State-Owned Enterprises in the Global Economy

Maciej Bałtowski, Grzegorz Kwiatkowski

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000594232
• Edition: 1
• Topic: Economics
• Subtopic: Public Finance
• Index: Economics

State-owned enterprises (SOEs) combine economic activities resulting from their position on the market with non-economic functions determined by the state owner. In many of the world's major economies, SOEs play an important role, and in some, such as China, India, Russia and Brazil, they are outright dominant. At the same time, the existence of SOEs is largely ignored by economic theory and the current figures on SOEs on a global scale available in the literature are questionable in terms of their methodological validity and thus they do not allow for a proper cross-country analysis. This book fills this research gap. It focuses on the scope and importance of SOEs in a broad group of the largest economies, primarily on a variety of quantitative estimates. It contains the results of an extensive and unique empirical study of 37 of the world's largest economies over the period from 2009 to 2018. The findings showed that the average share of SOEs – measured by operating revenues and total assets – in the group of the largest 100 enterprises (Top 100) of a given country is nearly 30%, while in the Top 20 group it is even slightly higher. The authors present an econometric analysis showing the relationship between the scope of SOEs and the various economic and non-economic characteristics of the studied set of countries. The book also contains an in-depth discussion of selected key issues, such as the functions of SOEs in various types of economies, the role of SOEs in capital markets and the phenomenon of SOEs with foreign capital. This work is addressed to both academic economists, dealing with macroeconomics and economic policy, as well as researchers and analysts from various international organizations and think-tanks.

1 Origin and history of the state-owned enterprise sector

DOI: 10.4324/9781003244462-2

Over the last 20–30 years, states have rarely created new SOEs. The existing SOEs usually have their origins in the distant past. They appeared in economies through a variety of processes 50, 100 or even more years ago, and their provenance and history still largely determine their functioning and roles in the economy. Knowing and understanding the origins of SOEs is important for knowing and understanding contemporary SOEs and the contemporary economy.

In this chapter and throughout the book, we will not limit the analysis to the developed Western countries, as is usually done by the authors dealing with the origins of SOEs (Toninelli, 2000; Bognetti, 2020). Today, the most important and also the most cognitively interesting is the existence and functioning of SOEs in such large and globally significant economies as those of China, India, Russia, Brazil and Indonesia, as well as in some smaller but nevertheless important economies, such as those of Poland, Egypt, Thailand and Saudi Arabia.

1.1 Before the First World War

Economic activities conducted by or on behalf of the state have a history as long as that of statehood itself. For centuries, from Ancient Egypt to the Chinese state of the Qing dynasty, state enterprises have enjoyed special privileges from rulers and have often benefited from legally guaranteed monopolies in many areas of the economy. However, the origins of modern state-owned enterprises (SOEs) need to be sought in the more recent past – around 150 years ago in the case of the developed Western countries and some Eastern countries, around 100 years ago in the case of countries that appeared on the world map after the First World War and only around 75 years ago in the case of post-colonial and post-communist countries.

In the second half of the 19th century, together with the formation of the modern arrangement of European states, various forms of economic activities carried out by governments developed. These early state enterprises, which are better described as economic government entities (EGEs), were fundamentally different from the modern ones. EGEs were generally elements of state administration, departments of specific ministries or even separate ministries. Their assets were the assets of the state, and, in economic and financial terms, EGEs were directly linked to the budget. It was only after the First World War, starting with the developed Western countries, that they gradually adopted the legal and organisational form of enterprises, meaning economic entities independent (at least partly) of governments, having financial independence of the budget.

The motives of governments to undertake (or to develop former) economic activities from the second half of the 19th century onwards varied in different countries. Three of these motives seem to be the most important and most common globally. First, EGEs were used as tools in the unification processes associated with the formation of nation states (Millward, 2011). Second, they took control – due to political plans – of the sectors of the economy considered strategic. Third, they supported the industrialisation of the country in the absence of private capital.

