"State capitalism" (5 of 8): mixed results?

The state has a limited role in the neoliberal doctrine. Even the basic functions of military and policing are being increasingly privatized, though strong government in defense of corporate stability and the comfort of the one-percenters is still consider a noble function of government. At most, the neoliberal faith sees a role for affirmative government in providing infrastructure, trained workers, subsidies for developing but as-yet-unprofitable technologies.

That's the subtext of this entry into The Economist's special report articles on "state capitalism", Mixed bag: SOEs are good at infrastructure projects, not so good at innovation 01/21/2012 issue.

"For many Chinese people high-speed trains are becoming a normal convenience," it says, meaning higher speeds than are standard in western Europe or (it goes without saying) the United States. But here we have to give the authors' neoliberalism some credit. They weave an argument that a medieval theologian would appreciate:

A balanced assessment of state capitalism has to allow for three caveats. The first is that there is no clear dividing line between state-owned and private companies. "Private" champions such as Huawei, the telecoms giant, have repeatedly been given government help. This makes it hard to produce precise calculations about the productivity of the two sectors. Second, ownership is not the only thing in play. Some of the problems, and the successes, of state capitalism have more to do with rapid development than with state ownership. Third, everything depends on context. It is quite possible for state capitalism to work well in some areas (eg, infrastructure) and badly in others (eg, consumer goods). It is also possible for it to boost growth at one stage of development and impede it at another.

So, government is still good for some things, like making the trains run on time. But for the creative stuff that makes lots of money, only private businesses can do that right. Or rather, private businesses do it the best. Or in a way that makes more money for private investors. Or something.

Yet the odds on any of these efforts succeeding are low. Governments are good at providing the seedcorn for innovation: America’s, for instance, provided some of the funding for Stanford University and even helped to found the first venture-capital company. But they are bad at turning seedcorn into bread. Josh Lerner, of Harvard Business School, describes state-sponsored innovation as a boulevard of broken dreams , a term more often applied to the entertainment industry. Malaysia's $150m BioValley, which opened in 2005, is now known as the "Valley of the Bio Ghosts" . Dubai has produced more red ink than new products. ...

There is striking evidence that state-owned companies are not only less innovative but also less productive than their private competitors. The Beijing-based Unirule Institute of Economics argues that, allowing for all the hidden subsidies such as free land, the average real return on equity for state-owned companies between 2001 and 2009 was -1.47%. Older studies suggest that productivity decreases with every step away from 100% private to 100% state-owned. An OECD paper in 2005 noted that the total factor productivity of private companies is twice that of state companies. And a study by the McKinsey Global Institute in the same year found that companies in which the state holds a minority stake are 70% more productive than wholly state-owned ones.

But this doesn't shed much light on why this should be so. For that matter, it's not even clear from this piece why it should be that the state is better at infrastructure than at innovation. And even the terms of the comparison leave a lot to be desired: just what kind of "innovation" do they mean? Certainly, some of the most important scientific discoveries that lead to commercial applications are developed in public universities - although most people would probably be surprised to hear how little direct state appropriations fund state universities these days. Ten percent is not unusual.

And it was the Pentagon that famously developed the Internet. In the US, our advocates for the magic of the Private Sector tend to exempt the Pentagon for the mystical curse they seem to think lays upon all the rest of the governmental functions. And maybe the Federal Reserve. But the Internet, I would say, was quite a significant innovation.

But it's also obvious that the authors of this piece are a bit nervous over their sweeping conclusions. Because after citing those studies just mentioned about much lower productivity in state companies, they go on to note:

But poor productivity has not stopped them from making lots of money. In 2009 just two Chinese state-owned companies China Mobile and China National Petroleum Corporation made more profits ($33 billion) than China's 500 most profitable private companies combined.

The point of reference of this whole series is that state-owned business is somehow inferior - less productive, less innovative - than private companies. It's a familiar assumption, and one you're not likely to hear Erin Burnett on CNN challenging. But this series is interesting because it shows that when even writers with what seems to be a strong ideological bent in constructing the stories start grappling with the actual facts of state-owned versus private enterprises, things quickly start looking far more complicated than the inefficient government/brilliant efficient private sector dichotomy which neoliberalism shares with hack "free enterprise" propaganda from Chambers of Commerce over the decades.

Tags: state capitalism