Reforming Chinas State-owned Enterprises and Banks - Essay Example

MACRO AND MICRO ECONOMICS Introduction owned enterprises can be defined as legal entities created for purposes of undertaking commercial activities for the government. Governments cannot undertake commercial activities directly; hence utilise these enterprises in undertaking commercial activities, which enable the government to generate income. These enterprises operate like other enterprises and their annual earnings become directed to the government to aid in financing government-sponsored projects. The enterprises might be owned fully by the government or partially, however, only government ownership exceeding 50% constitutes a corporation being branded as state-owned enterprise (Ramamurti & Vernon 1991). State-owned enterprises commonly exist in economic systems which have natural monopoly over free market, and where governments have vested strategic interests upon an industry. The number of state-owned enterprises within a country remains a determining factor for the economic system existing within the country. In recent times however, challenges in profitability of these enterprises have resulted in governments introducing privatisation as a way of making these entities profitable (Chiu & Lewis 2006). Other political factors like corruption have played a fundamental role in reducing the competitiveness of these entities within a free market. Making the enterprises profitable would involve total privatisation of handing management responsibilities to private organisations. These are the different privatisation approaches undertaken by governments in making these entities both competitive, and profitable. The aspect of privatisation brings about competitiveness while making the market become free. While monopoly exists to a certain extent within different economic systems, state owned enterprises have played a fundamental role in supporting the occurrence of natural monopoly. This refers to economic situation where an industry’s average production cost becomes controlled by single corporations. Within many socialist economic systems, much of the industries still remain under the dominance of state owned enterprises, which contribute towards monopolistic systems (Mosca 2008). The presence of many government-owned corporations creates cost advantage, economies of scale and barriers to entry, which enable these enterprises to operate alone. This situation restricts outputs and makes production inefficient in satisfying the demand side of any market. Private firms operating within such industries fail to prosper as a result of regulation, which initiates unfair competition. A centrally planned economy can be described as an economic system in which economic decisions become made by government entities. Within a different economic system, such decision would involve active engagement between businesses and consumers through reaching a balance between the demand and supply. Centrally planned economic system seeks to control the attributes of production and resource distribution, within an economic system. This is commonly performed through government entities involved in regulating different industries, and executed through commercial entities, which are the state-owned enterprises. Centrally planned economic systems assume that markets are focused on providing private benefits. These markets must become controlled for them to serve the interest of the general public. This control becomes initiated through governmental regulation in different industries. The market economy has been identified as opposite of the centrally planned system, where private organisations become involved in economic decision making process. Many modern economic systems combine the centrally planned approach with the market system to become effective and enhance competition. State ownership and privatisation in china The fundamental function performed by state owned enterprises remains enhancing increased productivity and financial performance of the governments in different industries. As a social economic system, the Chinese economy has remained characterised by countless state-owned enterprises operating within the county. The governments influence upon the economy remains relatively high, compared to other countries. The private entrepreneurial sector has continuously engaged in competition with state-owned enterprises within the country. The governments controlled a bigger percentage of the production industry and significant economic difficulties were experienced (Tian & Estrin 2008). Following intervention by western countries, the government embarked on a mission of relinquishing ownership of numerous enterprises. These enterprises where transferred to private owners, who would continue operating the enterprises for profits. A wave of privatisations began to occur in china during the 1970s, when the government realized that operating enterprises for political gains, provided little success at the global arena (Lin et al. 2001). Such government involvement appeared to stall economic growth, while contributing to poor lining standards of citizens. This privatisation approach however, has been significantly slow as the government evaluated the massive lay-off, which would occur, following restructuring of government-owned enterprises. The communist party, which remains the largest in china, offered immense resistance to the privatisation of these government enterprises. Majority of the influential managers within the government enterprises were members of the communist party, and became actively involved in leading resistance against privatisation. The deteriorating financial performance of state enterprises became the driving force towards introducing privatisation. The element of privatisation aimed at ensuring the corporations became profitable over the coming period. The government prioritised privatisation of government corporations in an effort to make them profitable and competitive within the global economy. The government of china adopted a market-oriented approach towards implementing changes within these corporations. These changes aimed at ensuring the enterprises met the market demands for various industries (Sun et al. 2002). The share stocks of many enterprises had been effectively affected by government ownership, with little trade being realised from the enterprises. The figure below show the pre-tax profits of the top 12 government controlled SOE in china Figure 1 profits for government controlled SOEs in China In ensuring successful privatisation the government adopted different approaches in implementing the privatisation process among state-owned enterprises. The company adopted the following approaches in implementing privatisation. Modern enterprise system – this involved the modification of management systems and the existing relationships between the government and state-owned enterprises. Within this approach business functions became separated from government functions through a clear description of right and responsibilities of the government and the enterprises. Corporatisation – this involved transforming the enterprises with all other structure into limited companies with shareholding capacities. The government, therefore, became a shareholder among other private shareholders. The companies