Dr. Sonjoy Chakraborty :
Public enterprises (PEs) are institution operating service of an economic or social character or behalf of government. The main attributes of public sector enterprises are: state owned, state control and management, public accountability, non profit motive, state privileges and regulations. In most of the countries, the roles of PEs are justified from a social point of view. In many cases PEs are not economically viable but socially desirable.
At present, more than 39 public corporations are producing mostly private goods and services. Though the government is not efficient in producing the private goods and services, the government has very important and strong role to produce these private goods. Generally in market-oriented economies, the state is expected to stop producing goods and services, which can better be done by private undertakings. The state is regarded to be a referee, not a player. However, unlike what is known, in many countries accepted market economy, the public sector has a significant role in the production of goods and services. Regarding the public enterprises in Bangladesh, Akram (1999) mentions:
Public enterprise activity is around 6 percent of the Gross Domestic Product (GDP) and their fixed assets represents 25 percent of Gross Fixed Capital Formation. Public enterprises operate in crucial industrial segments of the economy, particularly in manufacturing, and in providing infrastructure services. The net worth of public enterprises is approximately US$ 3.6 billion (approximately 14 percent of GDP). In 1996-97, the annual losses of the public sector approach US$ 250 million, which is equivalent to 30 percent of the country’s annual project disbursement aid and nearly 1 percent of its Gross Domestic Product. 90 percent of the public enterprises have borrowed highly from the nationalized commercial banks. There are nearly 300 public enterprises. These firms are organized into 39 corporations which are umbrella entities; four nationalized banks; three insurance corporation; two agricultural bodies; and three development financial institutions. Public enterprises are dominant in the following sectors: Electricity, gas, and water; railway; airlines and civil aviation; petroleum; telecommunication; and banks and insurance. 80 percent of public enterprise assets are in the utilities and infrastructure such as power, gas, telecommunications, and transport.
It can be argued that for the establishment of a well-operating free market economy, the state should not have a role in the production of goods and services to be served by private undertakings more efficiently, and it should only do with the role of regulator in the markets. However, what is known well in theory cannot be transformed into practice easily. At this juncture, having a role of referee or regulator (legislative, executive and the judiciary’s role), the state is in a position to play against private undertakings. This seems to be very strange, and certainly creates what is called a conflict of interests.
Public sector enterprise is a very much essential to control over the monopoly, oligopoly, duopoly market structure in the private sector and to ensure the competition for the betterment of the economy. Sometimes, due to the financial crisis or any other international or geopolitical reason, the private sector may loss its interest to produce essential goods and services. Sometimes, due to the internal political crisis, the opposing political party who are not in power can stop the supply of the essential commodity if they have the control over a specific industry. In such a situation, public sector keeps the important role to keep the economy on the proper track.
In the world, Bangladesh Economy is the 33th largest positioned economy (IMF estimation, 2017) on the basis of Purchasing Power Parity (PPP). The Present Policy initiated by the BIDA in 2016 made Bangladesh as an attractive destination for business and investment by upholding the position of the Doing Business Index from the position of 176th in 2017 to at least 99th within 2021. Generally, an economy is broadly divided into three categories, namely Primary sector, Secondary sector and Tertiary sector. Primary Sector includes the production functions by utilizing natural resources like water, land, forest, mining, etc. Secondary Sector includes the industrial activities like Manufacturing, Mining, Quarrying and Electricity, Gas and Water Supply. Tertiary Sector includes activities like Construction, Trade, Hotel, Transport and Communication, Finance, Insurance, Real Estate & Business Services and Community, Social & Personal Services. For ensuring the smooth economic progress, the government should have strong regulatory supervision and direct activities in all categories of the economy.
Business is the main component in building the economy by affirming the competitive, sustainable and community based environment for the country. It creates prosperity with a vision for economic and societal growth with a contribution to quality of life, generation of employment, reduction in poverty and the distribution of income. If government is out of the direct business activities, government will become incapable to promote, control and regulate the private sector due to lack of direct experience. In such a situation government direct participation on to produce the private goods and public goods is very essential.
