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Reviews / Comptes Rendus

Christafis H. Iordanoglou, Public Enterprise Revisited: A Closer Look at the 1954–79 UK Labour Productivity Record (Cheltenham, UK: Edward Elgar Publishing 2001)

PUBLIC ENTERPRISE has had a bad rap in recent years, with the ascendancy of neoliberal economics and the collapse of Soviet-style planned economies in eastern Europe. In most developed countries, policies of privatization, deregulation, and free trade have supplanted earlier social democratic efforts to build a mixed economy. IMF and World Bank structural adjustment policies have forced many developing countries to downsize their public sectors and abandon efforts to use public enterprise as a vehicle for domestic economic development. Moreover, one of the key objectives of recent international trade agreements has been to roll back the public sector and impose commercial disciplines on government enterprises.

Yet the prevailing view of neoclassical economists that public enterprise is invariably less efficient than private business is open to question for a variety of reasons. Recent failures of Enron, Nortel, WorldCom, and Andersen — to list just a few corporate disasters — suggest that the market does not always make the best economic decisions. So it may be timely to revisit the question of whether public enterprise is more, or less, efficient than its private counterparts.

Obviously this is a huge task. Those attempting to compare public and private enterprise encounter numerous methodological challenges. There is no single model for public enterprises. They operate in a wide range of different sectors of the economy and under varying regulatory and policy mandates. Changes in the scope and functions of public enterprises over time as well as recent privatization initiatives also make it more difficult to carry out long-term comparisons. Key data needed to make sound comparisons are often unavailable

In many cases, public enterprises operate in sectors with no comparable private competitors. They may be mandated to pursue public policy objectives, such as regional development, local procurement, training, and the like that impact their bottom-line. As the prices they charge and the employment practices they follow are politically sensitive, they may be required to adopt policies that a private business would shun. Their investment decisions may be determined by factors extraneous to their business such as politically imposed limitations on government borrowing. They may have been established because the private sector was unwilling to take long-term financial risks, or as a result of private sector bankruptcies or corporate bailouts. Some public enterprises have been hamstrung by under-capitalization or the fact of being located in a declining industry. And, some have seen their activities arbitrarily limited due to pressure from business on government — pressure intended to make them eschew competing in profitable areas of economic activity. For these, and many other reasons, evaluating the relative performance of public versus private enterprises is a daunting task.

While acknowledging the numerous methodological challenges, Christafis Iordanoglou has developed an interesting approach to evaluating a somewhat narrower question: the relative productivity of public and private enterprises. His study examines changes in labour productivity among comparable private and public industries over a 25-year period beginning in 1954. What is central to his study is not comparisons of the absolute level of labour productivity at any given point in time but, rather, comparisons of the long-term growth in productivity. His question is whether there is any discernible difference in the productivity performance of the two sectors over a 25-year period. Iordanoglou's initial focus is on industries in the UK. However, he broadens his study to look at how UK industries compare with the US during the same period.

Iordanoglou's study narrows the scope of comparison to public and private industries with three key characteristics. First, they must be capital intensive. Second, they must operate large-scale plants, producing standardized goods or services. Third, they must be expanding their sales at — or more quickly than — the overall average for all industries. His objective is to compare the best performing enterprises in both sectors. (He excludes low-growth industries because he believes that public enterprises in declining industries are normally pressured by governments and the public to cushion the employment and community impacts by maintaining operations that private businesses would close. In other words, they are required to pursue non-commercial objectives that negatively impact productivity.)

From an initial pool of 155 3-digit UK industry classification categories in mining, manufacturing, utilities, transport, and communications, he narrows the focus of his study to the 78 industries whose market sales grew at, or above, the overall average during the 25-year period of the study. Iordanoglou further reduces this list, excluding industries characterized by small- size plants (thus focusing only on industries with large-scale standardized production) and industries with high capital investment per employee. The resulting list includes five public and twenty-four private industry categories.

The five public sector industries are electricity, gas, water, telecommunications, and airlines. With the exception of water (which had about 20 per cent private ownership), the public sector industries were essentially monopoly suppliers. The private industries were in a variety of sectors such as food and drink, vehicle production, textiles, metal goods, chemicals, electrical engineering, paper, and building materials.

It is not possible in a brief review to indicate the various methodological issues associated with this process of selection. However, Iordanoglou provides a very detailed technical explanation of the basis for the criteria used to screen the various industries and the reasons for the various statistical measures he utilizes.

