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An International Comparison Of The Role Of Government In The Economic Development Of Developed And Emerging Economies, With Particular Reference To Government Corporations

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An International Comparison Of The Role Of Government In The Economic Development Of Developed And Emerging Economies, With Particular Reference To Government Corporations

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Content This dissertation has been 64—3109 microfilmed exactly as received SMITH, Hadley Edwin, 1929- AN INTERNATIONAL, COMPARISON OF THE ROLE j OF GOVERNMENT IN THE ECONOMIC DEVELOP- j ME NT OF DEVELOPED AND EMERGING ECONO- j MIES, WITH PARTICULAR REFERENCE TO GOV- j • ERNMENT CORPORATIONS. j ) University of Southern California, Ph.D., 1963 j E conom ics, general ! University Microfilms, Inc., Ann Arbor, Michigan Copyright by Hadley Edwin Smith 1964 AN INTERNATIONAL COMPARISON OF THE ROLE OF GOVERNMENT IN THE ECONOMIC DEVELOPMENT OF DEVELOPED AND EMERGING ECONOMIES, WITH PARTICULAR REFERENCE TO GOVERNMENT CORPORATIONS by Hadley Edwin Smith A Dissertation Presented to the FACULTY OF THE GRADUATE SCHOOL UNIVERSITY OF SOUTHERN CALIFORNIA In Partial Fulfillment of the Requirements for the Degree DOCTOR OF PHILOSOPHY (Economics) August 1963 UNIVERSITY O F S O U T H E R N CA LIFORN IA G R A D U A TE SC H O O L U N IV E R S IT Y PARK LO S A N G E L E S 7 , C A L IFO R N IA This dissertation, written by ............... under the direction of hXS—Dissertation Com mittee, and approved by all its members, has been presented to and accepted by the Graduate School, in partial fulfillment of requirements for the degree of D O C T O R OF P H I L O S O P H Y Date AygUS.t * . . . . 1 . 9 . 6 3 ......... DISSERTATIOKtCOM-MITTEE Chatrman AC KN OW LEDGME NT S The conduct of this study was facilitated by | Several interested persons who made personal reference tnaterials available. These include Ingvar S. Melin, Asso- i ciate Professor of Economics at the Swedish School of j i Economics, Helsinki, Finland; Frank P. Sherwood, Professor of Public Administration at the University of Southern California; and Emil J. Sady, Chief, Local Government Sec tion, Division of Public Administration, Department of Economic and Social Affairs, United Nations. The author is grateful, also, for the assistance of Paul Wanganess, Director of International Programs of the School of Public Administration at the University of Southern California. TABLE OF CONTENTS iCHAPTER PAGE I. INTRODUCTION............... 1 ! Objective ................................. 1 Importance, 2; Importance of the Govern ment Corporation, 2; Extent of Govern ment Corporations; 5; Importance of the Study of Government Corporations, 15 Scope and Method, 25; Scope, 25; Method, 26; Unique Features, 27 Previous Studies, Sources and Organiza tions, 28; Previous Studies, 28; Sources, 31; Organization of the Remaining Chapters, 32 II, THE REASONS FOR GOVERNMENT PARTICIPATION IN THE ECONOMY AND THE FUNCTIONS OF GOVERN MENT CORPORATIONS ........................ 3 5 Introduction ........... ......... 35 Clarifying and Classifying the Reasons ... 37 Reasons for the Economic Functions of Government, 41; National Government Participation, 43; State and Local Government Participation, 64 The Economic Functions Performed by Public Development Corporations, 68; Inter national Public Development Corporations, 68; National Public Development Corpora tions, 75; Functions of Other National Public Enterprises, 77; Regional, State, and Local Public Development Corpora tions, 82 III. OBJECTIONS AND LIMITATIONS TO GOVERNMENT ECONOMIC ACTIVITIES: A BRIEF REVIEW OF THE LITERATURE.......... 92 Aristotle.......................... .. 95 Adam Smith...................... 97 John Stuart Mill............. 99 Neoclassical View ......... ....... 102 British Nationalization ......... 103 IV. . THE ROLE OF THE GOVERNMENT DURING THE TAKE OFF STAGE IN THE DEVELOPMENT OF THE UNITED STATES AND INDIA...................... 116 $ iv CHAPTER PAGE | The Hypothesis, 118; Statement, 118; The Take-Off Stage, 121 Comparison of the Take-Off Stage of ; Developed and Underdeveloped Countries, 127; Per Capita Income, 129; Political and Cultural Background, 130; Rate of Economic Growth, 132; Population Char acteristics, 132 Possible Reasons for a Larger Public Sec- j tor in Emerging Economies, 134; Desire for Faster Rate of Growth, 134; Better ! Public Accountability with Public ! Enterprises, 136; Luxury Consumption, ! 136; Liberal Ideals, 138; Greater Obstacles to Development, 139; Derived Development, 140; The Rise of Economic Planning, 143; The Need for National Loyalties, 143; Size of the Economy, 144; Production of Capital Equipment, 144; Opposition to Foreign Capital, 145; The Degree of Backwardness, 145; National Independence, 146; Other Arguments, 146 Data on the Take-Off Stage of India and the United States, 147; Data on the Take-Off Stage in India, 147; Data on the Take-Off Stage in the United States, 148 Comparison of the Take-Off Stages of India and the United States, 149; Population, 149; Education, 171; Gross National Pro duct and Economic Growth, 172; Government Employment, 173; Employment in Agriculture and Manufacturing, 177; Sectoral Distribu tion of Income, 178; Government Expenditure, 180; Government Investment, 182; Additional Comments, 183 Summary and Conclusions, 185; The Take-Off Stage in Developed and Emerging Econo mies, 185; Reasons for a Larger Public Sector in Emerging Economies; 186;' The Take-Off Stage in India and the United States, 187; Conclusion, 190 V. PRINCIPLES OF THE GOVERNMENT CORPORATION . . . 194 Definition, 194; The Corporation, 194; The Government Corporation, 198; A New Definition, 216' Characteristics, 218; Steiner, 219; Seidman, 223; The United Nations Ran goon Seminar, 226; Friedmann, 228; The CHAPTER PAGE New York State Coordination Commission, 230; Robson, 233 Reasons for the Creation of Government Corporations, 235; Financial Advantages, 236; Jurisdictional Advantages, 245; | Administrative Advantages, 247 : The Public Purpose, 253 ! VI. OTHER FORMS OF PUBLIC ENTERPRISE ........... The Departmental Enterprise, 257; ! Characteristics, 257; Similarity to Government Corporations, 258; Dif ferences between Departments and Corporations, 259; Disadvantages of Departmental Structure, 259; Advan tages of Departmental Structure, 260 The Trading Agency, 261; Characteristics, 261; Advantages, 263; Disadvantages, 264 The State Company, 265; Characteristics, 265; Advantages of the State Company, 271; Disadvantages of the State Company, 274 The Management Contract, 279; Charac teristics, 279; Advantages, 280; Disadvantages, 281 The Contract for Research and Develop ment, 283; Characteristics, 283; Advantages, 290; Disadvantages, 290; Suggestions for Improvement, 295 Conclusion, 299 VII. HISTORY OF NATIONAL GOVERNMENT CORPORATIONS IN THE UNITED STATES ...................... The Corporation, 301 Chronological Development of National Government Corporations, 308; 1789- 1910, 308; Decade of World War I, 311; The 1920Ts, 315; Decade of Depression, 315; 1940-1963, 321; Summary, 328 Federal-State Conflicts, 332 Controls for Public Responsibility, 334; Legislative Controls, 338; Executive Controls, 349 Conclusions, 365 VIII. THE PRICE AND PROFIT POLICIES OF PUBLIC ENTERPRISE ................................. The Need for Profits, 374; Increased Public Revenue, 37 5; Loss of Tax Revenue 256 301 370 iCHAPTER j from Private Firms, 376; Equitable Distribution of the Burden of Develop ment, 376; Consumer Sovereignty and Resource Allocation, 377; Efficiency, | 379; Economic Growth, 380; Attract j Private Lenders, 382; Retirement of i Stock, 382; Payment of Welfare Costs, ; 3S3 j Arguments Against Profits, 387; Social J Inequity, 387; Price Instability, 388; | Distortion of Investment, 389 j Arguments for Deficits and Subsidization, 1 3S9; Over-capitalization, 389; New Competing Products, 390; Inflation, 390; Reduction of Balance of Payments Deficit, 391; Equating Average Revenue with Marginal Cost, 392; Low Produc tivity Regions ] 393; Preference for Special Users, 394; Self-sufficiency in the Event of War, 394 Pricing Problems, 395; Price Discrimina tion, 395; External Economies, 396; Deficit Industries, 396; Cost-Push Inflation; 397; Taxation of Profits, 397; Rate of Profits, 397; Competitive Profits, 398 The Report of the ICRICE Theory Committee on Price Setting in Public Undertakings, 399; Assumptions, 399; Commonly Used Price Policies, 401; Recommendations of the ICRICE Theory Committee, 404; Con clusion, 406 Administrative Problems, 407; Control, 407; Advisors to the Ministers, 403; Replacement of Managers and Board Members, 409; Direct Reinvestment Versus Pooling of Profits, 409 Price and Profit Policies of Public Authorities in New York State, 413 Profit Policies in Development Banks, 418 Profits in Centrally Planned Economies, 419 Conclusion, 421 IX. INVESTMENT CRITERIA AND PRIORITIES ......... Introduction and Definitions, 422; Definitions, 422; Investment Criteria and the Definition of Economic Develop ment, 425; Macro and Micro Criteria, 426; Conflicting Criteria, 427; Competing vi PAGE : 422 vii 'pHAPTER Investment Projects, 431; Non-economic Criteria, 432; Universal Investment Criteria, 432 | Macro-Criteria for Selecting Investment j Projects, 435; Comparative Advantage | Criterion, 436; Balanced Growth Cri- j terion, 444; Factor Intensity Cri terion; Foreign Exchange Criterion, 461; I Social Marginal Product Criterion, 463; The Efficient Sequences Criterion, 463; The Capital-Output Criterion, 469; Agricultural Criterion, 473; Benefit- Cost Criterion, 478; International Investment Criteria, 479; Absolute Level of Investment Needed, 480; Balanced Contribution of Invest ment Funds, 480; Balanced Use of Investment Funds, 481; Comparative Advantage Principle, 481; Specialized Training, 482; Economic Efficiency, 482 Investment Criteria of Development Banks, 483; Predetermined Priority of Invest ment Projects, 434; Ownership, 485; Size of Borrowing Enterprise, 486; Age, 487; Loan Requirements, 487; Conclusion, 489 Investment Criterxa of the International Bank for Reconstruction and Development, 490; Repayment Criterion, 491; Specific Project Criterion, 493; Social Marginal Benefit Criterion, 494; Organization Structure, 496; Tied Loans, 496; Sound Economic and Financial Procedures, 496; Encouragement of Private Investment, 497; Conclusion, 499 Investment Criteria of the United Nations Special Fund, 500; General Criteria, 501; Types of Projects Adopted 503; Conclusion, 505 Investment Criteria in Pakistan, 506 Methods for Determining the Priority of Investment Projects, 509; Private Profit, 509; National Economic Profitability, 511; Benefit-Cost Method, 514; The Philippine Formula, 514; Investment Priorities in Pakistan, 516 Summary and Conclusions, 517 PAGE X. THE PUBLIC ACCOUNTABILITY OF GOVERNMENT CORPORATIONS ...................... 523 viii CHAPTER i XI. Introduction, 523 The Purpose of Public Controls, 528 Criteria for Control, 534 Ministerial Control, 536; Britain, 536; Sweden, 540; Canada, 540; Australia, 541; Italy, 542; United States, 543; Summary, 544 The Board of Directors, 546; Britain, 547; Canada, 551; Prance, 553; New York State, 554; Australia, 557; Summary, 558 The Ownership-Control Doctrine, 560; Back ground, 560; Central Devices for Con trol, 565; Government Participation in Management, 569; Government Ownership and the Form of Corporate Organization, 572; More Important Reasons for Govern ment Corporations, 574; The Ownership- Control Doctrine in the United States, 576; Conclusion, 578 Other Methods of Control, 579; Competition, 579; Audit, 584; Budget, 587; Control by Consumers, 589; Personnel, 591; Legislative Committees, 593; Legislative Debates and Questions, 595; Conclusions, 597 SUMMARY AND CONCLUSIONS......................... Summary, 600; Introduction, 600; The Reasons for Government Performance of Economic Activities, 602; The Economic Functions of Public Development Corpora tions, 603; Objections and Limitations to Government Economic Functions, 604; The Role of the Government During the Take-Off Stage in the United States and India, 600; Principles of the Government Corporation, 607; Other Forms of Public Enterprise, 609; History of National Government Corporations in the United States; Price and Profit Policies of Public Enterprise, 614; Investment Criteria and Priorities, 617; The Public Accountability of Government Corporations, 619 Concluding Observations, 623; The Effective ness of the Government Corporation, 623; Additional Analysis, 626 PAGE 600 BIBLIOGRAPHY 627 ix AGE 658 659 661 663 664 669 673 678 686 690 695 A B C D E F G H I J K LIST OF TABLES TABLE I. Pakistan Sectoral Investment (1960-65) . . . ! II. State and Local Development Corporations i ! j in the United States......................... | III. Selected Economic Indicators of the Take-Off Stage in India, 1950-59 .................. IV. Distribution of Public Investment in India, 1950-59 ....................................... V. Gross National Product and Gross Investment 1950-58 ....................................... VI. Government Expenditure in India, 1950-58 . . VII. Functional Distribution of Government Expendi ture in India, 1958 ......................... VIII. National Expenditure on Defense in India, 1950-58 ....................................... IX. Indices of Production, Employment, and Pro ductivity of Manufacturing Industry and Agriculture in India, 1951—60 ....... X. Distribution of Employment in the Public Sector, 1958 ................................ XI. Percentage Distribution of Non—Services Employment in the Public Sector, 1958 . . . XII. Employment in the Public Sector, 1958 . . . . PAGE 7 14 150 152 153 154 155 156 157 158 160 161 TABLE i I ; x x ii. i XIV. ! i i XV. i i XVI. XVII. XVIII. XIX. xi PAGE Government and Private Investment During the Second Plan, 1956-61 162 Public and Private Investment During the Third Plan, 1961-66 ......................... 163 Functional Classification of Public Enterprises.................................. 164 Selected Economic Indicators of the Take-Off Stage in the United States, 1340—49 .... 165 Active National Government Corporations . . . 329 Loans of the International Bank for Reconstruction and Development, Classified by Purpose.......................................498 Types of Projects Approved, 1959-61 ......... 504 CHAPTER I INTRODUCTION I. OBJECTIVE The purpose of this study is to investigate the economic functions of government and the particular role of government corporations in the economic development of both industrialized and emerging economies. The work is partly an effort to treat the subject more systematically and comprehensively than previous studies and partly to provide some insights into the topic which might be less apparent from fragmentary treatment. The main task involves several lesser tasks. The functions of government and its limitations are considered and the roles of the governments of India and the United States during the take-off stage are compared. The prin ciples of the government corporation are studied and compared with other forms of public enterprise. The history of government corporations in the United States is reviewed and the profit, price, and investment policies of government corporations are analyzed along with the means for insuring that they are responsive to the public interest. 1 2 As has been recognized for centuries, research sometimes results in unexpected benefits. The ultimate end of this study is the increase of human welfare through the increase of knowledge. Although there are widely acknowledged problems of government corporations to be solved, the purpose of this study, nevertheless, is not limited to improving human welfare by contributing to their solution. In other words, the study has been, in part, a search for knowledge for its own sake. II. IMPORTANCE Importance of the Government Corporation The question of the wisdom of using government corporations is part of the great and ancient debate over the virtues of public versus private enterprise. Boulding observed that "the problem of the extent to which political agencies are suited to the conduct of business is perhaps the greatest controversy of our age."1 The controversy over the relative merits of socialism and capitalism is another part of this ancient debate. Regardless of one's personal preferences, the government corporation is a widely used economic institution. Robson has called it "the most important invention of the twentieth century in ^Kenneth A. Boulding, Principles of Economic Policy (Englewood Cliffs: Prentice-Malf, inc. , l9£&), p. 2997"™ the sphere of government institutions."'2 He contends that the public corporation is on trial as an economic institu tion because it has created some problems while solving others. Hanson holds that the public corporation is the most highly regarded non-departmental form of public enterprise in both developed and underdeveloped countries.3 Rossi, however, qualifies the prevalent view and concludes that the public corporation is administratively superior to the mixed corporation for governments which do not contem plate transferring their economic assets to private owner ship.4 In the nationalization acts, France abandoned mixed corporations in favor of public corporations with more dependence.5 The Rangoon seminar suggested the increasing importance of government corporations by noting that with the rapid expansion in the number of government owned and operated enterprises over the past twenty-five years, the ^William A. Robson, Rationalized Industry and Public Ownership (Toronto: University of Toronto Press, , pi 2JT 3A. H. Hanson, Public Enterprise and Economic Development (London: Routledge and Kegan Paul, Ltd., '1039), p. 342. 'Slario Einaudi, Maurice Bye, and Ernesto Rossi, Nationalization in France and Italy (Ithaca, New Torts: (jorneii University Press, 1903), p. 245. 5Ibid., p. 94. 4 public corporation has become the most common form of public enterprise.* * As early as 1926, John Maynard Keynes recognized the importance of semi-autonomous government organiza tions.^ Perhaps the chief task of Economists at this hour is to distinguish afresh the Agenda of Government from the Non^Agenda; and the companion task of Politics is to devise forms of Government within a Democracy which shall be capable of accomplishing the Agenda. . . . I believe that in many cases the ideal size for the unit of control and organization lies somewhere between the individual and the modern State. 1^ suggest» therefore, that progress lies in the 'growth and the recognition of semi-autonomous bodies within the State—rbodies whose criterion of action within their own fields is'solely the pufetic good as tlkey understand it, and from whose deliberations motives of f 'rivate advantage are excluded . . . bodies which in he ordinary course of affairs are" mainly autonomous within" their' prescribed limitation, but are subJecTE"*in the lasT resort to the sovereigntyof the democracy expressed through Parliament. 1 propose a return, it may be said, towards medieval conceptions of separate autonomies. But, in England at any rate, corporations are a mode of government which has never ceased to be important and is sympa thetic to our institutions. It is easy to give . examples, from what already exists, of separate autonomies which have attained or are approaching the ^United Nations, Report of the Seminar on Organiza tion and Administration of Public Enterprises in the industrial Field (New Delhi: United Nations, 19^9),p. 8. 7J. M. Keynes, The End of Laissez Fajre (London: Hogarth Press, 1926), pp. 41-42. tinderlines added. This selection is included in J. M. Keynes, Essays in Persuasion (New York: W. W. Norton and Company, Inc., 1^63), pp. 314. Also quoted by Ruth G. Veintraub, Government Corpora- tions and State Law (New York: Columbia University ihress, rarer r p / t i . -------- 5 mode I designate— the Universities, the Bank of England, the Port of London Authority . . . in the United States there are doubtless analogous instances. At the time Keynes wrote, numerous government corporations existed in the United States. Extent of Government Corporations No complete survey of government corporations in the world or in individual countries is available but various sources indicate the extent of their use. An unpublished report of the International Bank for Reconstruction and Development (IBRD) lists ninety-two development banks in underdeveloped countries of the world.® The study included any institution, public or private, whose principal func tion is to make medium or long-term investment in basic development projects or in industrial, mining, or agri cultural projects, or a combination of these, but excluded institutions which provide only medium or short-term agricultural credit. Most of these institutions are capitalized, at least in part, by government funds although Q International Bank for Reconstruction and Develop ment, Data on Development Banks (Washington; IBRD, 1959), p. 1221 For a recent discussion of the need, form, scope and problems of development banks, see Vincent Checchi, "Development Banks," Agency for International Development, Organization, Planning and Programming for Economic fievelbpment. lJniiedstateg Papers prepared for the United ations Conference on the Application of Science and Tech nology for the Benefit of the Less Developed Areas (Wash ington: Government Printing Office, 1963), pp. 137-144. the report does not indicate whether they were created by the government. In a related study, Diamond observed that every country represented at two courses held by the Economic Development Institute had at least one develop ment bank or was actively creating such an institution, and that all such banks were sponsored by government funds.® In Pakistan, public investment is roughly two- thirds of total net investment, much of which was under taken by government corporations.10 Most of this invest ment is in social overhead projects. Between 1952 and 1955, inclusive, thirty per cent of total public investment was for irrigation and power, twenty-eight per cent for transport and communications, ten per cent for education and health, and three per cent for housing. Industry accounted for fourteen per cent. The second five-year plan allocates Rs. 3,250 million, out of total development resources of Rs. 19,000 million, to government corpora tions. The government corporations are expected to raise about half of their funds, Rs. 1,500 million, from private sources with the government providing the remainder. Q William Diamond, Development Banks (Baltimore: The Johns Hopkins Press, l5i>7),pp. vii, IT 10See Appendix A. Also see Edward S. Mason, Promoting Economic Development (Claremont: Claremont tfoTIege; I555V7 pp.“ Tff=7I?---- TABLE I PAKISTAN SECTORAL INVESTMENT (1960-65) Sector Million Rupees Public Ejector 9JT5(5 ‘ j Semipublic Sector I (public corporations) 3,250 i i Private Sector 6,000 ' TOTAL lOjOOO11 Niaz suggests that government corporations will probably be used extensively by underdeveloped countries in the future regardless of the individual country’s official commitment to a particular economic system— 1 P either socialism or free enterprise. ^ In practice, the government corporation is a convenient organizational vehicle which permits official emphasis on either the private or public sectors, largely because it permits the public sector to act as entrepreneur, while obtaining financing from either public or private sources, and to transfer ownership to private investors whenever desirable and possible. India and Pakistan, with their contrasting emphasis on public enterprise and private enterprise, Government of Pakistan, Planning Commission, The Second Five_ Year Plan (1960-65) (Karachi: Government of Pakistan, June 1960), p. 31. 12 Aslam Niaz, "Public Corporations in India and Pakistan" (unpublished report prepared for the Inter national Public Administration Center, The University of Southern California, January 1962), p. 5. respectively, suggest this conclusion because the current role of government corporations in the economies of the two countries is roughly the same. In some underdeveloped countries, government corpo- rations produce extractive and manufactured goods.^ The Philippines, for example, has twenty-four public corpora tions engaged in cement production, coal mining, textile manufacture, cotton growing, operation of ocean-going vessels, operation of hydro-electric projects, production of fertilizer, shipbuilding and ship repairs, and steel production and fabrication along with projects undertaken jointly with private enterprise. During the last seven years, government participation in power and steel produc tion has become increasingly important because of the need for more jobs and a program to disperse industrial activities to different regions of the country.1^ In Pakistan, the government participates in industrial pro duction by lending to private companies and purchasing their stock through PIDC and PICIC. In the manufacturing field in India, there are 13 In Italy oil and gas are produced by a government monopoly, Ente Nazionale Idroburi (National Hydrocarbon Authority). See Indro Mantanelli, ’ ’Power Octopus," Atlas, September 1962, pp. 194—209. 1^United Nations, Public Industrial Management in Asia and the Far East (New York: United Nations, i960), ” pp. 117-121. twenty-nine public enterprises which are owned partially or completely by the central government. In addition, there are fifty-four public enterprises owned by various states. Of the manufacturing enterprises in which the central government participates, twenty-two are private limited companies, five are departmental enterprises, and two are public limited companies. Of the state enter prises, eighteen are private limited companies, fourteen are public limited companies, and twenty-two are depart mental enterprises.15 In Korea,, there are ten major public industrial corporations. Since the Korean War some public enter prise has been returned to private ownership even though the government still often holds indirect control. Public enterprises dominate some industries, however. In October 1959, employment in public enterprises as a per cent of total employment in various industries was: electric power (100 per cent); communication service (100 per cent); coal (56 per cent); tungsten (53 per cent); iron ore (25 ■^^United Nations, Industrial Enterprises in the Public Sector in India, Seminar on Management of Public industrial' £nterprises, Seminar Paper No. 26 (New Delhi: United Nations, 1959), pp. 22-27. Also see Seminar Paper No. 46, Administrative Problems of State Enterprises in India, prepared by the Indian Institute of ]>ublic Adminis tration. 10 16 | per cent); and steel (15 per cent). The United Kingdom has few public enterprises which manufacture tangible products which could be sold in a j competitive market, but it has a large range of public i I utilities which operate as public enterprises. The gross |revenues of all public enterprises constituted about twelve per cent of the United Kingdom's gross national iproduct (GNP) in 1958. Of this amount, about three- quarters, or nine per cent, was contributed by public corporations•^ The data mentioned above from India, the Philip pines, and Korea, indicate the widespread use of govern ment corporations for economic development. Other reports to the United Nations' Seminar on Management of Public Industrial Enterprises show similar extensive use by other countries. In the United States, 144 national government corporations have been created since 1846. Sixty—three 16 United Nations, Public Industrial Management in Asia and the Far East, op. cit., pp. 106-109. 17 P. Chantler, Management n of Public Enterprises in the United Kingdom. Seminar on Management of Public industrial Enterprises, Seminar Paper No. 62 (New York: jUnited Nations, 1959), p. 2. For an early study of govern- ment corporations in Britain see Lincoln Gordon, The Public Corporation in Great Britain (New York: Oxford University Press, 1938), 351 pp. Canadian government corporations are listed in Appendix B. 11 are currently active.18 The Communication Satellite Corporation, whose charter was granted by the District of Columbia on February 1, 1963, has many characteristics of government corporations but the enabling legislation specifies that it is not an agency or establishment of government (76 Stat. 419).19 Undoubtedly the extensive use of the government corporation in the United States is not recognized because it operates at the state and local level under other names such as public authority, development credit corporation, and industrial building authority, and may be either publicly or privately financed. New York State, for example, created fifty-three public authorities between 1921 and 1956, thirty—three of which are active today. At the end of 1955 these authorities had assets of over 3.4 billion dollars and an outstanding bonded debt of over 1.5 billion d o l l a r s . 20 When local authorities in the United States are added to state authorities the total is approximately 18 See Table III, Chapter VII, and Appendices £ and F. 18New York Times Western Edition, February 2, 1963. 2<*State of New York, Staff Report on Public Authori ties under New York State (ATUffiryf ' TSWpSYRfY 'STflEW C5WM1S- sion on' Coordination of State Activities, 1956), pp. 583- 587. See Appendix D. 12 1,809, excluding housing and redevelopment enterprises. Preston classifies these Into four types: standard, build ing, financing, and managing authorities.2* The state development credit corporation Is a relatively recent and growing institution. In 1957, there were 259 such corporations, all of which were located in the New England States (excluding Vermont), New York, and North Carolina. Ten states had created development credit corporations which were inactive while proposals for similar corporations were pending in fifteen states. All these corporations were created by state legislatures although some of them were financed by private investors.22 A recent study by the Committee for Economic Development (CED) indicates the large number of state, county, and municipal development organizations, but, unfortunately, the study does not provide much information 23 about their legal organization. The study indicated 21Nathaniel S. Preston, "Public Authorities Today," State Government. Summer 1961, pp. 205-211. Also see Appendix C. 22United States Senate, Committee on Banking and Currency, Development Corporations and Authorities (revised ed.; Washington, D.C.: G. P. O., 1959), 86th Congress, 1st Session, pp. 1«>>33. This document also contains statues and other material pertaining to development credit corpora tions in 31 states and articles dealing with the experi* ence in particular states. Donald R. Gilmore, Developing the "Little” Economies (New York: Committee for Economic Development, April 1960), 200 pp. 13 that there were 14,236 development organizations in existence in 1957—58. Some of these obviously were not corporations. The development organizations which probably have corporate form are listed in Table II. There was no indication whether any of the 299 municipal and county development agencies were corpora tions. There were 312 public local redevelopment and renewal agencies. Of the 130 which answered the question naire, 36 were separate redevelopment or renewal agencies or authorities, and 44 were combination housing authori ties and redevelopment agencies. The study also listed 141 port authorities, some of which were inactive. About 31 per cent of the private local industrial development groups were community development corporations. The study also found 1,952 community development corporations which were usually privately financed but had a public purpose. These were either non-profit corpora tions or community corporations from which little or no return was expected by the private investors. Of the planned industrial parks surveyed by CED, about 30 per cent were sponsored by community groups or government agencies. The significance of the CED report is that even though it does not give complete information on the number of government corporations involved in the study, it gives TABLE II* STATE AND LOCAL DEVELOPMENT CORPORATIONS IN THE UNITED STATES Number of Development Type of Organization Organizations Expenditures Publicly Financed Programs 810 $54,832,000 State Planning and Development Agencies State Supported Industrial Financing 54 27,861,000 Authorities 4 4,431,000 Municipal and County Development Agencies 299 842,000 Loaal Redevelopment and Renewal Agencies Port Authorities and Port Development 312 15,223,000 Agencies 141 6,475,000 Privately Financed Programs 2,398 30,634,000 Local Industrial Development Groups 867 553,000 Community Development Corporations 1,952 19,000,000 Development Credit Corporations 13 9,298,000 Planned Industrial Parks 395 a Area Development Associations 135 671,000 State and Local Development Councils 22 766,000 Regional Development Groups 14 346,000 TOTAL 3,208 $85,466,000 *Donald R. Gilmore, op. cit., pp. 15, 17. This table does not include all the agencies which were studfed by CED. ^Figure not available. « 15 conclusive evidence that the corporate form of organiza tion is widely and increasingly used for public purposes in the United States as well as in underdeveloped countries. Importance of the Study of Government Corporations Since the purpose of this stu^y is to promote economic development, the importance of the study is determined by the importance of economic development and the amount of increased economic progress which it stimulates. The contribution to knowledge, at best, is only modest. However, even a modest contribution can be significant if the subject is important. Lack of research. In spite of the importance of government corporations in both industrially advanced and less developed economies, no complete survey of the number of government corporations, the value of their assets, or their contribution to gross national product is available for any country, although various sources suggest their importance. In the United States there has been little study of government corporations in recent years. A few articles by Seidman, Dimock, and Key constitute brief surveys of the various aspects of their structure and operation. In Britain, there has been extensive study resulting from the creation of new government corporations through the nationalization policies of the Labor Party. Numerous r — articles and books have been published by Hanson, Robson, Crosland, D. N. Chester, T. E. Chester, Abel, Dugdale, Grove, Cole, Lewis, and others. There has been some study of government corporations in India by Galbraith, Appleby, Ramanadham, Das, and the Indian Institute of Public Administration. Others have studied public enterprise in various countries but no comprehensive study of government corporations has been attempted, and no systematic study of the rationale, structure, controls, and effectiveness of government corporations in the underdeveloped countries has been conducted. Many emerging economies have begun to create govern ment corporations only recently.Sometimes short-run, practical economic or political reasons dominate among the motives for creating them even though careful review of the experience of other countries suggests that these reasons should not be weighted as heavily when evaluating 24 A few years ago Hanson spoke of the very few studies on the development corporation even though it is one of the most frequently used forms of public enterprise. A. H. Hanson, "Public Enterprise in Nigeria, II. Develop ment Corporations," Public Administration. Spring, 1959, p. 21. 2®For example, see Mohamed Said Ahmed, "Public Corporations in the United Arab Republic," an unpublished report prepared for the International Public Administra tion Center of the University of Southern California, February, 1962, pp. 1-17. potential, long-run achievements. The urgency of doing something, along with the lack of educated researchers, results in very little systematic analysis of both what should be done and the effects of what has been done. Thus, underdeveloped countries may know tpo little about when and how to establish a government corporation and the subsequent results. An attempt to alleviate the lack of research was initiated in 1955 by the Economic Development Institute which was established in the United States by the Inter national Bank for Reconstruction and Development (IBRD). The objective of the Institute was to improve the quality of economic management in government in the less developed countries. According to the director of the Institute, Michael L. Hoffman, it provides an opportunity for the senior officials of member governments of IBRD to study and discuss the administrative problems which they face.26 Types of research needed. Three major types of research on the government corporation are needed: (1) study of the adequacy of the government corporation for promoting economic development when compared with other organizational institutions; (2) study of the effect of the structure and control of government corporations on 26 Michael L. Hoffman's, "Foreword" to Diamond, op. cit., p. v. the ability of the organization to achieve its goals; and (3) an international empirical survey to provide the data for conducting the two proceeding types of research. The first type of research would study the adequacy of the government corporation when compared with regulated private enterprise and other forms of public enterprise. The second type of research would deal with the universal and particular problems of the government corporation which limit its effectiveness. Identification of universal problems requires an international comparative study of government corporations while identification of the par ticular problems requires analysis of the individual government corporations within a country. Common problems. Many of the problems of government corporations are discussed by all writers. The presence of common problems indicates that comparative study of govern ment corporations might result in an improvement of their structure and operation and avoid their m i s u s e . 