Friday, September 20, 2013

EL LADINO GLOBAL VI


Sobrevivir a un contexto generalizado de incertidumbre, no es algo que a cualquier hijo de vecino se le dé. Sin embargo, múltiples mañas se dan aquellos que carecen de esta habilidad, y también de la empatía mínima para formar una red de cuadernos que sea capaz de protegerlos cuando sea absolutamente necesario. Con el fin de lograr sus innombrables objetivos, estos tipos no sólo son capaces de inventar sino además repetir hasta el hastío sus incomprobables teorías (long time ago, I told you, it is only one, among many other reasons, that the economy cannot be upgraded to the status of science; everybody there can be just right without any rigorous assessment confronted with the real world as other fields do everyday; well, to be sincere some of my peer$ on our topic are so keen to follow that path too, they pretend not to know that: "... apparently science and business just don't mix..."). ¿Quién de esos gurúes puede hoy explicarles porqué estaban a la baja simultáneamente el USD, el precio del barril de petróleo, y los metales preciosos, por ejemplo? Nosotros sí, pero hay algo muy pesado de por medio para dejarlo ir nomás porque sí, ¿verdad? Remember: I know the name of the game (it would take me 15 min. flat to learn the elusive rules) but, sorry I don't like to play it, honestly. Continuemos mejor "sobre hombros de gigantes" en la materia.


Man exploits man

Private enterprise good, public enterprise bad?

... "Since its rise in the 19th century the key goal of the communist movement had been the abolition of private ownership of the 'means of production' (factories and machines). It is easy to understand why the communists saw private ownership as the ultimate source of the distributive injustice of capitalism. But they also saw private ownership as a cause of economic inefficiency. They believed that it was the reason for the 'wasteful' anarchy of the market. Too many capitalists routinely invest in producing the same things, they argued, because they do not know the investment plans of their competitors. Eventually, there is over-production and some of the enterprises involved go bankrupt, condemning some machines to scrap heap and laying perfectly employable workers idle. The waste caused by this process, it was argued, would disappear if the decisions of different capitalists could be co-ordinated in advanced through rational, centralized planning -after all, capitalists firms are islands of planning in the surrounding anarchic sea of the market, as Karl Marx, the leading communist theorist, once put it. Therefore, if private property were abolished, the economy could be run as if it were a single firm and thus managed more efficiently.






"Few would now dispute that communism failed as an economic system. But it is a huge leap of logic to go from that conclusion to the proposition that state-owned enterprises (SOEs), or public enterprises, do not work... Privatization of SOEs has also been a centrepiece of the neo-liberal agenda that Bad Samaritans have imposed on most developing countries in the past quarter of a century."






State ownership in the dock

"... At the heart of the argument against SOEs lies a simple but very powerful idea . The idea is that people do not fully take care of things that are not theirs.

"Ownership gives the owner two important rights in relation to this property. The first is the right to dispose of it. The second is the right to claim the profits from its use.

"By definition, state-owned enterprises are properties collectively owned by all the citizens, who hire professional managers on fixed salaries to run them. Given that it is the citizenry that has the residual claim as the owner of the enterprise, the hired managers do not care about the profitability of their enterprises. Of course, the citizenry as the 'principal', can make it 'agents' of the hired managers, interested in the profitability of the SOEs by linking their pay to it. But such incentive systems are notoriously difficult to design. This is because there is a fundamental gap in the information between the principals and their agents. For example, when the hired manager says that she has done her best and that the poor performance is due to factors beyond her control, the principal will find it very difficult to prove that she is lying. The difficulty of the principal controlling the agent's behaviour is known as the 'principal agent problem' and the resulting costs (that is, the reduction in profits due to the poor management) the 'agency cost'. The principal-agent problem is at the centre of the neo-liberal argument against SOEs.

"...Individual citizens, even if they theoretically own public enterprises, do not have any incentives to take care of their properties (the enterprises in question) by adequately monitoring the hired managers. The problem is that any increase in profit resulting from extra monitoring of the SOEs managers by some citizens will be shared by every citizen, while only those citizens who do the monitoring pay the costs (e.g., time and energy spent in going through company accounts or alerting the relevant government agencies to any problems.