A special, exemplary role for the further development of the business of governments was played by EGEs in two industries that were very important back then: post and railways. From the beginning of their existence, that is, from the 17th to the 18th century, postal companies were usually owned by the state (rulers), and from the second half of the 19th century, they developed dynamically, becoming modern, network enterprises, providing services to the public nationwide. In most countries, railway companies were established from the mid-19th century onwards as regional ventures, usually with private capital, and to a lesser extent with public (government) capital. Railway lines formed access networks to major cities and then connected individual cities. It was only at the end of the 19th century, and in some countries much later, that large, nationally uniform, state railway companies were established, through major state investments, and often through nationalisations.

Italy and Germany are the best examples of countries where the development of EGEs was connected with the national and economic unification processes in the second half of the 19th century. The state-owned post played an important role in these processes, providing the same services throughout the country at uniform prices, set by the government. In Italy, the nationwide postal administration was established in 1862, even before the unification process was completed. In the German empire, the establishment of the nationwide post in January 1872 was one of the first economic decisions of the government. In Italy, a tool used to unify the state, especially in terms of evening out regional differences, and a driver of economic development was also the central support for industrialisation policies. Whereas in Germany, where there was a strong and rich private commercial and industrial sector, and regional differences were not so significant, the government was not directly engaged in industrialisation processes.

In Italy, the national state railway, Ferrovie dello Stato, was established in 1905, following the nationalisation of five regional railway companies. In Germany, until the end of the First World War, the rail network was divided into nine national railway systems, operating more or less within particular major Reich states and typically owned by the states (Länder).

In France, in the last decades of the 19th century, EGEs grew slower than in Italy, which largely resulted from historically grounded statist traditions. The French state influenced the economy more by concessions and by controlling the private sector than by its own economic activity, although the latter was not missing. In 1879, the French government created a uniform administration of postal and telegraph services. In the same year, the French Ministry of Post and Telegraphs was created. Shortly after, the state extended its monopoly to the telecommunications sector (telegraph and telephone), on the grounds of state security. In the case of railways, the system of six regional railways (state-owned and private), formed in the 1860s, survived in its basic outlines in France until 1938, until the time of nationalisation.

In the UK, state ownership was historically less important than, for example, in France. In the second half of the 19th century, the UK was a highly developed country, according to the standards of those times, with a large amount of private capital. Under such circumstances, the motive to promote industrialisation, typical of the development of SOEs in many continental European countries, was irrelevant. Yet, due to the UK’s ambitions to become a power, the strategic motive was important. As early as in 1869, the Telegraph Act created a state monopoly in telegraphic communication. At the same time, private telegraph companies existing then were nationalised. Much later, in 1912, the British government effectively nationalised the National Telephone Company, the largest private telephone company. In 1913, owing to Winston Churchill, the then First Lord of the Admiralty, the government acquired a majority stake in the thriving private oil company, Anglo-Persian Oil Company (APOC), a forerunner of the modern petrochemical giant – British Petroleum (BP). APOC, and from 1954, after the name change – British Petroleum – an SOE with mixed state-private capital, was controlled by the British government until the 1970s.

In the second half of the 19th century, the Royal Mail, established by Charles II in 1660, was a large and relatively mature EGE, a model for postal companies in many countries. The railway industry in the UK was in private hands for a very long time. It was not until the end of the Second World War, after the merger of four separate railway companies, that a national state enterprise – British Rail – was established.

In Spain, in the late 19th century, the scope of state ownership was small. EGEs existed only where they were justified strategically (defence), fiscally (tobacco monopoly and mines) or where they provided public services, such as postal and later telegraph services (Comín, 2008, pp. 695–696). The Spanish post has a tradition of more than 300 years as a state entity, while the Spanish railways as a uniform national SOE were only established in 1941, after the nationalisation of private entities that existed earlier, which generally operated on a concessionary basis.

In the US, the scope of state ownership declined systematically from the mid-19th century, both at the federal and at the state level, which clearly distinguished the US from other countries of the West. As C.J. Milhaupt and M. Pargendler (2017, p. 487) rightly noted, “the United States is exceptional in its traditional hostility to government ownership of enterprise”. The history of the US post dates back to the end of the 18th century. In 1872, the US Postal Service was given the status of a government department. The railway sector, quite fragmented, was largely private.

