A Lesson for Bernie Sanders and Alexandria Ocasio-Cortez from the International Monetary Fund

June 21, 2019 by Dan Mitchell @ International Liberty
 

I don’t think either Senator Bernie Sanders or Representative Alexandria Ocasio-Cortez actually understand that socialism is an economic system based on government ownership of the means of production, augmented by central planning, and price controls.

For what it’s worth, I think Crazy Bernie and AOC are just knee-jerk statists. They reflexively support more taxes, more spending, more regulation, and more intervention.

But since they both describe themselves as socialists, maybe it would be a good idea if they examined how the system works in the real world.
And I won’t even use a hellhole like Venezuela as an example.

Instead, let’s look at some recent research from the International Monetary Fund.

The bureaucrats looked at the legacy of socialism in Eastern Europe, specifically the extent to which governments still own and run businesses. Here are some of their findings.

…the former socialist countries of Central, Eastern, and Southeastern Europe (CESEE) have made tremendous progress in becoming full-fledged market economies and raising income levels. …Although the state’s role in the economy has diminished dramatically in the region, state ownership still remains significant in many countries and sectors. …there is now growing interest in whether an enhanced role for state-owned enterprises and banks (SOEs and SOBs) could be an important source of growth, or whether they would just impose a further drag on the economy. …in a new study, prepared in collaboration with the European Bank for Reconstruction and Development, the IMF examines the current footprint of state-owned enterprises and state-owned banks in the region, how they are performing… State companies now account for between 2 percent and 15 percent of total employment in the CESEE countries… They are especially prevalent in sectors such as mining, energy, and transport.

Here’s a look at the extent of government ownership in various nations of Eastern Europe.

Darker blue means more legacy socialism.

Kudos to the Baltic nations and Romania for largely getting the government out of the business of running businesses.

But other countries are laggards. And what can we say about the economic impact of their government-run companies?

The results are not good.

Our analysis finds that state-owned enterprises systematically underperform relative to private sector counterparts in nearly all countries. They tend to hoard labor, pay more generously, and generate less revenue per employee than private sector peers. Unsurprisingly, they turn out to be less productive and less profitable. Potentially large output gains would be achieved if productivity of state-owned enterprises could be raised to private sector levels. A similar picture emerges for state-owned banks, which in most countries make less-sound lending decisions than private counterparts and have lower profitability, often associated with higher shares of problem loans. …the analysis finds little evidence that the inefficiencies arising from state ownership can be justified by noneconomic objectives. The study does, however, point to significant shortcomings in governance and oversight of state companies.

Here’s a chart showing that government-run firms earn lower profits.

 

Because politicians are a de facto part of management, it’s no surprise that there’s also above-market pay at government-run firms.

And here are some specific numbers for the banking sector.
Once again, thanks to a combination of political interference and lack of a profit motive, we see inferior results.

So what does the IMF suggest?

Unlike fiscal policy, where the IMF has a very poor track record, the bureaucracy has the right instincts on private ownership vs government ownership.

…countries should take a fresh look at the rationale for existing state ownership, taking into account the costs, benefits, and risks of state ownership… Privatization (or bankruptcy) will sometimes be appropriate choices… At a time when growth-enhancing policies can be hard to identify, improving the performance of existing state-owned entities, or exiting in favor of the private sector where appropriate, could provide much-needed support for the economy.

I’ll close by elaborating on why government-run companies undermine prosperity.
Simply stated, it means that politicians are misallocating labor and capital in ways that reduce overall economic output.

Yes, a few insiders benefit (such as the workers who get above-market wages and the managers appointed by the government to run the firms), but the vast majority of citizens are net losers.

So why do governments in Eastern Europe maintain such self-destructive policies?

For the same “public choice” reason that we maintain policies – such as agriculture subsidies the Export-Import Bank, and occupational licensing – that reward narrow interest groups in the United States.