Front Matter

Front Matter

Clive Gray, R. Short, and Robert Floyd
Published Date:
September 1984
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    © 1984 International Monetary Fund

    Reprinted March 1986

    The term “country,” as used in this publication, does not in all cases refer to a territorial entity that is a state as understood by international law and practice; the term also covers some territorial entities that are not states but for which statistical data are maintained and provided internationally on a separate and independent basis.

    International Standard Book Number

    ISBN 9780939934300 (softcover)


    Publication of the present volume, with its three papers on macroeconomic aspects of public enterprise in mixed economies, marks an important stage in the Fund’s interest in the public enterprise sector as affecting the macroeconomic stability of members with mixed economies.

    In its periodic consultations with members and in negotiating country programs associated with the use of Fund resources, the Fund has often noted the presence of economic imbalances that arise in part from the implementation of government policies through the medium of public enterprises. Prominent among these are policies of controlling prices of public services, foodgrains, and other basic wage goods, which often prevent public enterprises from covering their costs, with corresponding fiscal and monetary repercussions. In part, these imbalances have related to the efficiency with which the producing units that make up the sector carry out the commercial role entrusted to them.

    The Fund has taken interest in this aspect of the problem when the aggregate impact of inefficiency in the public enterprise sector as a whole or in a number of major producing units has resulted in budgetary deficits too large to be financed under conditions of monetary stability. In a number of countries the public enterprise deficit has been identified as a proximate cause of excessive credit creation, leading to monetary expansion, price inflation, and, ultimately, to balance of payments pressures.

    With the publication of these papers, a largely untapped field—macroeconomic analysis of public enterprise in mixed economies—is being opened up for theoretical debate and statistical analysis. All three papers underline the contrast between the reliance that many governments place on public enterprise to promote growth and to achieve distributional and other objectives, and the paucity of the data that are gathered, collated, and analyzed as a basis for determining how far the objectives are being furthered and at what cost. The high priority that needs to be accorded such work in member countries cannot be doubted.

    J. de Larosière

    Managing Director

    International Monetary Fund

    September 1984


    The following symbols have been used throughout this volume:

    • … to indicate that data are not available:

    • — to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;

    • – between years or months (e.g., 1979–81 or January-June) to indicate the years or months covered, including the beginning and ending years or months;

    • / between years (e.g., 1980/81) to indicate a crop or fiscal (financial) year.

    “Billion” means a thousand million.

    Minor discrepancies between constituent figures and totals are due to rounding.


    The three papers in this volume reflect a view that analysis of the macroeconomic situation in countries with significant public enterprise sectors is enhanced by examining, among other things, the operations of the sector as a whole, or any industrial grouping therein, or even individual enterprises with sufficient weight to exercise a perceptible impact on macroeconomic parameters. Moreover, this interest obtains regardless of whether government imposition of noncommercial objectives on the sector or the latter’s intrinsic efficiency in conducting commercial operations is regarded as the primary determinant of the outcome of those operations.

    The ultimate implication of the papers is that, insofar as any facet of public enterprise operations is found detrimental to a country’s macroeconomic stability, the formulation of remedies addressing the factors in question is properly the concern of national policymakers and others with responsibility for restoring stability. It is in this spirit that the first paper, by Robert H. Floyd, summarizes the main issues in the debate currently under way in many countries with regard to ways and means of ensuring that public enterprises promote the economic and social objectives set for them without undermining macroeconomic stability.

    The second paper, by Clive S. Gray, establishes a conceptual framework for determining the macroeconomic impact of a country’s public enterprise sector, or any portion of the sector that may be of interest in a specific context. Emphasis is placed on defining algebraic indicators of such impact. In the final paper, R. P. Short presents cross-country comparisons, for up to 90 countries, of those indicators that lend themselves to estimation on the basis of published statistics.

    The remainder of this introduction addresses the following points: (1) defining the concept of public enterprise as used in the three papers; (2) illustrating, by way of a summary of Short’s paper, the macroeconomic phenomena associated with public enterprise operations which have resulted in bringing the sector as such within the scope of Fund attention; (3) presenting highlights of the other two papers; and (4) drawing provisional conclusions with respect to priorities for future data collection and analysis.

    Concept of Public Enterprise

    As used in all three papers, “public enterprise” refers to an organization (1) whose primary function is the production and sale of goods and/or services, and (2) in which government or other government-controlled agencies have an ownership stake that is sufficient to ensure them control over the enterprise, regardless of how actively that control is exercised. Two of the papers cite a third criterion, that the enterprise have at least the nominal objective of substantially covering costs, but reject it on the ground that some governments persist, most often for the sake of preserving employment, in operating enterprises that have no prospects for breaking even, while their efficient counterparts elsewhere do indeed cover costs. Problems that arise in applying the definition for purposes of statistical analysis are discussed at length in Short’s paper.

