How are China’s SOEs obstacles to reform?

Almost every feature in the modern economic landscape emerges, not through anyone’s design but spontaneously, in order to solve an optimization problem that involves tradeoffs.  Why not China’s State Owned Enterprises (SOEs) too?

For all the uncompetitive, lumbering, sluggish, internally inefficient, powerful interests that SOEs represent generally, there is the possibility that they might serve an important social role. How?

SOEs can stabilize employment. By definition, they don’t chase short-term profits, and so even as the overall economy slows, they can keep hiring. In doing so, they maintain employment growth at the margin, and help keep up consumption demand. Conversely, when the economy over-heats, they don’t have to ride the same faddish hiring pursuits as everyone else and aggravate high and increasingly wage-inflating demand for workers. Instead, SOEs can just keep on a slower steady trajectory, and so, at the margin, help reduce over-heating in the economy overall.

This isn’t to suggest that SOEs can be permanently out of step with the rest of China’s increasingly competitive economy, but instead to argue that in the short to medium term, being out of step can be a positive development. Through stabilizing the aggregate economy, SOEs can provide a public good that profit-seeking, market-driven firms and businesses cannot. Counter-cyclical stabilization policy is hardly at odds with sensible modern macroeconomic policy.

The same way that they can help smooth employment and growth over time, SOEs can also help stabilize and reduce inequality across space. Should SOEs re-locate towards the relatively under-developed parts of western China, they need not be daunted by poor infrastructure and transporation links cutting into profitability. Indeed, by such relocation, SOes can help propel the building of those transportation links, and therefore be part of a big-push initiative to rebalance geographically China’s economic development.

So, sure, if your business has been steamrollered by a gigantic State Owned Enterprise, or if you’re concerned about income inequality, you would think SOEs hold back progress and distort market incentives. But post-2008 hardly anyone clings any longer to pure market fundamentalism.

Might the sluggishness and lack of competitiveness in SOEs actually be part of a gigantic emergent mathematical program that seeks to trade off stability and economic efficiency? (in Chinese, 国企存在的意义主要是稳定民心和平衡市场)

2016.11.14-Danny.Quah-ifeng-SOEs

Also a bit of Economics and IR.

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Danny Quah

I am Li Ka Shing Professor of Economics, Lee Kuan Yew School of Public Policy, NUS. I work on economic principles for world order and on empirics for a shifting global economy.

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