State-Owned Enterprises in a Mixed Economy Q Taylor & Francis ~- Taylor & Francis Group http:// taylorandfra ncis.com State-Owned Enterprises in a Mixed Economy Micro Versus Macro Economic Objectives Mehdi Haririan First published 1989 by Westview Press, Inc. Published 2019 by Routledge 52 Vanderbilt Avenue, New York, NY 10017 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © 1989 Taylor & Francis All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Haririan, Mehdi State-owned enterprises in a mixed economy: micro versus macro economic objectives p. cm.-(Westview special studies in industrial policy and development) Includes index. ISBN 0-8133-7699-8 1. Government business enterprises. 2. Efficiency, Industrial. I. Title. II. Series. HD3850.H36 1989 350.009'2-dc19 88-36479 CIP ISBN 13: 978-0-367-28877-8 (hbk) To my father, Mohamad Rahim Haririan, and my mother, Maryam Ronasi, who helped me to appreciate the importance of scholarship and ideas and to my wife, Christine, for her understanding and moral support during the preparation of this book Q Taylor & Francis ~- Taylor & Francis Group http:// taylorandfra ncis.com Contents List ofTables and Figures ix List of Appendices xi Foreword, Willi Semmler xiii Prefa ce xvii 1 Growth and Expansion of SOEs 1 Causes and Motives, 1 Economic Reasons, 4 SOEs from a Historical Perspective, 9 SOEs from a Political Perspective, 10 SOEs Defined, 11 Economic Theory and Firm Behavior, 13 Expansion of Mixed Enterprises, 14 Extent of SOEs, 16 Conclusion, 17 2 Investment Criteria for SOEs 19 Test Discount Rate O'DR), 20 Required Rate of Return (RRR), 24 Some Alternative Approaches to Determining the Rate of Discount in SOEs, 29 Treatment of Risk and Uncertainty, 32 Conclusion, 34 Financing Sources for SOEs 37 Different Sources of Finance, 37 Debt Financing and Macro Objectives, 50 Conclusion, 54 4 Empirical Evidence on Operating Surplus, Capital Requirements, and Debt in SOEs 55 Conclusion, 66 5 Price Formation for SOEs 67 Marginal Cost Pricing, 69 Pricing Mechanism: Cost-Axiomatic, 80 viii Pricing Policies: Post-Keynesian and Post-Marxian, 85 Economies of Scale and Scope in Multiproduct SOEs, 91 The Classical Framework, 94 Conclusion, 101 ' Conflict in Micro and Macro Objectives ofSOEs 103 Efficiency Conditions, 104 Contract Between Government and SOEs, 107 Micro and Macro Objectives of SOEs, 107 The Goal Attainment Model, 111 The Application of Goal Attainment Model to Evaluate SOEs, 113 Demonstrable Biases, 119 Conclusion, 127 7 Summary and Conclusions 129 Appendices 137 Bibliography 175 Author Index 189 Subject Index 193 Tables and Figures Tables 1.1 Number of Public Nonfinancial Enterprises in OECD Countries 17 2.1 Investment Criteria 21 2.2 Percentage Share in Gross Fixed Capital Formation to Percentage Share in GDP at Factor Cost and Vice Versa 28 4.1 Comparative Productivity in Public Utilities, Transport, and Communications, Averaged from 19~1977 57 4.2 Capital Intensity Ratio, I<, for Some Developed and Developing Nations 58 4.3 Summary of Regression Analysis for Dependent (y) and Independent Variables and Pearson's Product Moment (r) 62 6.1 Profitability of Public Corporations and of Industrial and Commercial Companies (Percentages) 121 6.2 The Marketed Output Surplus as a Percentage of Net Marketed Output 122 6.3 Operating Surplus and Factor Productivity: Manufacturing Sector, Averaged from 1970-1975 (In Thousand Shilling) 123 6.4 A Comparison of the Rates of Return Between Private Enterprises and SOEs in England for Similar Industries in 1976 124 6.5 Severance Pay (in Months of Base Salary Provided) 125 6.6 Comparison of Increase in Labor Costs and Prices 125 Figures 5.1 Cost Pricing Guideline for Case I 87 5.2 Cost Pricing Guideline for Case II 91 6.1 Case I, When Planned and Actual Subsidies Are F.quivalent 115 6.2 Case II, When Planned and Actual Subsidies Are Unequal 116 6.3 When Cost of Commercial Objectives Is Underestimated 117