His conclusions from this comparison within the UK are not likely to endear him to the neoclassical crowd. Iordanoglou finds that labour productivity growth in the much-maligned UK public sector industries under study was considerably greater than in the private sector. When the 29 industries were rank ordered, four of the public sector industries were in the top eight. The other, water, was sixteenth. The unweighted mean growth rate in the public sector was 6.7 per cent compared with 4.8 per cent in the private sector. In Iordanoglou's words: The gross output per employee estimates for the period as a whole indicate that the public sector has shown the fastest growth rate. All arithmetic and rank means point to the same direction. In particular, the difference between the two sectors' rank means is invariably impressive. The effects of the changes in index type or the shift from an employee-hour to an employee-year kind of measure are minimal. Indeed, the position of the industries, relative to each other, seems to remain virtually unchanged. (129)

The second major component of Iordanoglou's study is a comparison of the performance of UK public and private industries with their US counterparts over the same period. The key issue for him was whether there was any difference in the rate at which UK industries closed the labour productivity gap with their US counterparts. In other words, were the five public industries able to close the gap more rapidly than the UK private sector industries?

For technical reasons, only 27 of the 28 industry groups were used in this comparison. The author made various statistical adjustments to make the UK and US data series compatible, including adjustments for differences in the industry classification systems and approaches to measuring inputs and outputs. The US comparators for the five UK public industries were predominantly privately owned, which avoided the problem of public to public comparisons which might only have shown that the public sectors in each country were equally efficient, or inefficient.

The analysis revealed that in the base year, 1954, US industries across the board enjoyed labour productivity that was about 2 1/2 times higher than their UK counterparts. The gap in the public sector was even greater. By the end of the study period, private sector UK industries had made very little progress in closing the productivity gap. In contrast, the public industries had significantly reduced it. In short, UK public enterprises were far more successful in closing the productivity gap than their private counterparts.

Iordanoglou is careful not to inflate the significance of his findings, believing that there are still many factors that could influence the relative success of the public sector in the UK. But he does speculate that one possible reason for its relatively good performance was that public enterprises avoided the propensity to focus on short-term returns on investment in favour of a longer-term approach. They were more willing to take long-term risks involving major capital expenditures unlike their more risk-averse private counterparts. He also believes that publicly owned industries enjoyed advantages associated with being able to plan a co-coordinated, industry-wide approach to their operations. This enabled them to maximize economies of scale, standardize production (and outputs), and avoid unnecessary duplication by being a single supplier.

The preceding account does not do justice to the very detailed and comprehensive analysis contained in the book. Almost one-half of the 659-page study is devoted to technical appendices explaining his methodology and supporting his decisions to adopt the various measurement tools he chose to use. There is also the (almost) obligatory discussion at the beginning of the book of the major arguments mainstream economists have generally used to prove that public enterprise is inherently less efficient than private, including a discussion of the principal- agent issue and the arguments associated with property rights.

The book is not without faults. At times the writing is awkward. Iordanoglou has a tendency to use the passive voice, a style that this reviewer finds irritating. His writing could benefit from George Orwell's advice on the proper use of language. The book would also have benefited from a good copy edit to eliminate a number of passages that simply restate what he has already said. But these are stylistic quibbles.

His discussion of the historical forces that shaped the establishment and functioning of public enterprises is also a bit thin, although to be fair this is not the central focus of the book. In the case of the UK, many of the industries that were nationalized, either by the Atlee government in the immediate post-war period, or the Wilson government in the 1960s, had been starved of investment by their private owners for more than a generation and were a huge burden on the wider economy. They were "bail outs" in the true meaning of this term. The governments' decisions to bring these industries into the public sector were motivated not so much by socialist ideology — although that was a factor — but, significantly, by the practical realization that only government could provide them with the amount of capital needed to modernize.

There are a number of other gaps in terms of the general discussion of the role of public enterprises in a mixed economy and the forces which have shaped their decision-making process. However, this would be another book of a somewhat different character.

Iordanoglou has carried out a very significant piece of work. His basic idea of comparing the growth rate of productivity in the public and private sectors over a 25-year period provides a very useful method of approaching the bigger question of the relative efficiency of public enterprise. The conclusions, despite some of his caveats, are important. They are also highly relevant to the current debate over whether governments should privatize what is left of Canada's public enterprise sector.

The book deserves wide distribution.


John Calvert Simon Fraser University

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