27 Errors of countries which have had more experience with govern ment corporations are sometimes repeated by countries with less experience. Of course, there are unique problems 27T . E. Chester, "Public Enterprise in South East Asia," The Political Quarterly. January, 1956, p. 54; and M. E. Dimock, "Government Corporations: A Focus of Policy and Administration, II," American Political Science Review, December, 1949, p. 1157. 19 which are not common to all countries. The importance of the unique problems should not be underestimated. Never theless, underdeveloped nations in particular can benefit vicariously from the experience of other nations which have had longer association with government corporations. Diamond noted the inadequacy of printed material on development banks in spite of their numerousness and their common problems.28 One of the interesting conclusions to which one is driven after examining a sample of these many development banks is that— whether in the United States or in Indonesia, whether in Great Britain or Mexico— the factors which lead to their creation and the prob lems they face, once set up, are generally similar in kind, if not in intensity. German T. Danque also reported that the difficulties of government corporations stem from common problems which range from politics to poor business and management prac tices. 29 Scholars uniformly agree that the major unsolved problem is the relation between the government corporation and the legislative and executive branches of government. The right balance between independence and political control has not yet been struck in most countries, and 28 Diamond, op. cit.. pp. vi-vii. 29 United Nations, The Management of Public Indus trial Enterprises in the Philippines. Seminar on Manage ment of Public Industrial Enterprise, Seminar Paper No. 29 (New Delhi: United Nations, 1959), p. 19. 20 the process of search and adjustment is still continu ing.^ Additional views. Various scholars and adminis trators have called for additional research on the organi zational institutions of economic development. Lionel Robbins believes that the study of economic institutions has been neglected in an attempt to perfect the instruments of analysis. There is urgent need for the best minds of the rising generation to apply themselves to the task of institutional invention in the light of patient, realistic investigations.^1 Robert L. Garner, who recently retired as head of the International Finance Corporation, suggested that many nations are to blame for their own poverty because they refuse to organize properly. Honey alone accomplishes nothing. . . . If it is applied to uneconomic purposes, or if good projects are poorly planned and executed, the results will be minus, not plus.32 Repeatedly Garner asserted, as have others, that the lack of capital is not the primary obstacle to economic develop- 30 Ibid. This has been one of the most controversial aspects of the Communications Satellite Corporation. See John W. Finney, "Satellite Corporation Seeks to Expand," New York Times Western Edition, February 13, 1963, pp. 13-4. 31 Lionel Robbins, The Economic Problem in Peace and War (London: MacMillan and Company, Ltd., 1947), p. 53^ 32Life Magazine, October 6, 1961, p. 4. 21 ment. There is, In most developing countries, more poten tial capital than is admitted, but large amounts are kept outside because of political instability and depreciating currency at home, or it is invested in unproductive land, low—priority buildings or otherwise hoarded.33 Thus, to Garner, the primary obstacle to economic develop ment is the lack of proper organization. Henry C. Wallich pointed out that derived economic development is primarily a process of organized application of existing innovations and that governments are usually better able than private entrepreneurs to provide good organization.34 The Rangoon Seminar expressed the need for specific studies on the commercial aspects of public enterprises, particularly study on an accounting system which would account for economic as well as social costs. The coun tries of the ECAFE region also requested assistance in establishing national institutes of management and national 33 Los Angeles Times. October 22, 1961. Eugene Block follows this line of reasoning. "It is really not just a lack of capital per se, of savings per se, of edu cation per se, of entrepreneurship per se, and so forth, which stands in the way of more rapid growth in the under developed world. It is more useful, I think, to consider the problem in terms of how to achieve the kinds of decisions which are needed to make more of the potential for growth." The Diplomacy of Economic Development (Cam bridge: Harvard University Press, 1960), p. 27. 34Henry C. Wallich, "A Theory of Derived Develop ment," in A. K. Agarwala and S. P. Singh, The Economies of Underdevelopment (London: Oxford University Press, 1958), p. 201. 22 training centers for managerial personnel. The United Nations is currently completing a study on development banks. The need for study of organizational institutions is illustrated by the exchange of letters between H. S. Suhrawardy, former Prime Minister of Pakistan, and J. A. Krug, leader of the United Nations Water Control Mission to Pakistan. In requesting the assistance of the Mission in studying problems of flood control and water resource development in East Pakistan, Prime Minister Suhrawardy said: Our governmental machinery is totally inadequate to deal with such a vast problem. It is widely dis persed and many departments deal with its several facets. It will be necessary to create a new govern ment organization— a new water and power authority— with sufficient powers to do an effective and compre hensive job. . . . Mr. Krug's letter summarizing the Mission's report pro posed : . . . the establishment of a Government Corporation, similar to the Pakistan Industrial Corporation, and reporting to the Chief Minister of East Pakistan, which would have complete authority and responsibility for dealing with all of the related aspects of water and electric power development.35 As a result, the Water and Power Development Authority was created. Organizations such as WAPDA are immense. Their United Nations, Water and Power Development in East Pakistan (New York: iTnited Nations Technical Assist ance Programme, 1959), pp. iv-viii. 23 relations with the national government and other govern ments are complex. The effect of errors in the organiza tion and operation of such large organizations is far more catastrophic than a similar error in a small organization, as is illustrated by the problems of the Helmand Valley water power project in Afghanistan. William Diamond recognized the need for study of the operation of development institutions: But the charter rarely reflects actual operations; and the most difficult problems— operational policies, criteria for investment, selection of personnel, quality of management— call for action after the statutes are written. An understanding of why invest ment institutions fail or succeed requires an examination not simply of statutes and balance sheets but mainly of the ways in which the institutions work, the methods of which they reach decisions, the con crete problems they face.3® Diamond pointed out the private sector's need for enterprise, managerial and technical skills, and a change in the attitudes of bankers and the business community, which can be partially satisfied by the development institution if it possesses certain requisites. The institution must have skilled and experienced management with an opportunity to exercise independent judgment imaginatively, management which can combine the requirements of an "institutional conscience" with the venturesomeness essential to a vigorous private sector.37 36Diamond, op. cit., pp. 84-85. 37Ibid. 24 Under these conditions the development corporation can effectively influence economic development. Halm concludes that in the developed countries of the West, the old controversy between advocates of social ism and capitalism is obsolete and that the regulated market mechanisms must be used to accomplish economic goals. However, he cautions that the ends and the mean- ends of these countries may be Incompatible. Comparative economics is absolutely essential as a basis for the selection of compatible aims and means. Once we have understood that the choice today is between totalitarian planning and a basically free but carefully regulated economy, we can turn to the task of inventing those regulations and institutions which fit the nature of the market economy and avoid the dangers of totalitarianism.3* * While Halm referred to developed economies, his warning may be applied to the selection of means- institutions in underdeveloped countries. The goals of the government corporation, for example, may be Incompatible with certain national goals. Or, the government corpora tion's goals may be compatible with national goals, when subject to certain regulations, but incompatible when not subject to these regulations or subject to other regula tions. Controls over the government corporation, for 38 George N. Halm, Economic Systems (New York: Holt, Rinehart and Winston, 196ft), p. vT jfor a thorough treat ment of ends and means, see Robert A. Dahl and Charles E. Lindblom, Politics, Economics and Welfare (New York: Harper and"brothers, 1963), especially Chapter 2. 25 « instance, may unwittingly discourage the transfer of ownership to private enterprise which is a national goal in some countries.39 Thus, analysis of the means* institution in underdeveloped countries may contribute to the accomplishment of national economic goals. III. SCOPE AND METHOD |Scope In this study the government corporation is regarded as a generic economic institution which is identifiable in most economies. Therefore, the study is not limited to the government corporations of underdeveloped countries but includes analysis of the experience of developed economies as well. Consequently, the investigation is not an empirical survey of the government corporations within a certain country. However, neither is it a detailed, comprehensive review of government corporations in all countries, which would be much too large a research pro ject. Moreover, much of the material necessary for both studies has not been collected. Even the collected data are often not available in English. The study excludes government corporations in the 39 Other competitive advantages of public enterprise may have the same effect. See William H. Nichols, "Accomodating Economic Change in Underdeveloped Countries," American Economic Revlew. Papers and Proceedings, May, 1959, p. 159. economies of countries commonly regarded as the Communist Bloc. Conceptually, this exclusion is not entirely necessary because Yugoslavia, for example, has nationalized corporations which are similar in structure, operation, and control to the government corporations of western economies.4® However, this limitation of the scope of the study has the advantage of restricting the project to manageable proportions as well as omitting the government corporations within countries which usually subject them to a degree of central control that is uncommon in western countries. The exclusion, in addition, avoids the danger of generalizations based on even less information than is available about western economies. The public development corporations utilized by all levels of government are included in the scope of this study. Four levels of government are involved: inter national, national, state, and local. Within the restric tions described, the scope of the study is as comprehensive as is permitted by the limited research data. Method The research technique required in the study has been implied in previous discussion of the research prob- 40pepeiasis, Mears, and Adelman, Economic Dgvelop- ment (New York: Harper and Brothers, 1961), pp‘ . 539-546. 27 lem. The first step was to locate sources of information about government corporations. This required a survey of foreign as well as domestic journal articles and boobs, l jThe information was then categorized in order to present I a horizontal, inter*economy treatment of each topic, j Because available data on government corporations are scattered among works dealing with related topics, con siderable research effort was required to assemble this information in an orderly manner. When sore than one scholar has studied a point their combined contribution is presented and differences are noted and evaluated. The subject of government corporations is a sub division of a larger topic, the economic functions of the state. Therefore, the larger topic is treated first. Similarly, because the government corporation is only one of many institutional means of promoting economic develop* sent, the other institutions with which the government corporation is compared are reviewed. Thus, the analysis proceeds from the general to the specific. Unique Features The study has several unique features. First, the government corporation is regarded as a generic, inter* national, economic institution which is identifiable in most developed and underdeveloped economies. Previous studies usually have been limited to the government corpo 28 rations of a particular country. Second, the study deals primarily with government corporations while most studies include other types of public enterprise. Finally, the government corporations initiated by all levels of govern ment are included. Host studies dealing with the role of government corporations in economic development have included only the government corporations at one level of government. IV. PREVIOUS STUDIES, SOURCES, AND ORGANIZATION Previous Studies No primary work has been written which treats the government corporation as an international, economic institution common to both developed and underdeveloped economies. John Thurston's Government Proprietary Corporations in the English-Speaking Countries (1937) is the broadest study. Ruth G. Weintraub's book, Government Corporations and the State Law (1939), dealt only with corporations created by the federal government under state incorporation laws.4* - An earlier work by Harold A. Van 41 Subsequent to enactment of the Government Corpo ration Control Act in 1945 (39 Stat. 597) wholly-owned government corporations created by the federal government under the laws of another political body have been rein corporated by Act of Congress. See Appendix H. 29 Dorn, Government Owned Corporations (1926), studied only those corporations in the United States whose capital stock was owned entirely or primarily by the Federal Government. Since 1939, there have been no new books dealing mainly with government corporations in the United States. Since World War II, however, several significant articles have been published by Marshall E. Dimock, C. H. Pritchett, Harold Seidman, and V. 0. Key. These writers also studied only the government corporations in the United States. In England, two major works have been written by W. A. Robson, Problems of Nationalized Industry (1952) and Nationalized Industry and Public Ownership (1960). These books deal principally with the government corporations created in England by nationalization. A. H. Hanson has written two works on the nationalized government corpora tion of England— Parliament and Public Ownership (1961) and Managerial Problems in Public Enterprise (1962). Many articles have also been written which investigate the prob lems of Britain's nationalized industries. Lloyd D. Musolf has studied a portion of the prob lems of government corporations in Canada in Public Owner ship and Accountability (1959). Another important book is Nationalization in France and Italy (1955) by Einaudi, Bye, and Rossi. Douglas V. Verney has written Public Enterprise 30 in Sweden (1959) and Warren C. Baum wrote The French Economy and the State (1958), which was the result of a research study sponsored by the Rand Corporation. In recent years more attention has been given to government corporations in underdeveloped economies. The United Nations published a report, Some Problems in the_ Organization and Administration of Public Enterprises in the Industrial Field (1954), of a seminar held in Rangoon. A later report, Public Industrial Management in Asia and the Far East (1960), summarized the papers presented at a second seminar held in New Delhi. These reports are important documents. However, the material is often organized by nation rather than by other subdivisions of the subject such as characteristics, problems, and economic effects. The reports also cover organizational economic institutions other than government corporations. The only studies with a scope similar to the scope of this investigation are those conducted by the International Bank for Reconstruction and Development--Development Banks (1957), by William Diamond, and Problems and Practices of Development Banks (1959) by Shirley Boskey— although these works do not include all types of government corporations. There have been no general works on government corporations in underdeveloped countries nor in particular underdeveloped countries. However, several books deal with government corporations along with other types of public enterprise. A. H. Hanson has written one book, Public Enterprise and Economic Development (1959), and edited another, Public Enterprise (1955). The former is devoted, in part, to a study of government corporations. The latter is a collection selected from the papers presented at the Rangoon Seminar. Daniel L. Spencer's India, Mixed Enterprise and Western Business (1959) does not include all government corporations in India. George B. Baldwin's book, Industrial Growth in South India (1959), is a collec tion of case studies, largely from the state of Mysore, which includes state-owned firms, state-aided firms, central government plants, and private firms. W. Fried mann's The Government Corporation: A Comparative Symposium is one of the few comparative studies. Sources Many sources exist which were not included in the section above on previous studies. These sources are mainly articles from journals published in various coun tries. Britain's Public Administration and Political Quarterly are important sources of information about the nationalized corporations in Britain and the government corporations of various other economies. Other foreign journals which have provided information are Pakistan's Federal Economic Review, India's Journal of Public Adminis- 32 tratlon, and the Annals of Collective Economy. Through the kindness of Frank P. Sherwood, Acting Dean of the School of Public Administration, various unpublished reports written by consultants to the government of Turkey are available. In the United States, the Public Administration Review and the American Political Science Review contain several articles and Marx's Elements of Public Administra tion has a chapter on government corporations. The Journal of Politics and Pacific Affairs also contain occasional articles of interest. Mason's The Corporation in Modern Society deals with both public and private corporations and various textbooks on the public control of business consider government corporations. One of the best early sources is a chapter in the second edition of L. D. White's The Study of Public Administration. The American Economic Review has many articles on economic development but has had no recent contributions on government corporations. Organization of the Remaining Chapters Chapter Two considers the reasons for the partici pation of national, state, and local governments in the economic systems of western countries and reviews the economic functions performed by public development corpo rations at all levels of government. In Chapter Three, some of the objections and limitations to government economic activities which have been advanced by scholars since the days of Aristotle are considered along with a resume of Britain's experience with nationalized government corporations. Chapter Four is devoted to a comparison of the role of government during the take-off stage in the economic development of the United States and India. In Chapter Five, an attempt at what might be called a theory of the government corporation is made. In the following chapter, the characteristics of other forms of public enterprise are assembled for comparison with the government corporation. Chapter Seven is a chronological survey of the use of government corporations by the federal government of the United States and traces the historic evolution of the controls used for obtaining responsibility to the public. Chapter Fight is a study of the pricing and profit policies used by public enterprises. In Chapter Nine, the criteria and priorities of investment policies are considered and the actual criteria and methods which are used by several public development institutions for determining the priority of investment projects are reviewed. Next, an international comparison is made of the controls which are used by governments to insure that government corporations act in the public interest. Chapter Eleven summarizes the findings of the study and presents some concluding observations regarding the role 34 of the government corporation as an organizational institu tion for promoting economic development. CHAPTER II THE REASONS FOR GOVERNMENT PARTICIPATION IN THE ECONOMY AND THE FUNCTIONS OF GOVERNMENT CORPORATIONS I. INTRODUCTION The government corporation is one of several types of public enterprise which perform economic functions. Other types of organization which are considered public enterprise include: (1) the executive department; (2) the trading agency; (3) the state company; (4) the private company operating under a management contract; and (5) the contract for research and development. A public authority is a government corporation.* Many types of economic functions are performed by government corporations, such as air and rail transporta tion, generation of electricity, creation and operation of communications facilities, development and operation of ports and harbors, mining, manufacturing, and provision Kenneth E. Boulding identifies five types of enter prise but the categories are too broad and overlapping to be very useful. See Principles of Economic Policy (Englewood Cliffs, New Jersey: Prentice-Hall, Inc., 1958), p. 301. 35 36 of agricultural needs such as credit facilities, produc tion of fertilizer, and the development and operation of irrigation facilities. Underdeveloped countries usually adopt government corporations, or some other form of public enterprise, in those industries which, in western industrial economies, are either public owned or privately owned and extensively regulated. In addition, however, government corporations in less developed economies often engage in trading, manufacturing, mining, and banking which are traditionally private-enterprise activities in the more industrialized, mixed-capitalist economies. Generally, countries continue to use government corporations as they become industrially advanced although Pakistan, Chile, Colombia, and other countries intend eventually to transfer ownership to private investors. Chile has already done this in some industries. There is no definitive answer, of course, to the question of how much government participation in economic activities is necessary for economic development. Prac tical answers seem to be guided as much by political ideals and expediencies as by economic facts. Hanson, who has had extensive experience with public enterprises throughout the world, indicates that some public enter prise is essential to economic development but that a 37 central planning agency is not essential. "Public enter prise without a plan can achieve something; a plan without public enterprise is likely to remain on paper."2 The role of the government in economic development is discussed in a later chapter. The purpose of this chapter is to systematize pre vious thinking about the reasons for the economic functions of government at various levels and to review the types of economic functions which are performed by government corporations at all levels of government. II. CLARIFYING AND CLASSIFYING THE REASONS The reasons for government action to solve a particular economic problem can be distinguished from the reasons for choosing the government corporation as the most desirable organizational institution for accomplish ing this objective. Writers often sacrifice conceptual clarity, however, by including both types of reasons in the same list which is intended to show the reasons for government corporations. An explanation of the public function to be carried out after the government corporation 2A. H. Hanson, Public Enterprise and Economic Development (London: Routledge and Keg an £au1, I9TE5), p." “ira:---- i 38 is created, of course, does not explain why this particular institution was chosen to perform the function nor why it was necessary for the government to perform the function. The lack of certain desired public goods and services, the inefficient production of them, or their maldistribution, results in public action to provide these goods and services or correct the inefficiency or maldis tribution. These unsatisfied public desires are the reasons for the economic activities of government. 3 The advantages of the government corporation over private enterprise and other organizational forms of public enterprise are the reasons for using the government corporation rather than another form of public enterprise. Consequently, this study attempts to distinguish clearly between the reasons for the government's economic action and the reasons for government corporations. In most writing on this topic authors discuss the advantages of the government corporation and list the characteristics which distinguish it from the executive department and other forms of public enterprise. Neverthe less, other authors mention the political or economic circumstances, such as war, the lack of money capital, ^Either the public's desire (the idea) or the desired public project (the unprovided public good or service) may be regarded as the public end. 39 economic depression, or a socialist ideal of public owner ship, which created needs that eventually resulted in the formation of government corporations. These are not reasons for government corporations. The source of confusion lies in the fact that the reasons for the government corporation, which are its advantages over other public or private institutions, are not distinguished from the reasons for government partici pation in business-type activities. Satisfying public economic needs efficiently does not necessarily require or permit the use of a government corporation. In fact, there is no duplication of items within the two sets of reasons. The reasons for government economic activities logically are never the reasons for creating government corporations. Furthermore, the reasons for creating government corporations can be expressed either positively or negatively. The reasons for creating government corpora tions, for example, can be presented either by indicating the desirable features and results acquired through its use or the undesirable features and results of other organizational institutions which are avoided. Every advantage is matched by a corresponding disadvantage of some other organizational form. Stated either positively or negatively the reasons for the government corporation are its advantages over alternative institutions. To com 40 pile a complete list of the reasons for government corpora tions both the disadvantages of other organizational forms and the advantages of the government corporation must be included. In practice, the reasons or advantages have not been consistently expressed either positively or negatively. Still another conceptual problem is the difficulty of distinguishing between the advantage itself and the effect of the advantage— that is, between the cause and its effect. Both the cause and the effect should be noted when pointing out the advantages of the government corporation over other public and private institutions. Once the need for government participation in business is established, then, the government's preference for the corporate form depends on the inherent structural and operational advantages of the government corporation over other forms of public enterprise. With its unique characteristics, the government corporation has certain advantages over other forms of organization in accomplish ing its public purpose. These advantages result from the special freedoms and powers, when compared to the execu tive department, for example, which are granted to government corporations by legislative bodies and executive agencies. The most commonly mentioned advantage, perhaps, is the resulting increase in the efficiency of the government 41 in conducting business-type functions. Many of the advantages mentioned in Chapters Five and Six are advantageous because they increase the efficiency of government enterprise. However, some of the advantages of government corporations do not involve efficiency in the usual sense. Avoiding a governmental debt limitation, for example, would not reduce the per unit cost of public goods and services provided by a government corporation. The following section identifies some of the unfav orable economic and political circumstances which result in government economic activities. The remaining sections of the division deal with the various types of public goods and services which are provided by government corpo rations and other institutional forms of public enterprise. III. REASONS FOR THE ECONOMIC FUNCTIONS OF GOVERNMENT All major reasons for government participation in business involve (1) the lack of private goods and services, (2) their inefficient production, or (3) their maldistribution, in the judgment of the government. Of course, government policies other than a policy of creating government corporations could induce private production of these goods and services or correct the inefficiency or maldistribution. Baum's study reveals a wide range of reasons for government economic activities. 42 In retrospect one cannot fail to be struck by the wide, almost bewildering, variety of problems that the government has tackled and of the functions it has assumed.4 The following reasons for the economic actions of government do not include the reasons for all government action, which would include reasons for political and military action, for example, but include the major reasons for the government's participation in economic activities. The participation by government may take the indirect form of regulation of private enterprise or the direct form of public enterprise.® While the reasons of the national government are probably emphasized, because of the greater amount of study devoted to this level of government in the past, an attempt has been made to include the reasons for state and local government partici pation in economic activities. Some of the reasons are common to all levels of government.** barren C. Baum, The French Economy and the State (Princeton: Princeton University 2>ress, 1958), p. 344". g C. A. R. Crosland discusses the purposes of social expenditure in The Future of Socialism (New York: The Macmillan Company] 1937), pp. 149-168. g Harold Koontz and Richard W. Gable, Public Control of Economic Enterprise (New York: McGraw-Hill""Book Co. , Inc., 19581, pp. 679-717. The reasons for public enter prise are discussed by David E. Lilienthal and Robert H. Marquis, "The Conduct of Business Enterprises by the Federal Government," Harvard Law Review, February, 1941, pp. 550-556. 43 National Government Participation The ideal of public ownership. The belief in the superiority of public ownership over private ownership has been a dominant motive for government participation in business in Europe and Britain.7 In the United States this motive has been less important.8 Because of the zeal for reform, public ownership is sometimes considered an end in itself, obscuring the inadequacies of the economic system, such as inequality of income distribution, which public ownership is expected to correct.9 The reasons for public ownership, therefore, also may be obscured. Underdeveloped countries today often consider socialism a superior economic system and the government corporation a superior vehicle for accomplishing the public interest.10 This is particularly evident in countries such as India and Egypt, but ideological motivation is probably 7 William A. Robson, Nationalized Industry and Public Ownership (Toronto: University of Toronto Press, l9(jd) , pi g Henry J. Abraham, Government as Entrepreneur and Social Servant (Washington: Public Affairs Press, l93<5), pi 101 and Harold Seidman, "The Government Corporation in the United States,V Public Administration, Summer, 1959, p. 104. o Supra., Chapter V. *°Eugene Staley, The Future of Underdeveloped Coun tries (revised; New York: Harper & Brothers, l96l), p. 433. 44 not the dominant reason for public enterprise in the less developed countries. According to Bryce, The overwhelming majority of countries which have embarked on government industrial development programs, however, have justified their approach on the basis of necessity, not of ideological belief.11 Inequality :if income distribution. Most govern ments have adopted measures to reduce the inequality of income distribution on the grounds of moral justice. The tax structure, social security programs, subsidies, and pattern of public expenditure may intentionally redis tribute income. Other governments may eliminate private property in order to eliminate rent, interest, and profits as sources of inequality. The latter method, which is often used in centrally planned, totalitarian economies, does not eliminate inequality, however, if the experience of Russia is typical. Price stability. A relatively stable price level requires government action in most economies. While infla tion and deflation are usually indications of prosperity and depression, the respective words are not synonyms. Consequently, a government may wish to pursue anti- inflationary and full employment policies at the same time. ^Murray D. Bryce, Industrial Development (New York: McGraw-Hill Book Company, Inc. , lW),'p.‘ 45 This is perhaps the most noted example of the conflicting goals of national economic policy.12 The post-war tech niques for curbing demand-pull inflation have been primarily monetary policy supplemented by limited use of fiscal policies. Recently the President of the United States used his political power directly to curb a cost- push inflation in the steel industry through threats of buying steel elsewhere and anti-trust investigations.13 Fluctuating production. Industrial capitalist economies are characterized by instability of investment expenditure which is reflected in the instability of industrial production, inventory accumulation, stock market prices, employment, and other economic indicators. Democratic governments attempt to counter the instability of the private sector through various indirect monetary and fiscal policies. Less developed economies are likely to use more direct methods such as central economic plan ning and public ownership. The faithful followers of Adam Smith, laissez faire, 12See Henry Wallich, "Postwar United States Monetary Policy Appraised," United States Monetary Policy (New York: The American Assembly, 1956), p. 38. Also, the report of the Commission on Money and Credit, Ifoney and Credit (Englewood Cliffs, New Jersey: PrentTce'"flail," Tnc. , 1961) , pp. 37-45. 13"What the Crisis in Steel Means," U. S. News. April 23, 1962, pp. 37-41. 46 and welfare optimization under competitive capitalism have historically held that short-run unemployment is not sufficient justification for government interference in the economy. This policy has lost favor in the United States since the recognition, during the 1930's, of the extreme severity of short-run unemployment. Some reluctant government spending to cure unemployment has been adopted on the grounds that, although they are both evil, unemploy ment is worse than additional government spending and budget deficits. Thus, while depression bares previously obscure weaknesses in the economic system to public scrutiny, it also has stimulated direct government spending to cure the depression. In the United States, the traditional goal of the budget-balancing was modified by President Roosevelt shortly after he took office subsequent to initially adopting economy measures such as the reduction of salaries of federal employees. Consequently, pump priming programs were adopted by the New Deal as a practical necessity for curing the depression. Perhaps the most significant change of economic attitude during the twentieth century has been demon strated in the Employment Act of 1946 which marked legisla tive acknowledgement of federal responsibility for main taining high levels of national income and employment. 47 Although there has been considerable disoussion over the intent of Congress, the Act is generally assumed to include reasonable price stability among the responsibilities of the President. Misallocation of resources. Critics of capitalism have long contended that the private enterprise system does not allocate resources in an optimum manner. The wastes of competition, excessive advertising, destroyed natural resources, and the inequities involved when social costs are not borne by the consumer, are some of the inequities which should be corrected. In some countries socialism has been adopted in order to effect the desired changes. According to the traditional principle of public f expenditure, total welfare would be increased if the marginal social benefit of increased public expenditure would more than offset the marginal social cost of the sacrificed private expenditure resulting from the realloca tion of resources from private to public uses.*^ Numerous difficulties are involved when a government attempts to find the optimum allocation of resources between public and ^Spencer, op. cit. , p. 178. 