State Capitalism: Why SOEs Matter and the Challenges They Face

385 Pages·2022·18.938 MB·English

by  Lalita Som

State Capitalism

State Capitalism
Why SOEs Matter and the Challenges
They Face
LALITA SOM
1
3
Great Clarendon Street, Oxford, ox2 6dp,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Oxford University Press 2022
The moral rights of the author have been asserted
First Edition published in 2022
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by licence or under terms agreed with the appropriate reprographics
rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America
British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number: 2022931624
ISBN 978– 0– 19– 284959– 5
DOI: 10.1093/ oso/ 9780192849595.001.0001
Printed in India by Rakmo Press Pvt. Ltd.
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
To my late grandparents.

Foreword
Much of the influence that governments have on their societies and econ-
omies occurs, in one form or other, through the medium of regulation.
Nevertheless, devising regulations that promote economic and social
advancement is rarely straightforward. There are technical complexities
and uncertainties to grapple with, and often there are political constraints
and pressures to surmount. The result can be regulatory initiatives that
are deficient in various ways. They may have unintended consequences,
including ‘collateral damage’ to those not directly targeted. They may
achieve their goals at excessive cost. Moreover, in some cases they may
not even serve their goals at all.
As ably demonstrated by the OECD Regulatory Policy Outlooks series,
regulating in ‘normal times’ already represented a significant challenge
for governments. The global financial crisis, the half-l ife of which is still
affecting many countries, was a dramatic illustration of the consequences
of regulatory failures— involving a combination of problems in financial
market and consumer credit regulation, housing policy, and systemic risk
management. Yet the consequences of these failures pale almost into in-
significance compared with the seemingly insurmountable challenges
societies currently face and will likely face in the coming years. Against
a backdrop of a once in a century global health and economic crisis—
coupled with climate change, inequalities from globalisation, ageing
population, and seemingly insatiable spread of misinformation on social
media platforms— sound even visionary public policy coupled with well-
functioning regulatory frameworks have never been more needed.
The necessary rebuilding of economies and society will challenge the
very foundations of the social compact— something that has become in-
creasingly strained in recent times. It will require change to the regulatory
frameworks that underpin the market economy, to better balance eco-
nomic efficiency with inclusiveness, resilience, and sustainability goals.
To combat the existential challenges of this era, the state will inevitably
viii Foreword
need to intervene in markets and society to a much greater degree than
in the past.
Lalita Som’s very timely and thoughtful book asks whether State cap-
italism is fit for purpose to rise to the challenges of the day. Based on
a number of case studies around the world, she paints a not all too re-
assuring picture. An important lesson from the book is that State capit-
alism and ensuing poor regulatory outcomes should not be regarded as
aberrations. On the contrary, poor regulation is better thought of as the
natural order of things, being much easier to achieve than good regula-
tion. It requires less effort and generally faces less political resistance, es-
pecially where certain groups can benefit from it in opaque ways at the
cost of the wider community. State economic action, even when ill con-
ceived, is often rewarded with public acclaim, as tangible evidence that
government is ‘doing something’. These uneven political pressures have
often manifested themselves in a ‘regulate first, ask questions later’ ap-
proach—t he antithesis of good policy process.
The case studies confirm that there are no simple prescriptions for
achieving State capitalism ‘nirvana’. Good regulation can only be secured
through systems within government that actually foster it— systems that
make it harder to regulate poorly than to regulate well. Dr Som points
to what is really needed is cultural change. The culture within the State
influences decisions at both the political and bureaucratic levels, about
whether, what, and how to regulate, as well as how to administer regu-
lation in place. In short, it exerts influence throughout the whole policy
cycle. That said, while political and bureaucratic cultures are not immut-
able, they are not easily changed and do so only slowly.
The book focuses much attention on SOEs, an important yet often
insidious instrument of State capitalism. In many countries around the
world, SOEs remain an important presence and account for approxi-
mately one- fifth of the world’s total stock market capitalization. As State
Capitalism shows, SOEs remain a strong pillar of the economy in both
large and small economies—e ven after successive waves of privatization
starting in the 1980s. It also recognises that SOEs often play a vital role in
delivering basic services, such as water and energy, and their perform-
ance is critical for citizens and the broader development agenda.
State Capitalism also documents very well, and no doubt disturbingly,
the dark side of SOEs. The book shows that regulatory preference for, and
Foreword ix
regulatory protection of, SOEs continues to be high in most emerging
market countries. Moreover, government backing and favour often times
gives SOEs unfair competitive advantage in their domestic market, where
they have crowded out private investment in new markets, products, and
technologies and have usurped entrepreneurial activity. The book also
shows that many large SOEs have provided services at below cost to pre-
ferred political constituencies for electoral gains and have consequently
failed other consumers by maintaining unjustifiably high costs for goods
and services. A disturbing trend is that in many instances SOEs have col-
luded to form the core of a public enterprise sphere of influence and have
been proactively and successfully determining the terms under which the
government allows them to operate.
State Capitalism rightly points to regulatory agencies as the public
bodies that are best suited to ensure consumer’s access to and the quality
of key public services provided by SOEs. Regulators also need to play a
critical role in the stewardship of SOE resource management including
new investments. They also need to oversee markets, enhancing effi-
ciency, and providing confidence, when SOEs compete in sectors that
also include private sector interest. This is no easy task. Regulators op-
erate in a complex environment at the interface among public authorities,
SOEs, the private sector and end-u sers. As ‘referees’, they must often bal-
ance competing wants and needs from different actors through the ap-
plication of good governance. This means that they must behave and act
objectively, impartially, and consistently, without conflict of interest, bias,
or undue influence.
The case studies in State Capitalism illustrate the challenges that regu-
lators face in managing the interface between state and the market.
Regulatory agencies have often operated with varying and sometimes
ambiguous degrees of independence from the executive (and inherently
more political) branch of government. Weak independence risks that a
different set of norms is applied to SOEs or norms are partially applied by
the regulator due to political pressures on how it discharges its powers.
As such, the absence of strong and independent regulatory bodies in
creating the necessary checks and balances against discretionary gov-
ernmental action has sometimes, threatened the performance of SOEs.
Likewise, the legislative framework that empowers regulators to pro-
vide an independent review of the economics of large-s cale projects