Paul Walker

Dr Paul Walker is an economist at University of Canterbury. He has expertise in microeconomics, institutional economics and industrial Organization. He blogs for The Dismal Science.

Work harder, live healthier - The Dismal Science

Jun 07, 2013

A new study, Work Harder, Live Healthier: The relationship between economic activity, health and government policy, has been published by the Institute of Economic Affairs and the Age Endeavour Fellowship in the U.K.

A summary of the findings of the research are:

In the past 50 years, labour market participation among older people has declined significantly, though the trend has reversed a little in recent years. In the EU, about 70 per cent of people aged between 60 and 64 are inactive.

In the case of the UK there has been a significant drop in the employment rate among older men. The employment rate among men aged 55-59 decreased from over 90 per cent to less than 70 per cent between 1968 and the end of the 1990s. Employment for men aged 60-64 slumped from around 80 per cent to 50 per cent and, for those aged 65-69, it halved from 30 per cent to about 15 per cent.

As with the rest of the OECD, this trend has reversed in recent years. The employment rate in 2008 was about 80 per cent for the 55-59 group, 60 per cent for the 60-64 group, and 20 per cent for the 65-69 age group.

Whilst people have been retiring earlier on average, they have also been living longer. A 61-year-old man in 1960 had the same probability of dying within a year as a 70-year-old man in 2005.

Healthy life expectancy at age 65 has also increased in the UK, although at a somewhat slower pace than regular life expectancy. This would suggest that people have the capability to work longer, though perhaps not to increase their working life on a one-for-one basis as life expectancy increases. Life expectancy at age 65 increased by 4.2 years for men between 1981 and 2006. During the same period, healthy life expectancy at age 65 increased by 2.9 years for men.

Increases in the number of healthy years of life that we can enjoy have not been reflected in longer working lives – indeed, the reverse is the case: people were working longer half a century ago.

If rising pension ages and labour force participation at older ages caused greater ill health then it would be a matter for concern. Most research on the relationship between health and working in old age has produced ambiguous results. Research in this area is inherently difficult because of the fact that, just as retirement can influence health, health can influence retirement decisions.

To date, research has not generally examined the relationship between the number of years spent in retirement and health. This issue is important. It is possible that health will initially improve when somebody retires and then, after a while, start to deteriorate due to reduced physical activity and social interaction.

New research presented in this paper indicates that being retired decreases physical, mental and self-assessed health. The adverse effects increase as the number of years spent in retirement increases.

The results vary somewhat depending on the model and research strategy employed. By way of example, the following results were obtained:
  • Retirement decreases the likelihood of being in ‘very good’ or ‘excellent’ self-assessed health by about 40 per cent
  • Retirement increases the probability of suffering from clinical depression by about 40 per cent
  • Retirement increases the probability of having at least one diagnosed physical condition by about 60 per cent
  • Retirement increases the probability of taking a drug for such a condition by about 60 per cent.
Higher state pension ages are not only possible (given longer life expectancy) and desirable (given the fiscal costs of state pensions) but later retirement should, in fact, lead to better average health in retirement. As such the government should remove impediments to later retirement that are to be found in state pension systems, disability benefit provision and employment protection legislation.
If results such as these continue to be found then you have to ask, in the New Zealand context, Why is the government so against increasing the age of eligibility for superannuation? A longer working life brings benefits to those still working and reduces the fiscal burden of superannuation. A win-win?

Making trade easier and less bureaucratic actually helps trade - The Dismal Science

Jun 04, 2013

Who would have guessed?

In a new column at VoxEU.org Bernard Hoekman and Ben Shepherd asks Who profits from trade-facilitation initiatives?. Trade-facilitation is just WTO jargon for making international trade easier and less bureaucratic. As it turns out trade-facilitation is one of the few areas where WTO talks are still making progress. The Hoekman and Shepard column discusses recent research that looks at the distribution of gains from trade facilitation among exporters of different sizes. Firm-level data from many developing countries show that firms of all sizes export more in response to improved trade facilitation.