    The discussion generally excludes government-owned banks, finance companies, insurance companies, and other financial institutions, on the ground that lumping the financial operations of these agencies with those of nonfinancial public enterprises would distort the analysis of macroeconomic issues associated with the latter. However, as indicated in Gray’s paper, issues of efficiency in resource management arise with financial as well as nonfinancial public enterprises, and a bailout of a shaky state bank has similar fiscal and monetary implications to an equivalent subsidy to an inefficient steel mill.

    Finally, restriction of the analysis to mixed economies excludes public enterprise in centrally planned economies from the scope of the volume. Short’s data refer only to mixed economies. While portions of Floyd’s and Gray’s analyses would apply to centrally planned economies, special characteristics of those economic systems raise issues not considered in any of the papers.

    Macroeconomic Parameters of Public Enterprise: A Summary of Short’s Findings

    The weight of the public enterprise sector in many mixed economies is illustrated by R. P. Short’s finding that the sector accounted, in the mid-1970s, for an average (weighted by gross domestic product (GDP)) of 9.5 percent of GDP for close to 50 countries, not including the United States, and an average (weighted by investment) of 16.5 percent of gross fixed capital formation for over 70 countries, also excluding the United States. For developing countries alone the average share of GDP was 8.6 percent and of gross fixed capital formation, 25–27 percent.

    Regardless of its weight in national output or investment, a public enterprise sector that is self-financing, or whose deficits, whether attributable to investment, inefficient operations, or pursuit of noncommercial objectives, are covered out of government resources or private savings under conditions of monetary stability, raises no issues of macroeconomic concern. However, questions of efficiency in resource allocation remain, and no country is spared what appears likely to be a permanent debate about how to ensure that its public enterprises operate more efficiently. Attainment of an acceptable level of efficiency in some cases might involve far-reaching institutional reforms, even compression of a sector that has mushroomed beyond adequate government control.

    Such issues are perhaps of more direct concern to the World Bank than to the Fund. However, Short’s data support the Managing Director’s observation on the contribution of public enterprise deficits to balance of payments pressures in many Fund member countries.

    For 25 developing countries for which data were available, Short estimates the average (weighted by GDP) overall public deficit, before reduction by government current transfers, at 5.5 percent of GDP during the mid-1970s. He further estimates that the overall deficit in developing countries increased by 2.5 percentage points of GDP between the late 1960s and mid-1970s.

    Defining the “budgetary burden” of public enterprises as the residual of government transfers and loans, less loan service payments by the enterprises, Short estimates this burden to average 3.3 percent of GDP for 34 developing countries, compared with a 4.4 percent estimate for the central government’s overall budget deficit in these countries. In other words, public enterprises accounted for three fourths of the central government deficit in the countries in question.

    To the budgetary impact of public enterprise must thus be attributed a portion of the monetary instability that has arisen as governments have reverted to their central banks and/or credit markets to finance budget deficits. Above and beyond government borrowing, public enterprises also revert directly to the credit markets. In a minority of cases some enterprises are entitled to borrow directly from the central bank; in certain other cases commercial banks can rediscount public enterprise obligations with the monetary authority, with analogous impact. According to Short’s computations, in 28 developing countries bank credit to public enterprises grew at 46 percent per annum in the mid-1970s (average rate weighted by GDP), compared with 27 percent for bank credit to other users. Public enterprises’ share in outstanding bank credit virtually tripled, from 10 to 30 percent, over the 1970s. Econometric analysis suggests that expansion of credit to public enterprises translated one-for-one into additional units of total credit.

    Short’s paper does not extend the analysis into estimation of the impact of public enterprise deficits on monetary expansion, price levels, or international payments, since this cannot be handled via cross-country comparisons of the available data but rather requires closer analysis of individual country parameters. However, it is in such repercussions that the Fund’s interest in public enterprise obviously culminates, and the conceptual framework for monetary analysis presented in the final segment of Gray’s paper offers guidelines and formulas for appropriate computations.

    Highlights of Floyd’s Paper

    Robert H. Floyd stresses five leading categories of issues that arise in reviewing the performance of the public enterprise sector as it functions in most mixed economies and in formulating solutions to the macroeconomic problems associated with public enterprise deficits.

    1. Issues of objectives

    Noncommercial objectives loom large in the establishment and operations of many public enterprises, but governments often fail to state them with sufficient clarity to guide managers concretely. Moreover, trade-offs between overlapping objectives are inadequately recognized, and the cost of achieving alternative objectives needs to be quantified as a basis for determining pricing policies and/or financial targets.

    2. Issues of control

    In many countries procedures for exercise of government control involve too much interference in operational matters that should remain the prerogative of management, and/or inadequate intervention at the policy level where adherence to government’s objectives must be sought. More use should be made of financial targets as a control device.

    3. Issues of pricing

    Prices of public enterprise inputs and outputs traded in noncompetitive markets are frequently controlled by government at levels diverging from marginal opportunity cost, engendering financial losses and social costs that outweigh any transitory advantages from subsidizing particular groups of consumers and/or procedures. For pursuit of noncommercial objectives, explicit taxes and subsidies are generally preferable to price control, the use of which should be largely restricted to curbing abuse of market power.

