New analysis of the role that state-owned enterprises play with regard to corruption in the global financial sector, suggest serious implications for national economies, according to new research by the International Monetary Fund (IMF)

"State-owned enterprises (SOEs) have a strong presence in the global economy and, in many advanced and developing economies, play a significant role in implementing public policy," Anja Bau, co-author of the new working paper notes.

Often, SOEs are seen as a way to address market failures, such as natural monopolies, exert better control of natural resources, or promote other policy goals.

Typically, public ownership continues to be important in many sectors, especially transportation, utilities (water, gas and electricity), and exploration of natural resources (oil and mining).

"Concerns with poor governance, however, have fuelled doubts about whether SOEs can achieve the desired goals or are the best option to address market failures.

Rent-seeking activities

In particular, corruption, the abuse of public power for private gain, can negatively affect how firms operate. Firms may dedicate efforts and resources to rent-seeking activities, instead of focusing on using resources in the most efficient way.

When firms manage large natural resources and there is weak transparency and scrutiny on the activities of these firms. There are also reasons that could make corruption more prevalent in SOEs compared to private firms.

It is easier for corrupt politicians to intervene in publicly-owned firms— especially when transparency and accountability are weak—and they have an incentive to do so, as they will benefit from the rents without bearing the cost.

Empirical studies that attempt to assess the effect of weak governance on the performance of SOEs are limited, and most rely on specific country examples and do not always differentiate between private firms and SOEs 

SOEs are present in key sectors of the economies around the world. While they can provide an important public service, there is widespread concern that their activities are negatively affected by corruption.

"We present new evidence on how corruption affects the performance of SOEs using firm level data across a large number of countries. One striking result is that SOEs perform as well as private firms in core sectors when corruption is low. Taking advantage of a novel database reforms, we also show that SOE governance reforms can generate significant performance gains," Baum states, but concludes that:

"The evidence shows that state-owned enterprise performance is severely undermined by corruption. When corruption in the country is high, or fiscal transparency is low, SOEs 27 performance is significantly weaker. This is true even after controlling for other country differences, including level of development (GDP per capita)."

Read this working paper in full: http://www.imf.org/external/pubs/cat/longres.aspx?sk=48800

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