According to Yergin and Stanislaw (80), SOE (State Owned Enterprises) signified the epitome of advanced economics. Therefore, for developing nations, such organizations (SOE) would be the only avenue for attaining development because private entities cannot raise vast amounts of capital at an instance. SOE’s were also seen to advocate for the good of a nation rather than an individual’s interest (Yergin and Stanislaw 81). Furthermore, the SOE’s would have qualified personnel employed by merit and not from patronage or lineage. In summary, the SOE’s were seen as organizations that would birth a nation’s identity and also spur economic development.
The SOE’s in developing nations encountered numerous problems in their set up and operation. First, there was poor coordination in their operations that led to many entities performing poorly financially or loosing resources. In turn, they were not performing functions they were intended to do. Second, some industries controlled by SOE started off at a disadvantage in comparison to established low-cost imports (Yergin and Stanislaw 82). This made it hard for them to attain profitability, or even break even. Lastly, the SOE’s were in many forms and had neither working capital nor autonomy. This made the execution of plans, and coordination operations difficult.
The strategy for privatization was enabling many public utilities and state owned corporates to be handled by groups, individuals, or parties for the aim of profit. This strategy of widening the ownership resulted in many people having a stake in public property; hence increased responsibility. Further, the strategy would limit the role of the government making the process of privatization irreversible (Yergin and Stanislaw 122). Also, in privatization, corporations would be extra efficient and have value in their offerings. Thus, according to Yergin and Stanislaw (122) the government share of GDP would reduce in privatization. Examples of companies corporatized and privatized include; British Steel, and British Telcom, In British Telcom, the negative impact was that the company could not be valued accurately because it did not know which of its operations were profitable. However, the merit was that operations in the company were standardized, efficient, and profitable (Yergin and Stanislaw 123). Another example is British steel, where privatization resulted in an increase in productivity and rationalization of facilities as an advantage. As a disadvantage, privatization resulted in a drastic reduction of the labor force, and foreigners having a stake in the company.
The relationship between the private sector and the procurement process in the US defense industry is effective. This is because contracting is highly structured and restricted in USA. This is advantageous where both parties involved can lay out their interests, and once there is an agreement, contracting and purchasing can commence. In USA, there is no single party that would determine the terms of the procurement; hence both parties are free to expand on what they require, and negotiate on a suitable fee. Thus, in the defense industry where the government looks for quality offerings at a suitable fee, they can negotiate with the private sector in hammering a deal that would result in timely delivery of cost effective equipment. This can be done in secrecy, a situation that is beneficial to the defense department.
In helping the economy recover, the defense industry should not have the additional goal of increasing overall spending. Increasing overall spending is a quick-fix to a perceived problem. However, this results in creating a negative surplus in government expenditure where an accumulation, through continued over- spending, results in increased debts. Therefore, a country operating under increased overall spending would result in the economy shrinking because the government would have grown much larger, and poor purchasing power in the economy. The purchasing power is affected through the Deficit-Hawk argument where the presence of a deficit in the budget increases spending by consumers hence improving the purchasing power. However, when government increases spending, the deficits are covered resulting in affecting the purchasing power.
Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: The Battle for the World Economy. New York: Simon & Schuster. (1998). Print.