48 private uses.15 Productivity and efficiency. Particularly in economies with relatively low productivity per worker the government may undertake measures to increase productivity. In the case of France, contradictory policies have been followed by the government.1® On the one hand, the govern ment has modernized private industry, developed new production methods, and encouraged competition, while on the other it has attempted to preserve the status quo by protecting economic and social groups from the effects of social progress.17 Increased demand for public services. The demand for publia services appears to rise at an increasing rate as real per capita income rises. This was suggested by 15 John F. Due, Government Finance (Homewood, Illi nois: Richard D. Irwin^ Inc. , 1334), p. 20. Also see Anthony Downs, An Economic Theory of Democracy (New York: Harper and BrotKers, 1557^;' D. S. Congress Jdfnt Economic Committee, Federal Expenditure Policy for Economic Growth and Stability (Washington: Government Printing Office^ T9T57T! and Paul A. Samuelson, "The Pure Theory of Public Expenditure," Review of Economics and Statistics, November, 1954, pp. 387-W. 16 Warren C. Baum, The French Economy and the State (Princeton: Princeton University Press, 1958), p. 251. Baum notes that the French economy was called "the paradise of the inefficient" by the Economist. 17Ibid., p. 236. 49 Engel's law and Is one of the reasons commonly given to explain the increased size of the public sector in the United States, relative to the private sector, from about eight per cent of GNP in 1930 to nearly twenty per cent in 1960.18 Others allege that the increasing complexities of modern society require proportionally greater public expenditures as the optimum population is exceeded. Subsidy for noncommercial activities. In some cases the government conducts a business enterprise in order to defray the expenses of another activity without using tax revenues. This reason occurs in multi-purpose projects when electric power revenues subsidize part of the cost of irrigation, flood control, or navigation improvement. The consumer's of electric power, conse quently, subsidize those who benefit from the related projects. To the extent that the users of electricity also benefit from the related projects, the users bear the costs of the combined projects. The non-electricity por tions of multi-purpose projects are sometimes called noncommercial activities because these public services cannot easily be subdivided into small units and sold to consumers. 18Delbert A. Snider, Economics: Principles and Issues (Homewood, Illinois: The Dorsey Press, 1963), "pp. 513=13. Public welfare services. The need for welfare services and the inability of private enterprise to provide them, or to provide them efficiently, has led government to conduct activities such as unemployment compensation and other predominantly insurance features of the Social Security Act. This reason is also illus trated by the rural electrification and low-cost housing programs. Unemployment compensation could never be profitable for private enterprise and other programs are not sufficiently profitable to attract private entre preneurs. Revolution of expectations. Less developed coun tries have learned to expect economic development. The people are beginning to enter an age of reason and industrial revolution. The widespread use of radios and broadcasting is probably the most important single cause of this revolution. As a result the government expects to actively engage in promoting economic development. Lack of private venture capital. The lack of pri vate risk capital and the availability of public capital for large investment projects with low profit prospects, usually social overhead projects, has stimulated public investment in these projects. This has been an important reason for the economic functions of government in the development of both advanced economies and newly developing 51 economies. There is some question among scholars, however, whether entrepreneurship or money capital is the most scarce factor of production in underdeveloped countries. The view of Garner that the lack of capital is not the primary obstacle to economic development was previously discussed. The various reasons for government economic activities are not equally important in different econo mies. In underdeveloped countries probably the most commonly mentioned reason for government economic action is the lack of private capital, with the most commonly mentioned advantage of government corporations being their accessibility to public investment capital. Governments allege that they are "compelled to develop resources and enterprises in the national interest which private capital 1 Q x Supra., Chapter I. Albert 0. Hirschman has con tended that the shortage of well-planned projects is usually the result of the uncertainty of the availability of funds and the lack of sufficient technical skills for large pro jects. "Entirely too much has been made of the argument that development is held back, not by the scarcity of funds but by a scarcity of ’bankable', i.e., well-conceived and engineered, projects." Hirschman, "Investment Policies and 'Dualism' in Underdeveloped Countries," American Economic Review, September, 1957, p. 552. For the arguments for public power development see U.S. Senator Frank Church, "Hell’s Canyon: Case for Public Power Development," Econo mics in Action, eds. Shelley H. Mark and Daniel M. Slate (2nd edition; Belmont: Wadsworth Publishing Co., Inc., 1962), pp. 212-218; the opposing views are presented by Senator Barry Goldwater, pp. 218-221. Investment by the government of Japan has been studied by H. Rosorsky in "Japanese Capital Formation, the Role of the Public Sector," Journal of Economic History, September, 1959, pp. 350-73. 52 is unable or unwilling to provide the necessary invest ment."20 In recent years, the governments of Israel and Turkey, for example, have provided about half of the gross investment in their countries.21 In ECAFE countries three trends have been noticeable during the postwar period. First, government investment, as a per cent of national investment and national product, has increased; second, government investment has comprised a growing per cent of total government expenditure; and third, there is a tendency toward the decentralization of government-financed investment programs which are increas ingly carried out by provincial or local governments, public enterprises, or the private sector. In many coun tries the rate of increase of public investment during the last decade has exceeded the rate of increase in private investment.22 While these facts do not constitute direct support for the assertion that the primary reason for government 20 United Nations, "Report of the Seminar on Organi zation and Administration of Public Enterprises in the Industrial Field," Seminar on Management of Public Indus trial Enterprises, Seminar Paper No. 8l (New Delhi: tfnited Nations, 1959), p. 4. 21United Nations, Economic Developments in the Middle East, 1958-1959 (New York: tfnited Nations", Department of Economlc and" Socia1 Affairs, 1960), pp. 41-45. 22United Nations, Economic Survey of Asia and the Far East. 1960 (Bangkok: United Nations, 1961), pp. 70- 71. 53 economic functions is the lack of private capital or that the primary advantage of the^ government corporation is its y accessibility to public investment capital, they suggest that public enterprise, including government corporations, probably is performing a larger absolute role in economic development and a larger role relative to the private sector. Insufficient entrepreneurial skills. The apparent lack of capital in emerging economies may result from the lack of entrepreneurs to utilize available money capital. "The shortage of technical, managerial, marketing, and administrative talent may be more serious than the shortage of capital."23 In addition, the available talent is con centrated in government positions. Thus, the government may be required to act as entrepreneur because there is no businessman with the required specific industrial skills. Inadequate private response to war demand. During war the utmost speed in the production of goods and ser vices essential for military purposes is needed. The inability of private producers to provide urgent require ments quickly and the government's advantage in possessing emergency wartime powers makes government participation in 23Bryce, op. cit., p. 39. 54 business activities desirable during war. The most rapid growth of public ownership in the United States has occurred during war periods.^ Inadequacy of credit institutions. Government participation in the economy often is in the form of providing credit institutions. Eighty-eight per cent of the active federal government corporations in the United States are either credit or insurance institutions. Sixty per cent of these provide agricultural credit. The need for credit institutions has been most obvious during depression when disruption within the monetary system has demonstrated its weaknesses. The United States Housing Authority, for example, was established in 1937 to provide housing credit. In addition, all industrially advanced economies and many less developed economies have central banks which are usually owned and are always extensively regulated by the government. Preference for short-term investment. In many emerging economies, the return for short-term investment in trading and handicraft projeots is high and less risky relative to the lower return and greater risk in long-term social overhead investment. This reflects the short-term ^Marshall Dimock, Business and Government (third edition; New York: Henry Holt and Company, TSF57TT P* 412. 55 preference of the people for immediate consumption rather than investment which will increase the long-run rate of economic growth. It results from extremely low real income, a lack of an ethia of frugality, and ignorance. Such countries, as a whole, have not reached the "age of reason." Consequently, the government often must provide the long-run investment capital. Reluctance of foreign investors. Some of the char- acteristics of the typical less developed country which discourage private domestic venture capital also dis courage foreign investors. The high returns on alternative projects, the reluctance of government to permit high profits or adopt favorable fiscal policies, political instability, currency convertibility problems, and the possibility of nationalization or expropriation, make potential investors hesitant to provide funds, particularly in long-term projects. As a result the government most often provide the capital as well as the entrepreneurship. Penalty for collaboration with the enemy. An unusual reason for government participation in business is illustrated by the Regie Renault case in France in which the government confiscated the property of the automobile company in order to punish the owners for collaborating with the enemy during World War II. The most important nationalization acts in France, however, provided for just compensation of the owners. Regie Renault is legally not a government corporation as are the other public enter prises in France. Volkswagen and other firms within the German Federal Republic were also nationalized, under the provisions of the Potsdam and Yalta agreements, as punish ment for their collaboration with Hitler.25 Insolvent private enterprises. Another reason for action by government is the social need for maintaining insolvent private enterprises. This is illustrated by the Panama Canal Company and the Alaska Railroad.25 The insolvency of the private enterprise may result from depression, inefficiency, improper regulation, or insuf ficient demand. In such cases, the government, in effect, assumes that the social benefit of the new public corpora tion exceeds the opportunity cost of the replaced private activities and usually is willing to subsidize the project on the grounds that the marginal' social product of the 25 Einaudi, Bye and Rossi, op. cit., pp. 109-19. Also see Richard Bailey, "Nationalization and Professor Hallstein,” The Spectator, April 6 , 1962, pp. 434-35. 26 The unprofitable Alaska Railroad, which was pri vately incorporated in the State of Washington, was pur chased by the United States in 1915 in order to stimulate settlement in the interior of Alaska. However, the Alaska Railroad is a separate bureau of the Department of the Interior rather than a government corporation. 57 public project exceeds the marginal social cost of other private projects sacrificed, thereby increasing social welfare. Income effect and development priorities. Egypt's nationalization act in 1960 is an illustration of govern ment participation in economic activities in order to establish control over the priorities given to develop ment projects. Other control techniques were either ineffective or untried. Participation in economic activities permits mobili zation of resources in order to carry out the planning program. The profits of the public enterprises can be channeled into the desired public projects as is the case with India's mixed enterprises.27 Profits might be used for tax offsets, a development fund, or as a tool of fiscal policy. Thus, the income effect is a reason for public participation in economic activities because it is a means of carrying out development projects in the order of priority established by the planning authorities. Quality control of food products. Uunicipal owner ship of water supplies is a common example of the quality control of food products. The Pure Food and Drug Act also 27 Spencer, op. cit., pp. 190-94. accomplishes quality control, through regulation rather than ownership. However, municipal ownership of water facilities would probably not be considered desirable if there were no reasons for public operation other than the need to control the quality of water. The problems of financing and the waste of private competition give additional advantages to public ownership. Egypt recently nationalized bread production in order to accomplish quality control over bread as well as to mechanize the industry. Government-owned liquor monopolies also are justified on the grounds that quality control is needed to protect the health of the public. Competition eventually would eliminate the producer of adulterated or harmful food products but the social cost of sickness and death which would also occur is too great to permit price competition to force such a producer out of business. Labor-management relations. In the United States, the government participates in labor-management problems through government bodies such as the National Labor Relations Board and the Federal Mediation and Conciliation Service. In such an economic system the government acts as a third person whereas in countries with nationalized industries the government is the management and strikes against the government involve a challenge to the 59 sovereignty of the government. Baum and others have con cluded that worker representation on the boards of direc tors of nationalized industries has not brought about the traditional socialist goal of worker participation in management.28 Nevertheless, in all economies the govern ment is actively engaged, directly or indirectly, in the solution of labor-management problems. Red tape. In less developed economies the bureau cratic procedures involved in acquiring the permits and licenses required for going into business discourage private enterprise from undertaking new projects. There fore, potential private producers may prefer to have the government establish the enterprise, thus relieving them of the administrative headaches of commencing operations. Balance of payments problems. A balance of payments deficit usually requires some kind of government action in the economy. This action might Involve curbing domestic inflation, devaluation, or acquiring credit from foreign governments. One-product economies may have balance of payments problems as a result of unstable demand of large importing economies. In such a case, the government's action may 28Baum, op. cit., p. 204. 60 involve negotiations to establish commodity stabilization agreements. Sometimes the government of the less developed economy attempts to establish other industries to reduce the impact of the instability of other economies. This was the reason the government participated in expanding the jute industry in Pakistan. Conservation of resources. Many government programs have included conservation of resources among their objectives. National forests, reclamation projects, regional development projects such as the Tennessee Valley Authority (TVA) and the Bonneville Power Administration, the Soil Conservation Service, and the Bureau of Sport Fisheries and Wildlife are examples of government conserva tion programs in the United States. The TVA is the only government corporation among these illustrations of public enterprise. Convenience. Sometimes convenience is the reason for government participation in business activities. The federal government, for example, finds that printing and publishing its own documents is more convenient than con tracting with private publishers through the bidding pro cedure. The State of California follows a similar pro cedure for printing and publishing state documents. Misuse of self-interest. To some extent, violation 61 of the public interest through the abuse, or potential abuse, of private economic power has resulted in government interference in business activities. In some cases the interference has taken the form of government corporations, particularly in the public-utility industries. Nationali zation in Britain has resulted, in part, from excessive profits, neglect of service, and a lack of response to public needs.^9 European countries, however, have not generally adopted anti-monopoly laws and have nationalized in order to obtain public accountability instead. In some cases the government participates in order to prevent the potential abuse of the public interest. The government may create a corporation to compete in an industry where the market is too small for more than one producer, thereby providing a competitive yardstick to show whether revenues of the monopolistic firm are unduly above costs. Similarly, the government may prefer to operate the industry as a government monopoly either by initially establishing the industry or by nationalizing it. Franklin D. Roosevelt expressed this reason for government participation in business during the 1930's. The New Deal . . . does not wish to run or manage any part of the economic machine which private enter- 2®Marshall E. Dimock, Government and Business (4th edition; New York: Holt, Rinehart and Winston, Inc.7 1961), p. 483. 62 prise can run and keep running. That should be left to individuals, to corporations, to any other form of private management, with profit for those who manage well. But when an abuse interferes with the ability of private enterprise to keep the national conveyor belt moving, government has a responsibility to elimi nate that abuse.30 Lack of coordination. The government sometimes participates in business activities in order to provide coordination of large public service organizations which would have insufficient centralization and coordination if they were operated by private enterprise. The post office, for example, is organized as a government department in the United States for this reason. In some countries, post office functions are performed by a government corporation. Either organizational form seems to provide the necessary centralization and the consequent coordination. The government's monopoly in coining and printing money also illustrates this reason for government participation in business activities. Conspicuous investment. Underdeveloped countries often like to emulate the economic practices of industri ally advanced countries. Consequently, these countries engage in conspicuous investment even though there is 3°Quoted in John H. Ferguson and Dean E. McHenry, The American Federal Government (New York: McGraw-Hill Book Company, Inc. , 134Y), p. 636. 63 little prospect that future demand will ever fully utilize the added productive capacity. The projects are usually developed by government corporations since private investors have considered them unprofitable. Distrust of foreign investment. In some cases the strong anti-colonial attitudes coupled with a strong nationalist spirit result in government development of projects which might be developed by private, foreign investment capital. Substantial industrialization by non nationals may be regarded as a threat to political and economic independence as well as detrimental to national prestige. War. During war and shortages of consumer goods, the prices system does not ration the limited supply equitably. Consequently, the government usually adopts price controls, wage ceilings, credit restrictions, and rationing. The government indirectly participates in the economy by rapidly increasing the resources demanded for military purposes. The chief executive is normally given emergency powers to direct the economy. Political leadership. Strong, charismatic political leaders may alter the role of government in the economy through their personal power. This type of leadership is most vividly illustrated by Hitler. 64 National defense. The security of the nation during peace is sometimes the reason for economic functions per formed by the government. Canada, for example, created the Polymer Corporation to produce synthetic rubber for military purposes. Various countries engags in atomic projects for military purposes. The United States has spent over two billion dollars annually out of recent budgets for atomic projects involving both peaceful and military purposes. State and Local Government Participation Some of the reasons for the national government's participation in the economy may also motivate state and local government participation. Inequality of income distribution, the lack of private venture capital, the abuse of self-interest, the inadequacy of credit institu tions, the increasing demand for public services, conserva tion of resources, convenience, and central coordination are some of the criteria for participation by the national government which are also reasons for state participation. Only the most significant additional reasons for state participation in the economy are included in this sec tion. 31 31 See Major Leonard Darwin, Municipal Trade: The Advantages and Disadvantages (New York: E. P.Dutton, T9635, pp. 63-33; and’Car1 D. Thompson, Public Ownership (New York: Thomas Y. Crowell Company, 1923), 444 pp. 65 Group needs. Group needs which cannot be efficiently provided by private enterprise are characterized by (X) the large volume of capital required; (2) the indivisi bility of the public good or service; (3) the essential nature of the product; and (4) unusual economies of scale. The presence of one or more of these features in an industry, excluding the third feature, makes it unattrac tive for private enterprise. The construction of public utilities, for example, requires unusually large amounts of real capital and loanable funds, which are often not available from private lenders. Some public services, such as law enforcement, cannot be subdivided for direct sale to consumers. Most public utilities can not operate effic iently at low levels of output because their fixed costs are large. Consequently, unregulated competitive public utilities would involve unnecessarily high costs per unit of output and wasteful production of social overhead capital. Finally, the quantity demanded by consumers does not decrease in proportion to increases in the price of these public goods and services because of their essential character in the pattern of consumption expenditure. The next three topics expand these reasons for state and local government participation in the economy. Wasteful competition. Competition in the production of public utility services results in wasteful duplication 66 of social overhead facilities, such as water, sewer, and telephone facilities. In the United States, water facili ties are usually municipally owned and regulated as a legal monopoly in order to prevent wasteful competition. Other public utilities are more often privately owned but publicly regulated. In underdeveloped countries, the pub lic utilities are more often owned and operated by national government corporations. Protection of consumers from inelastic demand. The consumer demand for public utility service is very inelastic because it is considered essential and because there are no competing services available, at least in the short-run. Consequently, public utilities have consider able influence on the price of their productive services which could be set well above the average cost per unit of service. As a result, public utility rates in the United States are regulated by state commissions in order to pro tect the consumer from his own inelastic demand. Indivisibility of public products. Police and fire protection and control of water pollution are examples of public services which are indivisible. One patrolman may protect an entire neighborhood, for example. Coupled with the infrequency of the need for many types of public pro tection and the zero elasticity of demand on such occa 67 sions, the possibility of corruption among the sellers is great with the result that careful public regulation would be required if private enterprise were to provide these protective services. Consequently, the efficiency of the government, without a profit motive, is greater than that of private enterprise in providing such public services. Central coordination of highway system. The main expenditure in state budgets and the second largest expenditure in local budgets is for highways. In 1959, expenditure for highways was 19.6 per cent of all state and local government expenditure.32 However, only one government corporation provided highways in the United States in the decades immediately prior to World War II. This was the Pennsylvania Turnpike Commission, created in 1937. State government participation is neoessary in order to provide an orderly highway system of uniform quality and to avoid wasteful duplication. Most authorities hold that the administration of highways in the United States has been too decentralized and has been divided among too many governmental units to be efficient.33 During the early 32U. Si Bureau of the Census, Statistical Abstract of the United States: 1961 (Washington: Government 'Print ing Office, 1961), p^ 411. 33 Harold M. Groves, Financing Government (New York: Henry Holt and Company, 195(5y, p. 484. 68 history of the United States, highways were provided by private corporations. Urbanization. As the population expands and improved transportation and higher productivity permits the labor force to live farther from the place of produc tion, public services also are increased. The automobile has required greatly increased expenditure on streets and highways. Redistribution and compulsory literacy through edu cation. In 1959 the expenditure for education was 35.4 per cent of state and local government expenditure.^ Education ranks first among local government expenditures and second among state government expenditures. The reasons for government participation in education are (1) a widespread acceptance of the view that universal educa tion is a desirable human investment, and (2) the neces sity of redistribution, usually accomplished through equalization procedures, in order to provide education facilities for low income areas. IV. THE ECONOMIC FUNCTIONS PERFORMED BY PUBLIC DEVELOPMENT CORPORATIONS International Public Development Corporations 34U. S. Bureau of the Census, op. cit., p. 412. 69 International Bank for Reconstruction and Development (IBRD). The World Bank was organized in December 1945 when twenty-eight member nations signed the Articles of Agree ment which had been initiated by the forty-four nations at the United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, in 1944.^5 The purposes of the World Bank are: to assist in the reconstruction and development of its member countries by facilitating the investment of capital for productive purposes, and thus promote the long-run growth of inter national trade and the improvement of levels of living; to promote participation in loans and investments made by private investors; and to make loans for productive pur poses when private capital is not available on reasonable terms. Perhaps the most important feature of the World Bank is its authority to issue bonds in order to obtain funds from which to make loans. The earliest sales of loans were guaranteed by the World Bank but this has become increasingly less necessary and, since 1956, the 3^For additional information on the World Bank and other international development organizations, see Charles H. Alexandrowicz, International Economic Organizations (New York: Frederick tf. £raeger, Inc. , 19i>3) , p. 139. Also see "Annual Meetings of the Fund, the Bank, IFC, and IDA," International Financial News Survey, September 21, 1962, ppr”23*=33s:------------------- 70 Bank has not normally guaranteed sales of parts of its loans to other investors. Total sales of Bank loans at the end of 1961 exceeded one billion dollars. Total loans were nearly six billion dollars. The borrowing governments guaranteed the loans.36 The World Bank encouraged the Indus Waters Treaty between India and Pakistan and has financed the Indus Waters Settlement Plan in addition to financing signifi cant portions of Pakistan's Second Five-Tear Plan and India's Third Five-Year Plan. On September 30, 1961 the World Bank had seventy- two members who had subscribed to approximately twenty billion dollars of capital, about eighty per cent of which is on c a l l .37 The International Development Association (IDA). The World Bank found that, under the Articles of Agreement, 36 International Bank for Reconstruction and Develop ment, Sixteenth Annual Report, 1960-1961 (Washington: IBRD, 1961). 37 A new International Development Authority has bev..i under consideration for several years. See Robert G. A. Jackson, The Case for an International Development Author ity (Syracuse: Syracuse University Press, 1959); tiarlan Cleveland, The Theory and Practice of Foreign Aid (Syracuse: Syracuse UnlversityPress, 1955); and Partners in Progress, A Report to President Truman by the International Develop- ment Advisory Board with a Foreword by Nelson A. Rocke feller (New York: Simon & Schuster, 1951). it could not satisfy all borrowers from less developed countries because of restrictions in the Articles. There fore, the IDA was organized in September 1960 as an entirely separate affiliate of the World Bank in order to provide loans on more flexible terms and to reduce the burden on the balance of payments of the recipient coun tries. 38 Membership is open to the members of the World Bank. By September 30, 1961 fifty-four member countries had become members of IDA and had subscribed about 900 million dollars. Unlike the World Bank, IDA makes no profit and is unable to obtain funds by selling bonds. The officers and staff of the World Bank serve ex-officio on IDA. The International Development Association, on September 30, 1961, had loaned nearly 137 million dollars to six nations: Chile, China, Columbia, Honduras, India, and Sudan. The loans were all to mature in fifty years without interest, repayment to begin after a ten-year period of grace; thereafter, one per cent of the principal is repayable annually for ten years and three per cent is repayable annually for the final thirty years. A service 3**Eugene R. Black recently argued that there is "a strong case for supporting IDA as the principal inter national instrument for the provision of development aid on generous terms of repayment but on rigorous terms of use." Los Angeles Times, March 10, 1963, pp. 1, 7. 72 charge of three-fourths of one per cent per annum on the amounts withdrawn and outstanding is made to pay IDA's administrative costs.39 International Finance Corporation (IFC). The Inter national Finance Corporation was established July, 1956. As of September 30, 1961 the IFC had sixty nations as members which had subscribed the ninety-seven million dollars of capital. The purposes of the IFC are: to encourage economic development in less developed member countries by invest ing, without government guarantee, in productive private enterprises that can provide competent management, in cases where sufficient private capital is not available on reasonable terms, and to act as a clearning house to bring together investment opportunities, foreign and domestic capital, and management. IFC considers itself an investing rather than a lending institution because it invests only in private enterprises and does not invest in government owned and operated enterprises. Usually its investment is in large industrial enterprises whose total assets, after financing, are 500,000 dollars or more. The investments are long- 39 International Development Association, Inter- national Development Association: First Annual Report. T ffg g rrg g r " W a E fn g fo n : 1 M T T M IX ---------------------------- ------- 73 term loans carrying interest and some right to participate in the growth of the business. IFC plans to sell its investments as soon as private investors can be attracted. Out of total investments of nearly fifty-eight million dollars on September 30, 1961, IFC had sold over nine million dollars. Recent loans have been made to Argentina, Brazil, Columbia, India, Jamaica, and Pakistan.^0 Inter-American Development Bank (IADB). The Inter- American Development Bank was established in December 1959 when it was accepted by nineteen Latin American Republics and the United States. The United States became a member through the Inter-American Development Bank Act of August 1959. The purpose of IADB is to promote the economic development of the member countries, individually and col lectively, particularly the countries of Latin America. Each member country appoints a governor to the board of governors which meets once a year. The member countries, which have voting power in proportion to their capital subscription, select seven executive directors. IADB has about 960 million dollars in capital. Loans are repayable only in the currency loaned and can be ^ International Financial New Survey, 13:1-50, January-December, l96l, pp. 265, 27X7 231, 249, 289. 74 made to either government or private enterprises, with or without a guarantee. Loans have usually been to develop ment banks for relending. The loans have been for the development of water supply systems, industry, agricul ture, and transportation. Brazil's loan of ten million dollars is the largest to date. The loan was to the Banco do Nordeste do Brazil S. A. (Bank of Northeast Brazil), created in 1959, in order to accelerate the development of northeastern Brazil which has not developed as rapidly as central and southern Brazel.41 European Investment Bank (EIB). The European Investment Bank was established by the six member countries of the European Economic Community (EEC) in 1958 to facilitate the financing of development and modernization projects in the EEC area. In addition to making loans, the EIB has an economic research staff which prepares aggregate data for the entire EEC. According to EIB fig ures, for example, money GNP in the EEC countries was approximately 200 billion dollars in 1961 and had increased five per cent over 1960. Since the EEC was organized in 1957 real GNP has increased twenty-one per cent.42 ^*News release of the Inter-American Development Bank on April 9, 1961 (NK-24/61). 42 International Monetary Fund, "Annual Report of the European Investment Bank," International Financial News Survey, XIV (July 6, 19^2), 2<56-207\ 75 In 1960, the EIB made 41.3 million dollars of loans and during 1961 made ten loans totaling 66.2 million dol lars to France, Italy, Belgium, and the Federal Republic of Germany. During the first four years of its existence EIB has made twenty-two loans totaling 160.2 million dollars. In 1961, for the first time, EIB borrowed in the capital market by obtaining a seven-year loan for f. 20 million from a group of Dutch banks. In July, 1961, EIB issued twenty-year bonds for f. 50 million in the Nether lands . Conclusion. Perhaps the most interesting fact relating to the international public development corpora tions is that they were created after World War II and all provide "foreign" credit for economic development. The international character of the Institutions, however, avoids the stigma of foreign investment and colonialism which is associated with private or public loans from a particular nation. The roost significant differences among the international lending institutions are in the lending and financing requirements. The IDA, for example, has the most liberal lending provisions but cannot finance itself by issuing bonds. National Public Development Corporations The economic functions performed by government 76 corporations initiated by the national government vary according to the country's level of economic development. In industrially advanced countries, most of which have achieved high levels of productivity through a decentra lized, private enterprise system, the functions of govern ment corporations are limited to providing for widely reoognized group needs, through such enterprises as public utilities and banking, and for special needs, such as war demand for emergency production, which are not met by private enterprise.^ In less developed economies the functions of govern ment corporations are far more diverse. For various reasons they engage in transportation, communication, harbor development, mining, manufacturing, processing, wholesaling, and retailing in addition to the public utilities, banking, and national defense. The functions performed by national government corporations are considered in more detail in Chapter VII T he importance of the national government in the economic development of the United States may be under estimated. Tariff policies, land grants, and the encour agement of canals and railroads illustrate the role of government during the 1800's. See the work of Carter Good rich, American Canals and Railroads (New York: Columbia University Press, I960); aniff Carter Goodrich (ed.), Canals and American Economic Development (New York: Columbia University I^ress, 1962). Also see Henry W. Bronde, "The Role of the State in American Economic Development, 1820- 1890," The State and Economic Growth, Hugh G. J. Aitken, editor (tfew York: SocialScience Research Council, 1959), pp. 4-25. 