State Enterprises in China and India: A Case of Government Failure

In Chapter 2, we noted that both market and government failures take place. Having considered cases of market failure and their impacts in Chapters 3 to 5, we now turn to government failure. We argue that state-owned enterprises in China and India qualify as a case of government failure in raising significantly the economic performance of these enter­prises despite various policy reforms and restructuring. This is not to deny that some of these enterprises have improved performance over the years in response to government efforts (particularly in China) but the fact remains that despite successive proclamations to reduce losses of these enterprises through an increase in productivity and economic efficiency, the results have been disappointing, especially in India. Are these failures inherent in the nature of public management of production which is often motivated by multiple and non-economic objectives? Are they due to asymmetric information and principal-agency problems discussed in Chapters 1 and 2? Or are they due to failure to implement policies for various non-economic, political and humanitarian reasons? We attempt to answer some of these questions by examining the economic performance of state enterprises in China and India in the light of two main criteria, the ‘soft-budget’ constraint and excess labour or ’overstaffing’.