The basic conclusions and policy implications of the research discussed are:

In a global sense, trade facilitation is a ‘good deal’ for countries, in that it has the potential to bring economic benefits at least on a par with, and perhaps well in excess of, those that would come from a major round of tariff cuts in manufacturing. However, from a negotiating standpoint, as well from the point of view of development policy, it is not just the global economic gains that matter, but also their distribution. Two questions are important.
  • First, is it primarily developed countries that stand to reap significant gains from improved trade facilitation, or will developing countries also gain?
  • Second, and tied to the first, in the context of computable general-equilibrium models, is it only large firms (mostly headquartered in developed countries) that benefit from trade facilitation, to the exclusion of small suppliers (mostly located in developing countries)?

On the first question, the available research suggests that both developed and developing nations stand to gain from improved trade facilitation, and that exports are expected to increase for both country groups.

The second question is also empirical in nature, but has not been subject to any rigorous testing. In Hoekman and Shepherd (2013), using a large dataset from a variety of developing countries, we find that firms of all sizes benefit from improved trade facilitation by exporting more in response to improvements like reductions in the time taken to export goods. Thus, except under special circumstances that do not appear to hold widely in practice, small firms stand to benefit from trade facilitation through the same mechanism that large ones do. As a result, countries where small, supplier firms are prevalent and lead firms are few or non-existent – which is the case for many developing countries – also stand to gain from improved trade facilitation.

In terms of policy, our results and review of the literature suggest two main conclusions:
  • First, those interested in supporting small producers and exporters in developing countries – policymakers, researchers, and the development community – should actively support improved trade facilitation in developing countries.
It flows from this that the same parties should welcome a WTO Agreement on Trade Facilitation.
  • Second, one of the main arguments put forward by some in the policy community as a reason for developing countries to be wary of the trade-facilitation debate does not stand up to empirical scrutiny.
The fact that small firms can benefit in the same way as large firms from improved trade facilitation means that economies where supplier firms are prevalent but lead firms are not still stand to gain from trade-facilitation reforms. This is not to deny that gains from trade facilitation could be distributed unequally or that governments should monitor the impacts of trade-facilitation initiatives. Distributional issues are, of course, important to the political economy of trade negotiations, and to their development implications. In this area – as more generally – it is important that reforms and projects are designed in a way that allows assessments of impacts over time. But the available firm-level data suggests that distributional concerns do not undermine the wealth of evidence showing that trade facilitation can boost trade and real incomes across the globe.
So I say unto you, go forth and be less bureaucratic and multiply thy trading.

Reference:
  • Hoekman, B, and B Shepherd (2013), “Who Profits from Trade Facilitation Initiatives?”, CEPR Discussion Paper 9490, May.

How not to run a business: examples of poor SOE performance - The Dismal Science

May 28, 2013

In a previous posting I noted that

By the late 1970s-early 1980s the sceptical minority was becoming larger, the mood was turning against government ownership [of firms] among both politicians and economists.
One of the motivating forces for politicians and economists rethinking their position on state-owned enterprises was a history of under performance by these firms worldwide. Some of the more extreme cases of poor SOE performance that have been publicised include:

McDonald (1991) outlines the case of the Hindustan Fertiliser Corporation in Haldia, West Bengal, India. By 1991 the firm had been operating for twelve years and employed twelve hundred workers. Yet up to that time the enterprise had not produced a single kilogram of fertiliser for sale!

The Economist (Economist 1994) details similar experiences in Italy: "[o]ne example was a rolling mill at Bagnoli near Naples built by Italy's state-owned steel company ILVA. Designed to create jobs in a depressed area where the Christian Democrats were strong, the plant, which took nearly a decade to complete, was never used. In Sardinia, another area of high unemployment, politicians made ENI, a state chemicals and energy conglomerate, refit a coal mine, only to leave the miners idle but on the payroll".

In France, the near-bankruptcy of then state-owned bank Credit Lyonnais is another example. In 1997 the French finance minister Dominique Strauss-Kahn admitted that the bank had probably lost around Ffr100 billion (around US$17 billion). The bank had to be bailed out three times in the 1990s. The total cost to the French taxpayer of the whole debacle has been estimated at between US$20 and US$30 billion. See the Economist (1997) for more on the affair.

