The role of state enterprises in the transition from command to market economies

Abstract

In transition from command to market economies total privatization has proved to be impossible to achieve, and a substantial part of large enterprises are likely to remain in full or partial state ownership. Hasty privatization has in many cases even proved to be destructive. There is a need to reconsider the basic approach to transition. Contrary to conventional wisdom prevailing in mainstream economics state-owned enterprises (SOEs) are not necessarily inferior to private firms in economic efficiency. J. Kornai's soft-budget constraint is reconsidered. Two models are suggested under which SOEs may prove to be viable in the long run and serve to promote a smoother physical transition. Under Model One (which is the general case) SOEs are largely separated from the state and operate on the basis of profit maximization. Under Model Two (which applies to certain industries) different objective functions are chosen for purposes of economic efficiency. Finally, preserving SOEs is seen as an alternative means of reducing inequitable income distribution at the source where primary incomes are created.