77 on the history of government corporations in the United States. Consequently, only brief treatment is needed here. However, many economic functions are performed by public enterprises which are not government corporations. Those which are operated by the federal government in the United States are discussed in the next section. Functions of Other National Public Enterprises Military. In the United States the Hoover Commis sion classified the business enterprises of the Department of Defense into forty-eight different categories of commercial-industrial activity which included 2,621 facilities.^ These facilities employed an estimated 600,000 people and the government's capital investment in the enterprises was estimated to be about fifteen billion dollars. The Hoover Commission selected nineteen of the categories for analysis and recommendation. Since a list of the forty-eight categories would be excessively long, the topics which were selected for special attention are listed below in order to show the type of economic functions which are performed by public enterprises within the Department of Defense. 44 Commission on Organization of the Executive Branch of the Government, Subcommittee Report on Business Enter prises of the Department of Uefense(Washington; Govern ment Pr int ing dffice", r^55), p. I3T 78 Air Transportation Bakeries Clothing Manufacturing Coffee Roasting Commissary Stores Laundries and Dry Cleaning Meat Cutting Medical and Dental Manufacturing and Repair Military Sea Transportation Service Military Industrial Reserve Facilities Naval Shipyards Panama Railroad Panama Steamship Line Post Exchanges Research and Development Scrap Metal Processing Terminal and Port Facilities Tugboat, Barge, and Derrick Operations Warehous ing4o The list includes retail, manufacturing, transpor tation, professional service, food processing, food serv ing, and other enterprises. Non-military. Very little aggregate information is available about the government-owned business enterprises within civilian agencies.46 Some of these, the government corporations, are discussed later in more detail. Within the Department of Justice, the Office of Alien Property continues to operate fifteen domestic business enterprises of the 434 which were acquired by the 4**Ibid. , pp. 19-53. 46The following information is based primarily on Business Enterprises, A Report to the Congress by the Commission on brganization of the Executive Branch of the Government (Washington: Government Printing Office, 1955). 79 Attorney General resulting from the disposal of enemy property under the War Claims Act of 1948. Of these fifteen, the General Aniline and Film Corporation is by far the largest. The Federal Prison Industries, Incorpo rated, is supervised by the Department of Justice also. The Post Office Department operates the Postal Savings System which had $2,251,000,000 in deposits in 1954. The parcel post system is often considered a business enterprise which competes with private express companies. The Post Office Department also manufactures and repairs mailbags and locks. The Department of the Interior operates the Alaska Railroad and its many related activities as a bureau of the Department. The objective of the railroad is to pro vide transportation within the state and develop areas along the lines of the railroad in order to stimulate settlement and the industrial and agricultural development of the State of Alaska. The railroad operates 482 miles of rail line, owns and controls a tug and barge line, docks, and terminals. The Bureau of Reclamation in the Department of the Interior is authorized to locate, construct, operate, and maintain works for the storage, diversion, and development of waters for the reclamation of arid and semi-arid lands in the western states. The Bureau of Land Management is 80 partially or totally responsible for mineral resources on approximately eight hundred million acres, about one-third of the area of the United States. The Bonneville Power Administration is a bureau of the Department of the Interior, created in 1937, to market power generated at the Bonneville Dam on the Columbia River in Oregon and Washington and other federal projects for which it has been designated the marketing agency. The Southeastern Power Administration is also a bureau, created in 1950, which transmits and disposes of the surplus electric power and energy generated at the federal reservoir projects in West Virginia, Virginia, North Carolina, South Carolina, Georgia, Florida, Alabama, Mississippi, Tennessee, and Kentucky. The Southwestern Power Administration was created in 1943 and carries out similar responsibilities in the Missouri-Oklahoma region. The Department of the Interior is the sole producer of helium and acted as innovator in the production of titanium and zirconium. For several years it also operated the Island Trading Company of Micronesia for trading purposes in the Guam area, but this enterprise has been sold to private owners. The General Services Administration provides much of the government’s office service needs through contracts with private producers. The Abaca project to produce 81 manila hemp was started during Vorld War II and has been continued to maintain a stockpile. The Cuba Nickel Company at Nicaro is a Cuban corporation wholly owned by the United States, which had invested about ninety million dollars by 1954. The plant, which was operated by the Nickel Processing Corporation on a cost-plus-fixed-fee basis, was nationalized by expropriation on October 26, 1960. The project is now being liquidated. Among the federal government's other business enter prises are the various printing activities whose total expenditures in 1954 were $370,000,000. For several years after World War II the Texas City Tin Smelter was operated to provide a smelter for South American tin ores during the war. The Veterans' Administration operates many business-type enterprises Including thirty bakeries, one hundred eighty-six laundries, and eleven dry-cleaning plants.47 The Puerto Rico Reconstruction Administration operated for twenty years after 1935 for the purpose of developing the island's agriculture but was liquidated in 47 See also the Commission on Organization of the Executive Branch of the Government, Staff Study on Business Enterprises Outside of the Department of Defense (Washing ton: Government Printing Office, 1955); and thereport of the first Hoover Commission, Commission on Organization of the Executive Branch of the Government, Federal Business Enterprises, A Report to the Congress (Washington: Govern ment Printing Office, 1949). 82 48 1955. The Department of Commerce, through the Civil Aeronautics Administration, maintains and operates the Washington National Airport. H. R. 7399, 87th Congress, 1st Session, proposed that the Washington National Airport and Dulles International Airport be made wholly-owned government corporations. The bill, however, was not enacted.^ Regional, State, and Local Public Development Corporations Regional development corporations. In the United States regional development corporations differ from local development corporations in that: one, they provide serv ices to an area that includes more than one political jurisdiction; and two, their functions usually do not include the acquisition, development, and disposal of industrial sites and facilities. Nevertheless, the purpose of both local and regional development corporations is to strengthen and diversify the area's productive capacity. The Office of Area Development in the United States Depart- ^Teodoro Moscoso, "Industrial Development in Puerto Rico," in Puerto Rico: A Study in Democratic Development comprising the January, l953 issue of The Annals, pp. BS- 64. ---------- 49 For the position taken on this bill by the Comp troller General, see the letter of the Assistant Comp troller General of the United States, Frank H. Weitzel, to Oren Harris, Chairman of the House Committee on Inter state and Foreign Commerce, dated July 17, 1961. 83 ment of Commerce does not include the industrial develop ment organizations in large, contiguous metropolitan areas in its definition of a regional development corporation because the term, regional, is reserved for organizations that include political entities which are more widely separated geographically.50 The reasons for regional development corporations usually involve inadequate regional economic growth. The solution to the problem requires the creation of oapital facilities which will serve the entire region. Therefore, the organization is large and serves several political jurisdictions. Often the function of the regional development corporation is to provide integrated river basin develop ment, that is, the orderly utilization of the water resources of river basins for multiple purposes.Illus trations in the United States include the Wabash Valley Industrial Development Council, the Upper Ohio River Development Council, and the Tennessee Valley Authority. 50 Office of Area Development, "Regional Industrial Development Organizations," in U. S. Senate Committee on Banking and Currency, Development Corporations and Authorities, op. cit.,"pi III. “ 51 United Nations, Integrated River Basin Develop ment (New York: United Nations, Department of Economic ancT Social Affairs, 1958), p. 1. 84 Obviously, a regional public development corporation may be chartered by either the national or state government. Examples of river basin development by national regional development corporations outside the United States include the Damodar Valley project in India,52 the Indus Basin Settlement Plan, the Water and Power Development Authority in East and West Pakistan,®** the Helmand Valley project in Afghanistan and many others.®4 Some regional development corporations are primarily concerned with attracting industry to the region through means other than river basin development. There are five or more regional development groups in North Carolina, for example, that emphasize this function. Such organizations prepare brochures that announce the existence of the regional promotional group and present a brief and accurate review of pertinent economic information about potential urban industrial sites. - - \ 52United Nations, A Case Study of the_Damodar Valley Corporation and Its Projects, Flood Control Series No. IB (.Bangkok: Economic (Jommission for Asia and the Far East, 1960), 110 pp. 53 United Nations Technical Assistance Programme, Water and Power Development in East Pakistan (New York: 'fhe Macmillan Company, 1958),"pp. 231-42. 54Tudor Engineering Company, Development of Helmand Valley (Washington: ICA, 1956). 85 Unlike their counterparts in the United States, regional development corporations in less developed economies also establish industrial estates. Industrial parks in the United States are usually not government corporations, but sometimes are private corporations. In Mexico, the National Financiera, a national development corporation, attempts to divert industry from the Mexico City and Monterrey areas to three industrializing cities in rural areas. The Constructors Industrial Irolo was created for this purpose in the state of Hidalgo. The Sind Industrial Trading Estates Company, Ltd,, in Pakistan and the Puerto Rico Industrial Development Company perform similar functions. State development credit corporations. State development credit corporations in the United States are private financial institutions chartered by special acts of state legislatures. Their function is to provide funds to firms which are unable to obtain funds elsewhere in order to develop the economies of their states. Thus, there is some question whether the state development credit corporation is a public or private corporation. In view of its development purpose and non-profit nature 55Paul S. Anderson, ’ ’State Development Credit Corporations,” Devaleproent Corporations and Authorities. U. S. Senate Committee on Banking and Currency (revised; Washington: Government Printing Office, 1959), pp. 82-96. 86 it is considered a public corporation in this study. The first state development credit corporation in the United States was organized in Maine in 1949. Other states have subsequently organized similar development corporations. They are exempt from state income taxes. The capital stock is subscribed mainly by non-financial institutions and individuals. The second and major source of funds is loans from financial institutions which pledge a line of credit in proportion to their capital. Member commercial banks are on call to make loans up to two or two and one-half per cent of capital and surplus for example. As the state development corporation lends it calls on members for funds. The members choose two- thirds of the directors. While dividends are usually allowed by the charters the investors regard their invest ment as a donation and do not expect dividends.56 State development corporations make three types of loans: (1) to firms that are profitable and wish to expand; (2) to companies that will begin operations in a community if suitable plant facilities are available. In such cases, the state development corporation often lends 5**Ibid. , p. 44. See the comments by Ralph S. Fielstad, who asserts that funds for local development corporations are easier to obtain in Minnesota if the undertaking is a profit-making enterprise. to local industrial development foundations which construct the plant facilities; (3) to marginal companies which have a reasonable prospect of becoming profitable. Most of the borrowers are among the larger of the small manufacturing concerns within a state. Since state development corpora tions provide less than two per cent of all loans made to small businesses their role in the economy is slight even though they are extremely important to particular communi- State credit authorities. The state credit author ity is similar to the state development corporation except that it is financed by state funds rather than by private investors. New Hampshire, Maine, Pennsylvania, Arkansas, and Puerto Rico have created state credit authorities. The loans of state credit authorities are usually used for constructing industrial parks, lending to local industrial foundations which expect to build plant facilities, insuring mortgages of local industrial funds up to ninety per cent of the project costs, and lending to state development credit corporations. State public authorities. In many states public 57For a brief review see U. S. Department of Commerce Office of Area Development, "Statewide Industrial Develop ment Credit Corporations and State Development Authori ties," Area Trend Series No. 3 (Washington: Government Pringint Office, 1958), 8 pp. 88 authorities perform functions which promote economic development.®8 In 1953 there were fourteen state public authorities operating toll roads and bridges in the United States, three port authorities, eleven building authorities, nine power and water authorities, and five miscellaneous authorities.®® The functions of these authorities are self-evident in most cases but additional comment about the building authorities and miscellaneous authorities may be helpful. Some states have housing authorities in addition to the public authorities which have been discussed above. The housing authorities in New York State are legally government corporations which are called public benefit corporations. They differ from the typical public benefit authority in that they receive significant government grants in aid, rather than being primarily self-supporting, and are subject to considerably more direct control than most public authorities. Their functions included provid ing low-rent housing, clearance, planning, reconstruction, ^^Tina J. Weintraub and James D. Patterson, The Authority in Pennsylvania: Pro and Con (Philadelphia: Bureau of riunicipal ftese arch of PhiladeIphia, 1949), pp. 28-34. 59 Council of State Governments, Public Authorities in the States. (Chicago: The Council of State Governments, 1953), Appendix B. The study excluded some public authorities because of statistical difficulties. 89 and rehabilitation of substandard and unsanitary areas.60 Local industrial development corporations. Several thousand local industrial development foundations have been created in the United States for the purpose of increasing and diversifying employment opportunities in local communi ties. The reason for community action which resulted in the earliest local industrial development foundations was the migration of the northeastern textile firms to the south. Subsequently other communities have used the device to attract industry to their towns. Anderson reviews their main functions. Their activities include constructing and buying industrial plants for lease or sale, buying and devel oping industrial sites for sale at or near cost to industry, making loans and investments in manufactur ing concerns, gathering and disseminating economic data for the area, providing counseling services, and acting as intermediaries between industries desiring funds and financing agencies. Their chief efforts go toward aiding new industries to move into the communities, but they also aid existing local concerns, many of which are small, to expand and help new firms get started.61 When local development corporations borrow from state development credit corporations the local corpora tion typically provides twenty per cent of the cost of the plant and holds the title. The state development credit ®^New York State, op. cit., pp. 621-54, 01Anderson, op. cit., p. 82n. 90 corporation provides twenty or thirty per cent, holding a second mortgage, while an insurance company or bank pro vides fifty or sixty per cent and holds the first mortgage. In less developed economies local economic develop ment is usually conducted through the organizational structure of a department of the national government. In India, for example, the community development program is the responsibility of the Ministry of Community Develop ment.^^ Consequently, in less developed economies there are few public corporations conducting economic develop ment solely within a village community. The functions of local public authorities in the United States are similar to the functions of state public authorities.6^ In fact, many local industrial development corporations are called public authorities. The Council of State Governments noted the difficulty of distinguish ing between state and local authorities. Not only are the local authorities created under general or special enabling legislation of the states, but, in some instances, their governing boards are appointed by the Governor, and other functional rela tionships exist.64 ®^United Nations, Community Development and Economic Development, Part IIA: A Case Study of the Ghosi Community fiTocIf, TJfter Pradesh, India (Bangkok: United Nations, Eco nomic Commission for Asia and the Far East, 1960), pp. 1-4. 63 Weintraub and Patterson, op. cit., pp. 13-27. 64 Council of State Governments, op. cit., p. 7. 91 The study by the Committee for Economic Development found that twenty-three per cent of all expenditures by state and local economic development organizations in the United States was for promotion, the largest single activity. Real estate acquisition and improvement accounted for eighteen per cent of total expenditures, while seventeen per cent was for planning and zoning, fifteen per cent for plant financing, eight per cent for non-banfcable loans to industry, six per cent for research and statistics, and five per cent for information.®5 There is no similar use of the local development authority in Great Britain where the local authority emerged during the 1800*s to own and operate water, gas, electricity, and municipal transportation systems.66 65Committee for Economic Development, Developing the "Little" Economies (New York: Committee for Economic Development, 1959), p. 18. 66 W. A. Robson, Nationalized Industry and Public Ownership (Toronto: University of Toronto Press, i960), p "**;— CHAPTER III OBJECTIONS AND LIMITATIONS TO GOVERNMENT ECONOMIC ACTIVITIES: A BRIEF REVIEW OF THE LITERATURE In order to identify the proper economic functions of government corporations, the proper economic functions of government must be determined. The word "proper" indicates that value judgments are involved. Obviously, individuals and nations disagree at any one time regarding the legitimate role of government in the economy, partly because of disagreement over national economic goals, and partly because of disagreement over policies for achieving economic goals. The concept of the proper economic role of government has changed with the passage of time. How ever, knowledge of the possible and probable economic results of the economic functions of the state can help governments make wise choices among alternative policies for promoting economic development. Public enterprise involves government operation of business activities. The controversy over the merits of public enterprise, relative to private enterprise or govern mental regulatory functions, is very old. Scholars have 92 93 debated the issue throughout recorded history since the days of Plato and Aristotle. Since 1940, the issue has not been discussed in American books and journals as often as it was discussed prior to World War II. The proper organizational forms for public economic activities in the United States have become quite well established and are no longer a major subject of debate. Even government corporations attract relatively little scholarly attention. Nevertheless, the proper economic functions of government are still hotly debated and there is some debate over the organizational forms for implementing new governmental economic activities. In other words, the institutions to be used are usually not controversial but the absolute and relative size of the public sector is very contro versial. This section obviously combines a discussion of the size and functions of the public sector with a discus sion of the appropriate institutions to be used. Recently, in Britain and other countries, the economic institutions of government have been more contro versial than in the United States. Moreover, over several decades the center of controversy has shifted from one institution to another. During the 1920's and 1930's, the public utility was the most controversial institution. Today the center of debate is the industry-wide, national ized government corporation. The public utility is no longer the center of controversy. The current literature on public enterprise is concentrated in the publications of countries which have nationalized at least some industries. During the early part of the twentieth century, publications dealt primarily with the wisdom of government ownership and regulation of public utilities.-*- More recently, works dealing with public enterprise study the industry-wide government corporations of the nationalized industries of France, Italy, and Britain. Ac even more recent controversy is the role of the government in promoting the economic emergence of underdeveloped countries. This topic is treated in Chapter IV. In this section, the objections and limitations to government economic activities, including public enter prise, which have been pointed out by a few key scholars of the past and present are discussed in order to briefly contrast these objections and limitations with the reasons for government economic activities which were presented in 1For example, see Major Leonard Darwin, Municipal Trade (New York: E. P. Dutton Company, 1903), 4€>5 pp.; Carl D. Thompson, Public Ownership (New York: Thomas Y. Crowell Company, 1925), pp. 354-426; and Warren M. Persons, Government Experimentation in Business (New York: John Wiley and Sons, tnc., 1534), 255 pp. 95 Chapter II.2 Aristotle Perhaps the immediate solution to the question of the proper economic role of government will appear less certain if we remember that Plato and Aristotle disagreed on this issue. At least in the Republic, Plato favored communal ownership of property while Aristotle argued in favor of private ownership and listed several objections to the social ownership of property.3 First, common ownership or public ownership leads to the neglect of property, Aristotle argued, because (using current terms) individuals lose much of their sense of participation and responsibility when a large group replaces the small family-group. Second, it reduces the incentive to produce. Third, it increases the contacts among men regarding matters that are most likely to involve friction. That is, common ownership does not ^The use of some terms presents special problems. For example, public enterprise does not include some govern ment economic functions, such as economic regulations. Also, critics of public enterprise have not always opposed public enterprise per se, but sometimes have opposed the organizational forml QTher critics consider regulation of private enterprise preferable to public ownership and operation of business enterprises. ^Thirty years later, in the Laws, Plato modified his views. provide the common goals needed for avoiding such con flicts. Fourth, it destroys moral life because the citizens cannot agree on the proper distribution of the product. Fifth, charity is virtuous but charity is impos sible if one has nothing to give. Giving to the state would also be impossible. Sixth, private ownership is essential for the natural expression of self-respect and the moral will of personality. Finally, the state, as a large group, is not a substitute for the natural unity of the family because common interest and affection vary inversely with the size of the group.4 Aristotle's objections are fundamental and apply to all forms of public enterprise because they result from the acquisitive nature of individuals which has not been eliminated or significantly modified during two thousand or more subsequent years of civilization. However, Aristotle did not discuss the merits of governmental regulatory activities which are such a large part of the economic functions of government in mixed-capitalist economies today. Aristotle held that private property was beneficial because it accomplished a moral end more effectively than 4 Aristotle's Politics (New York: The Modern Library, 1943), II, £(5-162. Also see Sir Ernest Barker, The Political Thought of Plato and Aristotle (New York: Dover Publications, Inc., 1959), pp. 390-396. 97 common ownership. His formula was private possession with common use. Adam Smith While Aristotle dealt only with communal ownership, Adam Smith considered both public enterprise and government regulation of private enterprise. Earlier writers were usually not concerned with the organizational forms of public intervention but only with the proper functions of government. According to Smith, the government needs to perform only three major types of duties. In fact, if the govern ment performs more than these functions, the public welfare will be decreased because it alters the competitive optimum allocation of resources. Very briefly, the proper func tions of government included national defense, maintenance of law and order, and provision of certain public works such as streets, canals, harbors, schools, and embassies.® From Adam Smith’s reasoning comes the idea, still prevalent today, that whatever private enterprise can do, the govern ment will do less well and the idea that the functions of government should be limited to those desirable activities which are not provided by private enterprise. Smith's central argument against excessive public ®Adam Smith, The Wealth of Nations (New York: The Modern Library, 1937)",“ p. 651. 98 enterprise was that it "retards, instead of accelerating, the progress of the society towards real wealth and great ness; and diminishes, instead of increasing, the real value of the annual produce of its land and labor.Adam Smith supported this argument with numerous observations which pointed out that individuals are better able than sovereigns to determine what should be produced in order to accomplish their self-interest as well as the public interest. The statesman, who should direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.7 In addition, managers of public enterprise are care less and inefficient because they assume that the wealth of the sovereign is both inexhaustible and available to pay any losses. Smith referred to the experiences of the English East India Company which incurred losses after accepting sovereign responsibilities.® Moreover, govern ments "are themselves always, and without any exception, the greatest spendthrifts in the society."® Other argu- 6lbid. 7lbid., p. 423. 8Ibid., p. 771, 775. 9Ibid,, p. 329. |ments against public enterprise are scattered throughout :the text but these observations are perhaps representative |of his reasoning. In summary, Adam Smith’s arguments against public enterprise are: (1) interference with private enterprise, | |other than the three legitimate functions of government, i . % results in the misallocation of resources; (2) public i officials are not as careful as private individuals when spending funds; and (3) the State is not an efficient administrator of enterprise because its agents are paid out of public funds rather than profits. However, in spite of his support of natural liberty, Adam Smith realized that there were exceptions to his general rule which required regulation of private enterprise to guarantee the public interest.*® John Stuart Mill Hill and other followers of Bentham adopted the "greatest happiness" principle as the criterion for deter mining whether government Intervention was in the public interest. The government, he thought, should not inter fere with action which concerns only the life, whether in ward or outward, of the individual, and does not affect the interests of others, or affects them only through the moral 10Ibid., p. 308. 100 influence of example.11 Mill pointed out that a restric tive regulation with which one does not agree results in considerable disutility to the individual and that the greatest happiness can usually not be accomplished unless the regulation is supported by a large portion of the population. Hill's second objection to government activities was the increase in authority and influence which the government consequently acquired.12 He felt this was undesirable because the majority often encroaches on the liberty of the minority. Hence it is no less important in a democratic than in any other government, that all tendency on the part of public authorities to stretch their interference, and assume power of any sort which can easily be dispensed with, should be regarded with unremitting jealousy.13 Mill's third objection to government economic activ ities was the inefficiency cf over-centralized decision making. He felt, however, that decentralized decision making would solve this problem except in cases where the government is unfit for economic functions. Mill agreed ■ * ’ 1John Stuart Mill, Principles of Political Economy with Some of Their Applications to Social'Philosophy " ’ (People^s edition; London: Longmans\ Green, and Co., 1896), p. 569. Book V, ch. XI deals with the "limits of the province of government." 12Ibid. , p. 570. 13Ibid. 101 agreed with Adam Smith that Individuals normally do things better than the government. He made one qualification among many others. In all the more advanced communities, the great majority of things are worse done by the intervention of government, than the individuals most interested in the matter would do them, or cause them to be done, if left to themselves. This maxim holds true throughout the greatest part of the business of life, and where- ever it is true we ought to condemn every kind of government intervention that conflicts with it. . . . In addition, he noted, all the advantages of government cannot outweigh "the one great disadvantage of an inferior interest in the result,"1® Mill adhered to the premise established by Adam Smith that the advocates of government interference must prove the public advantage of interference. In other words, Letting alone, in short, should be the general practice: every departure from it, unless required by some great good, is a certain evil.16 In Adam Smith and Mill, along with later writers such as Alfred Marshall who followed the same line of reasoning, the doctrine of laissez faire took shape and was continued, with some modifications, as the role of the 14Ibid., pp. 570-571. 15Ibid., p. 571. 16Ibid., p. 573. On his retirement from Parliament Herbert Morrison reasserted this principle as a criteria for determining the need for additional nationalization. See The Times, July 30, 1959, p. 4. 102 public sector became larger relative to the private sector. Neoclassical View Alfred Marshall, who noted the diminishing marginal utility of the last dollar of increasing incomes, held that government action to redistribute income from the rich to the poor would increase the total benefit accruing to society from a given income. However, he recognized that there was a limit to redistribution beyond which total benefit would be decreased because of reduced incentive and production.I7 Marshall often spoke in a manner which implied acceptance of the views of Smith and Mill such as when he suggested that the concept of consumer surplus would facilitate determination of beneficial interferences in the economy by government. Additional statistics, he thought, would help scholars determine "the limits of the work that society can with advantage do towards turning the economic actions of individuals into those channels in which they will add the most to the sum total of happi ness."1® A. C. Pigou, a leading welfare economist, exten- 17Alfred Marshall, Principles of Economics (eighth edition; London: Macmillan and Co., Limited, 1947), pp. 713- 714. 18Ibid., p. 475. 103 sively studied the methods through which government Inter vention might increase economic welfare.1® These methods either increased the quantity or altered the distribution of the national product. The economic reforms, initiated during the nineteenth century, have been introduced gradually and tested in accordance with the principles established by Smith, Hill and others who did not have the opportunity to evaluate the present-day means of govern mental participation in the economy. British Nationalization Today the most controversial form of government intervention is nationalization. In no country has there been more experience, or more careful thought about the experience, than in Britain. Some of the criticisms of nationalization are summarized below.^ 19 A. C. Pigou, The Economics of Welfare (fourth edition; London: Macmillan and Co., Limited^ 1932). 20 These topics have been discussed in C. A. R. Crossland, The Future of Socialism (London: Jonathan Cape, 1956), 540 pp.; P. 1. Homan, "Socialist Thought in Great Britain," American Economic Review, June,1957, pp. 351-362; Deryck Abe 1, , f £rftish"'Cbna'ervati ve s and State Ownership," Journal of Politics, May, 1957, pp. 227-239; Einaudi and others. Nationalization in France and Italy (Ithaca: Cornell University Press, 1955), pp. 32-50; "The Labour Party and the Ownership of Industry," Political Quarterly. October, 1957, pp. 309-315; and W. A. Robson, Nationalized Industry and Publiq Ownership (Toronto: University of Toronto Press, 1960), pp. 460-494. 104 Income equality. Public ownership through nation- lization is no longer necessary as a device for achieving equality of income, according to Crosland. Dugdale and others challenged Crosland's view.21 Others do not challenge the assertion but believe that the Labour Party will be slow to accept the fact. Ironically, the redistribution which occurred between 1938 and 1950 came from the working class rather than from the "capitalist" 22 class and was not primarily the result of nationalization. In the pamphlet, Industry and Society, the Labour Party advocated reducing the inequality of income in Britain through government ownership of some of the shares of large joint stock companies. This type of ownership is not intended to control the policies of the companies but solely to obtain a more equitable distribution of wealth and income.23 The new approach constitutes a change in the policy of the Labour Party toward public ownership. Nationalization has been regarded as a device for both 21John Dugdale, M.P., "The Labour Party and Nation alization," Political Quarterly, July, 1957, pp. 254-259. John Strachey also favors additional nationalization. See "The Object of Further Nationalization," Political Quarterly. January-March, 1953, p. 74. 22 Crosland, o p. cit., p. 45. 23 Labour Party, Industry and Society. Labour*s Policy on Future Public Ownership (London: Labour Party, 1957). Robson strongly opposes the new Policy; see Rob son, op. cit.. pp. 480-483. 105 control and redistribution. However, nationalization has not been a successful device for redistribution because the largest portion of the economy was not nationalized. Thus, another method was needed. Nationalization also has not been a successful control device because control has neces sarily remained in the hands of the old managers who are skilled executives. Consequently, the Labour Party has abandoned public administration (control) as a concomitant of public ownership.24 This distinction between public ownership solely for the purpose of redistribution and nationalization, for control purposes, first pointed out by Gaitskell, was one of the results of Britain's experi ence with the nationalization acts.2* * France has adopted similar views.26 Other European nations similarly have 27 discarded additional nationalization. 24 "The Labour Party and the Ownership of Industry," op. cit., p. 311. 25 Hugh Gaitskell, Socialization and Nationalization, Fabian Tract No. 300 (London: Fabian Society, 1"956), pp. 1-34. 26 Einaudi, op. cit., p. 56. 