With regard to the experience of the steel industry in the United Kingdom, Aylen (1988: 2) writes that in "1980/1 the [British Steel] Corporation made a total loss of pounds 1 billion on a turnover of just under pounds 3 billion, earning a place for a while in the Guinness Book of Records. [ ... ] By 1980 British Steel was fundamentally uncompetitive, with cost per tonne almost a third above those of West German producers, and by rights should not have survived". About coal, Vickers and Yarrow (1988: 331) could write, "[i]n recent years, mostly as a consequence of the combination of overinvestment in new capacity and the relatively slow rate of closure of inefficient collieries, the NCB [National Coal Board]'s continued viability has depended upon large injections of Government finance. In 1983-1984, for example, operating losses were covered by subsidies, known as deficit grants, amounting to pounds 875 million.". During a House of Commons debate on nationalisation, denationalisation and renationalisation in 1991 the then Financial Secretary to the Treasury, Francis Maude, said of the British experience with nationalised industries: "I do not wish to dwell on the record of nationalised industries in Britain. It is a sad and depressing saga in our nation's life. We all remember the British Steel Corporation, with its losses of £1 million every day of the year. We all remember British Telecom being in the Guinness Book of Records for the largest loss ever. We all remember the sloppy standards, the waiting lists for telephones, the ever-rising prices, the dingy tale of failure, the contempt for the customer, the craven management and the political interference". (Maude 1991).

The World Bank (World Bank 1995: 33-35) notes that in "Turkey, Turkiye Taskorumu Kurmu, a state-owned coal mining company, lost the equivalent of about $6.4 billion between 1986 and 1990. Losses in 1992 worked out to about $12,000 per worker, six times the average national income. Yet health and safety condition in the mine were so poor that a miners' life expectancy was forty-six years, eleven years below the national average. [ ... ] In the Philippines, the performance of the National Power Corporation steadily deteriorated from 1985 until the early 1990s. In 1990 the capital region alone lost an estimated $2.4 billion in economic output due to power outages. By 1992-93, electricity was shut off about seven hours a day in many parts of the country. In Bangladesh, in 1992 the state sugar milling monopoly had twice as many office workers as it needed, or about 8,000 extra employees. [ ... ] Meanwhile, sugar cost twice as much on the open market in Bangladesh as it did internationally. In Tanzania, the state-owned Morogoro shoe factory, built in the 1970s with a World Bank loan, never manufactured more than about 4 percent of its supposed annual capacity".

Kikeri, Nellis and Shirley (1992: 2) state that "[o]f particular concern to governments is the burden that loss-making SOEs place on hard-pressed public budgets. SOE losses as a percentage of gross domestic product (GDP) reached 9 percent in Argentina and Poland in 1989; through the 1980s about half of Tanzania's 350 SOEs persistently ran losses that has to be covered from public funds; in Ghana from 1985 to 1989 the annual outflow from government to fourteen core SOEs averaged 2 percent of GDP; and in China about 30 percent of SOEs were loss-making in 1991. The losses have important consequences: Mexico's minister of finance has noted that a fraction of the $10 billion in losses incurred by the state-owned steel complex would have been enough to bring potable water, sewerage, hospitals, and educational facilities to an entire region of the country (Aspe 1991)".

Denmark’s fat tax fiasco - The Dismal Science

May 27, 2013

The Institute for Economic Affairs in London has released a new report by Christopher Snowdon on The Proof of the Pudding: Denmark’s fat tax fiasco. A summary of the findings of the study are:

