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Soft Budget Constraints and State Capitalism

Author

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  • Sergei Guriev

    (European Bank for Reconstruction and Development (EBRD)
    Institut d’études politiques de Paris (Sciences Po)
    Centre for Economic Policy Research (CEPR))

Abstract

I consider the application of János Kornai’s soft budget constraint (SBC) concept to the state capitalist economy. I argue that interaction of SBC with agency problems within the government bureaucracy helps explaining a major feature of state capitalism – failure to privatize underperforming state-owned enterprises (SOEs). Bureaucrats supervising the failing SOEs prefer to keep them afloat and gamble for resurrection; in contrast, privatization would involve recognizing the loss, which would result in acknowledging the bureaucrat’s failure that is disincentivized by the state. This endogenously emerging preferential treatment of state-owned firms creates a competitive advantage against private firms; this explains why in state capitalism privatization may result in lower rather than higher productivity and therefore remain unpopular.

Suggested Citation

  • Sergei Guriev, 2018. "Soft Budget Constraints and State Capitalism," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 68(supplemen), pages 115-124, January.
    • Handle: RePEc:aka:aoecon:v:68:y:2018:i:supplement1:p:115-124
    Note: The views presented here are those of the author and not necessarily of the EBRD.
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    File URL: http://www.akademiai.com/doi/pdf/10.1556/032.2018.68.S.9
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    Cited by:

    1. Evguenia Bessonova & Ksenia Gonchar, 2022. "Can the Growth of Competitive Pressure and Hardening of Budget Constraints Reduce the Efficiency Loss due to State Ownership?," Russian Journal of Money and Finance, Bank of Russia, vol. 81(3), pages 22-53, September.
    2. Qin Lu & Zongyi Zhang, 2022. "Do Financial Support Policies Catalyse the Development of New Consumption Field?—Evidence from China’s New Consumer Enterprises," Sustainability, MDPI, vol. 14(20), pages 1-23, October.
    3. Simola, Heli, 2021. "Long-term challenges to Russian economic policy," BOFIT Policy Briefs 11/2021, Bank of Finland Institute for Emerging Economies (BOFIT).
    4. Zhu, Mengye & Qi, Ye & Belis, David & Lu, Jiaqi & Kerremans, Bart, 2019. "The China wind paradox: The role of state-owned enterprises in wind power investment versus wind curtailment," Energy Policy, Elsevier, vol. 127(C), pages 200-212.

    More about this item

    Keywords

    soft budget constraints; state capitalism; János Kornai;
    All these keywords.

    JEL classification:

    • P12 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Enterprises
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
    • P51 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Analysis of Economic Systems

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