27 Expressed in conversation by Ingvar S. Melin, Associate Professor, Swedish School of Economics, Helsinki, Finland, July 18, 1962. In his presidential address before the American Economic Association, Edward S. Mason said, "Government ownership is a dead issue if indeed it was ever a live one." The address was delivered on December 27, 1962, in Pittsburgh, Pennsylvania. Joan Robinson agrees. "In England certainly, and, I believe in all prosperous capitalist nations, socialist ideals are in full retreat." See "Beyond Full Employment," Annals of Collective Economy, 106 Productivity. An increase in the level of living depends primarily on increased productivity rather than redistribution. There is no evidence that additional nationalization will increase productivity significantly.28 Nationalization as a means. Socialists have con sidered nationalization an end in itself for many decades but this tenet of socialism has been discarded by many Labour Party members and thinkers such as Crosland who emphasize that nationalization is a means rather than an end.29 Crosland points out that nineteenth century laissez faire capitalism no longer exists because of the success of reforms which instituted social controls and subordinated private industry to social purposes. Thus, many of the negative goals of socialism have already been accomplished, according to Crosland, who refers to objec tives such as the rejection of competitive antagonism, a April-June, 1961, p. 161. Michael Lipton observes: "Nationalization, or other determined State intervention in the market forms in the industrial sector is radical in the West; but in underdeveloped countries it hurts hardly anybody (and thus achieves little) without land reform and efficient equitable taxation." See Balanced and Unbal anced Growth in Underdeveloped Countries," Economic Journal, September, 1962, p. 647. 28 Homan, op. cit., p. 352. 29 Crosland, op. cit., pp. 89-99. Also see W. A. Robson, Nationalized industry and Public Ownership, Chapter XVI, "Public Ownership’ * (Toronto: iJnivers ity of Toronto Press, 1960), pp. 485-486. 107 wider concern for social welfare, a belief In equality, and a classless society. Socialist goals which are unattainable through nationalization. Public ownership cannot achieve some socialist objectives. This is because some social charac teristics, such as political freedom, class stratification, exploitation, the distribution of income and capital, the degree of government planning, and the status of the worker, are social features which are not caused by the existence of private ownership. Consequently, nationalization is not needed to attain these socialist goals. Economic power. The centers of economic power are not changed by nationalization because economic power is not usually achieved through ownership. The separation of ownership and control was pointed out in the United States by Berle and Means three decades ago. The executives of commercial enterprises, labor unions, trade associations, and government are the centers of economic power. Conse quently, the change of ownership from private to public hands does not, in itself, necessarily result in control over the centers of economic power. Consequently, the most effective device for control may be a countervailing power to offset the force of every major government in the 108 market.In some cases, the government may act as the countervailing power. In adopting this position the Socialist Union argues in a manner similar to Galbraith. Perhaps overcentralization may be usefully regarded as a hinderance to effective countervailing power. The British Cooperative Party maintains, for example, that users of the services of nationalized industries have less control over administrators than they have over the elected councillors in municipal e n t e r p r i s e s .^2 Monopolies created by nationalization. Industry wide government corporations have been criticized as government monopolies. Suggestions have been made that socialists should stress competition among public and private enterprises within an industry in order to encour age competitive incentives to efficiency. Under this policy the government would either take over individual firms or establish new firms rather than nationalize an entire industry.^ The suggestion is in keeping with the 30 Socialist Union, Twentieth Century Socialism (London: Penguin Special, 1556), pp. 1-155. 31 John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power (Boston: Boughton Mifflin, IW52J.------------------- 32 Robson, op. cit., pp. 468-69. ^Abel, op. cit. , pp. 232-239. 109 trend toward decentralization and denationalization, most evident in the transport industry, since the Conservative 3 4 Party returned to office. Nationalization and totalitarian controls. Politi cal oversight by standing committees undoubtedly reduces industrial efficiency and may also be an essentially totalitarian device. Homan points out that this question arises in the writings of Gaitskell, Crosland and others.33 Hayek, of course, has stated the argument most strongly.3® Some socialist scholars admit and defend the compulsory 0 7 nature of socialist economic planning. 1 Efficiency. Nationalized industries have been criticized on the grounds of inefficiency. The late Hugh Gaitskell, for example, pointed out that the units were too large to get the best results from workers and that the 3^"The Labour Party and the Ownership of Industry," op. cit., p. 315. 35Homan, op. cit., pp. 357, 355. O C Friedrich A. Hayek, The Road to Serfdom (Chicago: The University of Chicago Press, 1954), p. T7fl. 37 Paul A. Baran, "National Economic Planning," A Survey of Contemporary Economics, Bernard F. Haley, editor Oiomewood: Sic hard 1 5 . I rw in, Inc. , 1952), II, 385; W. Arthur Lewis, The Principles of Economic Planning (London: George Allen and Unwin, Ltd. , 1959 Impression), p. 21; Paul M. Sweezy, Socialism (New York: McGraw-Hill Book Company, Inc., 19491, pi 255; and Karl Polanyis, The Great Transformation (Boston: Beacon Press, 1957), pp. 257, 258A and 2599. 110 esprit de corps of management had decreased. He noted that nationalized industries had difficulty attracting men of high quality to the top positions because public salaries were not competitive with those in private industry and that decisions in nationalized industries tended to be overcentralized.Crosland similarly contends that addi tional nationalization will not improve economic perform ance significantly. These are not criticisms of public ownership, however, but are criticisms of the structure and operation of government-owned industrial enterprises. The criticisms of nationalized industries should be weighed along with the fact that "each one of them is undoubtedly in a better condition than it would have been under private enterprise or, as was the case with gas and electricity, divided between private and municipal owner ship."40 Capital accumulation. Many observers have noted that both the public and private sectors in Britain have not had an adequate rate of capital accumulation. This is indicated by the fact that Britain's real gross income has increased by only 2.7 per cent annually since the war while 38Gaitskell, op. cit. , p. 12. 39 Robson, op. cit., pp. 413-459. 4®Ibid. , p. 446. Ill the growth rate of the countries of the Organization for Economic Cooperation and Development (OECD) has been 5.3 per cent, and the growth rate in the United States has been 3.7 per cent.^l Britain's growth rate is relatively low because gross investment has been between twelve and fifteen per cent of GNP annually while the United States and OECD countries have invested between sixteen and nineteen per cent of GNP. In addition, Britain’s gross capital output ratio is five to one, while in OECD countries the ratio is three to one.^ The railways are the least successful of the nationalized industries. Although the rate of investment since nationalization has been about 150 per cent of the pre-war rate, annual costs continually exceed revenues and deficits accumulate. Weatherford asserts that most observers believe that modernization can not make the rail ways break even.^ Homan suggested that the low rate of capital accumu lation may be the result of normal democratic pressures on nationalized industries which insist on low prices and high 41Clair Wilcox, Willis D. Weatherford, Jr., and Holland Hunter, Economics of the World Today (New York: Harcourt, Brace & World, fnc. , 1562), p! 7TT 42Ibid., p. 58. 43Ibid., p. 73. 112 wages at the expense of business saving.44 Weatherford supports this by indicating that "wages and working condi tions have improved greatly; in fact the main beneficiaries of nationalization are the workers."45 other countries in which the workers are economically dominant, including the United States, have had a similar experience even without nationalization.4® Worker participation in management. In Britain, as in the United States, the ownership of property is no longer the source of economic power. In addition, even in a collectivist economy the workers do not make production decisions.4^ Irrespective of who owns the means of production in the legal sense, both "confrontation" and "alienation" are inevitable; and someone other than the mass of workers must take the production decisions." In Britain, the nationalized industries are not managed by workers. Even in France, where worker representation was actually tried, the experiment was abandoned as unwork- ^^Homan, op. cit., pp. 352-353. 4®Wilcox and others, op. cit., p. 57. ^Raymond J. Saulnier, "For Prosperity in U.S.— A New Prescription," U.S. News & World Report, July 16, 1962, pp. 90-92. 47Crosland, op. cit., p. 70. 4®Einaudi, op. cit., p. 28. 113 However, worker participation was abandoned because of political reasons (the unions became dominated by commu nists) rather than for economic reasons. Public corporations and the public interest. The Conservative Party has argued that public corporations do not necessarily act in the public interest. Robson suggests that the probability of public corporations not acting in the public interest will be greater if the government adopts a policy of acquiring shares in private enterprises. His strongest argument is that the govern ment, as an owner of enterprises which provide revenue to itself, will experience conflicts of interest on issues such as the restriction of cigarette smoking in order to promote public health.49 Neither public nor private organ izations provide reliable self-regulation. Conclusion. In Britain, France and other European countries, public ownership through nationalization has nearly been abandoned as a device for control and redis tribution. With the relinquishing of public ownership as a socialist device for control, socialists have renounced the primary tenet with which they have been identified throughout the world for over a century. Without public ownership of productive factors socialist policies are not ^®Robson, op. cit., p. 481. 114 significantly different from the welfare policies of the United States. This leads to the conjecture that socialism in the future will increasingly be identified with cen trally planned economies which maintain the tenet of public ownership and that Britain will gradually cease to be popularly associated with socialism. Consequently, nationalization is now regarded as an inferior means to socialist goals rather than a necessary end of socialism. In fact, some socialist goals, namely the correction of defects which are not caused by private ownership, cannot be accomplished through public ownership. There is also little indication that additional public ownership will increase productivity. Furthermore, nationalization policies have not brought about worker participation in management or an adequate rate of capital accumulation. The Socialist Union maintains that the most effective device for control may be a countervailing power to offset the force of every major element in the market. The trend in Europe suggests that the proper eco nomic role of government, in advanced eoonomies at least, is control rather than direct ownership and operation of business enterprises. This seems to be a pragmatic conclu sion which has required some modification of traditional socialist ideals. The conclusion supports the contention of scholars 115 of public administration that an organization usually does not effectively control Itself. In nationalized industries effective self control, probably political rather than economic control, is required. The economy appears to operate more effectively when government agencies control private producers than when the government controls itself. It is conceivable, however, that the government could be the sole provider of capital, which is the main function of ownership, without significantly altering the autonomy of the owned enterprises by increased controls. This, of course, ignores the effects on private saving.50 Probably such a program would not accomplish redistribu tion because savers would then lend to the government for interest. Thus, in the subject of the proper role for the government another institution has become the center of controversy. The appropriate institution for control rather than the appropriate institution for ownership is becoming the center of attention. 50 See W. Arthur Lewis, ’'Public vs. Private Saving," Business Organization and Public Policy, Harvey F. Levin, editor (Hew York: Rinehart and Company," Inc., 1959), pp. 539-544. CHAPTER IV THE ROLE OF GOVERNMENT DURING THE TAKE-OFF STAGE IN THE DEVELOPMENT OF THE UNITED STATES AND INDIA Students of economic development have often asserted that governments must play a larger role in the development of currently emerging economies than was played by the government during the take-off stage of advanced economies.1 The purpose of this chapter is to evaluate this hypothesis by comparing the role of the government during the take-off stage in the United States with the current role of the government in India, which, according to Rostow, is leaving the transitional stage and entering For example, see ff. A. Lewis, "The range of activ ities which the government can usefully undertake is very wide. Moreover, it is even wider in the less developed than in the more developed economies." The Theory of Economic Growth (Homewood: Richard D. Irwin, 1966), p. 382. Max THli’ 1Iikan and Donald L. M. Blackmer point out: "This process will not be sufficient for the more rapid entry into growth desired by the presently underdeveloped coun tries, and active government steps to raise the rate of investment are required." The Emerging Nations (Boston: Little, Brown and Company, IsJ6i) , pp. 53-54. Ifobert L. Heilbroner notes: "In the great transformation which is now commencing in the underdeveloped areas, the market mechanism is apt to play a much smaller role than in the comparable transformation of the West during the Industrial Revolution." The Making of Economic Society (Englewood Cliffs: Prentice-Hall, Inc., 1§62), p" 216. 116 117 the take-off stape.2 The first task is to determine whether the govern ment in India has played a larger role than in the United States during the take-off period. The second task is to compare the rate of growth of the United States during the take-off stage with that of India. The third task is to consider whether the increased role of the public sector, if it is found to be a larger role, was necessary for accomplishing a rate of economic growth equivalent to that of the United States during its take-off stage. The governments of all countries participate in economic activities through regulatory controls of non government producing units and through directly conducting business activities.2 Measurement of both the regulatory and production roles of government is difficult. Measure- o W. W. Rostow, The Stages of Economic Growth (Cam bridge: At the University Press, 1960), p. 38. Also see Millikan and Blackmer (eds.), o p . cit.. pp. 46-53. 3 After reviewing the role of the government in the development of major capitalist countries, E. S. Mason makes three broad generalizations. "First, the relations of government to business at similar stages of development cover a wide spectrum even in countries which can be called capitalist; second, with development, the role of govern ment inevitably increases for purely technical reasons regardless of changes in ideological views concerning the proper relations of government to business; third, the differences in government-business relationships among countries at similar stages in their development are the resultant of many forces both physical and historical." Economic Planning in Underdeveloped Areas (New York: Ford- haro University Press, 1958), p. 28. 118 ment of the production role is, in itself, an impossible task in some economies although production data is gradually becoming more available. I. THE HYPOTHESIS Statement The hypothesis sometimes is less precisely stated than in the sentence above. Brand, for example, stated that, because of inadequate private industrialization, "the government will have to participate more actively in economic development in underdeveloped countries for a 4 much longer period than in many industrial countries." The ambiguity in Brand's statement leaves the reader wondering whether he is comparing the role of government in underdeveloped countries with the current role of government in industrially advanced countries or with the role of the government in advanced countries during the period when they were at a similar stage of development. Using Bostow's terminology, the reader wonders whether the author is comparing the take-off stage of the underdeveloped country with the mass-consumption stage of the industrially advanced country, or comparing the take-off stages of each economy. *W. Brand, The Struggle for A Higher Standard of Living (Glencoe: The Pree Press, 1058), p. 228. 119 Economies which are in the take-off stage of economic development may have different economic goals. Consequently, a comparison of the role of government dur ing the take-off stage compares the effects of pursuing dissimilar goals. During the take-off stage of industri ally advanced economies no one sought a particular rate of economic growth. However, with the accumulation of technological knowledge which can be borrowed and applied in underdeveloped countries and the demonstration effect for motivation, economic planners in underdeveloped countries expect a specific, high rate of economic growth if the preconditions (1) the expansion of society's human resources; (2) the laying down of basic transport, communication, irrigation, and power facilities commonly referred to as social overhead; and (3) a radical trans formation of the agricultural sector,5 for the economic take-off are established. The comparison of the effects of pursuing dissimilar goals is suggested by Rostow’s discussion of social overhead capital. Where, as in England, Western Europe, and the United States, the period of gradual readying for economic growth stretched over a number of decades, a slow expansion of social overhead facilities was sufficient. In some of the presently underdeveloped countries which have experienced very little investment in such facili ties, notably in Africa, capacity must be built in transport, communications, power, and possibly irriga- g Millikan and Blackmer, op. cit., p. 47. 120 tion well ahead of the emergence of a visible demand for them if the momentum of development is not to be retarded. . . . This is a kind of investment that is unlikely to take place on a sufficient scale without active government promotion.6 Consequently, the hypothesis must include the rate of growth, a national economic goal, to be achieved. The hypothesis, then, would state that the governments of emerging economies must play a larger economic role dur ing the take-off stage than was played by the governments of industrially advanced economies if the underdeveloped economy wishes to grow at an equivalent rate. The restate ment undoubtedly increases the probability of truth in the hypothesis. However, the governments of present-day emerging economies may perform a greater role because they expect a greater long-run rate of economic growth. Unfortunately, the greater role of government may not be indicated by the rate of growth during the early part of the take-off stage because the full economic effect of social overhead investment does not occur immediately. The statement by Brand, quoted above, suggests that the government of the transitional economy must play a larger role today than a century ago, because of the shortage of private industrialization, in order to achieve an equal rate of economic growth. An attempt to test this interpretation is made in this chapter. 6Ibid., pp. 49-50. 121 The Take-Off Stage The term "take-off stage" refers to the third of the five stages of development suggested by Rostov*. As mentioned above, Rostov estimated that the take-off stage commenced in 1843 in the United States and in 1952 in India. The year 1843 marked the beginning of the rapid growth of railways and manufacturing in the United States and 1952 marked the commencement of the first five year plan in India.7 The success of IndiaTs take-off efforts, however, is still uncertain. The purpose of this chapter is to compare the economic role of the Indian government during the 1950*3 with the role of the government of the United States dur ing the 1840's, assuming the two decades represent compar able periods in the development of the two economies. There is perhaps some question whether this period should be called the "transitional stage" instead of the take-off stage. The dividing years between the two stages are admittedly inexact but, since most of the years of the two decades fall in the take-off period designated by Rostow, 7 W. W. Rostow, The Stages of Economic Growth, op. cit., pp. 36-58; The Process of tioonomlc growth (2nd edi tion; Oxford: At the Clarendon Press, I960), pp. 274-306, 317-318; the latter section is reprinted in Bernard Okun and Richard W. Richardson, Studies in Economic Development (Holt, Rinehart and Winston^ TncTT l96l), pp. 196-191; Millikan and Blackmer, op. cit., pp. 53-60; and The Econom ic History Review, August, 1959, pp. 1-15. 122 the latter term Is used. The explanation of economic growth as a series of successive stages of economic development was not, of course, originated by Rostow. The German economists in the 1800's—-Friedrich List, Bruno Hildebrand, Karl Bucher, Gustave Schmoller, and Werner Sombart-—were members of the historical school which emphasized identifiable stages in the process of economic development.8 Furthermore, other contemporary economists have used other terms to describe the characteristics which Rostow attributes to the take-off stage. Liebenstein, for example, refers to a critical minimum effort which is essential for the sus tained growth of real income.® P. N. Rosenstein-Rodan has referred to these characteristics as the "big push" into sustained economic development,10 Myrdal does not utilize the stages concept but describes the take-off period as one in which the centrifugal spread effects, such as improved technology available from the developing center ®Bert F. Hoselitz and others, "Theories of Stages of Economic Growth," Theories of Economic Growth (Glencoe, Illinois: Free Press, I960), pp. 195-238. a Harvey Liebenstein, Economic Backwardness and Economic Growth (New York: John Wiley & Sons, Inc., 1^57), pp. 94-110. 10P. N. Rosenstein-Rodan, "Notes on the Theory of the 'Big Push'," Economic Development for Latin America, H. S. Ellis, editor Ofew York: St. Martinrs Press, Inc., 1961), pp. 57-81. 123 and Increased markets for raw materials, overcome the backwash effects on other regions through the attraction of capital, population, and trade to the developing area, which establishes a new center of self-sustained economic development. 11 Gerschenkron describes the take-off period using Toynbee's challenge-and-response concept. Toynbee observed that small challenges frequently do not produce any responses and that the volume of response begins to grow rapidly at some point as the volume of challenge increases. A considerable challenge must exist before a sustainable response in industrial development will occur.12 Moreover, the size of the challenge changes the quality of the response which, he maintains, is likely to retard economic progress and cause undesirable non-economic consequences.13 Prior to the take-off period, as conceived by Rostow, agricultural change occurs, considerable social overhead capital is created, and the country's individuals ^Gunnar Myrdal, Economic Theory and Underdeveloped Regions (London: Gerald Duckworth & 60., Ltd., 1957), p. 3T:--- 12 Gerschenkron, "Economic Backwardness In Historical Perspective," The Progress of Underdeveloped Areas, Bert F. Hoselitz, editor (tfhicago'P'UniVersity’ o'f Chicago Dress, 1952), p. 9. 13Ibid., p. 17. 124 and institutions are increasingly concerned with economic development. The landed group either ignores the changes or is unable to prevent them. The accelerated growth is in a sufficient number of sectors of the economy to be mutually supporting. Normally the shortage of resources is met by assistance from other economies. As additional capital is accumulated, national income and the capacity to produce more capital increases. Stagnation ends and expansion is reinforced. Education and industrial skills spread in a pyramid manner and the economic successes generate more optimism. With the aware ness that economic change is possible, technological change increases. Eventually, enough investment regularly occurs to sustain economic development. Leading sectors in the economy play an important role in industrialization. In various economies the lead ing sectors have been the railroads, timber, raw material processing, and import-substitution industries. A sharp rise in the portion of national income devoted to capital formation requires institutional changes to obtain savings and make them available for productive investment. Capital markets are formed and government taxes and investment increase. As industrialization occurs, urbanization takes place, with its changed attitudes and values. Successful 125 take-off reinforces the social and political position and prestige of the leaders of industrialization and encour ages the traditional groups to adopt new functions. The role of the government varies from totalitarian centrali zation to relatively little direct economic activity. However) economic coordination necessarily occurs as specialized production occurs. This can be partially pro vided by the market system but government participation is also necessary. Market imperfection renders it incomplete and slow, and in investment allocation the market mechanism has serious deficiencies. Thus in a contemporary take off, governmental programming and administration of a number of important processes and relationships are important.14 Although Japan executed a take-off without external capital, most emerging economies require external capital. Most economies do not have sufficient exports to pay for the imported capital goods which are required for indus trialization. Social and political changes take place. Religion and the military often become disassociated from political life, universal education is undertaken, and economic development is given high political priority. According to Rostow, history offers two types of take-off into sustained economic growth. One involves l^illikan and Blackmer, op. cit. , p. 57. 126 economies of well-established traditional societies which required fundamental changes in order to industrialize; the second involves economies of relatively new societies which were "born free" because they were colonies of Britain, which had already experienced many of the preconditions for the take-off, and because they were founded by noncon formist groups. In the latter group, preparation for the take-off was primarily a matter of building social-overhead capital, with less alteration in the structures, politics, and values of the society being necessary than in the well- established traditional societies.^5 in both cases, the disruption of traditional societies occurred because of the transmission of demonstration effects from other societies. As was implied above, the take-off is usually asso ciated with a pronounced stimulus. The stimulus may be from political revolution, technological innovation such as a new type of transportation, improvements in the inter national environment, or the need to develop import- substitutes. Rostow identified three major conditions of the take-off period. 1. A rise in the rate of productive investment *^Rostow, The Stages of Economic Growth, op. cit., p. 17. 127 from, say, 5% or less to over 10% of national income (or net national product— NNP); 2. The development of one or more substantial manu facturing sectors, with a high rate of growth; 3. The existence or quick emergence of a political, social, and institutional framework which exploits the impulses to expansion in the modern sector and the potential external economy effects of the take-off and gives growth an on-going character. 6 The take-off is not necessarily the period of most rapid industrial growth but is marked by a decisive shift in the investment rate during the first industrial phases. Although important developments occurred prior to the take-off in all industrial economies, these changes "were insufficient to transform the economy radically or, in some cases, to outstrip population growth and to yield an increase in per capita output." II. COMPARISON OF THE TAKE-OFF STAGE OF DEVELOPED AND UNDERDEVELOPED ECONOMIES The reasons for the increased role of the government in contemporary emerging economies center around the dif ferences which typically prevail in the economic environ ment during the take-off. Because of these differences the government must play a larger role in order to accomplish 16Ibid., p. 39. 17Ibid., p. 40. 128 a rate of growth equal to or greater than the rate achieved by the typical advanced economy during its pre-industrial phase. Many of the problems of economic emergence in under developed countries today are the same as they were in the pre-take-off phase of advanced countries but there are also significant differences. The similarities include the need for: increasing productivity in agriculture; the creation of social overhead capital; and the development of export industries. The differences involve: population pres sures; the level of technological knowledge; and political structures and attitudes.18 The first difference is the faster rate of popula tion growth. In economies which developed relatively early the rate of population increase, with the exception of sparsely settled countries such as Russia and the United States, was less than 1.5 per cent. Today, underdeveloped countries are typically growing from two to three per cent, largely because of the decrease in the death rate resulting from modern medical techniques. This may prevent per capita income from increasing even though GNP increases and actually reduces per capita income if GNP has not increased. Moreover, the increased rate of population 18 Millikan and Blackmer, op. cit., pp. 60-62. 129 increase is occurring in economies with higher population densities. As the gap of international inequality has widened the amount of available technological knowledge has increased. The later a country develops the larger is the amount of capital and technology to be introduced in order to produce efficiently. "Nowadays, first steps in many branches of industry and utilities must be giant steps. The third major difference has resulted from new mass communications systems which have qualitatively changed desires for economic development. Economies which developed in the past, for various reasons, had social and cultural values which encouraged economic growth. Today, underdeveloped economies are primarily concerned with increased consumption and welfare programs which tend to retard economic growth. On the other hand, the wider expectation of economic development may more than offset this restraint on growth. Per Capita Income Today there is a wide gap between the per capita income of the most advanced economies and the under developed economies. In 1959, for example, per capita income in the United States was $2,166 while in India per 19 Ibid., p. 62. Also see Heilbroner, op. cit,, pp. 125-126. capita income was about seventy dollars, or only 3.23 per cent of the economic leader. A wide gap, however, did not exist between economically advanced and backward countries a century ago. During the 1840’s the per capita income of the United States was no more than twenty-five per cent less than that of the United Kingdom.2® Moreover, the per capita income of the United States was probably never as low as in India today. Even in the 1840's per capita income in the United States was twice as high as it is in India today. Kuznets estimates that per capita incomes in the underdeveloped countries today are from one-sixth to one-third of the per capita incomes of the developed countries a century ago.21 He observes, also, that the economic leaders today were nearly always the economic leaders a century ago. Political and Cultural Background The countries which initially experienced an economic take-off had long histories of advancing knowledge and social organization. The countries which led the intellectual, religious, and geographical revolutions also 20 Simon Kuznets, "Underdeveloped Countries and the Pre-Industrial Phase in the Advanced Countries," The Eco nomics of Underdevelopment, A. N. Agarwala and S. P. Singh, ecTs~! (London: Oxford tJniversity Press, 1958), p. 138. The following comparisons are drawn primarily from this article. 21Ibid., p. 144. 131 led the consequent economic revolution. In contrast, the underdeveloped countries which are attempting a take-off today were outside the political and cultural sphere of the countries which first experienced the economic take off. They are attempting economic emergence without the long period of intellectual and social gestation which prepared the pre-industrial phase of the now advanced economies. The political systems involve subjection rather than political independence and their social struc ture includes serious obstacles to the establishment of an industrial economic system. According to Heilbroner, the economic systems of developing countries are similar to those of advanced economies during their emergence into industrialization in that the economic system is usually a command system. He concludes that "the economic structures of nations today bear an integral relation with their stages of economic development."22 The role of the government in under developed economies today, he notes, is similar to the role of the government during the mercantile period when the Western nations were given a powerful thrust toward industrialization by governments which were industry- minded. 22Heilbroner, op. cit., p. 224. 132 Rate of Economic Growth In currently underdeveloped countries the rate of economic growth and the rate of population growth have been lower over the past century than in more developed economies. This follows from the fact that the dispar ities in per capita incomes have increased. Rigidities within social institutions may have caused the slow rate of growth or may have been the result of the slow rate of economic growth. However, both may have been caused by a third variable. In any case, there is a negative correla tion between the rate of economic growth and the rigidity of the social institutions. Population Characteristics. Small populations. The populations of developed economies were small during the take-off stage in contrast to the tremendous populations of the underdeveloped countries today. During the 1840’s the population of the United States averaged about twenty million. China's popu lation is over 650 million and India's is over 438 million. The population density may be as much as forty-five times the density in the developing advanced economies. Rate of population growth. During the early development of advanced economies the populations typically grew less than ten per cent per decade, with the exception 133 | jof the United States and Russia. In the older underdevel oped economies suoh as India and China, the rates of growth! during the twentieth century have not been much higher, but | I j many underdeveloped countries have had rates of population | |growth exceeding twenty per cent. In the last decade iIndia's population also grew over twenty per cent. i f Although the data are limited, the populations of under** i developed economies appear to have inoreased at a faster rate than the populations of the older developed economies during their emergence.^3 Crude birth rate. During the first half of the nineteenth century the crude birth rates of the advanced economies typically were between thirty and thirty-five per thousand. Many underdeveloped countries today, how** ever, have crude birth rates in excess of forty per thou sand. This, of course, contributes to the higher rate of population growth in underdeveloped economies. Crude death rate. Conversely, the crude death rate of underdeveloped economies is usually considerably less than twenty per thousand while it was twenty or above in the pre-industrial phase of developed economies. This also contributes to a relatively higher rate of population. 23 Kuznets, op. cit., p. 149. 134 increase. Emigration. During the development of the advanced economies International and intercontinental migration pro vided an alternative to the disruptions of industrializa tion. This also tended to reduce the rate of population increase. With limited empty areas of the world to be populated, the underdeveloped countries today do not have a similar opportunity to relieve population pressures. Emigration is no longer a means of smoothing the way to economic development. III. POSSIBLE REASONS FOR A LARGER PUBLIC SECTOR IN EMERGING ECONOMIES Desire for a faster rate of growth. Ramanadham has argued that the role of the government during the take-off stage is larger than a century ago because "the pace of progress contemplated under the plans has been far faster than is expected under the conditions of an unplanned e c o n o m y ."24 This supports the observation made above that the government may do more because it expects a faster rate of economic growth. Consequently, the government adopts programs to make the faster rate of growth possible. Two alternative policies are pointed out by Ramanadham. V. V. Ramanadham, The Structure of Public Enter- prise in India (New York: Asia Publishing Rouse, 1^61) , p. 54. 