The Role of Public Enterprises in the National Economy

Public sector enterprises (PSEs) continue to play an important role in many developing economies, though they are frequently poorly managed and contribute to fiscal deficits. The debate about privatisation typically compares the efficiency of PSEs with comparable private firms, but the more interesting question is why in some countries both public and private firms are efficient, while in others both are inefficient. The paper argues that the key to successful development is the creation of future-oriented institutions to compensate for the critical missing market for future output, and this in turn requires the state to commit itself to ensuring secure title to future returns. If the private sector lacks confidence in its title the state may need to finance investment while establishing its reputation. The paper examines the evidence from Korea, India and Eastern Europe, discusses the appropriate boundaries of the state, and the management of PSEs.