bne IntelliNews – The state is back in business

The coronavirus (COVID-19) pandemic that struck the world this year has resulted in an increase in the role of the state as governments were forced to step in with emergency stimulus packages, support for people and companies whose incomes were hit by the spring lockdowns and a ramping up of funding for healthcare. 

The latest annual Transition Report from the European Bank for Reconstruction and Development (EBRD), titled “The state strikes back”, shows that the pandemic has encouraged people to see an increased role for the state in a more positive light. 45% of people in the post-communist states now favour higher levels of state ownership, says the EBRD’s chief economist, Beata Javorcik, in an interview with bne IntelliNews. Moreover, people who come of age during an epidemic are more likely to support public ownership and to be suspicious of the market economy. 

The more positive view of an increase in the state’s role in the economy is not purely a product of the coronavirus pandemic, however. This year’s public health crisis accelerated but did not create the phenomenon. 

“When the EBRD published its first Transition Report back in 1994, the prevailing consensus was that lower levels of state ownership helped to create more dynamic and prosperous economies … Today, there is a sense that the state is striking back,” says the report. 

“And that was true even before the arrival of COVID-19. In advanced economies, more firms were nationalised than privatised in the early years of the 21st century, while economies where state ownership is widespread, such as China and Singapore, have experienced exceptional rates of economic growth. Household surveys reveal significant and rising support for the expansion of state ownership, perhaps as a reflection of rising inequality and the scars of the global financial crisis of 2008-09.”

This could see a reversal of trends over the past decades. State employment declined in both advanced economies and emerging markets, and even faster in the EBRD region, from 45% in the mid-1990s to 24% in the mid-2010s – a change attributed both to privatisation and more vibrant entrepreneurial activity. 

However, since the international economic crisis, state employment has been increasing in many lower income economies. In around one third of the EBRD region, the public sector share of employment rose between 2015 and 2018, especially in four Eurasian countries, Armenia, Georgia, Kazakhstan and Mongolia. 

Despite decades of privatisations, “state-owned enterprises continue to play an important role in the EBRD regions, providing almost half of all public-sector employment”, concentrated in the energy, utilities and transport sectors, according to the report. 

A question of governance 

The role of state-owned enterprises as a stabilising force – for example, providing employment during downturns and in disadvantaged regions – was clear in spring 2020, when state-owned enterprise (SOE) employees were less likely to have their pay cut when lockdowns brought a halt to much economic activity. 

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