Contd from page 54 :
These include the activities of government ministries, but they also include activities of public non-market institutions such as schools, provided they are both controlled and financed by government. This means that the general government sector does not include public corporations or quasi-corporations, although they are part of the public sector.
The overall results suggest that the optimal level of government spending is 25%, according to the Scully model. Chobanov & Mladenova (2009), results show that the government size should not exceed the range from 20 to 30 percent of GDP, if economic growth is to be maximized. This is due to the inefficiency of allocation of scarce resources in the public sector and the crowding-out effect that government investment has on private investment. However, at present, government expenditure of Bangladesh is only 9.01% of its GDP. This is small considering most of the countries in the world.
Table 2: Study Result of Optimum Government Size of Few Countries
Author(s) Period Country/Panel Optimum Size
Chao and Gruber (1998) 1929- 1996 Canada 27%
Scully (2000) 1995 22OECDE/112 countries 20.2-22.3%
Afonso et al. (2003) 1990-2000 23 OECD 35%
Mavrov (2007) 1990-2004 Bulgaria 36-42%
Pevcin (2004) 1950=1996
Sheehey (1993) Panel 15%
Chobanov and Mladenova (2009) 1970-2009 28 EU 25%
Forte and Magazzino (2010) 1970-2009 27 EU 35.39-39.50%
Vedder and Gallaway (1998) 1947-1997 US 17.45%
Chen and Lee (2005) Taiwan 22.83%
Mutascu and Milos (2009) 1999-2008 EU-15 30.42%
Write and MOesen (2009) 23OECDE countries 41.22%
Chukwuemeka and Moses (2012) 1970-2006 Nigeria 23%
Lewis-Bonoe et al (2004) 1975-2002 Carribean 10-16%
Source: Respective Research Study
From the table, most of the study’s optimal size of the government is around 25%. In such a situation, to reduce the government size or reduce the public expenditure through the privatization of the public corporation, the economy may face fore vulnerable position.
B. Employment in the public sector is another important indicator of government size. To regulate and monitor of the public sector, the optimum amount of public servant is essential. It should not be very large or should not be very small.
Table: Percentage of Public Service Employment in Few Asian Countries Countries
Source: https://en.wikipedia.org/wiki/List_of_countries_by_public_sector
Employment in the Public service is only 12% in Bangladesh which is actually very low compared to any other country in the world. As per the calculation by the ILO, among the 87 countries, Bangladesh position is 70th (12%), that is, only above the 11 countries in the world.
If we consider the Asian countries, it is also the lowest in Bangladesh. USA and UK are the most developed country and these countries are advocating for the downsizing government, but the employment in the government sector is respectively 17.6% and 21.5% which is significantly higher. In such a situation, the government of Bangladesh should be more cautious to downsize the public sector. This will make more inefficient of the public sector due to the less than optimum size of the public sector, though there is no appropriate size of government sector employment.
Limitations of SOEs
The state own enterprises are essential which is explained earlier. In spite of above necessity there are a lot of limitations in the public sector enterprises. These are explained in the followings.
Governance challenges: SOEs operate in a highly competitive environment and face immense challenges in terms of accountability and oversight by multiple authorities, outdated processes and lack of new technology, weak internal controls, working in silos, and lack of motivation in employees to excel. There is a widely held connotation that it’s difficult for any organization to sustain and grow if they lack proper governance structure. The same holds good for the public sector enterprise. If several reporting agencies exist with their own specific agendas that may be conflicting with the objectives of the enterprise, the efficiency of the enterprise is likely to get impaired. Thus, many SOEs have reorganized their governance structure to bring about ‘ownership management’
Absence of clear ownership: SOEs face a typical challenge as a government owned organization which is yet to see a clear cut demarcation between ownership and management. As a consequence, there is a frequent interference of the government in the working of these entities and enterprises not functioning as Board managed organizations. This leads to slow and poor decision making and bureaucratization of SOEs.
Poor Project Planning: Investment decisions in many SOEs are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of a precise criterion a flaw in planning have caused undue delays and inflated costs in the commissioning of projects. Sometimes, projects are launched without clear-cut objectives a serious thought. Many projects in the public sector have not been finished according to the time schedule.
Over-capitalization: Due to inefficient financial planning, lack of effective financial control and easy availability of money from the government, several public enterprises suffer from over-capitalization. In Bangladesh there is no report regarding over-capitalization. The Indian Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd. Were over-capitalized. Such over-capitalization resulted in high capital-output ratio an wastage of scarce capital resources.
Excessive overheads: SOEs incur heavy expenditure on social on overheads like townships, schools, hospitals, etc. Recurring expenditure is required for the maintenance of such overhead and welfare facilities.