  • Denmark’s tax on saturated fat was hailed as a world-leading public health policy when it was introduced in October 2011, but it was abandoned fifteen months later when the unintended consequences became clear. This paper examines how a policy went from having almost unanimous parliamentary support to becoming ‘an unbearable burden’ on the Danish people.
  • The economic effects of the fat tax were almost invariably negative. It was blamed for helping inflation rise to 4.7 per cent in a year in which real wages fell by 0.8 per cent. Many Danes switched to cheaper brands or went over the border to Sweden and Germany to do their shopping. At least ten per cent of fat tax revenues were swallowed up in administrative costs and it was estimated to have cost 1,300 Danish jobs.
  • The fat tax had a very limited impact on the consumption of ‘unhealthy’ foods. One survey found that only seven per cent of the population reduced the amount of butter, cream and cheese they bought and another survey found that 80 per cent of Danes did not change their shopping habits at all.
  • The fat tax was always controversial and it became increasingly unpopular as time went on. Objections came not just from business owners, but also from trade unions, politicians, journalists and the general public. It was widely criticised across the political spectrum for making the poor poorer. By October 2012, 70 per cent of Danes considered the tax to be ‘bad’ or ‘very bad’ and newspapers routinely described it as ‘infamous’, ‘maligned’ and ‘hated’. Mette Gjerskov, the minister for food, agriculture and fisheries, admitted in late 2012: ‘The fat tax is one of the most criticised policies we have had in a long time.’
  • Denmark’s fat tax remains the leading example of an ambitious anti-obesity policy being tested in the real world. The results failed to match the predictions of the health lobby’s computer models and the failed experiment has since been largely swept under the carpet in public health circles. Ultimately, Danish politicians weighed the negligible health benefits against the demonstrable social and economic costs and swiftly abandoned it. Few mourn its passing.
  • The economic and political failure of the fat tax provides important lessons for policy-makers who are considering ‘health-related’ taxes on fat, sugar, ‘junk food’ and fizzy drinks in the UK and elsewhere. As other studies have concluded, the effect of such policies on calorie consumption and obesity is likely to be minimal. These taxes are highly regressive, economically inefficient and widely unpopular. Although they remain popular with many health campaigners, this may be because, as one Danish journalist noted, ‘doctors don’t need to get re-elected.’
Taxing a product to reduce its consumption sounds all well and good, after all demand curves slope downwards, but the reduction in quantity demanded will be small when demand for the product is inelastic. And the results noted in the third point above suggest that for the Danish at least, unhealthy foods are inelastically demanded. Other methods should be tried if reducing consumption of these foods really is worthwhile.

In short, yet another failed piece of social engineering. Not that this failure will have any effect on the demands of public health campaigners. As Snowdon notes,
Despite the unambiguous results of this natural experiment, public health campaigners in the UK continue to lobby for similar policies. Just four days after the Danes announced the abolition of the fat tax, the National Heart Forum called on the government to introduce a tax on foods that are high in salt, sugar and fat. Two months later, a coalition of 61 organisations demanded a 20p per litre tax on sugar-sweetened beverages (or - as they call them - ‘mini-health timebombs’). Most recently, the Academy of Medical Royal Colleges called for a 20 per cent tax on the same soft drinks. The Academy sheepishly mentioned that Denmark had experimented with ‘a slightly broader plan’, but did not acknowledge that the experiment had ended, let alone explain why.
If one really believes in 'evidence-based policy' should not this evidence be taken into account. Should we not be concerned with what actually happens when policies are tested in the real world? Should evidence of job losses and the cost of living increases not be of concern in policy development? But will health campaigners in New Zealand respond any differently from those in the U.K. when they just ignored the Danish results?

How to increase prices and profits in the U.K. retail energy market - The Dismal Science

May 23, 2013

This piece from the Adam Smith Institute website should act as a warning to countries wanting to reregulate their energy markets. Stephen Littlechild, Professor emeritus at the University of Birmingham, fellow of Judge Business School at the University of Cambridge and a top regulator from 1983 to 1998, explains how politicians and regulators have, by misunderstanding how markets work, regulated to boost energy firms' profits at the expense of higher bills for consumers. Markets may not be perfect but it helps to understand how they work before setting out to "fix" them.

Britain’s competitive retail energy market was the first in the world, and for many years the most competitive. It had the most active suppliers, and the most active customer switching. This competition and choice brought better offers for customers. It may not seem like it because of recent energy price increases. But these reflect increases in fuel costs like gas, higher costs of renewable energy and other obligations on suppliers, not a lack of retail competition.

In fact, retail competition was sometimes too fierce, witness the problem with doorstep mis-selling. But Ofgem took action to fix that problem.

Retail profits in the domestic sector used to be minimal; Ofgem calculated that many were negative. New entrants came into the market, but until recently most found it tough to survive.