135 Savings nay be encouraged and, being allowed to re main at private levels; goaded into channels of indus trial re-investment; alternatively, the Savings may be mopped up and, being accumulated at the governmental level, channelled loto industrial investment by the government itself.25 Staley made a similar observation.26 As informed opinion now recognizes, the role of the state in fostering the rapid transformation of stagnant underdeveloped economies into growing ones is neces sarily more active and comprehensive than the role we find appropriate in our own advanced economy. The pressure to produce quick results in newly developing countries creates situations analogous to those of wartime. . . . In a number of countries, state initiative exerted to get a stagnant traditional econ omy off dead center, through a large-scale public investment program as well as in other ways, has proved to be more of a stimulant than a handicap to the private sector. However, Staley advocates a more vigorous private sector than some students of economic development.27 He contends that a strong private sector is essential for political democracy. Hanson disagrees, holding that free enterprise is usually accompanied by an anti-popular dictatorship and that, because of the welfare sentiment, a 25Ramanadhan, op. cit. , p. 55. Also see Henry G. Aubry, "Deliberate Industrialization" Underdeveloped Areas, Lyle W. Shannon, editor (New York: Harper and 6rothers Publications, 1957), p. 269. For a general treatment of the role of the government see Herman Finer, "The Role of the Government," Economic Development, Williamson and But- rick, eds. (New York: f>rent ice-Hall, Inc., 1954), pp. 365- 426. 25Eugene Staley, The Future of Underdeveloped Coun- tries (revised edition; New York: Harper and Brothers, 1' ff ST )" , pp. 433-434. 27Ibid., first edition, p. 303. 136 government often cannot obtain popular support for an economic development program If it emphasizes the private sector.28 Better public accountability with public enterprise. In India, the second form of government participation, men tioned above by Ramanadham, has been adopted on the grounds that public enterprise is easier to control than private enterprise. The government could lend the savings to pri vate enterprise but has preferred to invest directly in public enterprise.29 Assuming Ramanadham's explanation to be correct, the assumption that public accountability is easier to obtain in public enterprise than in private enterprise is at least debatable. The public accounta bility of government corporations and other forms of public enterprise is probably the most discussed topic today in O A the field of government business activities. w Luxury consumption. Bronfenbrenner has argued that property income is large in underdeveloped areas but, con trary to Western experience, is used for luxury consump 28 Hanson, op. cit., p. 195. 29 Ramanadham, op. cit., p. 56. 30 For an argument that such government participa tion retards economic growth see P. T. Bauer, Indian Economic Policy and Development (New York: Frederick A. Praeger, 196l), pp. 123-123. 137 tion. Democratic governments find it difficult or impos sible to transfer luxury consumption spending to invest ment spending. Therefore, he contends that confiscation is necessary in order to achieve economic development, without sacrificing the level of living of the masses, by shifting income to developmental investment from capi talists’ consumption, from transfer abroad, and from unproductive investment in items such as luxury housing.31 Mason opposes this line of reasoning on the grounds that a government capable of executing confiscation to promote economic development will probably have achieved its totalitarian powers for reasons other than economic development.33 If a political revolution for the purpose of development occurred, however, the techniques adopted would probably not be similar to those used in early capitalism. Mason concludes that existing social relation ships, income distributions, individual values and human motivations so inhibit economic growth and that existing governments are so unwilling or unable to initiate change that political revolution is a prerequisite to economic 31 Martin Bronfenbrenner, "The Appeal of Confisca tion in Economic Development," Economic Development and Cultural Change, April, 1955. ^^dward S. Mason, Economic Planning in Under- developed Areas (New York: ^Fordham tlniversity Press, 1958), p t v t . ------------ 138 development. The new government would use much more plan ning and intervention than was used during early Western capitalist development. Liberal ideals. The last point mentioned above is supported by the experience of the emerging nations. How ever, the absence of private enterprise may not be the reason for the increased use of economic planning and pub lic ownership. During the early development of industrial nations, the liberal, intellectual doctrine was laissez faire, the reaction to excessive government restrictions on economic life. Today the liberal, intellectual ideal is state welfare policies in various forms. Reforms tend to adopt the thought and policies advocated by liberal intellectual leaders.^3 The conditioned preference of ■ reformers in less developed countries for public enterprise may be a more significant cause of the increased role of government during the transitional and take-off stages today than is commonly recognized.Pragmatic, rational 33 Coincident with the change in liberal intellectual ideals has been the passing of the priority of good govern ment which has given way to reformation of capitalist institutions. ^^Eugene Staley notes that "socialism” is a term more or less equated with social progress in newly develop ing countries. See The Future of Underdeveloped Countries, op. cit., p. 433. Also see Herbert E. Weimer who states: Sowever, in the economically underdeveloped new nations, nationalization is considered as a sort of touchstone of progressive thinking. It has become associated with 139 explanations for public enterprise in less developed countries may also be unrecognized justifications for exer cising the preferences of leaders who have been influenced by the liberal, intellectual leaders of the world and who, for more than a century, have generally advocated public ownership. This line of reasoning is supported by Hanson who pointed out that a government which stresses private enter prise is not likely to obtain popular support for a development program. In the greater part of the underdeveloped world the Duesenberry 'demonstration effect' has created such profound sentiments in favour of equality and 'wel fare* that development plans which fail to give more than lipservice to either are liable to run into insuperable political difficulties, even when the situation is such that private enterprise is proving its capacity to get on with the job. Greater obstacles to development. Meier and Baldwin emphasize that emerging economies today experience greater national aspirations and pride, and more importantly with the whole question as to whether industrialization can be achieved under government sponsorship within the framework of political democracy.” British Labor and Public Ownership (Washington: Public Affairs £ress, I960), pp. vii-viii. 35 J. K. Galbraith has discussed the conflicting eco nomic ideals of India in "Rival Economic Theories in India," Foreign Affairs, July, 1958, pp. 587-596. 36 Hanson, Public Enterprise and Economic Development (London: Routledge & ftegan Paul, Ei d . , 1959)7 p. 1^4. 140 obstacles to development than were experienced by nine teenth century transitional economies. Present day poor economies have remained stationary so long that more "positive governmental intervention is essential to get these countries off dead center."37 They indicate that development cannot be as spontaneous as it was under nine teenth century conditions. Meier and Baldwin recognize that each country needs particular policies suited to its specific characteristics and suggest four general areas for government action. One, the government may need to establish markets by promoting suitable institutions; two, government production is needed in fields where profits are too low or risks too high to attract private enterprise; three, government enterprise should be used in industries where the results of private enterprise are less satisfactory than public enterprise; and four, government direction is necessary to promote external economies and balanced growth.**8 Derived development. In contrast to the pre industrial phase in advanced countries during which innova tions were the means and profits the goal of economic 37 Gerald M. Meier and Robert E. Baldwin, Economic Development (New York: John Wiley & Sons, Inc., 1067), p. 35T:--------- 38Ibid. 141 development, less developed economies today are character ized by desires for greater consumption. The key motiva tion for economic development is consumer demand rather than supply, production, and profit.**® The orientation of less developed economies toward consumption, according to Wallich, results from the fact that economic development depends primarily on the assimilation of existing innova tions instead of on the creation of new inventions and innovations. "It is this feature that suggests the general concept of derived development— derived from innovations made elsewhere."4® Reasoning from this premise, Wallich asserted that the role of the government in the process of derived development is considerably different from the role of the government in originating economic development. Since the motivations of entrepreneurs do not provide the primary stimulus to economic development in less developed coun tries, the government usually plays a primary role. Wallich indicated some of the reasons why the role of the government is typically greater than during the pre- 39Henry C. Wallich, "Some Notes Toward A Theory of Derived Development," The Economics of Underdevelopment, A. N. Agarwala and S. Singh, eds. (London: 6xfdrd tfni- versity Press, 1958), p. 195. 40Ibid. 142 industrial phase of advanced economies.^ 1. In the less developed countries, where private enterprise is weak, development is not likely to go forward rapidly if the government likewise remains passive. 2. A second reason why one must expect more govern ment action in a derived development process is that much of the popular demand for higher living standards, which is one of the characteristics of the process, takes the form of political pressure. 3. A third reason for more government action is that in a development process carried forward by popular demand, a considerable part of total invest ment is likely to be in ’social overhead.* 4. A fourth reason lies in the prospect that sav ings will be low owing to the orientation of the process toward consumption. This suggests that the government will have to use the tax power in order to increase investment. 5. Finally, and perhaps most importantly, one may argue that intervention in the process of derived development is perhaps more suited to the abilities of government than intervention in originating develop ment. Wallich amplified his final observation by pointing out that originating development requires experimentation, imagination, willingness to make changes, and capacity to correct mistakes— virtues which governments do not usually possess. The greatest virtue of government .is organiza tion, he observed, and the process of derived development requires the organized application of existing innovations 41 Wallich, ibid., selected from p. 201. Numbers have been added. borrowed from other economies.^ 143 The rise of economic planning. According to the United Nations, economic planning emerged in various forms about 1930.^ Some underdeveloped countries have adopted the centrally planned procedures initiated by Soviet Russia in 1928 while in others indirect, macro-economic policies were adopted, partly as a result of the depression during the 1930's. Neither type of economic planning was practiced extensively by government during the pre industrial stage of the laissez-faire development of today's advanced economies. However, this observation ignores the catalytic influence of government in the economy during the period of mercantilism. The need of national loyalties. Millikan and Black- mer point out that a development plan not only serves to coordinate development activities, which are undertaken more rapidly than during the pre-industrial phase of advanced economies, but also serves as a vehicle for estab lishing and pursuing national economic goals and for trans- ^^Edward S. Mason supports this point. See "The Role of Government in Economic Development," American Economic Review, Papers and Proceedings, May, I960, p. 637. 43 United Nations, op. cit., p. 54. 144 ferring the loyalties of the people from local to national matters,44 The construction of a potentially successful five year plan requires considerable effort by the govern ment . Size of the economy. There is a possibility that the role of the government is typically larger in a large underdeveloped economy than in a small underdeveloped economy during a given stage of development because small economies are more dependent on international trade which may not be compatible with governmental control of the allocation of resources. Mason indicates that the size of the economy, the density of the population, and probably other physical characteristics of the economy condition the relation of public to private enterprise. No research, however, has been conducted to verify this speculation.4^ Production of capital equipment. At least during the early years of development efforts, production of capital goods is not very attractive to private investors. Consequently, the government may provide metallurgical and engineering facilities, for example, to maintain the tex tile or food processing industries. Heavy industry is even ^Millikan and Blackmer, op. cit. , p. 65. 45 Mason, op. cit., p. 641. 145 less attractive to private enterprise. Investment is very capital-intensive and demand for the output will not be sufficient for many years after production.^6 In the emergence of the now advanced industrial economies, these investments were provided by private enterprise rather than by the government. The decision of the governments of underdeveloped countries to produce capital equipment, of course, results from their dissatisfaction with the rate of growth in their economies. The tendency for the avail able capital to be used in less capital-intensive indus tries, such as light manufacturing, is widely recognized. Opposition to foreign capital. Since underdeveloped countries usually regard foreign private enterprise as evidence of colonial exploitation, they often prevent or limit the amount of foreign capital which might develop the economy. Therefore, the government assumes the capital-providing role of foreign enterprisers. The degree of backwardness. According to Gerschen- kron, the role of the government is proportional to the degree of backwardness in the society initiating develop ment. The more backward an economy, the larger will be the role of the government. Mason comments that the back- 46 A. H. Hanson, Public Enterprise and Economic Development (London: Routledge and kegan I^aul, Ltd., 1959), p T r s s . 146 wardness of an economy can accentuate the role of the government by influencing the motivations and goals of political leaders in a way which requires public action, and by making it possible for government to facilitate the transfer of existing technology.47 These points were dis cussed above. National independence. Illustrative of the rise of new, independent nations is the fact that twelve new nations have been created in the ECAFE region during the postwar period.4® The potential role of new national governments in guiding their own economic destinies has provided a tremendous optimism regarding the possibility of improving their national economic status. Undoubtedly national independence is only one among many causes of the revolution of rising expectations. In any event, national freedom has added to the confidence of national leaders that their economic problems can be solved. Other arguments. Some of the arguments for the increased role of government in emerging economies were 47 Mason, "The Role of Government in Economic Devel opment," op. cit., p. 537. See Alexander Gershenkron, "Economic backwardness in Historical Perspective," op. cit., pp. 3-29. 48Unlted Nations, Economic Survey of Asia and the Far East 1960 (Bangkok: United tf at ions, 1961), p. 53"! 147 discussed in Chapter II. The lack of private venture capital, the scarcity of entrepreneurs in the traditional society, the lack of credit institutions needed for channeling savings into productive investment, the prefer ence for short-term investment, the need to establish development priorities, and the distrust of foreign invest ment were treated as reasons for government participation in the economy but are also reasons why the governments of underdeveloped economies believe they must play a larger role than did the governments in the pre-industrial phase of advanced economies. IV. DATA ON THE TAKE-OFF STAGE OF INDIA AND THE UNITED STATES Data on the Take-Off Stage in India The following data is presented in order to help identify the differences in the role of the government dur ing the take-off stage of the underdeveloped and advanced economies. Unfortunately, some of the data which is avail able for India is of little help because no comparable data for the 1840's is available for the United States. Some 49 helpful comparisons, however, can be made. 49 For statistical data on India see the annual sur veys of the United Nations, the latest of which is the Economic Survey of Asia and the Far East 1961 (Bangkok: United Nations, Economic Commission for Asia"*and the Far East, 1962). The 1960 Survey contains several chapters on Data on the Take-Off Stage in the United States 148 Much of the information which is available on the take-off stage of the United States appears in the Histori cal Statistics of the United States, Colonial Times to 1957 published in 1960, which is a revision of Historical public finance in the postwar period. Also see Wilfred Malenbaum, "India and China: Contrasts in Development Performance," American Economic Review, June, 1959, pp. 284- 309; V. V. Ramanadharo, ^fhe structure of Public Enterprise in India (New York: Asia Publishing fiouse, 1961), 256 pp.; ifnited Nations, World Economic Survey I960 (New York: United Nations, Department of Economic and Social Affairs, 1961), 237 pp.; Clair Wilcox, Willis D. Weatherford, Jr., and Holland Hunter, Economies of the World Today (New York: Harcourt, Brace & World- , fncT, 1962), chap. 51 Adamantios Pepelasis, Leon Hears, and Irma Adelman, Economic Develop ment (New York: Harper ^Brothers, 1961), chap. 13 on India was written by Amlan Datta. Nabagopal Das, Industrial Enterprise in India (2nd edition; Calcutta: Orient Long mans , 1956), 200 pp. P. T. Bauer, Indian Economic Policy and Development (New York: Frederick" A. Praeger, 1961)j T52 pp. Planning Commission, Government of India, The New India (New York: The Macmillan Company, 1958), 412 pp. ’; Government of India, Planning Commission, The Five Year Plan, 1952; The Second Five Year Plan, 1956; Third five Year Plan, Graft Outline, i960 (New t?elhf: Government Printing-Office); D. R. Gadgil, The Industrial Evolution of India in Recent Tiroes (London: Oxford University Press, 1950); Wilfred Malenbaum, East and West in India’s Economic Development (Washington: National Planning Association; 1959), 67 pp. and "India and China: Development Contrasts," Journal of Political Economy. February, 1956, pp. 1-24. Central Statistical Organization, Statistical Abstract and Monthly Abstract of Statistics (New Delhi: Central Statis tical Organization); V. Amsteg, The Economic Development of India (New York: Longmans, Green, 1952); B. Datta, Eco nomics of Industrialization (Calcutta: The World Press, 1957); D. L. Spencer, India— Mixed Enterprise and Western Business (The Hague: Martimas Nijhoff, 1959); M. M. Mehta, Structure of Indian Industries (Bombay: Popular Book Depot, 1955); H. S. Joshi, "The Development Banks," The Indian Economic Journal. January, 1961, pp. 249-257; D. T. Lakdawala, "Contribution of Public Enterprises," Indian Statistics of the United States, 1789-1945. An excellent collection of early economic data is included in the articles edited by Seymour Harris, American Economic His- 50 tory. Unfortunately, data on the composition of gross national product during the take-off stage is not available. V. COMPARISON OF THE TAKE-OFF STAGE OF INDIA AND THE UNITED STATES Population India’s population density is nearly 360 persons Economic Journal. April, 1960, pp. 395-404; S. Kesara Iyengar, "Planning in India (1951-1966),” Annals of Collec tive Economy, January-June, 1962, pp. 59-77; I. M, D. Little, "A Critical Examination of India’s Third Five-Year Plan," Oxford Economic Papers. February, 1962, pp. 1-24. 50 See United States Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1957 (Washington, D. C., 1960); Seymour E, Harris (ed.), Ameri c an Economic History (New York: McGraw-Hill Book Company, Inc., 1961), particularly chapters 2 and 10. W. W. Rostow, The Process of Economic G r o w t h (2nd edition; Oxford: At the Clarendon Press, 1960), Appendix I; John F. Kennedy, Eco nomic Report of the President (Washington: Government Printing Office, 1962), 300 pp.; Solomon Fabricant, The ! Trend of Government Activity in the United States Since i1900 (New York: The National Bureau of Economic Research, Inc., 1952); Raymond Goldsmith and Simon Kuznets, "Income and Wealth in the United States," Studies in Income and Wealth. Series II (New York: National Bureau of Economic Research, Inc., 1952); Davis R. Dewey, Financial History of the United States (12th edition; New York: Longmans, Green, land Co., 1936), especially pp. 223-267; Lewis H. Kimmel, Federal Budget and Fiscal Policy 1789-1958_ (Washington: The Brookings Institution, 1958), pp. 22-25; Sidney Ratner, American Taxation (New York: W. W. Norton and Company, Inc., 1942), pp. 40-47. 150 TABLE III SELECTED ECONOMIC INDICATORS OF THE TAKE-OFF STAGE IN INDIA, 1950-59 Item: Total: Population0 , 1951 ' 1961 Population Increase During the Decade ' Persons Per Square Mile of Land Area 1951 1961 Birth Rate (per 1000 ^ 1951 1961 Death Rate (per 1000 ^ 1951 1961 Life Expectancy in 1951 Per Cent of Children in Primary School* 3 1951 1961 Literacy Rate* 5 1951 : Gross National Product (billion rupees in 1952 prices)^ 1950 1958 Per Capita GNP0 , 1950 (1952 prices) 1958 1958 (current prices in dollars) 1958 (U. S. dollars in 1840 prices) Industrial Origin of National Income, 1950-51 (per cent of total) * 3 Agriculture, Forestry and Fishing Mining, Manufacturing, and Hand Trade Commerce and Transportation Government Services Gross Domestic Capital Formation as A Per Cent of Gross Domestic Product (1950-59)c Annual Rate of Growth of GNPC ^ Per Cent of Gross National Expenciture by the Public Sectore 1950 359, 000,000 438,000,000 22.0 $ 293.8 358.5 40 40 27 20 32 years 40$ 60$ 17$ 101 130 281.3 rupees 302.3 rupees $70 $29 51. 2$ 16. 0$ 17.7$ 15.1$ 3$ 9*: 151 TABLE III (continued) Item:____________________________________ ___________ Total: 1958 16.5# Government Investment as A Per Cent of GRPe 1950 2.7$ 1958 7-1$ i Employment in the Public Sector^ i 1956 4,529,255 i 1958 5,385,519 j i960 6,512,681 1 Working Force by Sectors, 1950-5b* ' 1 ($ of total) Agriculture, Forestry and Fishing 72.4$ lining, Manufacturing and Hand Trade 10.6$ Commerce and Transportation 7*7$ Government Services 9*3$ Per Cent of Public Employment in 1958 by Levels of Governmentf Central Government 35*9$ State Government 42.8$ Government Corporations and Companies 8.5$ Local Government 12.8$ Foreign and Domestic Saving as A Per Cent of Gross Domestic Product, 1950-59^ 8$ Per Cent of Working Force Employed in Agriculture, 1950-51h 72.4$ : Cost of Living in 1958 (1950 = 100)e 115 Miles of Rail Lines in 1955 34,000 Rail Lines Per 1000 Square Miles 28 aThe World Almanac and Book of Facts for 1962. ^Wilcox and others, Economies of the World Today, chapter 5- cUnited Rations, World Economic Survey i960. Malenbaum, "India and China: Contrasts in Development Perform ance, " op« cit«s per capita data derived. United Rations, Economic Survey of Asia and the Far East i960; includes national, state, and local expenditure. ■^V. V. Ramanadham, Structure of Public Enterprise in India 1961, p. 21. ^United Rations, Economic Survey of Asia . . ., op. cit. ^Clair Wilcox and others, Economies of the World Today, op. cit. 152 TABLE IV DISTRIBUTION OF PUBLIC INVESTMENT IN INDIA, 1950-59a Type of Investment: $ > of Total Investment: Transport & Communications 32 Construction (*) Agriculture 29 Industry 13 Energy 8 Health & Education 16 Other 2 aFrom United Nations, Economic Survev of Asia And the Far East i960, p. 75. ^Included under other headings • TABLE V GROSS RATIONAL PRODUCT AND GROSS INVESTMENT, 1950-58s ________G.N.P._____________ ______Gross Investment_______ Billions Rupees Index Billions Rupees Index Year (1952 Prices) (1952=100)_________(1952 Prices) (1952=100) Per Cent of G. N. P. 1950 101 93-4 9-4 88.7 9.3 1951 103.7 95.9 9.9 93-4 9.5 1952 108.1 100.0 10.6 100.0 9.8 1953 114.4 105.8 11.1 104.7 9.7 1954 117.8 109.0 13-4 126.4 U.4 1955 120.1 111.1 1^.5 136.8 12.1 1956 126.1 116.7 16.7 157.5 13.2 1957 126.8 117.3 17.2 162.3 13.6 1958 130.0 120.3 17.5 165.1 13.5 aFrom Malenbaum, "India and China" Contrasts in Development," American Economic Review, June, 1959, P. 287. 153 154 TABLE VI GOVERNMENT EXPEKDITUEE IN INDIA, 1950-58a Government Government Share of Investment in Expenditure Investment Government Expenditure | Year (# of GNP) (# of GNP) (%) 1 1950 9 2.7 29 1951 9 2.9 31 1952 10 3.0 30 1953 10 3.2 33 195^ 12 h.b 37 1955 Ik 5.5 hi 1956 1^ 6.1 h3 1957 16 7.1 hh 1958 16 7.1 h3 aFrom United Nations, Economic Survey of Asia and the I960, ch. 5• ^Includes national, state, and local government expenditure. 155 TABLE VII FUNCTIONAL DISTRIBUTION OF GOVERNMENT EXPENDITURE IN INDIA, 1958a Per Cent of Total Item_________________________Government Expenditure Economic Services 46 Agriculture 8 5 Community Development 9 Transportation & Communications 13 Industry 17 Social Services 16 Education 8 Health 3 Social Welfare 5 General Services 27 Defense 13 Other Expenditures 11 Interest on Debt 4 Pensions 1 aFrom United Nations, Economic Survey of Asia and the Far East, I960, p. 79. 156 TABLE VIII NATIONAL EXPENDITURE ON DEFENSE IN INDIA 1950-1958a Per Cent of Total Per Cent of Year__________ Government Expenditure________Net National Product 1950 20 1.9 1951 20 1.9 1952 19 1.9 1953 19 1-9 1954 17 2.1 1955 14 1.9 1956 13 1.9 1957 15 2.4 1958 13 2.1 aFrom United Nations, Economic Survey of Asia and the Ear East, I960, p. 83. 157 TABLE IX INDICES OF PRODUCTION, EMPLOYMENT, AND PRODUCTIVITY OF MANUFACTURING INDUSTRY AND AGRICULTURE IN INDIA, 1951-1960 (1953 = 100) Per Capita Agricultural Year Production8 , Employment9, Productivity5 , Production*3 1951 95 98 97 - 1952 98 102 96 93 1953 100 100 100 103 195^ 107 102 105 101 1955 116 105 110 100 1956 126 115 110 103 1957 130 117 ill 100 1958 131 115 ilk 103 1959 llj-3 122 117 105 i960 160 -- -- 106 aFrom United Nations, Economic Survey of Asia and the Far East, 1961, p. l6. bIbid., p. Ijb. TABLE X DISTRIBUTION OF EMPLOYMENT IN THE PUBLIC SECTOR8 , (December 31, 1958) CENTRAL GOV'T. STATE GOV'T. GOV'T.CORPS. & COMPANIES Amount Employment $Total ^Industry Employment Amount ‘ /dTotal ^Industry Amount Employment $Dotal ^Industry Agriculture, Live stock, Fishing, etc, 2,450 .1 17.3 11,135 .5 78.7 561 .1 4.0 Mining & Quariying if,050 .2 7.2 78 .lb 4 52,010 11.5 92.6 Manufacturing 85,434 4.4 36.9 ^9,915 2.2 21.6 94,340 20.7 4o.8 Construction 57,983 3.0 12.9 336,918 14.6 74.7 26,373 5.8 5.8 Electricity, gas, water, & sanitary services 1,155 .1 1.4 26,769 1.2 32.3 46,911 10.3 56.5 Trade & Commerce 434 .1* .6 1,529 .7 2.2 67,476 14.8 96.9 Transport, Storage & Communications 1,375,082 ll.l 92.9 36,251 1.6 2.5 42,203 9.2 2.9 Services 405,808 21.0 13.5 1,843,693 79.9 61.4 127,907 28.0 4.3 TOTAL tv-- - „; 1,932,396 100.0C 35.9 2,306,296 100.0° 42.8 P v , n • „ ^ f 457,781 ■n 100.0° 8.5 ^Derived from Ramanadham, The Structure of Public Enterprise in India, p. 21. ^Less than. cDo not add to 100 "because of rounding. % y June i960, public employment was 6,512,681. 158 TABLE X (continuation) Amount LOCAL BODIES Employment $ Total i Industry Amount TOTAL i o of Public Employment Agriculture, etc. — — — ll+,ll+6 .3 Mining, etc. — — — 56,138 1.0 Manufacturing 1,755 .3 .8 231,1+1+1+ 1+.3 Construction 29,711 1 +.1 + 6.5 1+50,985 8.5 Electricity, gas, etc. 8,11+2 1.2 9.8 82,977 1.5 Trade & commerce 202 .03 • 3 69,639 1.3 Transport, storage, etc. 26,186 3.8 1.7 1,1+79,722 27.5 Services 623,060 90.3 20.7 3,000,1+68 55.7 TOTAL 689,056 100.0C 12.8 5,385,519d 100.oc 159 TABLE XI PERCENTAGE DISTRIBUTION OF NON-SERVICES EMPLOYMENT IN THE PUBLIC SECTORa (12/31/58) Description Central Govt. State Govt. Quasi- Govt. Local Bodies Total U. K. Agriculture, livestock, fishing, etc. 0.16 2.4 0.17 - - O.58 --- Mining and quarrying 0.27 0.02 15-77 — 2.38 28 Manufacturing 5.6 10.8 28.6 2.7 9.7 ) Electricity, gas, water and sanitary services 0.08 5.8 14.2 12.3 ) 3.47 ) 15 Construction 3-8 72.8 8.0 45.0 18.8 14 Trade & Commerce 0.03 0.03 20.4 0.3 2.8 — Transport, storage & communications 90.0 7.8 12.8 39.7 62.7 43 TOTAL5 100.0 100.0 100.0 100.0 100.0 100 aRamanadham, The Structure of Public Enterprise in India, p. 23. Non-services employment does not include employees ■who perform administrative functions. ^Totals do not add to 100 because of rounding. 161 TABLE X U EMPLOYMENT IN THE PUBLIC SECTOR December 31* 1958 Increase over Percent Increase Description of Industries______3/3l/56_____________over 1956 Agriculture, livestock, forestry & fishing Mining and quarrying Manuf actur ing Construction Electricity, gas, "water & sanitary services Trade & commerce Transport, storage & communications Services 2,371 20.1 11,830 26.7 58,379 33.7 105,637 30.6 19,132 30.0 34,076 95.8 140,543 10.5 484,296 19.2 From Ramanadham, The Structure of Public Enterprise in India, p. 25- TABLE XIII GOVERNMENT AND PRIVATE INVESTMENT DURING THE SECOND PLAN (l956-6l)a PRIVATE PUBLIC TOTAL Amount f o of Private Investment Amount < f o of Public Investment Amount of Total Investment l o Private Public Agriculture & Community Devel opment 175 7.3 338 8.9 513 8.3 3^.1 65.9 Irrigation 100 1+.2 1+56 12.0 556 9-0 18.0 82.0 Large industries (including power and mining) 617 25.7 1077 28.3 I69I + 27.3 63.6 36.1+ Small industries and other enter prises 100 1+.2 120 3.2 220 3.5 ^5.5 5^.5 Transport and communication 83 3.b 1335 35.1 ll+l8 22.9 5.9 9!+.l Others (social ser vices , residential building, misc.) 925 38.5 J+7^ 12.5 1399 22.6 66.1 33.9 Stocks 1+00 16.7 ------ — 1+00 6.1 + 100.0 — TOTAL 21+00 100.0 3800 100.0 6200 100.0 38.7 61.3 aDerived from V. V. Ramanadham, The Structure of Public Enterprise in India, 1961 Figures are for planned rather than actual investment. , p. 58. TABLE XXV PUBLIC AND PRIVATE INVESTMENT DURING THE THIRD PLAN (1961 -66)a PRIVATE PUBLIC TOTAL Industry Amount $ Private*5 Investment Amount $ Public*3 Investment Amount $ Total Investment i Priv. i Pub. Agriculture, etc. 800 20.0 675 10.9 1,475 14.5 54.2 45.8 Irrigation - - 640 10.3 640 6.3 100.0 Large Industries (including power) 1,090 26.2 2,425 39.1 3,475 34.1 30.2 69.8 Small Industries 275 6.9 160 2.6 435 4.3 63.2 36.8 Transportation & Communications 200 5.0 1,450 23.4 1,650 16.2 12.1 87.9 Others 1,075 26.9 650 10.5 1,725 16.9 62.3 37.6 Stocks 600 15.0 200 3.2 800 7.8 75.0 25.0 TOTAL 4,000 100.0 6,200 100.0 10,200 100.0 39.0 60,8 aDerived from Ramanadham, The Structure of Public Enterprise : for planned rather than actual investment. in India, p. 59. Figures are ^Columns do not add to 100 because of rounding. 163 TABLE XV FUNCTIONAL CLASSIFICATION OF PUBLIC ENTERPRISES3 , Dept, enterprises Boards Corporations Companies Total Pub. Functions Type Total Type Total Type Total Type Total Enterprises Manufacturing Basic & heavy Others 4c lc 5 10c +7cs+7c+44s 68 73 Trade lc 1 #10+8s 9 lc +ls 1 1 12 Finance lc 1 1 1 4c+9s 13 10c 10 25 Insurance lc 1 - - 2c 2 lc 1 1 + Transport *lc+15s 16 - - 3c+7s 10 2c+2cs+2s 6 32 Promotion & development - - - - - - k 5c 5 5 Policy administration - - - - - - 3c 3 3 Electricity 8 c multi purpose l4s 14 7 7 lc 1 _ 22 Construction - _ - - - - lc 1 1 Mining - - - - - - 3c+3cs+3s 9 9 Services & misc. 7c 7 - - - - lep 1 8 TOTAL 45 45 8 s - P TVVU- 8 35 35 106 106 194 Note: c= Central; s = State; p = private *The fifteen State Warehousing Corporations come under Promotion & Development also. •^Promotion & Development also one of its chief functions. |of these,two come under Policy Administration also. 164 165 TABLE XVI SELECTED ECONOMIC INDICATORS OF THE TAKE-OFF STAGE IN THE UNITED STATES (1840-49)a jItem: Total: Population- 1840 17,069,453 1850 23,191,876 1S60 31,443,321 Population increase during the decade— 35.9% Persons per square mile of land area- 1840 9.8 1850 7.9 1860 10.6 Birth rate (per 1000)— 1840 51.8 1860 44.3 1880 39.8 1930 21.3 Death rate (per 1000)— 1860 18.7 1880 19.8 1956 11.0 Life expectancy at birth in Massachusetts- 1850 (male) 38.3 years (female) 40.5 " 1855 (male) 38.7 (female) 40.9 ” |Per cent of population age 5—17 enrolled in public school grades 1-12— 1870 57.0% TABLE XVI (continued) Item: Total: 1880 57.0% 1956 83.6 Literacy Rate- 1870 80.0% 1890 86.7 1910 92.3 1952 97.5 National income — 1839-49 (millions in 1913 prices)1 3 $2,760 1849-59 (millions in 1913 prices) 4,750 1839-49 (millions in current prices) 2,630 1849-59 (millions in current prices) 4,522 1869-73 (Kuznets1 data in current prices) 6,710 1839-49 (millions in 1955 prices) 6,706 1849-59 (millions in 1955 prices) 11,542 Per capita national income— 1839-49 (1913 prices) 133 1849-59 (1913 prices) 174 1839-49 (current prices) 132 1849—59 (current prices 166 1869—73 (Kuznets1 data in current prices) 165 1S39-49 (1955 prices) 335 1849-59 (1955 prices) 422 Wholesale price index (Kenen) — 1840 (1900 - 100) 127 1850 111 1860 109 1910 125 1950 288 1955 304 Industrial origin of private production income, 1838°— Agriculture 35% Manufacturing 10 167 TABLE XVI (continued) iltem: Total: I Contract Construction 6% ' Transportation and Communication 18 I Trade 9 Services 14 ; Misc. and Financial 9 Federal employees-- 1841 18,038 1851 16,274 Government employees, federal, state, local0 — 1900 1,401,000 1910 1,964,000 Per cent of public employment by level of government in 1900c — Federal 31% Civilian 22 Military 9 State and local 69 School 35 Non-School 34 Gainful workers, 1840c— 5,590,000 Per cent of labor force employed in agriculture, forestry, and fisheries0 — 1820 71.9% 1840 68.6 1860 59.4 Per cent of labor force employed in manufacturing0— 1840 14.6% 1860 18.3 168 TABLE XVI (continued) Item: Total: i ideral expenditures (thousands)— 1840 $24,318 1841 26,566 1842 25,206 1843 11,858 1344 22,338 1845 22,937 1846 27,767 1S47 57,281 1843 45,377 1349 45,052 Government expenditure, federal state, and localc — 1903 $1,700,000 1913 3,100,000 Miles of railroad operated— 1830 23 1S40 2,818 1850 9.021 1860 30,626 1957 386,996 Rail lines per 1000 square miles — 1840 .8 1850 2.5 Surfaced mileage of rural roads and municipal streets — 1904 154,000 1920 369,000 1940 1,367,000 1957 2,371,000 aData from United States Bureau of the Census, Historical Statistics of the United States, Colonial Time's"~fd 1957, Washington", D. Co, 1560, unless otherwise noted. 