Over staffing: Manpower planning is not effective due to which several public enterprises. Recruitment is not based on sound labor projections. On the other hand, posts of Chief Executives remain unfilled for years, despite the availability of required personnel.
Under-utilization of capacity: One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effective production planning and control, proper assessment of future needs, adequate supply of power and industrial peace, many industrial peace, many undertakings has failed to make full use of their fixed assets. There is considerable idle capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control.
Lack of a proper price policy: There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings. Public enterprises are expected to achieve various socioeconomic objectives and in the absence of a clear directive, pricing decisions are not always based on rational analysis. In addition to dogmatic price policy, there is a lack of cost-consciousness, quality consciousness, and effective control of waste and efficiency.
Inefficient Management: Managerial efficiency and effectiveness have been low due to uninspiring leadership, too much centralization, frequent transfers and lack of personal stake. Civil servants who are deputed to manage the enterprises, often lack proper training. Political interference in day-to-day affairs, rigid bureaucratic control and ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.
Unsatisfactory industrial relations: In several public enterprises relations between management and labor are far from cordial. Millions of man-days and output have been lost due to strikes and gheraos. Wage disparities have been the main cause of labor trouble in the public sector. The percentage increase in the payments of public sector employees had been higher than the percentage increase in the consumer price index.
Lack of coordination: Various public enterprises are dependent on one another as the output of one enterprise is the input of another. For instance, the efficient functioning of power and steel plants depends on the production and transportation of coal, which in turn is dependent upon supplies of heavy equipment machinery. Despite such interdependence, materials management and research has not been achieved. Coordination in the production programs of different enterprises at various stages would help to reduce excess stocks and shortages of vital inputs.
Inadequate research: In the public enterprises, there are no research activities for the proper policy undertaking. The interesting matter is that, the authority did not fell the necessity of this research.
Difficulties in Obtaining Capital and Expansion of Funds: The Low rate of capital formation results in the slow production process, which further leads to low income and low saving and eventually leading to low investment, hence resulting in inadequate capital. Moreover, absence of orderly capital market in Bangladesh causes complexity in IPOs for expansion of funds.
Different roles of government in business
The Government’s objective is to optimize the role of the state in eliminating the consequences of the crisis and creating appropriate conditions aimed at improving the quality of life. The Government performs many different roles in an economy. Conventionally, it was presumed that role of government is to sustain the law and order, protect a country from external attacks, provide social security, take care of public utilities and maintain peace within a nation. The Government has command over all resources in an economy. Over time these roles have taken a concrete shape to bring about development and growth of an economy as well business. The vision has been to improve international competitiveness, rapid modernization and sustainable growth. For this purpose the government of Bangladesh decided to participate actively in the regulation, promotion and planning of business activities after independence. These roles are essential to provide the platform to excel the competitiveness of businesses domestically, to ensure the balanced regional growth, the constitutional framework, infrastructural improvement and public utilities. Regulatory Role, Entrepreneurial Role, Promotional Role, Planning Role is played by the government in business.
a. Regulatory Role: Generally, the government attempts to measure and control the limits of the Private Sector. Listed below are the major objectives from the government’s end to regulate the business processing/ functioning:
a. To reduce the monopoly, oligopoly, duopoly or any other cartle in the market
b. To provide balance regional growth
c. To supply the essential raw materials to the infant industry
d. To legalized and standardize the functions of private and public sector
In regulatory role, the government directs businesses for their actions. This is done by standardizing the code of conduct, norms and regulations in domestic environments. The Government of Bangladesh has the foremost objective of social welfare; hence they control the business and economic activities in such a way that it benefits the society and buyers. Regulating it involves ceiling the prices, rationing the goods, imposing taxation on excess profits, allocation of foreign exchange, adding restrictions on foreign trade, industrial licensing, etc. It is mainly done in Discretionary measures and non-discretionary measures.
Discretionary measures involve the direct measures by the discretion of of scare recourses for optimum utilization of resources, licensing the goods like hazardous chemicals, defense and railways. Indirect control government majorly regulates the balance regional growth with optimum utilization of resources in a nation as a whole. These discretionary measures are performed at the micro level, i.e. at the firm level or industry level. While regulating government makes sure that the interest of all sections should be maintained. For example, no conflict among the management and labor and labor laws should be preserved administrative authority. These include fixation of prices of commodities, quantitative restrictions on export or import, rationing of supplies of goods, distribution. Contd on page 56
These include the activities of government ministries, but they also include activities of public non-market institutions such as schools, provided they are both controlled and financed by government. This means that the general government sector does not include public corporations or quasi-corporations, although they are part of the public sector.
