Economics of State-Owned Enterprises

Abstract

State-owned enterprises (SOEs) account for a substantial proportion of GDP, employment and assets in many countries. This article reviews the theory relating to SOEs: their economic rationale, the circumstances in which SOEs are the preferred form of government intervention, and their efficiency and welfare consequences. Based on the theory and empirical evidence, we develop a novel five-step framework that can guide policymakers and economic advisors in making decisions about maintaining and/or creating SOEs. The framework suggests that the use of SOEs should be limited to circumstances in which a market failure exists, less invasive forms of intervention such as regulation/taxes/subsidies and private sector contracting are ineffective or not possible, and the welfare loss of the market failure exceeds the costs, distortions and inefficiencies of SOEs.

Keywords: state-owned enterprise, government, market failure, efficiency, social welfare

JEL Classification: H11, H23, H41, D60, L32, L51, P43