Why Public Sector activities are essential
a. Understanding the illegal activities of the regulator or the government: Sometimes, regulatory authority or the government employee may provide the illegal facility to the private businessman or the traders due to the shortage of appropriate knowledge, knowledge gap, nepotism or instead of illegal facility. The public enterprise would not provide the illegal facility to the regulatory authority because they have no personal interest. The public enterprise has to face the unequal competition in the market and they will inform to the government regarding this illegal activity of the regulatory body or government activity.
b. Unequal development: Due to the infrastructure and demand constrained, the private sector did not develop the commercial enterprise. Then these areas will be deprived from the development process. In considering the equity, public sector has to come to operate the commercial activity instead of many constrain so that other private entity may got the interest to develop the commercial or industrial activity in those less developed area.
c. Creation of competition: To make a desired growth through increasing investment by reducing unequal competition in the trade and business “Bangladesh Competition Commission” is established. To ensure the availability of products and services of the common people at the competitive price and to get the maximum utility of the product, it is essential to create a healthy competitive environment in the market. The goal of the Competition Commission is to create equality in the market by creating sustainable competition in the economy, ensuring consumer interest and best practice in the market. Public sector enterprise is a very much essential to control over the monopoly, oligopoly, duopoly market structure in the private sector and to ensure the competition for the betterment of the economy as well as to assist the “Bangladesh Competition Commission” for performing their activity efficiently.
d. International or geopolitical reason: Sometimes, due to the financial crisis or any other international or geopolitical reason, the private sector may lose its interest to produce essential goods and services. The the sublic sector can playthe important role to save the nation.
e. National political reason: Sometimes, due to the internal political crisis, the opposing political party who are not in power can stop the supply of the essential commodity if they have the control over a specific industry. In such a situation, public sector keeps the important role to keep the economy on the proper track.
f. To prepare appropriate rules and regulations: If the government has no direct experience in the production and Business area, then the government has to face the serious knowledge shortage to prepare the appropriate rules and regulation to run the private sector efficiently.
g. Absence of research expenditure in the private sector: It is called that “no research no development”. At the early stage of development, private sector did not ready to spend for the research and development. Because, the research output is very low in the early stage and it is slow too.
Table 1: research expenditure of Few countries.
Rank Country Expenditure on Rand D (Billion USD in PPP) Expenditure on Rand D % GDP (Billion USD in PPP) Per capita GDP for R and D Expenditure Year
1 USA 473.4 2.74% 1,442. 51 2013
2 China 409 2.10% 298.56 2015
3 Japan 179.8 3.58% 1,413.90 2014
5 S. Korea 91.6 4.29% 1,518.47 2014
6 India 66.5 0.85% 39.37 2015
8 UK 44.8 1.70% 692.9 2014
9 Russia 42.6 1.19% 290.21 2014
33 Pakistan 2.4 0.29% 13.29 2013
36 Malaysia 10.6 1.30% 344.3 2015
40 Thailand 3.6 0.39% 52.67 2011
48 Indonesia 2 0.08% 8.09 2013
54 Vietnam 0.87 0.21% 9.91 2011
87 Hong Kong 2.7 0.73% 373.09 2012
Source: https://en.wikipedia.org/wiki/List_of_countries_by_research_and_development_spending*Only those nations which annually spend more than 50 million dollars have been included.
So, the private sector is very much interested to invest in this area in the early stage of economic development like the low and low medium income level. In this stage, only the public sector has to keep the role for the research and development.
In Bangladesh, Expenditure for R&D is less than 50 Million USD and it is also true that there is no real statistics of the research expenditure. So, it is not included in the mentioned sources. In this mentioned source, 87 countries are considered.
h. Development of human capital through public investment
Developing the human capital is the prime role of the government. There is no scope to economic development without developing human capital. The Private sector is very much silent to invest for the development of human capital in the early stage of economic growth. Public investment is an area that can have direct relevance for economic growth. This is the basic infrastructure of the economy. Public investment in basic infrastructure is an essential precondition for capital accumulation in the private sector. Public investment in education and health facilities improves human capital formation. However, public investment is also an area where grossly unproductive white elephants can be found. Diamond (1989) has found that capital spending on education, health, and housing has a positive effect on economic growth.
