Role of public enterprises in the national economy

The debate about privatization typically compares the efficiency of PSEs with comparable private firms, but the more interesting question is why in some countries both public and private firms are efficient, while in others both are inefficient. This paper argues that the key to successful development is the creation of future-oriented institutions to compensate for the critical missing market for future output; this in turn requires the state to commit itself to ensuring secure title to future returns. If the private sector lacks confidence in its title the state may need to finance investment while establishing its reputation. The paper examines the evidence from Korea, India, and Eastern Europe; discusses the appropriate boundaries of the state; and the management of PSEs. (Author abstract)