STATE OWNED ENTERPRISES: THEIRS AND OURS

A STATE-OWNED ENTERPRISE

The very existence of the State means that certain groups and individuals will receive favored treatment, while those who are disfavored will be marginalized to varying degrees, or even prohibited from entering the market altogether:  From the first historic forms of the State, the State has always formed and will always form alliances with certain individuals and segments of society -- to which the government bureaucrats will provide favors and special dispensations, and to the severe disadvantage of those individuals and groups that are not so favored.

If you study the history of any industry in the United States -- from the railroads, to telephone companies, to steel and automobile companies -- you will find that the most successful companies are those which have received the most favorable treatment from the State. Sometimes it is "legal," in the form of regulations largely crafted by the regulated industries themselves (which is exactly what happened during the Progressive Era of the early twentieth century: "It was not a coincidence that the results of progressivism were precisely what many major business interests desired," Gabriel Kolko), subsidies and the like, or illegal, via bribes and other forms of payoffs. [Arthur Silber]

Almost everything in America was invented and developed using taxpayers money, yours and mine. Solar panels, atomic power, computers, pharmaceutical drugs, space travel, the Internet.  If no market existed for them then taxpayers money was used to buy them and create a market.  When these technologies were mature they were given to private individuals and companies for their profit.  

To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent. While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its tax rate since 2007 has been 2.4 percent. [Bloomberg].  Google, a corporation with all the rights of an American citizen, pays 10% of the taxes that you and I pay.  So do all the other big corporations in America.  Many pay none at all.

The Chinese Government is trying a different approach:  keeping the capitalist bird in a socialist cage. The government keeps control of critical technologies and companies, keeps the jobs in the country, and keeps the profits in the country for the benefit of taxpayers. That way the corporations' profits pay the costs of government and keep citizens' taxes low. Until recently this was considered impossible, but recently The Financial Times took another look:

A decade ago, China’s state-owned sector looked like an economic disaster waiting to happen. In the aftermath of the 1997 Asian financial crisis, average profit margins in Chinese state companies fell to close to zero, and many reported huge losses. The government felt it had no option but to embark on a brutal programme of closures that left tens of millions without jobs.

Fast-forward 10 years and the situation is almost unrecognisable. In 2007, the combined profit of the 150 or so companies controlled by the central government is expected to have reached Rmb1,000bn ($140bn). In the five years to 2008, this figure rose by 223 per cent. At the end of last year, the list of the world’s 10 most valuable companies contained four groups controlled by the Chinese state.

What we are witnessing, in other words, is an experiment in capitalism that could challenge much of the conventional wisdom about state ownership. Plenty of countries have strong state-owned companies in semi-monopolies such as telecommunications or heavily regulated sectors such as energy and mining. Yet China is trying to create a series of leading public companies in industries exposed to cut-throat competition, where technology, design and marketing are crucial features – just the sort in which state-owned companies have typically suffered at the hands of private rivals.

According to Andrew Grant, head of McKinsey’s China practice, many of the successful companies in China have what he calls a “hybrid” structure, mixing features of private and state companies. The best SOEs gain financial firepower from their state parents but have sufficient independence to be managed like private companies. Likewise, some of the most successful privately run groups, such as telecommunications equipment maker Huawei and PC manufacturer Lenovo, have been helped by their close ties to government. “You are starting to see the development of a really interesting dynamic in the state sector,” says Mr Grant. “It is not the case that SOEs are going to dominate the entire economy, but I am very optimistic about some of them. Financial Times

In the USA, the commanding heights of capitalism  are owned and controlled by 1% of Americans, but recently we found that many businessmen were incompetent or dishonest and cared nothing for the welfare of the USA, whose technologies they exploited.  They needed trillions of our dollars to stay afloat and that even then they continued to send our jobs abroad.  Not a very good bargain for us.

In China, the commanding heights of capitalism--banks, oil, communications, defence--are owned and controlled by the Government for the benefit of everyone.  And it seems to be working.  Their SOEs are immediately responsive to taxpayers' needs so, when the Financial Crisis struck, they added jobs and boosted investment.  They cooperated with government and, when the government raises their taxes they simply pay up like you and I do.  And they seem to be getting the hang of capitalism quite nicely:

Many SOEs have listed part of their shares, exposing them to at least some shareholder influence and executives' compensation is being linked more to performance rather than bureaucratic formulas.

"SOEs are increasingly competitive in attracting top executive talent," says David Michael, head of Boston Consulting Group's China office. "There are a number of local Chinese managers of multinationals or private sector companies who have gone to work in the State sector."

A similar remark comes from Yin Mingde, a partner at Allpku management consulting company, who said, "There have been increasing signs that China's SOEs are learning the skills of corporate finance. Chinalco's snap purchase of Rio Tinto stock was one example."

Several SOEs have taken on foreign strategic investors in recent years and some have multinational executives on their boards, Yin said, adding. "These relationships have not been without tensions, but they have helped to sharpen performance." [China Daily].

Makes you think, doesn't it?

For an excellent overview of this subject, read John Cassidy's New Yorker piece on Enter the Dragon