"...Being part of the government, the argument goes, SOEs are often able to secure additional finances from the government if they make losses or are threatened with bankruptcy. In this way, it is argued, enterprises can act as if the limits on their budgets are malleable, or 'soft', and get away with tax management."








State vs private

"... The citizens, despite being the legal owners of public enterprises, have neither the ability nor the incentive to monitor their agents, who have been hired to run the enterprises. The agents (managers) do not maximize enterprise profits, while it is impossible for the principals (citizens) to make them do so, because the inherent deficiency in information they possess about the agents' behaviour and the free-rider problem amongst the principal themselves.

"... All the agreements against state ownership of enterprises actually apply to a large private-sector firms as well. The principal-agent problem and the free-rider problem affect many large private-sector firms... The hired managers (like their SOE counterparts) will also have no incentive to put in more than sub-optimal levels of effort (the principal-agent problem), while individual shareholders will not have enough incentive to monitor the hired managers (the free-rider problem).

"...If they are politically important (e.g., large employers or enterprises operating in politically sensitive industries, such as armaments or healthcare), private firms can also expect subsidies or even government bail-outs... Conversely, state-owned enterprises are 'not totally' immune to market forces. Many public enterprises across the world have been shut down and their managers sacked because of bad performance - these are equivalent to corporate bankruptcies and corporate takeovers in the private sector.

"...In the early 1980s, the troubled US car maker Chrysler was rescued by the Republican administration under Ronald Reagan, which was in the vanguard of neo-liberal market reforms at the time."








State-owned success stories

"...Korea also provides another dramatic example of a successful public enterprise in the form of the (now privatized) steel maker, POSCO (Pohang Iron and Steel Company). The Korean government made an application to the World Bank in the late 1960s for a loan to build its first modern steel mill. The bank rejected it on the grounds that the project was not viable. Not an unreasonable decision. The country's biggest export items at the time were fish, cheap apparel, wigs and plywood. Korea didn't possess deposits of either of the two key raw materials - iron ore and coking coal. Furthermore, the Cold War meant it could not even import them from nearby communist China. They had to be brought all the way from Australia. And to cap it all, the Korean government proposed to run the venture as an SOE. What more perfect for disaster? Yet within ten years of starting production in 1973 (the project was financed by japanese banks), the company became one of the most efficient steel-producers on the planet and is now the world's third largest.






"...Well-performing state-owned enterprises are also found in Latin America. The Brazilian state-owned oil company Petrobras is a world class firm with leading-edge technologies. EMBRAER (Empresa Brasileira de Aeronáutica), the Brazilian manufacturer of 'regional jets'(short-range jet planes), also became a world class firm under state ownership. EMBRAER is now the world's biggest producer of regional jets and the world's third largest aircraft manufacturer of any kind, after Airbus and Boeing. It was privatized in 1994, but the Brazilian government still owns the 'golden share'(1% of the capital), which allows it to veto certain deals regarding military aircraft sales and technology transfers to foreign countries.





"...The rise of neoliberalism during the past couple of decades has made state ownership so unpopular in the public mind that successful SOEs themselves want to underplay their connection with the state... there is nothing 'inevitable' about poor performance by public enterprises and that improving their performance does not necessarily require privatization.









The case of state ownership

"...The Korean steel maker POSCO is a more modern and more dramatic case of an SOE set up due to capital market failure. The general lesson is clear: public enterprises have often been set up in order to kick-start capitalism, not to supersede it, as it is commonly believed.






"State-owned enterprises can also be ideal where there exists 'natural monopoly'. This refers to the situation where technological conditions dictate that having only one supplier is the most efficient way to serve the market. Electricity, water, gas, railways and (landline) telephones are examples of natural monopoly. In these industries, the main cost of production is the building of the distribution network and, therefore, the unit cost of production will down if the number of customers that use the network serves is increased. In contrast, having multiple suppliers with his own networks, of, say, water pipes, increases the unit cost of supplying each household. Historically, such industries in the developed countries often started out with many small competing producers but were then consolidated into large regional or national monopolies (and then often nationalized).