    4. Issues of information

    Expansion and systematization of data collection on public enterprise operations by the ministry of finance or its proxy would yield a high return in most countries by way of providing elements for improved policy formulation at both the microeconomic and macroeconomic levels.

    5. Issues of financing

    The choice of optimal proportions of debt and equity capital in public enterprise financing is a much-discussed issue, but one of distinctly secondary importance to ensuring a level of return that covers the opportunity cost of all forms of capital. Another key issue is the privileged status of public enterprises as applicants for credit from public financial institutions and the credit market at large; in the short run this advantage tends to displace private borrowers, in the long run its inflationary impact is paramount. Also touched on are the question of government control of direct foreign borrowing by public enterprises and their entitlement to discretionary use of any foreign exchange earnings.

    Highlights of Gray’s Paper

    Describing the intrinsic social efficiency of government in organizing scarce factors to produce goods and services for sale as the “quintessential policy issue” of public enterprise, Clive Gray’s conceptual paper defines five logical stages in macroeconomic analysis of the public enterprise sector, starting with (1) aggregation of nominal (accounting) parameters and extending through (2) measurement of shares of public enterprise parameters attributable to government’s imposition of noncommercial objectives compared with those reflecting commercial operations; (3) adjusting nominal prices for opportunity costs, especially but not solely the opportunity cost of capital, in order to correct for artificially low interest rates; (4) defining criterion values against which to measure public enterprise sector performance on a partial equilibrium basis—the principal such value being full coverage of opportunity cost, that is, zero deficits in an economic sense; and, finally, (5) comparison of adjusted public enterprise sector parameters with simulated outcomes of alternative modes of industrial organization within a general equilibrium framework. Gray suggests that country analysts, with encouragement and, potentially, technical assistance from international agencies such as the Fund, should be directing their attention to points 1–4, leaving the general equilibrium analysis to a later stage.

    The bulk of the paper focuses on deriving algebraic indicators of the public enterprise sector’s fiscal and monetary impact. On the fiscal side, some indicators compare the sector’s performance with that of the private sector, while others measure its relative performance over time. One key fiscal indicator is the net balance of flows between government and the public enterprise sector, with special attention to the question of whether unrequited grants and implicit subsidies from government compensate the sector for financial losses incurred in its pursuit of noncommercial objectives. Classifying these objectives under economic stabilization, economic growth, income redistribution, localization/indigenization, and miscellaneous, Appendix I discusses ways of assessing the public enterprise sector’s performance in achieving them vis-à-vis alternative approaches, notably via incentives to and regulation of the private sector.

    Another key indicator is the public enterprise sector’s aggregate return on capital stock, revalued to current replacement values, and comparison of that return with the social discount rate. Appendix II outlines a shortcut (Harberger’s application of the perpetual inventory approach) to revaluation of the capital stock.

    The concluding section on monetary indicators accents the public enterprise sector’s appropriation of credit as a ratio to its share in output, and provides formulas for computing the impact of a given amount of credit creation to finance public enterprise deficits on money supply, price indices, and imports.


    The intercountry statistical comparisons in which R. P. Short has pioneered indicate the order of magnitude of the macroeconomic problems arising from public enterprise operations and show these problems obtaining across a broad range of countries. From this point the focus must turn to in-depth analysis of individual countries, which should point the way to appropriate remedies, generally to be sought in the resolution of one or (usually) more of the issues identified by Robert H. Floyd, by assessing the extent to which financial imbalances of the public enterprise sector result from inefficient operation, excessive investment, and/or imposition of other noncommercial objectives on enterprises. Application of the guidelines in Clive S. Gray’s paper is commended to staff members of national and international agencies charged with such assessment.

    Helpful comments on the papers in this volume were received from a number of staff members in the Fund’s Fiscal Affairs Department, in particular from Alan A. Tail, Deputy Director; A. Premchand, Advisor; Ved P. Gandhi, Division Chief; Peter S. Heller, Division Chief; and Pedro Radó, Senior Economist. Comments were also received from Ana María Jul, Assistant Division Chief, and José Fajgen-baum. Economist, in the Western Hemisphere Department of the fund.

    Rasheed O. Khalid, Deputy Director, Fiscal Affairs Department, and Ernst-Albrecht Conrad, Division Chief, reviewed the papers for publication.

    The book was edited and prepared for publication by Rosanne Heller. The staff of the Graphics Section of the Fund helped in a number of ways: Kenneth Hutcherson oversaw the production and typesetting process, and Hördur Karlsson and Carlos Cornelio designed the cover. The production process in the Fiscal Affairs Department was coordinated by Moira M. Lavery, and the typing and coding were done by Lyndsey B. Livingstone, M. Regina Llana, Nita Merchant, and Sonia A. Piccinini.

    The opinions expressed in the papers are those of the authors and do not necessarily represent the views of either the Fund or other staff members.

    Vito Tanzi


    Fiscal Affairs Department

    International Monetary Fund

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