became limited companies, which had government ownership. Majority of the government ownership was retained at levels below 50%. The bureaucratic role of the government became completely eliminated from the corporations, as they became capable of operating independently. Supervisory system reform – the supervisory systems became clearly defined in seeking to enhance the role played by the government. The state ownership involved numerous obscure responsibilities, which involved bureaucratic functions being performed by the government, on behalf of the enterprise. The supervisory role for the enterprises became transferred to private organisations which would supervise operations. Large scale reform – the dominance of the communist party was utilised in enhancing large-scale reforming of the enterprises. Many of the individuals involved in the privatisation were members of the party. Acceptance by the party contributed towards many enterprises being privatised. A combination of different approaches enabled the Chinese government to implement privatisation successfully within a socialist economic system the government planned majority of the processes which were adopted because of the influence of the communist party upon the economy. Assessment of the impacts of privatisation contributed to the slow privatisation in china. Though the process has been slow, many organisational have been fully transformed into private entities. The number of state-owned enterprises significantly reduced from 114,000 in 1996 to 34,000 in 2003. State ownership and privatisation in Russia The cave in of the USSR was the beginning of spontaneous large-scale privatisation of state-owned enterprises within Russia. Many of these state–owned firms operated with the energy, financial and industrial sector of the Russian economic system. Privatisation of state-owned enterprises had been declared illegal during the soviet era in Russia. The element of privatisation was undertaken haphazardly in Russia because of the existing pressure from international community. The government required to transform the economy from a vitally planned scheme to a market organization, within the shortest period possible. Unlike in china where privatisation was slow, Russia experienced quick privatisation. Though the speed enhanced significant transformation toward, market economic system, the approach produced adverse effects upon the economic system. Large portions of national wealth became held by relatively small percentage of the population known as the business oligarchs, consequently resulting in a dramatic widening of the wealth gap. The Russian federation inherited numerous ineffective state owned enterprises following the collapse of the Soviet Union. The government deliberately embarked on a move to sell majority of these enterprises to the Russian public, seeking to return the wealth to the people. Without proper transformational structures, majority of these assets became transferred to few individuals. Many Russian citizens continue to advocate for reviewing of the privatisation policies utilised during the voucher privatisation period. As opposed to china which had a functional government controlling the privatisation operations, the Russian privatisation was marred with multiple corruptions and malpractices (Shleifer & Treisman 2000). The government remained relatively weak and was seeking quick economic solutions, to many dysfunctional state-owned enterprises. Many of these enterprises ended up collapsing or being sold to foreigners. The Russian privatisation process involved rapid transferring of assets through voucher programmes. This appeared as an asset transfer rather than controlled privatisation plan, for ineffective state-owned enterprises. The collapsing of the communist system and centrally controlled economy in Russia was deemed to be an opportunity for economic transformation. The imminent threat of civil war within the state further quickened the privatisation process. The process lacked proper control measures and analysis of the resulting consequences of the process (Hanson 2007). The changes coming with the privatisation of public enterprises became uncontrollable in Russia resulting in the adverse effects felt even today. A gradual approach to the privatisation process remains better than swift approaches, like what the Russian federation utilised. The figure below indicates the declining share of SOE within major industrial enterprises in Russia Figure 2 the declining share of state owned enterprises The privatisation of state-owned enterprises in Russia occurred without proper regulation, which resulted in undervaluing of many assets. The move was aimed at achieving political stability for the country following collapse of the Soviet Union. Privatisation is commonly pursued in improving the profitability and competitiveness state-owned enterprises. The threats of civil war and political instability might have driven the Russian federation towards hasty privatisation of many government assets. This privatisation has significantly contributed to continued economic problems faced in the country two decades after the privatisation of state enterprises. Conclusion Privatisation of state-owned enterprises has continuously been established as the solution towards making these establishments become competitive and profitable. The element of having many government-controlled firms within an economic system becomes a factor supporting monopolistic economic system. Many communist societies remain adamant from relinquishing economic control, and presenting a market economic system. While privatisation could be utilised in ensuring profitability and competitiveness of ineffective government enterprises, the privatisation process must be undertaken carefully for successful privatisation. Quick privatisation process remains dangerous as many factors could become undermined in the privatisation process. Effectiveness of the privatisation remains dependent on consideration of the consequences and not assumption of automatically gaining benefits. The purpose of implementing privatisation should be the improvement of operations, as political gains cannot transform the economic system. References Chiu, B. & Lewis, M., 2006. Reforming China’s State-owned Enterprises and Banks, New York: Edward Elgar Publishing. Hanson, P., 2007. The Russian Economic Puzzle: Going Forwards, Backwards, or Sideways? International Affairs, 83(5), pp.876–877. Lin, J.Y., Cai, F. & Li, Z., 2001. State-owned Enterprise Reform in China, Beijing: China: Chinese University Press. Mosca, M., 2008. On the origins of the concept of natural monopoly. The European Journal of the History of Economic Thought, 45(2), pp.317–353. Ramamurti, R. & Vernon, R., 1991. Privatization and Control of State-Owned Enterprises, Geneva: World Bank. Shleifer, A. & Treisman, D., 2000. Without a Map: Political Tactics and Economic Reform in Russia, Cambridge: MIT Press. Sun, Q., Tong, W.H. & Tong, J., 2002. How does government ownership affect firm performance? Evidence from China’s privatization experience. Journal of Business Finance & Accounting, 29(1-2), pp.1–27. Tian, L. & Estrin, S., 2008. Retained state shareholding in Chinese PLCs: does government ownership always reduce corporate value? Journal of Comparative Economics, 36(1), pp.74–89.  Read More