"The third reason for the government to set up state-owned enterprises is equity among citizens... If the service in question is a vital one that every citizen should be entitled to, the government, may decide to run the activity itself through a public enterprise, even if it means losing money in the process.

"...Subsidies require tax revenues in the first place. Collecting tax may seem straightforward, but it is not easy. It requires capabilities to collect and process information, calculate the taxes, owed, and detect and punish evaders... Developing countries have only limited abilities to collect taxes and, consequently, to use subsidies to address the limitations of the markets.

"State-owned enterprises are often more practical solutions than a system of subsidies and regulations for privete-sector providers, especially in developing countries that lack tax and regulatory capabilities. Not only can they do (and, in many cases, have done) well, under certain circumstances they may be superior to private-sector firms."









The pifalls of privatization

"The first challenge is selling 'the right enterprises'. It would be a bad idea to sell public enterprises with natural monopolies or those providing essential services, especially if the regulatory capability of the state is weak. But even when it comes to selling off enterprises for which public ownership is not necessary, there is a dilemma. The government usually wants to sell the worst performing enterprises precisely those that least interest potential buyers. Therefore, in order to generate private sector interest in a poorly performing SOE, the government often has to invest heavily in it and/or restructure it. But it is performance can be improved under state ownership, why then privatize it all? Therefore, unless it is 'politically' impossible to restructure a public enterprise without a strong government commitment to privatization, a lot of problems in public enterprises may be solved without privatization.

"...the privatized firm should be sold at 'the right price'.Selling at the right price is the duty of the government, as the trustee of the citizen's assets.

"In order to get the right price, the privatization programme must be done at the 'right scale' and with the 'right timing'... What is more, given fluctuations in the stock market, it is important to privatize only when the stock market conditions are good. In this sense, it is a bad idea to set a rigid deadline for privatization, which the IMF often insits on and which some governments have also voluntarily adopted. Such a deadline will force the government to privatize regardless of market conditions.

"Even more important is selling the public enterprises to the 'right buyers'. If privatization is going to help a country's economic future, the public enterprises need to be sold to people who have the ability to improve their long-term productivity

"More importantly, SOEs are often sold off corruptly to people who have no competence to run them well -massive state-owned assets were transferred in a corrupt way to the new 'oligarchy' in Russia after the fall of comunism.

"Privatization of natural monopolies or essential services will also fail if they are not subject to the 'right regulatory regime' afterwards. When the SOEs concerned are natural monopolies, privatization without the appropiate regulatory capability on the part of the government may replace inefficient but (politically) restrained public monopolies, with unefficient and unrestrained private monopolies.

"...Commenting on the privatization of the Mexican state owned telephone company, Telmex, in 1989, even a World Bank study concluded that 'the provatization' of Telmex, along with its attendant price-tax regulatory regime, has the result of 'taxing'consumers -a rather diffuse, unorganized group- and then distributing the gains among more well-defined groups; (foreign) shareholders, employees and the government.





State ownership in the dock

Black cat, white cat

"...Privatization sometimes works well, but can be a recipe for disaster, especially in developing countries that lack the necessary regulatory capabilities.

"...there is a great need for SOEs in the developing countries than in the developed countries, as they have underdeveloped capital markets and weak regulatory and taxation capabilities.

"...One important thing to do is to review critically the goals of the enterprises and establish clear priorities among them. Very often, public enterprises are charged with serving too many goals - for example, social goals (e.g. affirmative action for women and minorities), employment generation and industrialization.

"Increase in competition can also be important in improving SOE performance. More competition is 'not always' better, but competition is often the best way to improve enterprise performance.

"... when it comes to SOE management, we need a pragmatic attitude in the spirit of the famous remark by China's former leader Deng Xiao-ping: 'it does not matter whether the cat is white or black as it catches mice'.





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