Figure: Human Capital Index, 2017
Source: World Economic Forum Report, 2017
Note: Higher value indicates lower position.
According to the Human Capital Index, 2017, the position of Bangladesh is 111th among the 130 countries in the world (World Economic Forum Report, 2017). This indicates that the government has to take the appropriate role to develop this basic infrastructure of the economy.
Optimum government size and Bangladesh
A. Government expenditure is the indicator of direct control of the overall business activity of the economy. Among the 8 Asian and 9 developed countries, government expenditure is the minimum in Bangladesh. Including USA and UK, most of the developed countries are the main advocate of the free economy, that is, the least government interference. However, in UK 39.21% GDP expenditure is government and it is 22.68% in the USA, which is the significantly higher in the world. The world average is 27.74%, which is the 300% of Bangladesh. If we observe among the Asian countries, developed countries and the group of the countries, the public expenditure is the lowest in Bangladesh. This indicates that Bangladesh should have more control over the business activity of the government or the country has less than optimal government interference on the overall business activity.
Figure: Government Expenditure as a Percentage GDP in Few Asian Countries
Source: World Bank Open Source
Figure: Government Expenditure as a Percentage GDP in Few Developed Country
Source: World Bank Open Source
Figure: Government Expenditure as a Percentage GDP in Few Group of Country
Source: World Bank Open Source
Many studies have aimed at estimating the effects of public expenditure on economic growth. Empirical studies have yielded conflicting results: some support the hypothesis that a rise in the share of public spending is associated with a decline in economic growth ((Landau, 1986) and Scully, (1989)); others have found that public spending is associated positively with economic growth (Ram (1986)); and still other studies have found no significant relationship (Kormendi and Meguire (1985) and Diamond (1989)). Public expenditures were observed in one study to have no impact on growth in developed countries, but a positive impact in developing countries (Sattar, 1993).
A number of studies have found a positive correlation between economic growth and various education indicators or expenditures: primary and secondary levels of educational attainment (Barro (1991) and Easterly and Rebelo (1993)); the share of expenditures on education in total expenditure (Otani and Villanueva (1990)); and capital expenditures on education (Diamond (1989)).
Boro (1983), Armey et al. (1995) and Rahn et al. (1996) and Scully (1998, 2003) did theoretical and empirical research and popularized the existence of an optimal size of government as depicted by an inverted U curve (therefore, it is referred as “BARS” Curve” after Barro, Armey, Rahn, and Scully). As the size of government, measured on the horizontal axis, expands from zero (complete anarchy) initially the growth rate of the economy-measured on the vertical axis – increases. As government continues to grow as a share of the economy, expenditures are channeled into less productive (and later counterproductive) activities, causing the rate of economic growth to diminish and eventually decline. The research studies using various empirical techniques and different sets of countries conclude that the optimal government size (total government spending as a share of GDP) is between 17% and 40% of GDP, and the mode of the estimates is in the range of 20 to 30% of GDP, much lower than the current government share in most developed countries . In 2007 the OECD average of total final government expenditures is 40.4% of GDP, while for the Euro area, the average is 46.2% of GDP (Chobanov & Mladenova, 2009).
The general government sector consists of the totality of institutional units which, in addition to fulfilling their political responsibilities and their role of economic regulation, produce principally nonmarket services (possibly goods) for individual or collective consumption and redistribute income and wealth. The distingtion between two types of production, and refers to them as market and non-market activities. Goods and services sold on the market are regarded as output of public corporations, not government. They are valued at market prices, even if these prices are less than cost. Examples are publicly-owned telecommunications, railways, utilities, etc. Goods and services which are produced by state employees and distributed without charge (or at prices which are not economically significant) are deemed to be the output of general government.
