NOTES ON GROWTH DR. BANDI RAM PRASAD
[email protected]
THE STATE AND BUSINESS THE BUSINESS OF THE STATE KEEPS GROWING
T
he state and its business have been seeing changing winds and horizons. Post Second World War, when development economics was the main theme, it was the State that was in reign putting up factories and setting up businesses all over. In the 1970s, the norm was a nationalization happening every day in one or the other developing country right from banking to insurance and from aviation to automobiles. The 1980s heralded Margaret Thatcher in UK and her push for privatization that witnessed sharp reversal of the State with fire sale of government businesses. The rise of Ronald Reagan as US President 1990s saw further consolidation of this pushback of the State giving birth to what is famously known as “Washington Consensus” and prime place that it gave to the private sector in economic policy. The late 1990s in Asia and other emerging markets and 2000s in the developed world saw the State again returning to the rescue and recovery of the private sector right from providing capital infusion to buying corporate bonds and in some cases even funding the whole business to stop from failing and held it in its hand till normalcy restored. The stance of the State had interesting history. State was at its might during the US Marshall Plan (1947) which with a budget of $17bn ($250bn now) revived the war ravaged Western Europe and put it on the fast track to growth. 1950s saw the advent of development finance where bilateral and multi-lateral assistance began helping developing countries to find growth and development in which the ownership issues were determined by the nature of donor. If its from West, the focus was on the private sector and if its from Soviets then it is the State. India adopted a mixed economy model drawing help both from the West and the Soviet Union. The shift of the global economic power that began to veer towards BRICS and other major
1
No.01| April 2018
developing countries in the last two decades and the race to have a hold over the natural resources once again made the State a front runner in many developing countries. Global Financial Crisis of 2008 reinforced the role of the State in resolution and economic recovery. How strong the State is in business? Organization for Economic Cooperation and Development (OECD) in its review on State Owned Enterprises (SOEs) in 2017 covering 40 countries in the group and other major countries such as Brazil, India, Argentina and Saudi Arabia showed that the State at present is fully or majority owners of 2467 commercially oriented enterprises valued at US$2.4 trillion employing about 10 million people. China alone has 51000 SOEs valued at US$29.2trn that employs over 20 million people. Hungary (370), India (270), Brazil (134) and Poland (126) have a good number of SOEs. Norway has huge presence of the State in terms of value and employment. Though SOEs are dominant in network industries such as Electricity, Gas and Telecoms it is Finance which is the largest individual sector accounting for 26% of SOEs by value. UNCTAD in its World Investment Report (2017) identified 1500 State-Owned Multi National Enterprises (SO-MNEs) with more than 60000 affiliates across the world. 15 of the top 100 Multi National Enterprises (MNEs) from the world and 41 of the top MNEs from developing and transition economies are state owned. Of the 1500 SO- MNEs identified, the largest percentage is in finance, insurance and the real estate. A comparative study showed that share of SOEs in Fortune Global 500 during the period 2005 and 2012, rose from about 10 percent to 19 percent in regard to the number of companies; 18 percent to 30 percent by employment; 8 percent to 20 percent in revenues, 8 percent to 22 percent in profits 9 percent to 19 percent in size of assets from 9 percent to 21 percent
THE STATE AND BUSINESS THE BUSINESS OF THE STATE IS ONLY GROWING
by shareholder equity. The WIR noted “State owned MNEs are typically large and play major roles in key economic activities in their home countries”. SOEs have their own share of setbacks. Petrobas of Brazil, Gazprom of Russia, Citic of China, 1MBD of Malaysia and India’s Coal India and PSBs faced embarrassment and a series of investigations and in some cases indictments. Notwithstanding these irritants, the response of the global policy right from OECD to World Bank is for the reform the SOEs than the routine prescription of privatization that may seem to be not be giving a positive trade off. The overall firm level governance index of SOEs at 45.3 compares well with 49.8 in case of ADR firms (that have numerous disclosures) While the image of SOEs may not be so glowing, India’s record is something to crow. Share of SOEs in top 10 firms is 59 percent in India, as compared to 91 percent in China and 81 percent in Russia. Revenues formed 16 percent of GDP compared to 12 percent in Brazil and 16 percent in Russia (China 35%); net profit 4% compared to 2 percent each in China and Brazil and 3 percent in Russia; assets 75 percent as compared to 51 percent in Brazil and 64 percent in Russia (China 176%).
This could give India a reason to look far beyond the sale of stakes in SOEs to buttress fiscal position or selective privatization. The need is for a strategy and policy that could provide the SOEs enough scope to enhance the power and position of India. Despite the derision that SOEs face in general, China worked hard to consolidate gains by various reforms including separating SOEs into those of strategic importance and others for social development. It is this kind of focus that made China assume 4 and 9 of the top 25 financial and non-financial MNEs respectively whereas India is contended with less than two positions. An imperative for India is to step up the quality of governance than tinker with ownership. On a wide range of parameters such as protection of minority shareholders interest, strength of auditing and reporting standards, property rights, efficiency of legal framework India’s index has actually fallen during the period during 2013/14 as compared to 2006. Its time to set these priorities right first.
2 Growth Markets Advisory Services Growth has become an important aspiration and imperative for countries. Globalization and liberalization has enhanced the access to global markets for resources, within the reach of the countries. To harness this benefit, it is important for countries in transition to design and develop efficient and transparent financial market infrastructures with effective frameworks for policy, regulation and market conduct and an extensive capacity building that will engage with numerous stakeholders to empower them with benefits of market development. A sound strategy backed with a clear, defined, and properly sequenced plan of action for creating comprehensive markets structures and pursuing sustained initiatives to create depth and diversity is an important challenge. Growth Markets Advisory Services is engaged in helping and assisting institutions to learn about opportunities in financial markets development, extend help and guidance in various processes of building financial market infrastructure, designing responsible governance and management structures and devising market development strategies, capacity building, research, communication, evaluation, stakeholder engagement, financial literacy, investor education and knowledge management. SECTORS & SEGMENTS Capital Markets | Banking | Investors | Stock Exchanges | Commodity Exchanges | Intermediaries | SMEs SPECIALISATION Consulting | Research | Advisory Services | Executive Education SERVICES Policy Advocacy | Market Development Strategies | Business Development | Capacity Building | Growth Management | Education | Knowledge Management | Corporate Governance | Market Communications | Financial Education | Investor Awareness | Corporate Films & Videos | Research & Publications | Conferences & Seminars
