Commentary
About the data
Definitions
Data sources
State-owned enterprises—still important
Despite more than a decade of divestiture efforts and the growing consensus that the private sector should play a larger role, state-owned enterprises account for nearly as large a share of developing economies today as they did 20 years ago. Indeed, as data compiled for the World Bank's Bureaucrats in Business: The Economics and Politics of Government Ownership (1995b) show, the size of the state enterprise sector has diminished significantly only in the formerly socialist economies and a few middle-income countries. In most developing countries, particularly the poorest, bureaucrats run as much of the economy as ever.
Are state enterprises a problem? The answer people give depends on where they sit on the ideological spectrum. But consider how these enterprises influence the economies of developing countries:
In many developing economies state enterprises absorb large amounts of money that could be better spent on basic social services. In Tanzania the central government provides them with subsidies equal to 72 percent of its spending on education and 150 percent of its spending on health. State enterprises often capture a disproportionate share of credit, squeezing out private borrowing. In Bangladesh they take about one-sixth of domestic credit, but account for less than 3 percent of GDP. A modest improvement in the efficiency of state-owned enterprises would substantially reduce the fiscal deficit in most developing countries and eliminate it in some. Reducing their operating costs by a mere 5 percent in Egypt, Peru, Senegal, and Turkey would reduce the fiscal deficit by about one-third.
Although governments are selling more and bigger enterprises, the state enterprise sector has remained stubbornly large outside Eastern Europe, the former Soviet Union, and a handful of countries in other regions. These large sectors can hinder growth—in part because state enterprises are often less efficient than private firms and in part because the resulting deficits are typically financed in ways that undermine macroeconomic stability. And because these sectors tend to be larger in low-income countries, state enterprises are likely to be most costly in the countries that can least afford them.
State-owned enterprises are defined as government-owned or -controlled economic entities that generate the bulk of their revenue from selling goods and services. This definition limits such enterprises to commercial activities in which government controls management decisions by virtue of its ownership stake. But it encompasses enterprises directly operated by a government department or those in which the government holds a majority of shares directly or indirectly through other state enterprises. It also encompasses enterprises in which the state holds a minority of shares, if the distribution of the remaining shares leaves the government with effective control. It excludes much public sector activity—such as education, health services, and road construction and maintenance—that is financed in other ways, usually from the government's general revenue. The focus is on nonfinancial state enterprises.
Data for state enterprises do not always correspond to this definition. What is considered a state enterprise varies not only among countries but also within countries over time. In exceptional cases governments include in their data on state enterprises activities that are not commercial, such as agricultural research institutes. But more frequently they omit activities that clearly are state enterprises. The most frequent omissions occur when governments define state enterprises narrowly—for example, by excluding those with a particular legal form (such as departmental enterprises), those owned by local governments (typically utilities), or those considered unimportant in terms of size or need for fiscal resources. Accordingly, data on state enterprises tend to underestimate their relative importance in economic activity.
Privatization is the transfer of productive assets from the public to the private sector. Direct sales are the most commonly used method of privatization, accounting for 79 percent of all transactions in 1995. Through this method, governments can attract strategic investors who are able to transfer technological and management know-how (and capital) to newly privatized enterprises. Selling equity, however, may not change effective control. It may result only in revenue effects, with no gains in efficiency. The second most commonly used method is share issues in domestic and international capital markets, accounting for 32 percent of all sales and 9 percent of transactions in 1995.
• Economic activity is the value added of state enterprises, estimated as their sales revenue minus the cost of their intermediate inputs, or as the sum of their operating surplus (balance) and wage payments.
• Investment refers to fixed capital formation by state enterprises.
• Credit is credit extended to state enterprises by domestic financial institutions.
• Net financial flows from government is the difference between total financial flows from the government to state enterprises (including government loans, equity, and subsidies) and total flows from state enterprises to the government (including dividends and taxes). Taxes paid by state enterprises are treated as a transfer of financial resources to the government.
• External debt is the debt outstanding and disbursed as a result of the direct external borrowing of state enterprises, whether or not government guaranteed. It generally does not include debt that may have been assumed or incurred by the government on behalf of state enterprises.
• Overall balance before transfers (current account or savings) is the sum of net operating and net nonoperating revenues. Unless otherwise noted, net operating revenues (or operating surplus or balance) refer to gross operating profits, or operating revenues minus the costs of intermediate inputs, wages, factor rentals, and depreciation.
• Employment for many countries refers to the share of full-time state enterprise employees in total formal sector employment only, but for some it refers to employment in all state enterprises, including financial ones. Thus the data for state enterprise employment are not directly comparable.
• Proceeds from privatization include all sales of public assets to private entities through public offers, direct sale, management and employee buyouts, concessions or licensing agreements, and joint venture arrangements.
Data on state enterprises were collected mainly from World Bank member country central banks, finance ministries, enterprises, and World Bank and International Monetary Fund reports. These data were then collated into a single database for the World Bank Policy Research Report Bureaucrats in Business: The Economics and Politics of Government Ownership (1995b). The feature text also draws from this source. Data on privatization are from the World Bank's Global Development Finance 1997.
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