the 1930s of state holding companies like Istituto per la Ricostruzione Industriale (IRI). Such holding companies came to account for 30% or more of the assets of the Italian joint stock companies by the 1980s (see Chapters 2, 3, and 5).

BEFORE AND AFTER THE WAR

The contributions in this book are organized into two parts. Part I (Chapters 1–7) focuses on the general nature, aims, and quantitative dimensions of SOEs. In Part II, Chapters 8 through 13 contain case studies of specific sectors: steel, oil, shipbuilding, and electricity in both countries. It is possible to identify certain phases in the role and characteristics of SOEs which were common to the two countries.

Before World War II, strategic factors played a strong role in both nations with the postal service, telegraph, telephone, and airlines taken into state ownership, as well as railways in Italy, international cables in Britain, and some shared participation in oil companies. Ideology was not, up until the 1940s at least, a prominent rationale for nationalization in Italy and UK, if for no other reason than because at the time there was some political confusion about what nationalization really meant and implied (for instance, as shown by O’Hara in Chapter 4).

When politics came into play, it was in its most specific field, that of protecting national interests. It was strategic policy aimed at controlling activities that were crucial for security or economic independence. In the UK, there was state control over telephone and telegraph services to safeguard communication channels with the peripheral regions of the empire as well as the financial channels of the city; in Italy, instead, politics showed its presence in postal services, railroads, and supply of crude and distribution of oil products. Yet, in both countries, control of oil resources was felt to be a basic need to be secured through a large government share in the Anglo-Iranian Oil Company (AIOC) in the UK or the founding of Azienda Generale Italiana Petroli (AGIP) in Italy during the fascist period, when the issue of energy dependence on imports was unsuccessfully fought by a country launched toward autarky. In neither case, however, was the political side capable of following a straight strategy. In 1937 the fascist government in Italy set the regime’s own interests above those of economic logic, ridding itself (for political reasons) of the rich oil fields of the Mossul region,¹ while in the late 1950s Mattei had to struggle against government hostility toward the investments of Ente Nazionale Idrocarburi (ENI) abroad, which threatened to crowd out domestic investment, particularly in Italy’s southern regions (as shown by Pozzi in Chapter 9). Conversely, for AIOC the end of the war implied stricter bureaucratic burdens and the attempt of the government to interfere in the strategies of the company. In the 1930s, another major political intervention in Italy was of course the rescue of large firms in the financial and production sectors. A banking crisis and problems of industrial investment led to state intervention via the establishment of IRI which, after the war, became the precursor for the other state holding companies, ENI and Ente Finanuziamento Industria Marifatturiera (EFIM).

After World War II, government policies for promoting economic development and social justice became more prominent generally in Europe and the late 1940s saw wholesale nationalization of railways, gas, electricity, and coal in the UK. In part, this was a product of regulatory failure as well as of the more general crisis of the private sector following the depression of the 1930s and a socialist influence in some sectors like coal. The late 1940s was a period of national reconstruction after the war, and the Attlee government was able to heavily intervene in the UK economy. In Italy (given its earlier fascist past), the state had to keep a lower profile, albeit without any diminution of the role of SOEs.

In the 1950–1980 period, there is little doubt that SOEs in both countries were perceived as a vehicle for modernization and innovation. The term “modernize” even appears in the title of O’Hara’s chapter (Chapter 4), as modernization stands at the center of the Labour Party’s political platform, even with the necessary caveats concerning the ambiguous interpretation it was sometimes later given. However, the clear aspiration of public enterprises to innovate and modernize runs through practically all of the chapters in this book. In the British case, this can be seen easily not only from O’Hara’s Chapter 4 but also in the transport sector (cf. Gourvish, Chapter 6), starting from the Railway Modernization Plan of 1955 (even though, in the end, it turned out to be a partial failure) to the major motorway building program of the late 1950s; in the iron and steel industry with the 1967 creation of the British Steel Corporation characterized by a managerial team with “a strong focus on restructuring and modernization” (Ranieri, Chapter 10); and, finally, in the energy sector. If the short-lived British National Oil Corporation (BNOC) tried to optimize search and production of North Sea oil, it was in the electricity sector where the best yields were obtained. As early as the 1920s, the state established the Central Electricity Board, which created the first European integrated network of power transmission; in the 1940s, this was merged with all generating and distribution in the form of the nationalized British Electricity Authority and Area Boards (Millward, Chapter 12). Such a dynamic approach curiously contrasts with the conservative one of private shipbuilding (highlighted by Mellinato, Chapter 11), which seems to have also conditioned state behavior in this sector.

Similarly, modernization and innovation emerge as characterizing traits of the Italian experience, particularly in the quarter century following WWII, that is, in the heyday of the entire history of public enterprise when the size of Italian SOEs, measured in terms of capital and assets, reached its maximum extension (see Toninelli and Vasta, Chapter 5). This was especially true in the cases of oil and steel, where the development of a modern technocracy marked a fundamental step toward managerial capitalism. In Chapter 13, Giannetti also shows that in the electricity sector, the nationalization of most of the production and distribution system greatly increased the technical efficiency of the grid and accelerated the transition toward thermal power generation. Finally, and in contrast to the UK, direct state intervention in shipbuilding in Italy meant rapid technical transformation in at least two phases: in the construction of big liners in the 1930s (though this penalized the rest of the fleet), which brought international recognition and prestige to the nation, and, in more recent years, when a managerial and technical revolution based on automation and flexibility relaunched Italian engineering in passenger/cruise shipbuilding (Mellinato, Chapter 11). In the period 1945–1973, the so-called golden age, the economies of both France and Italy grew robustly while the UK started to experiment with new economic policies, in part imitating the former two. In the 1960s, it was economic planning on the French model. In the 1970s, it was Italy that was copied as the Industrial Reorganization Corporation was established to promote mergers and act somewhat like a state merchant bank (as shown by O’Hara in Chapter 4) along the lines of IRI.

The 1970s provided the second major economic turning point of the 20th century, as the oil crisis ...

Table of contents

• Cover
• HalfTitle
• Title
• Copyright
• Contents
• Figures
• Tables
• Preface
• Part I Policies, Outcomes, and Funding
• Part II State-Owned Enterprises in Different Sectors
• Acronyms
• Contributors
• Index