Ownership versus Environment: Why are Public Sector Firms Inefficient?

In this paper we disentangle the sources of public sector inefficiency using 1982-1995 panel data on manufacturing firms in Indonesia. We consider two leading hypotheses: (1) public sector enterprises are inefficient due to monitoring problems and (2) public sector enterprises are inefficient because of the environment in which they operate, as measured by the soft budget constraint. The two models are nested in a production function framework and the empirical results provide support for the second hypothesis. Public sector enterprises are inefficient because of their access to soft loans; public sector ownership has no independent impact on productivity growth. The finding that ownership per se does not matter, but environment does, holds when we control for fixed effects and when we allow for the endogeneity of government loans. Interestingly, private sector firms with access to government loans did not perform more poorly than other private sector enterprises. Another dimension of the environment, i.e. import penetration, also matters; public sector enterprises that have been shielded from import competition are inferior performers.

Ownership versus environment : disentangling the sources of public sector inefficiency

The authors compare the performance of public and private sector manufacturing firms in Indonesia for 1981-95. They analyze whether public sector inefficiency is due primarily to agency-type problems ("ownership") or to the business environment in which public enterprises operate, as measured by soft budget constraints or barriers to competition. They nest the two alternatives in a production function framework. The results, obtained from fixed-effects specifications, provide support for both models. The business environment matters. Only public enterprises that received loans from state banks or those shielded from import competition performed worse than private enterprises. Ownership matters. For a given level of import competition or soft loans, public enterprises perform worse than their counterparts in the private sector. Eliminating soft loans to Indonesia's public enterprises would raise total factor productivity by 6 percentage points; the same result could be achieved by increasing import penetration by 15 percentage points. The authors show that these findings are not due to selection effects for either privatization or the receipt of soft loans.Labor Policies,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies,Economic Theory&Research,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies,Economic Theory&Research,Public Sector Economics&Finance

Does Direct Foreign Investment Affect Domestic Firms' Credit Constraints?

Firms in developing countries cite credit constraints as one of their primary obstacles to investment. Direct foreign investment, by bringing in scarce capital, may ease domestic firms' credit constraints. Alternatively, if foreign firms borrow heavily from domestic banks, they may exacerbate domestic firms' credit constraints by crowding them out of domestic capital markets. One plausible mechanism by which this may happen is indirect. Foreign firms may be more experienced and have better financial ratios and thus, be a safer bet for lending institutions. Using firm-level data from the Ivory Coast for the period 1974-1987 we test the following hypotheses: (1) domestic firms are more credit constrained than foreign firms and (2) borrowing by foreign firms exacerbates the credit constraints of domestic firms. Results suggest that domestic firms are significantly more credit constrained that foreign firms and that borrowing by foreign firms aggravates domestic firms' credit constraints. By splitting the sample into state-owned (SOE) and privately owned domestic enterprises we are able to show that SOEs are less financially constrained than other domestic enterprises, consistent with the notion of a 'soft budget constraint'. Borrowing by foreign firms affects only privately owned enterprises. Finally, we explore possible explanations for the crowding out effect.

Moving to greener pastures : multinationals and the pollution-haven hypothesis

Are multinationals flocking to pollution havens in developing countries? Using data from four developing countries (Cote d'Ivoire, Mexico, Morocco, and Venezuela), the authors examine the pattern of foreign investment. They find almost no evidence that foreign investors are concentrated in dirty sectors. They also examine the behavior of multinationals doing business in these four countries, testing whether there is any tendency for foreign firms to pollute more or less than their host country counterparts. To do this, they use consumption of energy and dirty fuels as a proxy for pollution intensity. They find that foreign plants in these four developing countries are significantly more energy-efficient and use cleaner types of energy than their domestic counterparts. The authors conclude with an analysis of US outbound investment between 1982 and 1994. They reject the hypothesis that the pattern of US foreign investment is skewed toward industries in which the cost of pollution abatement is high.Economic Theory&Research,Environmental Economics&Policies,Water and Industry,Pollution Management&Control,Decentralization,Environmental Economics&Policies,Water and Industry,Pollution Management&Control,Energy and Environment,Economic Theory&Research