Contd on page 55
Public enterprises (PEs) are institution operating service of an economic or social character or behalf of government. The main attributes of public sector enterprises are: state owned, state control and management, public accountability, non profit motive, state privileges and regulations. In most of the countries, the roles of PEs are justified from a social point of view. In many cases PEs are not economically viable but socially desirable.
At present, more than 39 public corporations are producing mostly private goods and services. Though the government is not efficient in producing the private goods and services, the government has very important and strong role to produce these private goods. Generally in market-oriented economies, the state is expected to stop producing goods and services, which can better be done by private undertakings. The state is regarded to be a referee, not a player. However, unlike what is known, in many countries accepted market economy, the public sector has a significant role in the production of goods and services. Regarding the public enterprises in Bangladesh, Akram (1999) mentions:
Public enterprise activity is around 6 percent of the Gross Domestic Product (GDP) and their fixed assets represents 25 percent of Gross Fixed Capital Formation. Public enterprises operate in crucial industrial segments of the economy, particularly in manufacturing, and in providing infrastructure services. The net worth of public enterprises is approximately US$ 3.6 billion (approximately 14 percent of GDP). In 1996-97, the annual losses of the public sector approach US$ 250 million, which is equivalent to 30 percent of the country’s annual project disbursement aid and nearly 1 percent of its Gross Domestic Product. 90 percent of the public enterprises have borrowed highly from the nationalized commercial banks. There are nearly 300 public enterprises. These firms are organized into 39 corporations which are umbrella entities; four nationalized banks; three insurance corporation; two agricultural bodies; and three development financial institutions. Public enterprises are dominant in the following sectors: Electricity, gas, and water; railway; airlines and civil aviation; petroleum; telecommunication; and banks and insurance. 80 percent of public enterprise assets are in the utilities and infrastructure such as power, gas, telecommunications, and transport.
It can be argued that for the establishment of a well-operating free market economy, the state should not have a role in the production of goods and services to be served by private undertakings more efficiently, and it should only do with the role of regulator in the markets. However, what is known well in theory cannot be transformed into practice easily. At this juncture, having a role of referee or regulator (legislative, executive and the judiciary’s role), the state is in a position to play against private undertakings. This seems to be very strange, and certainly creates what is called a conflict of interests.
Public sector enterprise is a very much essential to control over the monopoly, oligopoly, duopoly market structure in the private sector and to ensure the competition for the betterment of the economy. Sometimes, due to the financial crisis or any other international or geopolitical reason, the private sector may loss its interest to produce essential goods and services. Sometimes, due to the internal political crisis, the opposing political party who are not in power can stop the supply of the essential commodity if they have the control over a specific industry. In such a situation, public sector keeps the important role to keep the economy on the proper track.
In the world, Bangladesh Economy is the 33th largest positioned economy (IMF estimation, 2017) on the basis of Purchasing Power Parity (PPP). The Present Policy initiated by the BIDA in 2016 made Bangladesh as an attractive destination for business and investment by upholding the position of the Doing Business Index from the position of 176th in 2017 to at least 99th within 2021. Generally, an economy is broadly divided into three categories, namely Primary sector, Secondary sector and Tertiary sector. Primary Sector includes the production functions by utilizing natural resources like water, land, forest, mining, etc. Secondary Sector includes the industrial activities like Manufacturing, Mining, Quarrying and Electricity, Gas and Water Supply. Tertiary Sector includes activities like Construction, Trade, Hotel, Transport and Communication, Finance, Insurance, Real Estate & Business Services and Community, Social & Personal Services. For ensuring the smooth economic progress, the government should have strong regulatory supervision and direct activities in all categories of the economy.
Business is the main component in building the economy by affirming the competitive, sustainable and community based environment for the country. It creates prosperity with a vision for economic and societal growth with a contribution to quality of life, generation of employment, reduction in poverty and the distribution of income. If government is out of the direct business activities, government will become incapable to promote, control and regulate the private sector due to lack of direct experience. In such a situation government direct participation on to produce the private goods and public goods is very essential.