Retail competition has been enhanced by a dozen switching sites. Each seeks the best way to attract users, to offer the simplest calculations, to include the most relevant information and the clearest comparisons, to facilitate subsequent switching. No other country can boast as lively, innovative and effective market for information and assistance to energy customers as Britain.
What you may ask is wrong here? Energy prices were increasing and someone had to be blamed. Ofgem (Office of Gas and Electricity Markets) the U.K. regulator for energy markets, was unable to find evidence of market failure and thus it concluded that the problem was customer failure. Customer failure being a nice way of saying "consumers are stupid"!. Customers were paying high prices because they were unable or unwilling to understand suppliers’ offers and thus the market had to be simplified.
An increasingly crackpot series of proposals and directives has emerged from Ofgem, Government and now Which? magazine for dumbing down the retail market. All are well-intentioned, none shows any understanding of competitive markets, none will increase customer engagement, and all will make customers worse off.
First came ideas from Ofgem,
It noticed that suppliers based in one area were offering lower prices to customers in their competitors’ areas. In 2009 it decided that requiring suppliers to charge the same price to all customers would bring the benefits of the lower prices to all customers - Right? Wrong. Suppliers predictably found it more profitable to raise their low prices to new customers than to lower their prices to existing customers.

Customers suffered because the low-price offers were withdrawn. They also began to lose interest in switching supplier: the switching rate has since fallen by nearly a half. But suppliers did not lose out from this reduction in competition. Quite the opposite: Ofgem’s calculations show their retail profit margins increasing to an all-time high: from minus £10 per dual fuel customer in May 2009 to about £50 from 2010 to 2012 to £100 now.

In 2011 Ofgem proposed that all suppliers should offer the same monthly standing charge – which Ofgem itself would specify. It overlooked – or didn’t care – that this prohibited tariffs with no standing charge, which are popular with pensioners. And that Ofgem would now be jointly responsible for setting energy prices. Ofgem withdrew its proposal.

Meanwhile, suppliers found other ways to compete – for example by offering lower prices online. Customers benefited – until Ofgem decided that this made the market too complicated. In October 2012 Ofgem proposed that suppliers would be allowed only four tariffs per fuel. This of course is tough on customers with minority tastes, like green tariffs, or even tariffs with no standing charge. And innovation will cease if a supplier can only innovate by withdrawing an existing tariff that supplies about a quarter of its customers. But now it’s simplicity that counts, not the availability of products that customers want.

There are other petty restrictions. Discounts must be the same each year, expressed in pounds not percentages. If this restriction had been in place, it would have banned the best offer in the market earlier this year. And in future it may not be viable for suppliers to offer discounts that don’t use percentages to tailor the discount to the size of bill. But the availability of good offers is no longer a relevant consideration.
Then ideas from the government,
At the same time, another bright idea popped up at Prime Minister’s Question Time. Just in time for the County Council Elections. The campaign leaflet says “Conservatives in Government have forced energy companies to put customers on the lowest tariff”. Leave aside that this is not yet enacted, and still just an idea that Ofgem might reluctantly trial. Leave aside too why Conservatives in Government and not Ofgem are now regulating energy companies. Let us just ask: what does it mean and is it a good idea?

If it means that energy suppliers will be forced to put their own customers on to the lowest tariff offered by their rivals, is there the remotest chance of this working? Suppose it means that energy suppliers will be forced to put customers on the lowest tariff they themselves offer. But if a supplier offers a discount on its standard tariff coupled with an exit charge of £50, do we really want to force that supplier to put all its customers on a tariff that locks them in? And if a supplier wanted to offer a discount for new customers, but was forced to put all its existing customers on the same discounted tariff, isn’t it obvious that it would be more profitable not to offer the discount in the first place? Once again, the proposal will drive out the best offers.
And finally ideas from Which? magazine.
It says that Ofgem’s proposals for simplifying the market don’t go far enough. The government should require single unit prices for each energy tariff, like petrol prices on a garage forecourt. Simplicity is flavour of the month, and petrol is a competitive market, so what’s wrong with this? Lots.

First, Which? seems to be asking for a single uniform price across the whole of the country. But distribution network charges vary considerably across the country. To impose a uniform retail price or network charge would require massive geographic cross-subsidisation between network operators and between customers that would be neither workable nor obviously equitable.

Second, forcing all tariffs to have a zero standing charge would mean that suppliers would not be allowed to offer a lower unit price to larger customers that are more economic to serve, and suppliers would no longer be interested in attracting smaller customers. The likely impact on different kinds of customers has not been considered.

