The Favored Status of the State Entrepreneur in Economic Development Programs

Abstract

In this paper a number of factors affecting economic assistance programs in underdeveloped areas are examined, and the conclusion reached that such programs contain a built-in bias which channels investment funds to governmentowned enterprises at the expense of private entrepreneurs. Financiers want to see a prospectively enterprise with a substantial safety margin against adverse developments before they are ready to supply investment funds. But entrepreneurial programming quite generally, and especially in underdeveloped countries, is guided by numerous other considerations besides maximizing profits within limits dictated by considerations of safety. Consequently there is a large gulf between plans as drawn up by prospective entrepreneurs in underdeveloped areas and as approved by Western bankers and cost accountants. Clearly, there is a very difficult problem of communication deriving from the great differences in the cultural environments of lenders and borrowers. The process of project selection by Western financiers for obvious reasons uncovers great weaknesses in the projects submitted (i. e., in the new factor combinations), and the unfavorable diagnoses result in the elimination of many private entrepreneurs from the competitive arena. The mortality of project proposals, however, is not so great when projects are to be implemented by the State as entrepreneur. This might seem odd since the State has to draw on the same limited reservoir of imperfect entrepreneurs as the private sector, and the new factor combinations proposed are no better and, in fact, are sometimes worse. The decisions favoring the State as owner-operator--insofar as they are not based on political grounds-seem to be due to the fact that the State is able to project the picture of a enterprise notwithstanding the inferior factor combinations, by means of subsidized factor costs--an avenue not generally open to the private entrepreneur. As a result we get viable enterprises, bad allocations of resources, and very questionable additions to the total output of the country concerned. A plea is made for comparing state and private enterprises on the basis of realistic factor costs.