Why Public Sector activities are essential
a. Understanding the illegal activities of the regulator or the government: Sometimes, regulatory authority or the government employee may provide the illegal facility to the private businessman or the traders due to the shortage of appropriate knowledge, knowledge gap, nepotism or instead of illegal facility. The public enterprise would not provide the illegal facility to the regulatory authority because they have no personal interest. The public enterprise has to face the unequal competition in the market and they will inform to the government regarding this illegal activity of the regulatory body or government activity.
b. Unequal development: Due to the infrastructure and demand constrained, the private sector did not develop the commercial enterprise. Then these areas will be deprived from the development process. In considering the equity, public sector has to come to operate the commercial activity instead of many constrain so that other private entity may got the interest to develop the commercial or industrial activity in those less developed area.
c. Creation of competition: To make a desired growth through increasing investment by reducing unequal competition in the trade and business “Bangladesh Competition Commission” is established. To ensure the availability of products and services of the common people at the competitive price and to get the maximum utility of the product, it is essential to create a healthy competitive environment in the market. The goal of the Competition Commission is to create equality in the market by creating sustainable competition in the economy, ensuring consumer interest and best practice in the market. Public sector enterprise is a very much essential to control over the monopoly, oligopoly, duopoly market structure in the private sector and to ensure the competition for the betterment of the economy as well as to assist the “Bangladesh Competition Commission” for performing their activity efficiently.
d. International or geopolitical reason: Sometimes, due to the financial crisis or any other international or geopolitical reason, the private sector may lose its interest to produce essential goods and services. The the sublic sector can playthe important role to save the nation.
e. National political reason: Sometimes, due to the internal political crisis, the opposing political party who are not in power can stop the supply of the essential commodity if they have the control over a specific industry. In such a situation, public sector keeps the important role to keep the economy on the proper track.
f. To prepare appropriate rules and regulations: If the government has no direct experience in the production and Business area, then the government has to face the serious knowledge shortage to prepare the appropriate rules and regulation to run the private sector efficiently.
g. Absence of research expenditure in the private sector: It is called that “no research no development”. At the early stage of development, private sector did not ready to spend for the research and development. Because, the research output is very low in the early stage and it is slow too.
Table 1: research expenditure of Few countries.
Rank Country Expenditure on Rand D (Billion USD in PPP) Expenditure on Rand D % GDP (Billion USD in PPP) Per capita GDP for R and D Expenditure Year
1 USA 473.4 2.74% 1,442. 51 2013
2 China 409 2.10% 298.56 2015
3 Japan 179.8 3.58% 1,413.90 2014
5 S. Korea 91.6 4.29% 1,518.47 2014
6 India 66.5 0.85% 39.37 2015
8 UK 44.8 1.70% 692.9 2014
9 Russia 42.6 1.19% 290.21 2014
33 Pakistan 2.4 0.29% 13.29 2013
36 Malaysia 10.6 1.30% 344.3 2015
40 Thailand 3.6 0.39% 52.67 2011
48 Indonesia 2 0.08% 8.09 2013
54 Vietnam 0.87 0.21% 9.91 2011
87 Hong Kong 2.7 0.73% 373.09 2012
Source: https://en.wikipedia.org/wiki/List_of_countries_by_research_and_development_spending*Only those nations which annually spend more than 50 million dollars have been included.
So, the private sector is very much interested to invest in this area in the early stage of economic development like the low and low medium income level. In this stage, only the public sector has to keep the role for the research and development.
In Bangladesh, Expenditure for R&D is less than 50 Million USD and it is also true that there is no real statistics of the research expenditure. So, it is not included in the mentioned sources. In this mentioned source, 87 countries are considered.
h. Development of human capital through public investment
Developing the human capital is the prime role of the government. There is no scope to economic development without developing human capital. The Private sector is very much silent to invest for the development of human capital in the early stage of economic growth. Public investment is an area that can have direct relevance for economic growth. This is the basic infrastructure of the economy. Public investment in basic infrastructure is an essential precondition for capital accumulation in the private sector. Public investment in education and health facilities improves human capital formation. However, public investment is also an area where grossly unproductive white elephants can be found. Diamond (1989) has found that capital spending on education, health, and housing has a positive effect on economic growth.