Third, limiting the variety of energy products so that customers are faced with only one price per supplier would enable and encourage suppliers to coordinate prices. If one supplier breaks ranks then other suppliers will either follow or that supplier will fall back into line. Customers will find that suppliers offer similar prices almost all the time. Where then is the incentive to engage in the market?
Littlechild's conclusion,
All these schemes assume that regulators and governments know more about customers than those who make a living by discovering and providing what customers want. These schemes won’t really simplify the market and they won't persuade customers to engage more. But they will restrict competition, and customers will be worse off because the best offers will disappear. Suppliers will find it costly to comply with the proposed 126 pages of new regulatory red-tape, but the costs will be passed through to customers and the suppliers will grumble all the way to the bank.

State-owned enterprises in the global economy - The Dismal Science

May 05, 2013

Some state-owned enterprises have become global players and the subject of much policymaking concern. There is a widespread perception that they may be acting differently when competing with private firms in the global market place. A new column at VoxEU.org, "State-owned enterprises in the global economy: Reason for concern?" introduces a new database on state-owned firms that shows that more than one in ten of the world’s largest firms are state-owned.

The article, by Max Büge, Matias Egeland, Przemyslaw Kowalski and Monika Sztajerowska, argues,

The rise of state capitalism – the spread of a new sort of business in the emerging world will cause increasing problems” argued a January 2012 special issue of The Economist. State-owned enterprises have always been an important element of most economies, including the most advanced ones. However, the state sector has traditionally been characterised by orientation towards domestic markets and often lagging business performance. Today, some contemporary state-owned enterprises are among the largest and fastest expanding multinational companies. They increasingly compete with private firms for resources, ideas and consumers in both domestic and international markets.

This new trend has attracted the attention of the media which reports regularly on large cross-border deals sealed by state-owned firms. It has also been noticed by policymakers and business, many of whom are calling for a 'levelling of the playing field' in international trade and investment. The discussions of new state-owned enterprises disciplines in the ongoing Trans-Pacific Partnership negotiations and the implementation of stricter national investment screening mechanisms for state-owned enterprises in some countries are testimony to this.
The article goes on to ask, Why do these international SOESs matter and what policy tools are available to deal with any problems they may cause? There does seem to be one obvious way of dealing with such SOEs, have the home countries of the SOEs privatise them. The article continues,
The significant extent of state ownership among the world’s top companies raises a question about its impact on the global competition. The triple role of the government as a regulator, regulation enforcer and owner of assets opens a possibility of favourable treatment granted to state-owned enterprises in some cases. These advantages can take the form of, for instance, direct subsidies, concessionary financing, state-backed guarantees, preferential regulatory treatment, exemptions from antitrust enforcement or bankruptcy rules. They may well be justified in a domestic context, for example, to correct market failures, provide public goods, and foster economic development. But if their effects extend beyond borders, they may undermine the benefits from international trade and investment, which are predicated on the basis of non-discrimination and respect for market principles. Two recent OECD workshops on the issue (one in 2012 and in 2013) gathered numerous representatives of global firms and governments revealed this is indeed a serious concern.

