Chapter 11: Public and Private Enterprises: Finding the Right Mix Beyond Economic Growth: An Introduction to Sustainable Development By Tatyana P. Soubbotina

Overview of Chapter 11: Public and Private Enterprises: The Right Mix Differences in government expenditures Developed v. developing; trends over time The dilemma of public-private ownership State-owned v. private enterprise Market failures Is there a trend toward privatization? Market liberalizations in formerly communist countries

Differences in government expenditures Government expenditures increased in 20th century Developed countries: Great Depression & competition w/ Socialist countries Developing countries: government expenditures help to accelerate industrialism and post industrialism Government expenditures are higher share of GDP in high-income countries (Fig. 11.1) U.S. government expenditures are relatively low Is this trend continuing? Or reversing?

The dilemma of public-private ownership Government expenditures differ across countries Developed countries spend more on transfer payments Developing countries spend more on state-owned enterprises (Fig. 11.2) Arguments for state-owned enterprises Investments in modernization and technology Low prices for basic goods and services (energy, housing, etc.) Prevent mass unemployment Opponents argue state-ownership is inefficient Managers don’t have incentive to be profitable Is it good to increase profits by charging high prices? By firing workers?

When is state intervention in the economy necessary? Some markets may not exist in developing countries Do state-owned enterprises prevent market development? Markets may fail even in advanced economies Underproduction of public goods (e.g., roads, defense) Underproduction of positive externalities (health, education) Overproduction of negative externalities (pollution) Overpricing of natural monopolies (electricity, water) Underproduction of social services (pensions) Insufficient information Governments not necessarily better (corruption) Example: state-owned agricultural marketing corporations

Is there a trend toward privatization? Privatization can increase efficiency and release money for other uses Market liberalization (removing controls on prices, wages, production, etc.) can expand private sector Mass privatizations (sales of state-owned enterprises) in formerly communist economies had mixed success Many formerly communist countries dramatically increased the private sector share of output in the 1990s (Fig. 11.3)