In Canada, in the last decades of the 19th century, EGEs (traditionally referred to as crown corporations) were created in relatively large numbers, especially where there was no private capital. At the provincial level, SOEs that still exist today emerged in the energy (e.g. Ontario Hydro, 1906) and telecommunications (SaskTel, 1908) sectors. Shortly after the Confederation of Canada was formed of four provinces in 1867, the Post Office Department of the Canadian government, commonly referred to as the Royal Mail Canada, was established, which meant the creation of a national postal company. Meanwhile, the ownership of the railways was transferred from the provinces to the new central government.

Australia, today a country with a negligible share of SOEs, used to be a country with an extensive and active role of the state in the economy for a long time. In the last years of the 19th century, when the foundations of the Australian statehood were being formed, “governments played a significant role in the lives of citizens, and the statutory corporation and government business enterprises collectively, assumed critical roles in the development of a robust and well-functioning state” (Aulich & Wettenhall, 2019, p. 19). One of the historical sources states that “the Government fed, clothed and employed everyone. It cleared and cultivated farms; it bred and reared flocks; it built and ran mills; it discovered and developed mines” (Bland, 1945, p. 203). The Australian Post, initially in the form of the Postmaster-General’s Department of the federal government, was established in 1901, as the successor to colonial post services. It was not until 1989 that this company was corporatised from an EGE form into the Australian Post Corporation. In Australia, the rail network developed within provinces, initially with private capital.

In China, in the very long history of this state, state ownership has always been important. For centuries, state entities have benefited from the legally guaranteed monopolies in many areas of the economy, which was to generate state revenue, and their existence has always been associated with the pursuit of various military and modernisation purposes. In the second half of the 19th century, a form of an enterprise involving cooperation of the state and private capital emerged, the purpose of which was to modernise the Chinese economy and catch up with the Western European countries (Sheng & Zhao, 2012, pp. 230–240).

The Chinese postal service, as a uniform enterprise, was established much later than its counterparts in the European countries, as it was only in 1912. The Qing dynasty ruling in China was sceptical about the introduction of railways, but the defeat in the First Sino-Japanese War caused a change in position – the government was forced to grant concessions to foreigners to build railways.

In Japan, the accelerated industrialisation of the economy in the second half of the 19th century was associated with nationalisations and the creation of new EGEs (in the form of industrial factories and shipyards). In the late 19th century, nationalisation pressures grew, mainly for military reasons. The state monopoly was extended to telephone services, tobacco production and distribution; a state-owned Yawata Steel Works was established. However, fiscal problems and organisational failures in the functioning of EGEs soon contributed to a change in the attitude – state-owned entities were privatised, often for part of their value. This was the way large industrial conglomerates (zaibatsu) were created, which supported the functioning of the Japanese economy in subsequent decades (Grabowiecki, 2006, p. 8) and which – formally private – showed a significant degree of informal dependence on the government.

The nationwide postal network in Japan was established in 1872, and the Japanese post existed as a government agency for many decades. The nationwide rail network – Japanese Government Railways – was established in 1906, following the nationalisation of 17 private railway companies. Local railways still remained in private hands.

In Russia, EGEs played a major role long before the 1917 Revolution. Since the time of Peter the Great, mines, factories, banks, forests, post and later also telegraph companies were owned by the state. Iron railways were created, as in many other countries, in various ownership configurations, largely as private joint-stock companies. As they developed, due to the strategic importance of railways, the state gradually took control over them using various methods (concessions, nationalisations, own investments), until the end of the 19th century, when all major railways went into the hands of the government. They were controlled by the Ministry of Communications, established in June 1865.

1.2 From the First to the Second World War

After the First World War, together with the development of the modern republic state, based on the constitution and codified law, in the developed Western countries, a need and expediency emerged to separate the economic activities carried out by the state from the budget. This was to be achieved by commercialising (corporat...

Table of contents

• Cover
• Half Title Page
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Table of Contents
• List of figures
• List of tables
• Introduction
• 1 Origin and history of the state-owned enterprise sector
• 2 State as an owner
• 3 Research objectives and assumptions: methodological framework
• 4 State-owned enterprise sector in 32 largest economies in the world
• 5 State-owned enterprise sector in selected post-communist economies
• 6 Aggregate and comparative data and their analysis
• 7 Selected problems of SOE presence in the economy in light of our findings
• Final remarks
• Index