Given these potential anti-competitive effects of state ownership on the global market, what tools are available to address them? We look at those in detail in our paper, surveying existing regulatory frameworks at the national, bilateral or multilateral level, and consider their relative strengths and weaknesses. For example:
  • National antitrust law can in principle be used to deal with the abuse of dominant position by state-owned enterprises, including in the international context, or to prevent anticompetitive effects associated with merger and acquisition activities of state-owned enterprises.
However, traditional antitrust standards apply to profit maximising firms and are not aimed at preventing subsidies and artificially low prices –except where these are manifestly motivated by predatory strategies [...].
  • Competitive neutrality arrangements introduced by some OECD jurisdictions aim to mitigate or eliminate competitive advantages of state-owned enterprises, including with respect to taxation, financing costs and regulation [...].
Some of these frameworks refer specifically to state-owned businesses (e.g. in Australia) while others are ownership-neutral. In the EU, for example, the state interactions with private and state-owned firms alike are governed by a set of special rules in the areas of antitrust, state aid and transparency.
  • WTO rules are generally ownership-neutral (except for the notable exceptions in the Accession Protocols of China and Russia).
The disciplines that they impose on government regulations and actions do not distinguish between situations where the provider of the goods or services covered by the regulation or action is a public or a private entity. They can nevertheless discipline some government policies and actions involving state-owned enterprises, for example, when they receive trade-distorting state subsidies. Violation of national treatment or most-favoured nation principles, granting of subsidies or other forms of influencing trade by state-owned enterprises themselves can also be covered by WTO disciplines if these enterprises can be proven to be “vested with or performing a governmental function”. Yet, some of the definitional ambiguities have rendered application of these disciplines uncertain and some provisions allow countries to exempt state-owned enterprises’ actions from certain WTO disciplines (e.g. in the GATS).
  • Many existing preferential trade agreements and bilateral investment treaties include specific provisions on state-owned enterprises, attempting to fill gaps in existing multilateral provisions;
Some explicitly specify that their provisions apply similarly to state-owned enterprises, clarify some of the definitional lacunae in the WTO context, or include additional state-owned-specific disciplines. As mentioned at the outset, state-owned enterprises provisions are currently being discussed in the ongoing Trans-Pacific Partnership negotiations.

Some of these regulatory frameworks have been used to contest actions or advantages of state-owned enterprises [...]  and in some of these cases the relevant ruling bodies have found that governments have indeed pursued state-owned enterprises strategies inconsistent with these frameworks. Yet, in some cases these challenges were found to be without merit.
The article's conclusion,
Our understanding of the recent emergence of international trade and investment by state-owned enterprises, and thus policy responses, are still in the early stages of development. International trade and investment by state-owned enterprises could well continue to increase as countries with significant state-owned enterprise sectors grow and become more internationalised, or because of advantages state-owned enterprises may enjoy – even though nascent privatisation programmes in some countries pull in the opposite direction. A better understanding of the implications of state-owned enterprises’ trade and investment for the functioning of international markets is needed to help governments formulate informed and balanced policy responses.
The first best answer would seem to be to encourage these "nascent privatisation programmes". Regulation in the overseas countries is second best, at best.

Just for fun: theory of the firm 13 - The Dismal Science

May 03, 2013

As has been noted previously the theory of the firm is not well developed within Austrian economics. But his does not mean there have been no attempts at formulating an Austrian approach to the firm. One such attempt is that of Nicolai Foss and Peter Klein in their book Organizing Entrepreneurial Judgment: A New Approach to the Firm.

The classic questions in the theory of the firm are, Why do firms exist, what determines a firm's boundaries and how are firms organised internally? To see Foss and Klein's answers lets begin with the one-person firm. For Foss and Klein the explanation for such a firm lies in the fact that markets for judgement are incomplete. A combination of two factors result in an entrepreneur having to form a one-person firm. To begin, entrepreneurs may know their ideas are "good risks" but my not be able to communicate this to the capital markets. A similar problem arises in a more standard model in Rabin (1993). Rabin works within an adverse selection framework and shows that the adverse selection problems can be such that, in some cases, an informed party has to take over the firm to show that their information is indeed useful. For Rabin an informed party has information about how to make a firm more productive but can't reveal the information to the owners of a current firm. If the information is revealed the current firm can produce using it without any payment to the informed party. If the information is not revealed why should the firm believe the information is in fact useful? Within the Rabin framework it is suggested that firms are more likely to trade through markets when informed parties are also superior providers of productive services that are related to their information. But if, on the other hand, information is a firm’s only competitive advantage, it is likely to obtain control over assets, possibly by buying firms that currently own those assets or setting up his own firm. Second, Foss and Klein argue that entrepreneurship represents judgement under "genuine" uncertainty and such judgement can not be assessed in terms of its marginal product and thus it can not be be paid a wage. This idea is more innovative since standard models of the firm work, at best, within environments of risk, rather than uncertainty. In short, there is no market for the judgement and therefore exercising judgement requires the person with judgement to control the firm. Foss, Klein and Linder (2013: 25-6) explain an implication of this incompleteness of the judgement market,

Exercising judgment implies [...] asset ownership, for judgmental decision-making is ultimately decision-making about the employment of resources, that is: to arrange or organize the capital goods the entrepreneur owns (or has influence over). Obtaining ownership rights over tangible and intangible assets also strengthens the bargaining position. Ownership rights—as stressed in organizational economics—allow parties to “fill in the blanks” of a contract, including the right to exclude others from accessing or using an asset [...]. It thus also ensures that the entrepreneur can appropriate rents from his/her entrepreneurial idea.
Similarly the standard property rights approach to the firm sees asset ownership at the centre of the explanation of the firm. Both the Rabin(1993) adverse selection model type model and the related moral hazard model of Brynjolfsson (1994) utilise the property rights framework and both result in the informed party (the entrepreneur) owning the firm (controlling the physical assets of the firm) so they can appropriate rents.