169 TABLE XVI (continued) I i_ | Rostow, The Process of Economic Growth, p. 345. Per j capita figures derived from Martin’s data and by applying the -wholesale price index used by Kenen in I Harris (ed.)f American Economic History, p. 80. Kuznets’ figures from Historical Statistics. t ! Q ' • Kenen, ibid., ch. 3. j 9 -—■ • !per square mile compared with eight persons per square mile j ;in the United States in 1850. Although India is approximately forty-five times as ;densely populated as the United States during the take-off | |period, the population is not growing as rapidly. The r I Indian population growth during the decade prior to 1961 ! I was 21.4 per cent but the American population increased I ;nearly 36 per cent between 1840 and 1850. However, India's 2.15 per cent annual rate of population increase startled the economic planners who had estimated that the increase would be about 1,25 per cent a year. They had estimated that the population would be 408 million in 1961 instead of 438 million. As a result of the new population figures, the increase in per capita income which had been set at 2.2 per cent annually had to be decreased to 1.3 per cent. During the take-off decade in the United States the birth rate was much higher than the current birth rate in India and the rate did not decline to the present Indian Ibirth rate until 1880. The death rate in India is probably about the same as the death rate in Massachusetts during the 1840's but India's death rate has fallen dramatically during the last ten years. At the beginning of the take off stage the death rate was much higher than in the United States. Although India's population is not growing as fast 171 as America's population during the take-off, the signifi cance of the population increase is far greater because of the larger size of the population relative to the resources of the economy. During the middle of the nineteenth century the rate of population growth in the United States was of little concern and, fortunately, was steadily declining. The life expectancy at birth of thirty-two years in India in 1951 is considerably less than the life expec tancy of thirty-eight to forty years in the United States in 1850. However, since 1951 life expectancy has increased in India. Education The earliest figures for the United States (1870) show that fifty-seven per cent of the population between the ages of five and seventeen were enrolled in public schools in grades one through twelve. A roughly comparable figure for India shows that sixty per cent of the children were in primary school in 1961. The per cent of children in primary school has increased by fifty per cent during the last decade, however, which is a much faster increase than occurred in the United States. There probably was no marked increase in the proportion of the school age popula tion enrolled in schools during the take-off period in the United States. The rapid increase in elementary learning 172 iseems to be a phenomenon of modern emerging economies. The rapid increase in learning, of course, requires a rapid increase in government outlays for education. Education is Iprimarily a public responsibility in all economies. The earliest literacy rates for the United States were much higher than current literacy rates for India. i Estimates range from twelve to seventeen per cent for India j |in 1951. In 1870, about eighty per cent of the population in the United States was literate. Gross National Product and Economic Growth Figures for gross national product are not particu* larly useful in themselves. However, GNP per capita and the rate of increase are significant. Relying on Martin's data, used by Rostow, GNP in 1913 prices increased in the United States from $2,760,000 in the 1839-1849 decade to $4,750,000 in the 1849*1359 decade, or an increase of fifty-three per cent. Per capita income in 1913 prices increased from $138 to $174 for an increase of twenty-six per cent. In India from 1950 to 1958 GNP increased from 101 billion rupees to 130 billion rupees in 1952 prices, according to Malenbaum. Extending this rate of growth for a full decade, the rate of increase during the decade was about thirty—three per cent. Per capita income increased from about 281 rupees in 1950 to 304 rupees in 1959, or an 173 increase of 8.2 per cent.51 This is about one-third of the increase in per capita income which occurred in the United States during the take-off period. However, the fact that per capita income increased during the decade is an indi cation that India has actually entered the take-off stage. Per capita agricultural production increased fourteen per cent. The rate of increase in GNP was considerably less in India than in the United States but this is not very significant because the rate of population growth was also much less. Government Employment In 1900, the earliest year for which figures are available, employment by all levels of government in the United States was 1,401,000. Employment in the public sector, thus, was 1.8 per cent of the population of 75,994,575 and 5.1 per cent of the labor force. However, the figures used by the Bureau of the Census for the labor force in 1900 are undoubtedly too low because the esti mated population is about fifty per cent higher than the census figures. If the labor force was actually about 41.5 million rather than 27.6 million, public employment was 3.4 51This estimate is about a third lower than the fig ures used by India's economic planners whose data shows an annual increase of 3.5 per cent in GNP and an annual per capita increase of 1.3 per cent. See Wilcox and others, op. cit., p. 123. 174 per cent of the labor force. In 1840, the federal govern ment employed 18,038 persons, which was only .3 per cent of the gainful workers. According to the report of a study by the Indian Ministry of Labour and Employment, Employment in the Public Sector, published in 1959, employment in the public sector by all levels of government, including government corpora tions and government companies, was 5,385,519 which is 1.3 per cent of the estimated population in 1 9 5 8 . In 1960, public employment had increased to 6,512,681 which was 1.5 per cent of the population. Thus, employment in the public sector increased twenty-one per cent between 1958 and 1960. It had previously increased 18.9 per cent between 1956 and 1958. According to Wilcox, 9.3 per cent of the working force provided government services in 1950-51. If Wilcox' definition of the labor force is sufficiently narrow, the difference between these estimates might be slight but it appears to be too great to ignore. Ramanadham estimates the total working force at 160 million, approximately 36.5 per cent of the population. Total employment in the public sector at the end of 1959 was approximately 6.4 million, or about four per cent of the labor force. Excluding the portion of public employ- 5Ramanadham, The Structure of Public Enterprise in India, op. cit., pp. 21-30. 175 ment engaged In providing administrative services, Ramanadham concludes that only three per cent of the labor force is employed by public enterprises as opposed to ten to twelve per cent in the United K i n g d o m .53 In 1900 the federal government employed thirty-one per cent of all public employees, civilian and military, in the United States. This proportion is still about the same in the United States. According to the Ministry of Labour and Employment, the Indian central government employed 35.8 per cent of all public employees in 1958. Thus, the relative roles of different levels of government in the United States is about the same as in India. In order to arrive at comparable figures, the per cent of the population in the labor force may be assumed to be the same in each economy. Ramanadham estimates that 36.5 per cent of the population is in the labor force and that four per cent of the labor force is employed by govern ment in India. If the labor force were the same per cent of the population in the United States in 1850, there were approximately 8.5 million workers. Assuming federal employment was thirty-one per cent of public employment in 1850 as it was in 1900, public employment was 58,187 which was .7 per cent of the labor force. This is only one-sixth of the portion of the labor force in the public sector in 531 bid. , p. 3. 176 India. In addition, employment in the public sector in India has recently increased much more rapidly than the population and the labor force. The study by the Ministry of Labour and Employment indicated that the state governments in India employed more public employees than any other level of government. The state government hired 42.8 per cent, the central govern ment 35.9 per cent, local bodies 12.8 per cent, and government corporations and companies 8.5 per cent of total public employment at the end of 1958. The central government provided 92.9 per cent of the public employment in transportation, storage and communications while the state governments provided only 1.6 per cent. In manu facturing the central government provided 36.9 per cent of the public employees and the state governments provided 21.6 per cent. Government corporations, however, provided 40.8 per cent of the public employment in manufacturing, which is more than any level of government provided. The state government dominated public employment for providing government services and in the agriculture, con struction, and public utility industries. State government provided 78.7 per cent of the public employment in agricul ture, 74.7 per cent in construction, 61.4 per cent in government services, and 32.3 per cent in electricity, gas, water and sanitary services. In each of these industries 177 the state government dominated public employment. Government corporations and companies provided 92.6 per cent of the public employment in mining and quarrying, 96.9 per cent in trade and commerce, and 56.5 per cent in electricity, gas, and water industry. Local bodies pro vided less public employment in every industry than the other types of institutions considered. Local bodies provided a larger share of public employment in the govern ment services industry (20.7 per cent) than in any other industry. Ninety per cent of the public employees of local bodies were employed to perform government services. As would be expected, most employees of the central government were in the transportation, storage and communi cations industry. Most state government employees were engaged in providing government services. Surprisingly, more employees cf government corporations and companies (28 per cent) performed government services than any other function. Employment in Agriculture and Manufacturing If the figure in the table above is reliable, the per cent of the Indian labor force employed in agriculture in 1950 was about the same as in the United States in 1840. Each had about seventy per cent of the labor force in the agricultural industry. However, other estimates for India are as high as eighty-five per cent which leads one to con- 178 i | |clud6 that India has probably not reached the degree of j industrialization achieved by the United States by 1840. It is perhaps too early to determine whether the per cent i of the labor force in agriculture is decreasing signifi- jcantly. During the two decades of the take-off in the j United States, between 1840 and 1860, the per cent of the I labor force in agriculture, forestry, and fisheries i SA jdeclined substantially from 68.6 to 59.4 per cent.0* In 1840 in the United States 14.6 per cent of the labor force was in manufacturing and hand trades while the comparable figure for India in 1950-51 was 10.6 per cent. This also indicates that India in 1950 was not as industri alized as the United States in 1840. No figure is avail able for the portion of the labor force in commerce and transportation in the United States. Sectoral Distribution of Income The data for the industrial origin of national income in the two economies are not exactly comparable. i The figures for the United States measure private production income while the figures for India measure national income, which includes incomes paid by government. However, the existence of differences, if not the size of the dif- 54 LebergottTs figures for the gainful workers in agriculture in 1840 work out to 63.9 per cent. See Harris, American Economic History, op. cit., p. 282. 179 ferences, will be indicated by comparison. Perhaps the most significant difference is that the value of agricul tural output relative to the value of total oujbput is significantly higher in India than in the United States during 1840. In other words, considerably more of national income originated in the agricultural sector in India than was true for the United States in 1840. Manufacturing in the United States provided for a share of income perhaps twenty per cent larger than in India. The data on the industrial origin of national income also gives some hints about the relative distribution of incomes in the emergence of India and the United States. In each of the two economies about seventy per cent of the population was in the agricultural sector. In India, the agricultural sector received fifty-one per cent of the national income while during the emergence of the United States the farmers received only thirty-five per cent of the private income. The farmers in the United States, therefore, bore much more of the burden of industrializa tion than the Indian agricultural sector. The level of living of the average Indian, however, is less than one- half the level of living of the average American in 1840. In India, the transportation, manufacturing, and commerce industries employed eighteen per cent of the labor force and received 33.7 per cent of the national income. 180 In the United States these industries employed roughly twenty-two per cent of the labor force and received forty- three per cent of the private income. Government Expenditure In 1903, the combined expenditure of the federal, state, and local government in the United States was $1.7 billion in current prices, which was seven per cent of the GNP. By 1913, combined expenditures had increased somewhat to about 8.6 per cent of GNP. In 1903, federal expendi tures were 29.7 per cent of total government expenditure and were 2.29 per cent of GNP. State and local expendi ture is not available for years prior to 1903. Between 1839 and 1849 federal expenditures in the United States annually averaged $30.8 million in current prices. Assuming federal expenditures were 29.7 per cent of total government expenditure between 1839 and 1849, as they were in 1903, the combined annual expenditure of fed eral, state, and local government during the decade was $103.4 million. Thus, combined government spending was about 3.9 per cent of national income annually between 1839 and 1849. In contrast, the expenditures of the public sector in India between 1950 and 1958 increased from 9.3 per cent to 16.5 per cent of GNP, according to the United Nations. Further increased expenditure is indicated by the twenty- 181 one per cent Increase In employment in the public sector between 1958 and 1960. This is the first conclusive evi dence among the economic indicators previously considered that the role of the government in the economic develop ment of India is substantially greater than was the role of the government in the industrialization of the United States. The Central Statistical Organization (CSO) indi cated that the share of the government in national income was 10.8 per cent in 1957-58. This percentage has undoubtedly increased because of the rapid increase of public investment in government companies and other forms of public enterprise since 1958. However, the estimate is significantly lower than the estimates by the United Nations for 1958. CSO estimated that 4.5 per cent of net domestic product originated in public enterprises in 1958. Ramanad ham indicates that this figure is misleadingly small because a much larger portion of the economy is "amenable" to the public sector. He includes mining, factory estab lishments, commerce, and transport and communications as industries "amenable" to the public sector.®® These industries provide 26.1 per cent of net domestic product. 55 Ramanadham, The Structure of Public Enterprise in India, op. cit., p. 3. 182 We might conclude, therefore, that the public sector in India will be somewhat larger than the twenty per cent in Britain and the twenty-five percent in the United States by the time India reaches economic maturity. For purposes of comparison, however, the important point to observe is that government expenditure in India was three times as large (12.9 per cent of GNP) as government expenditure in the United States (4.2 per cent of national income) during the take-off period. Government Investment Although comparable figures for the United States are not available, the share of investment in the increased government expenditure in India has been large. According to Malenbaum, gross investment nearly doubled between 1950 and 1958 while gross national product rose about thirty per cent. Gross investment rose from 9.3 to 13.5 per cent of gross national product. Data collected by the United Nations indicated that spending by central, state, and local governments in India increased from nine to sixteen per cent of gross national product while government investment rose from 2.7 to 7.1 per cent of gross national product between 1950 and 1958. Much of the increased government spending, in other words, was investment spending. As a result, the share of investment in government expenditure increased from twenty- nine to forty-three per cent. The transport and communications industry received a larger share of the government's investment than any other industry. Nearly one-third, thirty-two per cent, of the total government investment went to the transport and communications industry between 1950 and 1959. Agricul ture’s share of twenty-nine per cent was only slightly smaller. This indicates India's stress on agriculture rather than heavy industry. Industry received thirteen per cent and health and education received sixteen per cent. While agriculture received a larger share of govern ment investment than industry in 1958, industry received a larger per cent of government expenditure than agriculture. Agriculture received* nine per cent and industry seventeen per cent of total government expenditure. Forty-six per cent of total government expenditure was for economic services, sixteen per cent for social services including eight per cent for education, and thirteen per cent for defense. Additional Comments Investment in the second and third plans. While there is no comparable data for the United States, the role of the government in investment spending is conveniently 184 Indicated by the data in the second and third five year plans. Although the total amount of government investment spending is fifty per cent (a total of $15.2 billion) larger in the third plan, the government does not provide a larger share of total investment. During the second plan the government expected to provide 61.3 per cent and during the third plan expects to provide 60.8 per cent of total investment. Actual government investment was some what smaller than expected during the second plan. In agriculture, transport and communication, and small industries the government is decreasing its share of investment spending during the third five year plan. In irrigation, large industries (including power and mining), social services and residential building, and ownership of stocks the government is increasing its share of investment spending under the third plan. Distribution of public enterprises by industry. The government company is the most common form of public enter prise in India. Of 194 public enterprises 106 are govern ment companies, forty-five are departmental enterprises, thirty-five are government corporations, and eight are boards. Government companies are usually manufacturing enterprises. Of 106 government companies sixty-eight are manufacturing concerns, ten engage in trade, and nine in mining. Nearly all of the boards serve in the field of 185 electricity and multi-purpose projects. Host of the government corporations are financial, transportation, or trading enterprises. Three-quarters of the departmental enterprises are in the transportation and electricity industries. Railroads. During the 1840’s in the United States the number of miles of railroad operated approximately tripled, but even in 1850 there were only 2.5 miles of rail lines per one thousand square miles. India now has twenty-eight miles of rail lines per one thousand square miles. The United States did not reach this amount until about 1880. From forty to fifty years were required to build railroad mileage comparable to India's today. Thus, India's emergence is facilitated by a much more adequate rail system than existed in the United States during the early part of the take-off period. VI. SUMMARY AND CONCLUSIONS The Take-Off Stage in Developed and Emerging Economies The evolution of an economy to a condition known as the take-off stage, in which ten per cent or more of national income is devoted to investment and a high rate of economic growth is maintained, is different today from the evolution of currently advanced economies a century or so ago. Population density is greater, the level of 186 scientific and technological knowledge has tremendously increased, the cultural characteristics of the countries are typically less suited to industrialization, and the advent of mass communications systems has led to consump tion-oriented rather than production-motivated development. There are other significant differences. Per capita income is from seventy to eighty-five per cent less in the emerging economy, the gap in per capita income between contemporary emerging and developed economies is far greater, the emerging economies have not experienced an intellectual and social revolution, and the rate of economic growth is typically much less per capita. The populations are typically much larger and the rate of population growth much greater, than during the take-off of advanced economies. The crude birth rate is higher, the crude death rate is lower, and there is less oppor tunity for emigration. These differences result in a different role for government in the process of economic development. Reasons for A Larger Public Sector in Emerging Economies The awareness of the possibility of economic devel opment, known as the demonstration effect, coupled with the different conditions of emergence into the take-off stage, usually results in a larger role for government in the development process than occurred in the economies which 187 emerged earlier. There is a conscious, public desire for a faster rate of economic growth, the public demand for welfare programs is larger, public enterprises are often considered more accountable to the public than private enterprises, the need for curtailing luxury consumption is widely recognized, and the liberal ideals of socialist critics of capitalism have been widely adopted by reformers. In addition, the government is better suited to the organized application of existing innovations than it is to originating innovations, the techniques of economic plan ning have been utilized for government participation and direction of the economy, and national institutions have been conceived as devices for replacing local loyalties with national loyalties. Private enterprise is typically weak, large amounts of capital goods are needed before the mar kets have developed, and the spirit of nationalism often excludes foreign loanable funds and increases the desire to lessen national poverty. In short, economic develop ment today is a national goal whereas it was an incidental by-product of profit-making during the emergence of most advanced economies. The Take-Off Stage in India and the United States India's population is much larger and more dense than the population of the United States during the take off period, but India is not growing as rapidly as the 188 United States even though it is growing faster than the typical underdeveloped economy. The birth rate in the United States was higher than in India but was unusually high. The death rate in India has declined to about the level which existed in the United States in 1840. Life expectancy was about twenty-five per cent higher in the United States. The literacy rate in India in 1951 was at least seventy-five per cent less than in the United States in 1840. The proportion of the children in primary school is similar to that of the United States but has increased at least fifty per cent during the last decade. There was probably no comparable increase in the United States. Per capita GNP in India is less than one-half as high as in the United States in 1840 and the rate of economic growth in per capita income was only one-third as high. However, per capita income in India increased about eight per cent during the decade. Public employment seems to be about six times as large in India relative to the labor force as it was in the United States in 1850. In addition, it has increased about twenty per cent bi-annually since 1956. The ratio of employment at various levels of government to public employment was about the same in each economy. Government corporations and companies employed only thirteen per cent 189 of public employment in India. About seventy per cent of the labor force of both economies was in agriculture but some estimates for India have been higher. This ratio declined rapidly before 1860 in the United States but there is no similar decline yet observable in India. Approximately fifty per cent more national income derived from agriculture in India than in the United indicating that the agriculture sector bore a larger share of the burden of industrialization in the United States. Manufacturing and other non-agriculture industries received a larger share of national income in the United States than in India. Government expenditure was about four per cent of GNP in the United States and increased from about nine to sixteen per cent in India which is the most conclusive evidence that the role of the government is substantially higher in India. Only 4.5 per cent of net domestic pro duct originated in public enterprises but this will be increased perhaps six times if present plans are carried out. A large portion of the increase in government expend iture was for investment. As a result, government invest- , ment became a fifty per cent larger share of government expenditure. In the second and third plans the government was scheduled to provide about sixty per cent of total investment. No comparable data is available for the United States. The United States did not acquire the amount of rail lines per thousand square miles which now exist in India until about 1880. This was a period of rapid construction of railroads. There was no significant expansion of rail facilities in India during the 1950*s. Over one-hrlf of the public enterprises in India are government companies and over two-thirds of these are manufacturing concerns. The government of the United States did not engage in manufacturing during the 1840fs. Conclusion The three tasks set forth at the beginning of the chapter may now be reconsidered. The first task was to determine whether the government of India is playing a larger role during the take-off period than did the govern ment of the United States. This can be answered affirma tively. Government expenditure is four times larger in India, government employment six times larger, and the government owns and operates a significant number of manu facturing and other enterprises although their output and employment is relatively small. Toward the end of the decade, government expenditure for education was probably approaching the proportion which existed in the United States in 1840. Moat of the public enterprises may be called public utilities. 191 The second task was to compare the rate of growth of each economy during the two decades. India did not even come close to the rate of growth in the United States in spite of the fact that the population was increasing nearly seventy-five per cent faster in the United States. In India, GNP increased thirty-three per cent as opposed to fifty-three per cent in the United States. Per capita income in India increased eight per cent while in the United States the increase was twenty-six per cent. The third task was to consider whether the increased role of government was necessary in India in order to achieve a rate of growth equal to the rate of growth in the United States during the take-off period. Obviously, the Indian economy was not able to match the growth of the economy of the United States. The increase in the amount of government spending needed to match the growth of the United States, however, might not be as large as seems necessary at first. With public expenditure averaging 12.5 per cent of GNP during the decade, up 3.5 per cent from the start of the decade, the rate of growth might be approximately tripled by increasing the average annual public expenditure to 19.5 per cent of GNP, assuming the population growth was equivalent. In any event, the increased role of government clearly cannot be attributed to a faster growth rate in 192 India than in the United States during its take-off. Furthermore, an even greater amount of government spending would be necessary, in the absence of other successful economic policies to encourage economic development, in order to triple the rate of growth to the twenty-six per cent per capita growth rate of the United States. General izing from the case of India and the United States, the economic role of the government must be much larger in underdeveloped countries today in order to approximate the rate of economic growth which prevailed during the pre industrial phase of advanced economies. As was noted earlier, there is no convenient method for comparing the rate of combined public and private investment spending in India with that of the United States. The increased role of government in India may not have offset the smaller role of private investment. In addition, the effect of the increased role of government may have a delayed influence on GNP which is not yet fully observable. Finally, the government of the United States or India may have performed a role which has not been indi cated by the statistical measures utilized.56 Special c/s See Carter Goodrich (ed.), Canals and American Economic Development (New York: Columbia TJniversify Press, 1^62) , and American "Canals and Railroads (New York: Colum bia University Press, I960)Ragnor Nurkse, Problems of privileges and restrictions on private enterprise can significantly influence the rate of economic growth and would not be indicated by the amount of public employment, expenditure, or investment. Capital Formation in Underdeveloped Countries (Oxford: Basil Blackwell, 1553), p. 153 and the references cited; and Nathan Hiller, The Enterprise of A Free People: Aspects of Economic Development in New York State During the Canal Period (Ithaca: Cornell~tfn~fversi~t~y Press , 1962) , 253 "pp1 ; CHAPTER V PRINCIPLES OF THE GOVERNMENT CORPORATION The economic needs which are satisfied by government economic activities were considered in Chapter II along with the functions of government corporations. The next task is to determine, as precisely as possible, what a government corporation is and why a government might choose to use the corporate organizational form rather than some other institution, such as the executive department, for accomplishing its economic objectives. Consequently, the purpose of this chapter is to: (1) formulate an internationally applicable definition of the government corporation; (2) identify the most significant characteristics of the government corporation; (3) indicate the reasons for creating government corpora tions, and (4) consider the public purpose of government corporations. I. DEFINITION The Corporation The use of the word corporation, when referring to government corporations, suggests a similarity between an 194 195 incorporated private enterprise and an incorporated public enterprise. Consequently, a discussion of the corporation may serve as an appropriate introduction to a definition of the government corporation. In English and American common and statute law, a corporation is A body politic or corporate formed and authorized by law to act as a single person, and endowed by law with the capacity of succession; an entity recognized by law as constituted by one or more persons and as having various rights and duties together with the capacity of succession; a juristic person constituted by one or more natural persons.1 A corporation is generally regarded as a juristic person distinct from the person or persons composing it. Some authorities, however, reject the concept of a person existing by legal fiction and hold that the corporation is a number of natural persons acting under special rules of agency, or presentation, and is governed by special rules of succession. Authorities at the other extreme hold an anthropomorphic theory which regards the corporation as having a true personality other than the sum of its mem bers, which is not created, but merely recognized by the law. Many difficult legal problems center around the ^W. T. Harris (ed.), Webster’s New International Dictionary (Springfield; G. C.' lAerriam Company, 1927), p. src:------- 196 question of whether the corporation is an entity or a group of persons. In practice, both interpretations are used. In some cases, natural persons are held to be separate from the legal person. In other cases, owners and managers are held liable when their individual actions harm other owners, creditors, or the public. Taylor combines these views of the corporation. A corporation is an association of mutually agreeing persons, natural or legal; it is an autonomous legal unit, distinct from its associating members in name, in the duration of its life, and in its liability to creditors; it exists because the state has by statute enabled it to exist.2 The definition which is most commonly accepted in judicial decision is that of the Dartmouth College Case in which Chief Justice Marshall observed that "a corporation is an artificial being, invisible, intangible, and existing q only in contemplation of the law." The law distinguishes between a corporation sole, a corporation with only one member, such as a bishop in Eng land, and a corporation aggregate, which has two or more members. There also are several legal classifications according to the functions of corporations. An ecclesi- 2W. Bayard Taylor, Financial Policies of Business Enterprise (New York: D. Appleton-Century Company, 19^57, pY "29.---- 3 U. S. 518, 636 (1819). Also see Scott Buchanan, The Corporation and the Republic (New York: Fund for the Republic, 1958), pp. 3-6. 197 astical corporation, for example, Is concerned only with religious matters and consists only of spiritual persons. Lay corporations include all others. Lay corporations include eleemosynary corporations, those created for charitable purposes such as hospitals and asylums, and civil corporations. Civil corporations are divided into public corporations, sometimes called municipal corpora tions, and private corporations, which include ordinary businesses as well as those chartered to follow a public calling or to render those services essential to the public convenience or safety. Today the latter are called public utilities or, in legal terminology, public-service corporations or quasi-public corporations. Some organiza tions have some of the qualities of an artificial person even though they are not legally incorporated. These organizations are known as quasi corporations while those with full powers as a legal entity are known as complete corporations. In England, the term "company" is used rather than the term "corporation" when referring to business enter prises. As generally used in England the term, company, includes corporation, guild, joint-stock company, and partnership (as these terms are used' in the United States), while the term, corporation, is reserved for non-business enterprises. 198 Haney interestingly grouped corporations into two categories— economic and non-economic. The non-econotnic category included quasi-political, eleemosynary, educa tional-scientific, religious, and social-fraternal corporations. He divided economic corporations into two major groups, according to their tendency toward monopoly, each group having several sub-groups.4 The Government Corporation There is no commonly accepted definition of a govern ment corporation. In 1939, Leonard D. White recognized the difficulty of constructing a definition.5 There is no generally accepted definition of the government corporation. Analysis of these corpora tions reveals no simple or uniform type of corporate structure. They vary in the method of incorporation, in their relation to the central administrative struc ture, in the degree of operating independence, in the source of their capital funds, and in their internal organization. Some writers, such as Hanson** and Dimock,7 give no defini tion and are content with a listing of the common charac- 4Lewis H. Haney, Business Organization and Coabina- tion (revised; New York: The MacMillan Company, 1921), p. 9TT 5Leonard D. White, Public Administration (New York: The MacMillan Company, 1939), p. 128. g Hanson, op. cit., p. 343. Marshall E. Dimock, Business and Government (third edition; New York: Henry Holland Company, 1957), pp. 402- 427. In the second edition Dimock lists six characteris tics . 199 teristics of government corporations. Others give con flicting definitions. Ramanadham, for example, defines a public corporation® As a nationalized industry which is not organized as a department of Government, nor run by a local authority, nor given joint stock company form and which operates on the principle of financial self- support. This definition is weak because it is negative, emphasiz ing what is not a government corporation, and because there obviously are many government corporations in the world which are not in a nationalized industry. The United States has no nationalized industry but has numerous institutions which are called government corporations. The Dartmouth College case not only defined a corporation, but also distinguished between public and private corporations.® The Supreme Court held that Dart mouth College, under a charter granted by the British crown in 1769, was a private corporation whose charter was not dissolved by the Revolution and, therefore, being a private corporation, that it was not liable to the control of the legislature of the state of New Hampshire. Thus, the g V. V. Ramanadham, Problems of Public Enterprise (Chicago: Quadrangle Books'^ 1909), pp. 10—11. 9 For a thorough analysis of the legal definition of a public business, see Ford P. Hall, Concept of Public Business (Bloomington: The Principia Press, Inc., 1940), pp. 90-157. 200 decision asserted that the state legislature had no consti tutional right to alter the charter without the consent of the corporation because such action would violate the sanctity of the contract. The decision rested, in part, Ion whether Dartmouth College was a public or private i i (corporation and Justice Story's distinctions between public I ! jand private corporations are often quoted. I Early in the history of the United States, there fore, Justice Story contributed to legal clarity but logical confusion by his remarks in which he seemed to make ownership the legal criterion for distinguishing pri- 10 vate corporations from public corporations. Public corporations are generally esteemed such as exist for public political purposes only, such as towns, cities, parishes, and counties; and in many respects they are so, although they involve some pri vate interests; but strictly speaking, public corpora tions are such only as are founded by the government for public purposes, where the whole interests belong also to the government. If, therefore, the foundation be private, though under the charter of the government, the corporation is private, however extensive the uses may be to which it is devoted, either by the bounty of the founder or the nature and objects of the institu tion. For instance, a bank created by the government for its own uses, whose stock is exclusively owned by the government, is in the strictest sense, a public corporation. So a hospital created and endowed by the government for general charity. But a bank, whose stock is owned by private persons, is a private corpo ration, although it is erected by the government and its objects and operations partake of a public nature. Justice Story's observation that a bank is a private 10 Wheaton 518, 561 (1819). 