In a world where borders have never counted for less, the economic crisis has transformed the relationship between government and business. Here, we examine what the future may hold for the public and private sectors.
We live in a world transformed. The global downturn — an economic storm that took the financial markets to the brink — has left governments and the business world in a position that neither foresaw, even a few years ago.
Governments have been forced to take stakes in companies in strategically important industries such as automotive and finance. Now they are torn between legislating to limit risk, and encouraging growth — and returns — for the “shareholders” of these new state owned enterprises (SOEs): voters.
Finding the balance between these two aims is a considerable challenge. Limiting either unduly may limit the competitiveness of these firms.
With such a difficult balancing act, it is not surprising that many policy-makers have marked their intention to return to basic free market operations as soon as possible — with a clear, distinct role for the state. This won’t be easy — it will likely take several years and require a high degree of sensitivity. Nor is it necessarily the right answer.
Consider the two models of governance in existence before the economic downturn. At a basic level, mature markets had relatively limited state involvement, and emerging markets had far higher state involvement.
Are “western” governments correct to plan a strategic withdrawal? Could a compromise position, with an increased role for SOEs, actually be the optimal result?
Certainly, state-owned and directed companies — primarily from the emerging markets — are becoming larger and more competitive on the global stage.
State-owned and directed companies — primarily from the emerging markets — are becoming larger and more globally competitive.
These organizations are also becoming better governed. While leading SOEs may not be as productive as key private sector competitors, they have become more competitive and more transparent, having skillfully taken heed of some of the best practices in the corporate world.
For some companies this has been driven by requirements placed upon them as they have privatized part of their shares to raise capital.
More broadly, with the rise in globalization, and their expansion overseas, these firms do not enjoy the monopolies that existed in a simpler, more nationalistic era, and thus need to compete more effectively — both at home and abroad.
However, the politicization of credit decisions can lead to a misallocation of capital. Productivity may be improving, but without the resources and backing of the state, and the advantages of a monopoly, there are doubts some of these companies would do quite so well; profitability in growing markets with no competition is a very different proposition to profitability in free market conditions.
There is still a high degree of uncertainty around the speed and scale of any state rollback, in both emerging and mature markets
In the meantime, SOEs — and the state, more broadly — will remain a significant part of the business landscape. SOEs and their multinational corporation counterparts will continue to compete more often on the same stage. Governments and business may well find that there are lessons to be learned in both directions.