Outsourcing Jobs? Multinationals and US Employment

Critics of globalization claim that US manufacturing firms are being driven to shift employment abroad by the prospects of cheaper labor. Others argue that the availability of low-wage labor has allowed US based firms to survive and even prosper. Yet evidence for either hypothesis, beyond anecdotes, is slim. Using firm-level data collected by the US Bureau of Economic Analysis (BEA), we estimate the impact on US manufacturing employment of changes in foreign affiliate wages, controlling for changing demand conditions and technological change. We find that the evidence supports both perspectives on globalization. For firms most likely to perform the same tasks in foreign affiliates and at home ("horizontal" foreign investment), foreign and domestic employees appear to be substitutes. For these firms, lower wages in affiliate locations are associated with lower employment in the US. However, for firms which do significantly different tasks at home and abroad ("vertical" foreign investment), foreign and domestic employment are complements. For vertical foreign investment, lower wages abroad are associated with higher US manufacturing employment. These offsetting effects may be combined to show that offshoring is associated with a quantitatively small decline in manufacturing employment. Other factors, such as declining prices for consumer goods, import competition, and falling prices for investment goods (which substitute for labor) play a more important role.

Trade, Foreign Investment, and Industrial Policy

During the last three decades, developing countries have made enormous strides in opening up their protected domestic markets to international trade and foreign investment. Yet most countries have not simply opened up their markets. They have also instituted a range of policies to encourage exports, attract foreign direct investment(FDI), promote innovation, and favor some industries over others. This leads to the following question: is openness to trade and FDI alone sufficient to achieve high growth rates in developing countries? If harnessing the gains from globalization requires additional policies, can we identify them? While some types of complementary policies, such as building roads and ports, are not controversial, others are. Bhagwati's suggestion to "attract foreign funds" implies tilting incentives in favor of foreign investors, which means abandoning policy neutrality. Our goal in this chapter is to explore the popular but controversial idea that developing countries benefit from abandoning policy neutrality vis-a-vis trade, FDI and resource allocation across industries.Trade, Foreign Investment, Industrial Policy, Developing Countries

Openness and Growth: A Time Series, Cross-Country Analysis for Developing Countries

This paper draws together a variety of openness measures to test the association between openness and growth. Although the correlation across different types of openness is not always strong, there is generally a positive association between growth and different measures of openness. The strength of the association depends on whether the specification uses cross-section or panel data (which combines cross-section and time series). For industrializing countries, which have exhibited significant fluctuations in trade regimes over time, long-run averages may not serve as very meaningful indicators of policy

Learning From Developing Country Experience: Growth and Economic Thought Before and After the 2008–2009 Crisis

The aim of this paper is twofold. First, we document the changing global landscape before and after the crisis, emphasizing the shift toward multipolarity. In particular, we emphasize the ascent of developing countries in the global economy before, during, and after the crisis. Second, we explore what these global economic changes and the recent crisis imply for shifts in the direction of research in development economics. We place a particular emphasis on the lessons that developed countries can learn from the developing world

Ownership Versus Environment: Disentangling the Sources of Public-Sector Inefficiency

An unanswered question in the debate on public-sector inefficiency is whether reforms other than government divestiture can effectively substitute for privatization. Using a 1981–1995 panel data set of all public and private manufacturing establishments in Indonesia, we analyze whether public-sector inefficiency is primarily due to agency-type problems or to the environment in which public-sector enterprises (PSEs) operate, as measured by the soft budget constraint and the degree of internal and external competition. The results, obtained from fixed-effects specifications, provide support for both models. Ownership matters because, for a given level of government financing or competition, PSEs perform worse than their private-sector counterparts. The environment matters because only PSEs which received government financing or those shielded from import competition or foreign ownership performed worse than private enterprises. The results suggest that the efficiency of PSEs can be increased through privatization, through manipulation of the environment, or through a combination of both approaches