Thoughts prompted by an interview with CKGSB

Along with many other worthies, I was interviewed for a long article on state-owned enterprises in the Cheung Kong Graduate School of Business magazine. One of the questions that I was asked, which is one of the ones people always ask, is: aren’t SOEs bad for China’s growth?

Given that profitability and productivity is systematically lower in state firms compared to private firms, it seems like the answer should be yes. Yet it’s fairly clear that in China’s case, growth is higher than it would be otherwise, precisely because SOEs have maintained very high rates of investment spending. So the growth numbers are probably not where the economic effects of SOEs are most obvious. But I suggested that they can still be seen if you take a broader view:

“Having a large share of economic activity controlled by state-owned enterprises means larger potential for corruption, lower potential for innovation and a smaller range of opportunities for people to pursue different careers and lifestyles,” says Batson. “There are a lot of effects on how the economy is structured that make a difference to people aside from the effects on the growth rate.”

For me, the broader point that came out of this discussion was this: the question of whether China’s economy should be organized around a large role for SOEs is ultimately not a technical question about growth maximization but one about values, what kind of society is desired. As long as the costs are not overwhelming–as they were during the 1990s, when the entire state sector was losing money–the government can continue to pursue its socialist values. And so far the costs have indeed been manageable.

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