Wednesday, November 07, 2007


Dozens of popular opinions have claimed that the size of government and state-owned enterprises does not actually and potentially affect growth performance.

In real terms, the empirical argument in favor of privatization is a simple theoretical and practical fact that the allocation of resources in private ownership is done more effectively than under public ownership. Privatization, in fact, significantly stimulates growth and is a primary tool to reduce external distortions on capital markets and overall economic performance.

When government borrows more, it reduces the amount of capital the investors could borrow, thus raising the level of interest rate. This is a typical situation that describe how resources are scarce and become even scarcier when government funds the budget deficit by borrowing.

In China public ownership is widespread subject to China's economic system. Kerk Phillips and Kunrong Shen's research on the effect of public ownership on regional economic growth in China concludes the following:

"We find that controlling for a variety of other factors, the greater the importance of state owned enterprises, as measured by the proportion of total industrial production they produce, the lower the provincial growth rate. The average estimate is that a decrease in the SOE share of industrial production by ten percentage points increases real GDP growth the following year by 1.14%"

Source: Kerk Phillips, Kunrong Shen: What Effect Does the Size of State-Owned Enterprises Have on Regional Growth in China, Burghham Young University Economics Working Paper, April 2003 (link)

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