But what of the multi-person firm? As many attributes of capital only become apparent via using those assets, experimentation in an effort to discover the best uses for the particular assets the firm owns is needed.
Given the interdependence that typically exists in a multi-state value chain and involving different inputs, the best time and place to use a particular asset depend on the specification of the uses of all other assets that are needed in value delivery [...] Thus, entrepreneurs need a contractual set up that allows them to experiment at low cost. (Foss, Klein and Linder 2013: 26).
Such experimentation can lead to hold-up problems if a market contract is used to coordinate collaborators. The basic argument Foss and Klein (2012) make is that foregoing the market as a means of coordination in favour of a firm lowers the costs of experimentation. Under market contracting collaborators have the power to veto changes in the experimental set-up which allows them to extract extra quasi-rents from other collaborators in return for their agreement to make the changes to the set-up. Within a firm, a hierarchical relationship, the entrepreneur can redefine and reallocate decision rights among the collaborators, who are now employees, and can sanction those who do not utilise their decision rights efficiently. The use of a firm therefore allows the entrepreneur to experiment without enduring the costs, bargaining and drafting costs, of constant contract renegotiation. For Foss and Klein (2012) this provides the basic rationale for the multi-person firm.

When considering the boundaries of the firm, Foss and Klien (2013) argue that Austrian ideas developed in the socialist calculation debate suggest that when organizations are large enough to conduct activities that are exclusively internal – so that no reference to the outside market is available – they will face a calculation problem. That is the firm's size is limited by the fact that the more a firm does internally the fewer genuine market prices in has as a basis for rational rational judgements about the scarcity of the resources and whether an entrepreneurial profit exists.

With regard to the internal organisation of firms Foss and Klein (2012) note a problem arises in that the entrepreneur will typically lacking information or knowledge to make optimal decisions. One way to deal with this dispersed knowledge is for the entrepreneur delegate decision rights to managers who have better information. This delegation allows the firm is able to exploit the locally held knowledge without having to codify it for internal communication or motivating managers to explicitly share their knowledge. There is however a trade-off with such delegation.
Unlike independent players in markets, managers within firms never possess ultimate decision rights and thus there are incentive limits to the extent to which market principles can be applied within firms [...] This gives rise to problems of motivation, i.e. moral hazard – to use the organizational economics terminology. Managers and employees may use the delegated decision-rights in both productive, that is, functional or value-enhancing from the owners’ perspective, and destructive (i.e. dysfunctional or value-diminishing) ways [...]. They may pursue new profitable business opportunities or engage in developing new forms of exploiting (quasi)-rents from the firm by creating new forms of hold-ups etc (ibid.). Yet, delegation may also imply risks of duplication of effort due to a lack of coordination of activities. The benefits of delegation in terms of better utilizing dispersed knowledge thus need to be balanced against the costs of delegation due to problems of interest alignment (what organizational economics would call “agency costs”) and coordination [...]  (Foss, Klein and Linder 2013: 29-30)..
This means entrepreneurs need to exercise judgement about other people's judgement in insofar as they must evaluate employees according to their ability to use delegated decision rights properly.

One point that Austrians share with their mainstream counterparts has been the reluctance until recently to open the "black box" of the firm. The judgement-based approach suggest that the Austrians have much to offer now that the box is has been opened.

Refs.:
  • Foss, Nicolai J., and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm. Cambridge: Cambridge University Press.
  • Foss, Nicolai J., Peter G. Klein and Stefan Linder 2013. 'Organizations and Markets', SMG Working Paper No. 8/2013 April, Department of Strategic Management and Globalization, Copenhagen Business School.