Figure: Human Capital Index, 2017
Source: World Economic Forum Report, 2017
Note: Higher value indicates lower position.
According to the Human Capital Index, 2017, the position of Bangladesh is 111th among the 130 countries in the world (World Economic Forum Report, 2017). This indicates that the government has to take the appropriate role to develop this basic infrastructure of the economy.
Optimum government size and Bangladesh
A. Government expenditure is the indicator of direct control of the overall business activity of the economy. Among the 8 Asian and 9 developed countries, government expenditure is the minimum in Bangladesh. Including USA and UK, most of the developed countries are the main advocate of the free economy, that is, the least government interference. However, in UK 39.21% GDP expenditure is government and it is 22.68% in the USA, which is the significantly higher in the world. The world average is 27.74%, which is the 300% of Bangladesh. If we observe among the Asian countries, developed countries and the group of the countries, the public expenditure is the lowest in Bangladesh. This indicates that Bangladesh should have more control over the business activity of the government or the country has less than optimal government interference on the overall business activity.
Figure: Government Expenditure as a Percentage GDP in Few Asian Countries
Source: World Bank Open Source
Figure: Government Expenditure as a Percentage GDP in Few Developed Country
Source: World Bank Open Source
Figure: Government Expenditure as a Percentage GDP in Few Group of Country
Source: World Bank Open Source
Many studies have aimed at estimating the effects of public expenditure on economic growth. Empirical studies have yielded conflicting results: some support the hypothesis that a rise in the share of public spending is associated with a decline in economic growth ((Landau, 1986) and Scully, (1989)); others have found that public spending is associated positively with economic growth (Ram (1986)); and still other studies have found no significant relationship (Kormendi and Meguire (1985) and Diamond (1989)). Public expenditures were observed in one study to have no impact on growth in developed countries, but a positive impact in developing countries (Sattar, 1993).
A number of studies have found a positive correlation between economic growth and various education indicators or expenditures: primary and secondary levels of educational attainment (Barro (1991) and Easterly and Rebelo (1993)); the share of expenditures on education in total expenditure (Otani and Villanueva (1990)); and capital expenditures on education (Diamond (1989)).
Boro (1983), Armey et al. (1995) and Rahn et al. (1996) and Scully (1998, 2003) did theoretical and empirical research and popularized the existence of an optimal size of government as depicted by an inverted U curve (therefore, it is referred as “BARS” Curve” after Barro, Armey, Rahn, and Scully). As the size of government, measured on the horizontal axis, expands from zero (complete anarchy) initially the growth rate of the economy-measured on the vertical axis – increases. As government continues to grow as a share of the economy, expenditures are channeled into less productive (and later counterproductive) activities, causing the rate of economic growth to diminish and eventually decline. The research studies using various empirical techniques and different sets of countries conclude that the optimal government size (total government spending as a share of GDP) is between 17% and 40% of GDP, and the mode of the estimates is in the range of 20 to 30% of GDP, much lower than the current government share in most developed countries . In 2007 the OECD average of total final government expenditures is 40.4% of GDP, while for the Euro area, the average is 46.2% of GDP (Chobanov & Mladenova, 2009).
The general government sector consists of the totality of institutional units which, in addition to fulfilling their political responsibilities and their role of economic regulation, produce principally nonmarket services (possibly goods) for individual or collective consumption and redistribute income and wealth. The distingtion between two types of production, and refers to them as market and non-market activities. Goods and services sold on the market are regarded as output of public corporations, not government. They are valued at market prices, even if these prices are less than cost. Examples are publicly-owned telecommunications, railways, utilities, etc. Goods and services which are produced by state employees and distributed without charge (or at prices which are not economically significant) are deemed to be the output of general government.
Contd on page 55