The overall results suggest that the optimal level of government spending is 25%, according to the Scully model. Chobanov & Mladenova (2009), results show that the government size should not exceed the range from 20 to 30 percent of GDP, if economic growth is to be maximized. This is due to the inefficiency of allocation of scarce resources in the public sector and the crowding-out effect that government investment has on private investment. However, at present, government expenditure of Bangladesh is only 9.01% of its GDP. This is small considering most of the countries in the world.
Table 2: Study Result of Optimum Government Size of Few Countries
Author(s) Period Country/Panel Optimum Size
Chao and Gruber (1998) 1929- 1996 Canada 27%
Scully (2000) 1995 22OECDE/112 countries 20.2-22.3%
Afonso et al. (2003) 1990-2000 23 OECD 35%
Mavrov (2007) 1990-2004 Bulgaria 36-42%
Pevcin (2004) 1950=1996
Sheehey (1993) Panel 15%
Chobanov and Mladenova (2009) 1970-2009 28 EU 25%
Forte and Magazzino (2010) 1970-2009 27 EU 35.39-39.50%
Vedder and Gallaway (1998) 1947-1997 US 17.45%
Chen and Lee (2005) Taiwan 22.83%
Mutascu and Milos (2009) 1999-2008 EU-15 30.42%
Write and MOesen (2009) 23OECDE countries 41.22%
Chukwuemeka and Moses (2012) 1970-2006 Nigeria 23%
Lewis-Bonoe et al (2004) 1975-2002 Carribean 10-16%
Source: Respective Research Study
From the table, most of the study’s optimal size of the government is around 25%. In such a situation, to reduce the government size or reduce the public expenditure through the privatization of the public corporation, the economy may face fore vulnerable position.
B. Employment in the public sector is another important indicator of government size. To regulate and monitor of the public sector, the optimum amount of public servant is essential. It should not be very large or should not be very small.
Table: Percentage of Public Service Employment in Few Asian Countries Countries
Source: https://en.wikipedia.org/wiki/List_of_countries_by_public_sector
Employment in the Public service is only 12% in Bangladesh which is actually very low compared to any other country in the world. As per the calculation by the ILO, among the 87 countries, Bangladesh position is 70th (12%), that is, only above the 11 countries in the world.
If we consider the Asian countries, it is also the lowest in Bangladesh. USA and UK are the most developed country and these countries are advocating for the downsizing government, but the employment in the government sector is respectively 17.6% and 21.5% which is significantly higher. In such a situation, the government of Bangladesh should be more cautious to downsize the public sector. This will make more inefficient of the public sector due to the less than optimum size of the public sector, though there is no appropriate size of government sector employment.
Limitations of SOEs
The state own enterprises are essential which is explained earlier. In spite of above necessity there are a lot of limitations in the public sector enterprises. These are explained in the followings.
Governance challenges: SOEs operate in a highly competitive environment and face immense challenges in terms of accountability and oversight by multiple authorities, outdated processes and lack of new technology, weak internal controls, working in silos, and lack of motivation in employees to excel. There is a widely held connotation that it’s difficult for any organization to sustain and grow if they lack proper governance structure. The same holds good for the public sector enterprise. If several reporting agencies exist with their own specific agendas that may be conflicting with the objectives of the enterprise, the efficiency of the enterprise is likely to get impaired. Thus, many SOEs have reorganized their governance structure to bring about ‘ownership management’
Absence of clear ownership: SOEs face a typical challenge as a government owned organization which is yet to see a clear cut demarcation between ownership and management. As a consequence, there is a frequent interference of the government in the working of these entities and enterprises not functioning as Board managed organizations. This leads to slow and poor decision making and bureaucratization of SOEs.
Poor Project Planning: Investment decisions in many SOEs are not based upon proper evaluation of demand and supply, cost benefit analysis and technical feasibility. Lack of a precise criterion a flaw in planning have caused undue delays and inflated costs in the commissioning of projects. Sometimes, projects are launched without clear-cut objectives a serious thought. Many projects in the public sector have not been finished according to the time schedule.
Over-capitalization: Due to inefficient financial planning, lack of effective financial control and easy availability of money from the government, several public enterprises suffer from over-capitalization. In Bangladesh there is no report regarding over-capitalization. The Indian Administrative Reforms Commission found that Hindustan Aeronautics, Heavy Engineering Corporation and Indian Drugs and Pharmaceuticals Ltd. Were over-capitalized. Such over-capitalization resulted in high capital-output ratio an wastage of scarce capital resources.
Excessive overheads: SOEs incur heavy expenditure on social on overheads like townships, schools, hospitals, etc. Recurring expenditure is required for the maintenance of such overhead and welfare facilities.
Over staffing: Manpower planning is not effective due to which several public enterprises. Recruitment is not based on sound labor projections. On the other hand, posts of Chief Executives remain unfilled for years, despite the availability of required personnel.
Under-utilization of capacity: One serious problem of the public sector has been low utilization of installed capacity. In the absence of definite targets of production, effective production planning and control, proper assessment of future needs, adequate supply of power and industrial peace, many industrial peace, many undertakings has failed to make full use of their fixed assets. There is considerable idle capacity. In some cases productivity is low on account of poor materials management or ineffective inventory control.
Lack of a proper price policy: There is no clear-cut price policy for public enterprises and the Government has not laid down guidelines for the rate of return to be earned by different undertakings. Public enterprises are expected to achieve various socioeconomic objectives and in the absence of a clear directive, pricing decisions are not always based on rational analysis. In addition to dogmatic price policy, there is a lack of cost-consciousness, quality consciousness, and effective control of waste and efficiency.
Inefficient Management: Managerial efficiency and effectiveness have been low due to uninspiring leadership, too much centralization, frequent transfers and lack of personal stake. Civil servants who are deputed to manage the enterprises, often lack proper training. Political interference in day-to-day affairs, rigid bureaucratic control and ineffective delegation of authority hamper initiative, flexibility and quick decisions. Motivations and morale of both executives and workers are low due to the lack of appropriate incentives.
Unsatisfactory industrial relations: In several public enterprises relations between management and labor are far from cordial. Millions of man-days and output have been lost due to strikes and gheraos. Wage disparities have been the main cause of labor trouble in the public sector. The percentage increase in the payments of public sector employees had been higher than the percentage increase in the consumer price index.
Lack of coordination: Various public enterprises are dependent on one another as the output of one enterprise is the input of another. For instance, the efficient functioning of power and steel plants depends on the production and transportation of coal, which in turn is dependent upon supplies of heavy equipment machinery. Despite such interdependence, materials management and research has not been achieved. Coordination in the production programs of different enterprises at various stages would help to reduce excess stocks and shortages of vital inputs.
Inadequate research: In the public enterprises, there are no research activities for the proper policy undertaking. The interesting matter is that, the authority did not fell the necessity of this research.
Difficulties in Obtaining Capital and Expansion of Funds: The Low rate of capital formation results in the slow production process, which further leads to low income and low saving and eventually leading to low investment, hence resulting in inadequate capital. Moreover, absence of orderly capital market in Bangladesh causes complexity in IPOs for expansion of funds.
Different roles of government in business
The Government’s objective is to optimize the role of the state in eliminating the consequences of the crisis and creating appropriate conditions aimed at improving the quality of life. The Government performs many different roles in an economy. Conventionally, it was presumed that role of government is to sustain the law and order, protect a country from external attacks, provide social security, take care of public utilities and maintain peace within a nation. The Government has command over all resources in an economy. Over time these roles have taken a concrete shape to bring about development and growth of an economy as well business. The vision has been to improve international competitiveness, rapid modernization and sustainable growth. For this purpose the government of Bangladesh decided to participate actively in the regulation, promotion and planning of business activities after independence. These roles are essential to provide the platform to excel the competitiveness of businesses domestically, to ensure the balanced regional growth, the constitutional framework, infrastructural improvement and public utilities. Regulatory Role, Entrepreneurial Role, Promotional Role, Planning Role is played by the government in business.
a. Regulatory Role: Generally, the government attempts to measure and control the limits of the Private Sector. Listed below are the major objectives from the government’s end to regulate the business processing/ functioning:
a. To reduce the monopoly, oligopoly, duopoly or any other cartle in the market
b. To provide balance regional growth
c. To supply the essential raw materials to the infant industry
d. To legalized and standardize the functions of private and public sector
In regulatory role, the government directs businesses for their actions. This is done by standardizing the code of conduct, norms and regulations in domestic environments. The Government of Bangladesh has the foremost objective of social welfare; hence they control the business and economic activities in such a way that it benefits the society and buyers. Regulating it involves ceiling the prices, rationing the goods, imposing taxation on excess profits, allocation of foreign exchange, adding restrictions on foreign trade, industrial licensing, etc. It is mainly done in Discretionary measures and non-discretionary measures.
Discretionary measures involve the direct measures by the discretion of of scare recourses for optimum utilization of resources, licensing the goods like hazardous chemicals, defense and railways. Indirect control government majorly regulates the balance regional growth with optimum utilization of resources in a nation as a whole. These discretionary measures are performed at the micro level, i.e. at the firm level or industry level. While regulating government makes sure that the interest of all sections should be maintained. For example, no conflict among the management and labor and labor laws should be preserved administrative authority. These include fixation of prices of commodities, quantitative restrictions on export or import, rationing of supplies of goods, distribution. Contd on page 56