201 corporation if it is owned by private persons suggests that the presence of any private owners makes a corporation private. Thus, in this decision ownership is the criterion for distinguishing between public and private corporations rather than other criteria such as the public or private status of the incorporators. Hornstein also assumes a government corporation is completely owned by the govern ment. ’ ’ The Government Corporation . . . resembles the one-man corporation since all of its shares are owned by a single shareholder (the federal government). . . . This interpretation seems to have been used in the Government Corporation Control Act of 1945 in which the most restric tive provisions apply only to wholly-owned government corporations. Justice Story's comments indicate, also, that a pri vate corporation may have public functions and, therefore, that the functions of a corporation do not determine whether it is public or private. As a result, the legal definition of the government corporation in the United States is so narrow that many corporations, which were created by special act of the 11George D. Hornstein, Corporation Law and Practice (St. Paul: West Publishing Co.“ 1959)” !T| 25. 202 legislature and are commonly known as government corpora tions, are legally considered private corporations. The Emergency Corporations of World War I, for example, were legally private corporations.12 Consequently, the narrow legal definition in the United States is not used in prac tice throughout the world because ownership is not a universally applied criterion for distinguishing private corporations from public corporations. In the United States for example, the government does not own the Federal Land Banks. In Allegheny Co. v. Diamond Market (123 Pa. 164, 16 Atl. 619), the public corporation was held to be one that cannot carry out the purposes of its organization without certain rights under its charter from the commonwealth and that private corporations are those that need no franchise from the state to accomplish these purposes. The concep tual clarity of this distinction, however, has been questioned by some authorities.12 In his comparative analysis, Friedmann broadly defined the public corporation as1^ 12Daniel L. Spencer, India., Mixed Enterprise and Western Business (The Hague: Martinus Ttfijhoff, 1959), p. TV. Seidman disagrees with Spencer on this point. 13 Francis Rawle, Bovier’s Law Dictionary (St. Paul: West Publishing Co., 1914TJ I, "694. 14Wolfgang Friedmann, The Public Corporation (Toronto: The Carswell Co., L^sTJ 1954), "p. 441. 203 An institution operating a service of an economic or social character, on behalf of the government, but as an independent legal entity; largely autonomous in its management, though responsible to the public, through government and parliament, and subject to some direction by the government; equipped on the one hand with independent and separate funds of its own, and the legal and commercial attributes of a commercial enterprise. This is probably the most careful definition of the many definitions which have been advanced. Friedmann does not fall into the error of making public ownership a criterion of the public corporation. However, a government corpora tion may produce goods as well as services. The Brownlow Commission also described the public corporation in a manner which sometimes is loosely called a definition. Its particular value lies in freedom of operation, flexibility, business efficiency, and opportunity for experimentation. . . . Particularly in the case of permanent, as opposed to emergency, corporations, free dom of operation finds justification in the fact that they are financially self-sustaining. The balance sheet incentive is present to insure efficient and economical administration without the imposition of the usual Government controls. The first statement of the Brownlow Commission points out an advantage of the government corporation, presumably over the government department. The second 15 President’s Committee on Administrative Manage ment, Report With Special Studies (Washington: Government Printing Office, i\TJY), p. 3lF2. 204 statement is not universally accurate because some public corporations can finance themselves by levying taxes, such as in New York, while others are regularly subsidized from tax revenues. The final statement of the Commission suggests an early fallacious assumption that balance sheet accounting increases the incentive of employees and the efficiency of the government corporation, Finally, the definition is of little help in distinguishing public corporations from private corporations. In 1937, Thurston defined the government proprietary corporation ”as a corporation engaged in the operation of a business enterprise, in which the government holds either the entire or a controlling interest.”-*-® In his study, Thurston did not include corporations in which the government held less than a majority of the stock and appointed less than a majority of the directors. Two years later, Weintraub dismissed the word "proprietary” from the definition.17 The adoption of the word proprietary into the title was intended by Mr. Thurston to refer to activities of the government which are commercial as distinguished from those which are purely governmental. It will be 16 John Thurston, Government Proprietary Corporations in English-Speaking Countries (Cambridge: Harvard tfni- versfty Press, 1937) , p. TT. 17 Ruth G. Weintraub, Government Corporations and State Law (New York: Columbia University "Press’, 1939) , p. t s:-------- 205 seen that many of the government corporations are set up with mixed motives. The elimination of soil erosion is one of the purposes of the T.V.A., but so equally is the sale of electrical energy. The first may be considered governmental, the second pro prietary. . . . The term is therefore too narrow to be accurately applied to many government corporations. Similarly, Weintraub excluded the term "government- owned corporation" because there were some corporations which were "neither entirely government owned nor subject 1 8 to a board of directors chosen by the government," even though created and closely controlled by the government. Therefore, she adopted the term "government corporation." Thus, Weintraub supports the contention made above that a definition cannot accurately state that the government corporation is either completely or partially owned by government, In much of his writing, Hanson has not attempted to define a government corporation. However, several dis tinguishing features which might be considered a definition are identified in a report prepared for the government of Turkey.19 A public enterprise (a) is working or should be working, in accordance with a state plan for the pro motion of economic growth, (b) derives its capital from public funds or from publiclv-guaranteed loans, 18Ibid. 19 A. H. Hanson, "Some General Proposals for the Reorganization of the State Enterprises" (unpublished article, N.D. ), p. 1. 206 (c) is run by managers who are state-appointed, and (d) is therefore a part of the apparatus of government, and ultimately subject to political control. It is not half inside government and half outside; it is wholly inside. The latter sentence of Hanson's definition has the whole hearted agreement of Robson who has asserted that ’ ’ the government corporation is, however, not an autonomous institution and was never intended to be."^® The first distinguishing feature does not apply, for example, to government corporations in the United States, which are not subject to the administrative jurisdiction of a plan ning commission. There is no formal economic plan such as there is in India, Pakistan, and other centrally planned economies. Hanson suggests, in addition, that some govern ment corporations are quite independent of the planning commission or are themselves the major planning organiza tion. This distinguishing feature, therefore, is not sufficiently universal to be included in a definition. The second distinguishing feature has already been discussed. Government corporations are not universally owned by the state. The third distinguishing feature is also not uni versal. The boards of many government corporations have directors appointed by the private owners, such as in the nationalized corporations of France. The final disting- 20 William A. Robson, Nationalized Industry and Public Ownership (Toronto: University of Toronto Press, 1960), p. 74. 207 uishing feature noted by Hanson is ambiguous because both public and private corporations are ultimately subject to political control. There is a difference in the degree of political control applied, however, which has been 21 pointed out by Ramanadham. The common feature of most descriptions is that it combines private status and ability with public purpose and responsibility. The latter is not wholly absent in the case of private enterprise; but it is dependent on the interpretation of public purpose by private businessmen, governmental persuasion and, in the end, government regulation, ad hoc or otherwise. Private corporations are left relatively free to exercise their self interest with the hope that competition will serve as the automatic regulator, while government corpora tions are subject to numerous regular controls, often because of the absence of competition. Thus, Hanson's final distinguishing feature is significant although not expressed well. Under the General Incorporation Law in New York the term "public corporation" includes: (1) a municipal corpo ration, such as a county, city, town or school district; (2) a district corporation, such as any territorial sub division other than a municipal corporation, which possesses the power to levy taxes, or to require the levy of taxes, and the power to contract indebtedness; and (3) a public benefit corporation, which is organized to 21 Ramanadham, op._ cit. , p. 22. 208 construct or operate a public improvement, the profits from which benefit the state or the people of the state.22 The public authority is a public benefit corporation, as defined by the General Incorporation Law in New York. Twenty-eight of the thirty-three active public authorities are called public benefit corporations in the enabling acts.23 Formulating an acceptable definition is made diffi cult by the broad interpretation of the term "public corporation" in New York State. The municipal corporation and district corporation, for example, are not created by special act of the legislature as is the public benefit corporation. Moreover, they can finance themselves by levying taxes, directly or indirectly, which public benefit corporations cannot do. Thus, a definition which states that government corporations are created by special legis lative act or executive degree would not be accurate because municipal and district corporations in New York State are not created by either of these methods even though, under New York laws, they are public corporations. Similarly, a definition which states that a government 22State of New York, Staff Report on Public Author- ity— Authorities Under New York" State, Report of the Temporary State dotnmission on Coordination of State Activ ities (Albany: State of New York, March 21, 1956), p. 63. 23Ibid., pp. 65-66. 209 corporation is self-supporting would not be accurate because district and municipal corporations are financed by tax revenues and because many government corporations are subsidized. Perhaps the less specific language of President Roosevelt in his message to Congress of 1933 makes his definition more workable. President Roosevelt indicated that the Tennessee Valley Authority would be A corporation clothed with the power of government but possessed with the flexibility and initiative of a private enterprise.24 Friedmann feels that this is the classical definition of the government corporation. Twenty-one years later the language of President Roosevelt appeared again in a publi cation of the United Nations. With the rapid expansion in the number of govern ment owned and operated enterprises, it became evident that a new institution had to be developed which could be clothed with the power of government but which would 24 President Franklin D. Roosevelt's message to Congress on April 10, 1933 in Samuel I. Rosenman (comp.), The Public Papers and Addresses of Franklin D. Roosevelt (New York: Random House, tsJUS)" , il, 122. President Roose- velt also said that the Tennessee Valley Authority would have "the broadest duty of planning the proper use, conser vation and development of the natural resources of the Tennessee River drainage basin and its adjoining territory for the general social and economic welfare of the nation." He indicated that the creation of the Tennessee Valley Authority was inspired by his use of public power authori ties in New York State. 210 possess the operating flexibility of private enter- prise.25 Shortly after World War II President Truman, in his Budget Message in 1948, gave a brief summary of the distinguishing features of the government corporation. Experience indicates that the corporate form of organization is peculiarly adapted to the administra tion of government programs which are predominantly of a commercial character— those which are revenue pro ducing are at least potentially self-sustaining, and involve a large number of business-type transactions with the public. In their business operations such programs require greater flexibility than the customary type of appropriation budget ordinarily permits. As a rule the usefulness of a corporation lies in its ability to deal with the public in the manner employed by private enterprise for similar work. 6 While the summary has commendable scope and clarity it is somewhat long to be a good definition. Like Justice Story in the United States, Maurice Bye makes ownership the criterion for distinguishing private enterprise from public enterprise in France. He defines the public sector and, presumably, government corporations as "including only those enterprises in which over half of the capital stock is owned by the national government."2^ 25u nited Nations, Some Problems in the Organization and Administration of Public Enterprises in the industrial Field (.New York : TJnited Nations technical Assistance Administration, 1954), p. 9. 9 f i H. Doc. 19, 80th Congress, pp. M57-M62. 27 Einaudi, Bye, and Rossi, Nationalization in France and Italy (Ithaca: Cornell UniversTTy^Press'J 1955), p. 66. 211 This classification was used in 1946 by Robert Schuman, the Minister of Finance. Bye uses the terms "public sector" and "nationalized industry" interchangeably and expands his definition of the public sector by pointing out enterprises which are not included. It may be most easily defined by a process of elimination. It excludes enterprises that are entirely operated by private individuals or groups. It also excludes economic enterprises that are owned by govern mental units inferior to the national government, like the departments and the cities, and public services performed by agencies of the national government whose purposes are not mainly economic, like defense, educa tion, and the administration of justice.28 Ramanadham, as was noted above, also resorted to a negative definition. Bye's exclusions would exclude all of the public corporations of New York because they are owned by a government unit which is inferior to the national government even though they are legally public corpora tions. The exclusion of enterprises that are entirely operated by private individuals or groups seems to exclude government corporations if the personnel are not part of the civil service. This exclusion, if intended by Bye, is questionable because the personnel of some government corporations, such as TVA, are not part of the civil service. The types of governmental control, which are applied 28Ibid., p. 65. 212 to government corporations but are not applied to private corporations, might be a useful distinguishing criterion. Similarly, the degree of government control can be used as a distinguishing criterion. McDiarmid pointed that the Federal Home Loan Banks, as initially organized, were privately controlled through private selection of eight of the twelve board members even though the government owned eighty per cent of the capital.^® In India, a public corporation, in its strict tech nical sense, means a corporation established by an Act of Parliament. The author of a report prepared by the Indian Institute of Public Administration notes that there are other government enterprises which are called corporations, such as the National Coal Development Corporation (P) Ltd., and the State Trading Corporation (P) Ltd., but that these OA companies are registered under the Companies Act. w This would be another exception to a definition which stated that government corporations are created by special legis lative act or executive decree. In India, a public company does not refer to a public corporation, which is a government corporation, but oq McDiarmid, op. cit., p. 33. 30 United Nations, Administrative Problems of State Enterprise in India. Report of a Seminar, December, 1957. United Nations Seminar on Management of Public Industrial Enterprises, Seminar Paper No. 46 (New Delhi: United Nations, 1959), p. 51. 213 to a company created under the Companies Act. Thus, India has private companies, public companies, and public corpo rations. Baldwin, who has had considerable experience with India's public enterprises, clarifies this non-American terminology. One should not confuse the "public corporation," a generic term for state-owned enterprises, with the Indian "public company." In India, as in Britain, a "public company" is a non-governmental firm whose shares are traded on the public market. A "private company" refers to non-governmental firms whose shares are not traded publicly— that is, to closely held firms, usually family-owned.31 More precisely, a public company under Indian law means a non-governmental corporation whose stock is held by more than fifty persons. In the first sentence of the quotation above, Bald win asserts that a government corporation is owned by the government. This is careless statement because, in India, not all state-owned enterprises are government corpora tions. Thus, while it may be correct to say that all public corporations are state-owned, it is not correct to say that all state-owned enterprises are public corpora tions. India’s government, for example, has created wholly-owned state companies under the Companies Act. These state companies are not regarded as government corpo- 31George B. Baldwin, "Public Enterprises in Indian Industry," Pacific Affairs, March, 1957, p. 3n. 214 rations even though they are completely state-owned. The state companies are similar to government corporations except that (1) they are likely to be competitive enter prises subject to ordinary company law; (2) they are more autonomous than the government corporation; and (3) the government expects to eventually transfer its ownership to pr iv ate owne rs. While India's government corporations may be completely state-owned this is not universally true in other economies. In many countries, such as France, Egypt, and Turkey, the government must own more than fifty per cent of the capital in order for the enterprise to legally be a government corporation. This shows that the state ment of the United Nations Seminar at Rangoon, that a public corporation is wholly-owned by the government, is incorrect.^2 jn fact, British government corporations have traditionally been privately owned, quite opposite to the traditional complete ownership by government in the United States. The private stockholders of British government corporations, however, have had no voting rights. The 32United Nations, Some Problems in the Organization Administration of Public Enter pr i s es TiTTKe industrial Eield (.New Y’ ork: United Nations, Technical Assis-tance Administration, 1954), p. 9. 33 Marshall E. Dimock, Government-Operated Enter prises in the Panama Canal Zone (Chicago: Ifniversity of CHfcag'o TreVsT T 9'J4j; p\" T99.— 215 public utility trust is privately owned but wholly con trolled by the government,34 Robson indicates that public utility trusts are government corporations.3® Under the laws of the United States a state or muni cipality may become the sole shareholder of a corporation without changing its status as a private corporation. Thus, a private corporation does not become a public corpo ration merely because the government increases its financial participation.3® This practice seems to contra dict the implications of Justice Story's Statements in the Dartmouth case quoted above. Another definition problem is the use of the word, ownership, to mean debt ownership, equity ownership, and provision of appropriated funds. A Senate report, for example, states that the Tennessee Valley Authority is a wholly-owned government corporation. The United States, however, has not subscribed to stocks or bonds of TVA but 37 has provided appropriated funds. In practice, the 34 John H. Ferguson and Dean E. McHenry, The American Federal Government (New York: McGraw-Hill Book Company, Ind. , 1047) , ~ pp. ?20-421. 35 Robson, op. cit., p. 27. 36 W. Bayard Taylor, Financial Policies of Business Enterprise (New York: D. Appleton-Century Company, 1042), p ~ . 201 37 U. S. Congress Senate Committee on Government Operations, Audit Report of Government Corporations and Agencies (Washington: Gl’ O, 1054), p. 02. 216 government may own either debt securities or equity securities of the government corporation. In usual legal terminology, ownership of a corporation is held by the stockholders who have a residual claim on the assets while bondholders have a prior claim on the corporation’s earn ings but no claim on the assets. As a bondholder only, which is often the case, the government is not an owner of a government corporation. This, then, is still another reason that a definition cannot state that the government either partially or completely owns a public corporation, even though the government owns the corporation’s bonds. The problem can be avoided by stating that the government usually has a financial interest in the government corpo ration. A New Definition With the weaknesses of previous definitions in mind, a new definition may be proposed with the hope that it distinguishes the government corporation from both the government department and the private corporation. A government corporation is a legal entity which is initiated by representatives of the public, including a government corporation; is incorporated by either a national or state government for a public purpose through general or special legislative act or legisla tive decree; is controlled by the government but is more autonomous than the executive department and less independent than private business corporations; obtains a major part of its funds from sales, but is usually at least partly financed by the initiating government. 217 Thus, the government corporation is a legal arti ficial person like private corporations. A public body is the incorporator which initiates the request for incorpora tion that may be granted by either the same body or by a different political body.®® The public nature of the initiating body is the key distinguishing feature of government corporations. The public corporation, there fore, may be incorporated under state general incorporation laws for creating private companies, under state general laws for creating public corporations (as in Pennsylvania), or by a state or national special legislative act, regard less of the level of the initiating political body. The government corporation is subject to special budget, audit, and other controls which do not apply to executive departments or to private corporations. Some times the planning agency exercises important control. Nearly always, at least at the time of creation, a financial interest in the public corporation is held by a government agency at the level of the initiating body. The identity of a government corporation does not depend on the amount of financial interest held by the government although incorporation acts often require, for 3*rhe fact that Thurston utilized this criterion for identifying government corporations has been overlooked by subsequent writers. See John Thurston, Government Propri etary Corporations in English Speaking Countries (Cam- bridge: Harvard University Gres’ s , 1^37), p. TIT 218 control purposes, that the government own at least fifty- one per cent of the capital. Therefore, an economy may have mixed-ownership government corporations and mixed- ownership private corporations. Private corporations which have been nationalized and, therefore, were not initiated in the first instance by a political body, can be regarded as having been initiated in their nationalized form by a political body. The key features which distinguish the government corporation from the private corporation are: (1) the public rather than private incorporator; (2) the usual practice of incorporating under laws other than the general laws for incorporating private companies; (3) the special controls that apply to government corporations; and (4) the customary financial interest of the government. II. CHARACTERISTICS A list of the characteristics which are universally inherent in government corporations would, of course, con stitute a definition. Many authors have attempted to isolate the essential characteristics of government corpo rations but the items included vary significantly. Some times essential characteristics are omitted. Other authors include items which are not universal characteristics, usually because they are describing the characteristics of 219 government corporations within a particular country. When pointing out unique features most writers compare the gov ernment corporation with the executive department and point out key powers, controls, and structural features which are O Q not found in executive departments. ° In this section, the characteristics identified by several reputable authors are discussed. Steiner Compared with the executive department, the govern ment corporation has the advantages of the private corporate form, according to Steiner.^ First, the public corporation exercises the three main functions of govern ment-legislative, judicial, and executive. Legislative and judicial functions cannot be legally delegated, but the Supreme Court has ruled that quasi-legislative func tions and quasi-judicial functions can be delegated as long as the delegated power is to achieve a specific objective and is not broader than is necessary to achieve that end. This, when unrestricted, gives the government corporation 39 See Henry J. Abraham, Government as Entrepreneur and Social Servant (Washington, TjT C.: Public Affairs Press, 40 George A. Steiner, Government's Role in Economic Life (New York: McGraw-Hill Book Company, Inc . , 1353), p!i 3BTT This work may be regarded as representative of the treatment of government corporations in textbooks on the public control of business. 220 considerable discretion in interpreting, implementing, and enforcing policy. Second, the corporation is more independent from direct political controls than the department or inde pendent regulatory commission. Third, the corporation is financially independent. It has considerable discretion in the use of its funds, may borrow, may use its income to pay expenses, and can often issue stock. Fourth, the corporation is free of civil service personnel require ments. Fifth, it has administrative autonomy from the executive branch of the government. Sixth, the government corporation is a legal entity which can sue and be sued and is free from departmental restrictions on the awarding of contracts and purchases of goods and services> Steiner’s list of characteristics is, for the most part, similar to the lists of other writers. Regarding the fourth feature, there is considerable support in many underdeveloped countries for appointing a number of civil servants on the board of directors.^ Thus, while there is no charter requirement that board members be civil servants, an unwritten rule is often followed. Also, as was noted above, most government corporations in the United States 41 United Nations, Public Industrial Management in Asia and the Far East, United Nations 'fechnicalAssistance Programme (New York: ^Department of Economic and Social Affairs, 1960), pp. 61-67. 221 are at least partially subject to civil service require ments . The fifth characteristic mentioned by Steiner was extensively discussed, particularly prior to the passage of the Government Corporation Control Act of December 6, 1 9 4 5 . Dimock and Pritchett maintained that the enact ment of the Control Act eliminated much of the inde pendence of government corporations from the executive branch which, according to them, was the primary charac teristic of government corporations. Thus, Pritchett eulogized the demise of the government corporation in an often-quoted passage. The attributes which marked the earlier federal corporations and made them representatives of a dis tinctive type of administrative organization have been disappearing before our eyes, like the Chesire cat. Soon there may be nothing left but a smile to mark the spot where the government corporation once stood. Later Dimock echoed this point of view. The distinguishing marks of the corporate device have long been considered their autonomy of manage ment and their self-contained finance, and yet since the middle of the 1930Ts these characteristics have, in practice, disintegrated to such an extent that in many cases, but not all, very little that resembles 42Public Law No. 248, 79th Congress. 43 C. Herman Pritchett, "The Paradox of the Govern ment Corporation," Public Administration Review, Summer, 1941, p. 389. 222 44 principle or authencity remains. Seidman criticized both Dimock and Pritchett by suggesting that other characteristics are more important than either independence from executive departments or a strong board of directors which are "relatively superficial manifestations of the corporate f o r m ."45 He pointed out that the board of directors is not an essential charac teristic of government corporations since some government corporations have operated effectively without a board. In addition, there is considerable similarity among the powers granted by Congress to government corporations. Thus, Seidman concluded that the deluded Dimock and Pritchett mourned an un-"authentic" body of the government corpora tion whose spirit was really more vibrant than ever after its encounter with the Government Corporation Control Act. Marshall E. Dimock, "Government Corporations: A Focus of Policy and Administration, I," The American Political Science Review, October, 1949,"p. 901. Tn the latest edition of business and Government (4th edition; New York: Holt, Rinehart and Winston, inc., 1961), Dimock says, "Compared with government corporations in many other nations, the American variety is so hedged in and modified as to essential characteristics that most of these agencies are hardly recognizable as corporations. . . . It would seem simply common sense that when government sets out to manage a business enterprise, it should be allowed to use the same methods that private business uses with so much success. If a particular policy is wrong, then it should be changed, but a proper device of management should not be emasculated and then criticized as inefficient," p. 388. 45Harold Seidman, "The Theory of the Autonomous Government Corporation: A Critical Appraisal, Public Administration Review, 1952, XII, 92. 223 Regarding the first characteristic, Seidman directly contradicts Steiner: "Government corporations do not 46 perform quasi-judicial or quasi-legislative functions." He attributes the misconception to the common belief that government corporations have the same legal relationship to the executive as independent regulatory agencies. This is not true, of course, since the Supreme Court ruled in the Morgan case, which involved a TVA director removed by President Roosevelt, that directors of government corpora tions are responsible to the President. Commissioners of the independent regulatory agencies, however, cannot be removed by the President. Seidman Seidman organizes the distinguishing attributes of a United States Government corporation into seven types: (1) legal status; (2) authority to make expenditures; (3) financing; (4) budget; (5) audit and accounts; (6) person nel; and (7) management.47 In the following paragraphs the 46 Ibid.. p. 93. For a discussion of the quasi powers of regulatory commissions and government corpora tions, see John H. Ferguson and Dean E. McHenry, The American Federal Government (New York: McGraw-Hill Book Company, Inc., 1347), pp. ?09, 419-21. 47 Harold Seidman, "The Government Corporation in the United States," Public Administration, Summer, 1959, pp. 106-109. Note the assertion of C. Herman Pritchett in 1941 that there are "only two respects in which government corporations have maintained their individuality. One is 224 unique features of each type of attribute are summarized in the order presented by Seidman. The government corporation as a legal entity is different from the legal character of the government of the United States, which can only be sued with its consent. Therefore, the government corporation can sue and be sued in its own name. It may acquire and dispose of property without regard for the complex body of statutes which apply to government agencies and may borrow without obligating the United States. The unique feature of the second type of attribute lies in the authority of the government corporation to make expenditures without the subsequent approval or disapproval exercised by the General Accounting Office over government agencies. The financing of the government corporation differs from that of the government agency in that the government corporation is not financed by annual appropriations from Congress as is the agency which ordinarily must turn over AC unobligated appropriations and revenues to the Treasury. that, by definition, they have all received a charter of incorporation under legislative authority. . . . A second uniformity is liability to suit." Public Administration Review, Summer, 1941, p. 385. 48 For a review of the financing of Federal government corporations in the United States see Warren C. Robinson, "The Financing of Federal Authorities," American Journal of Economics and Sociology, October, 1959, pp. 45-63. 225 Government corporations may receive capital appropriations, however, which are not subject to fiscal year limitation, and the bonds which it issues to the public are not sub ject to the statutory limit on the public debt unless they are guaranteed by the Treasury. Usually government corpo rations are expected to pay, out of user charges, all costs of operation including interest, depreciation, and services provided by other government agencies, although the Commodity Credit Corporation in the United States is a notable exception. Seidman notes that some authorities oppose applying the principle of self-support to non corporate agencies which are financed from revolving funds "on the grounds that these are no different from tradi tional government services properly chargeable, in whole or in part, to the general taxpayer."^'7 Since the Government Corporation Control Act was passed in 1945, wholly-owned government corporations have been required to submit business-type budgets which are approved or disapproved as a single item by Congress. Mixed-ownership government corporations are excluded from this provision of the Government Corporation Control Act. Congress has the authority to limit the use of corporate funds for any purpose, although it usually has not imposed restrictions except on administrative expenditures. 49Ibid,, p. 107. 226 | The Comptroller-General is required to make an jannual, business-type audit although he usually cannot dis- jallow individual items of expenditure as he does when 5 • auditing agencies. Instead, the Comptroller-General jreports his findings and recommendations to Congress. In l ; jpractice, the Comptroller-General has interpreted his duties very broadly and also makes recommendations con- i cerning policies, such as the scope, purpose, organiza tional structure, and pricing policies of the government corporation. Thus, he does not limit himself to review of of accounting procedures and internal financial control. While employees of government corporations are federal employees, according to Seidman, they are frequently exempted from some or all of the laws applying to Federal employees. However, the personnel systems of government corporations are very similar to those of other government agencies. Historically, government corporations have been managed by boards of directors, but the trend in the United States is toward single administrators. The Saint Lawrence Seaway Development Corporation, the Public Housing Admini stration, and the Federal Housing Administration, for example, have single administrators. The United Nations Rangoon Seminar In 1954, the United Nations held a Seminar on Organization and Administration of Public Enterprises in the Industrial Field in Rangoon, Burma, which identified i : ithe principal characteristics of the government corpora tion that are listed below:®0 I (a) It is wholly-owned by the state. i (b) It is generally created by or pursuant to, a special law defining its powers, duties and immunities ! and prescribing the form of management and its rela- ! tionship to established departments and ministries. i j (c) As a body corporate, it is a separate entity for legal purposes and can sue and be sued, enter into contracts, and acquire property in its own name. Corporations conducting business in their own name have been generally given greater freedom in making contracts and acquiring and disposing of property than ordinary government departments. (d) Except for appropriations to provide capital or to cover losses, a public corporation is usually independently financed. It obtains its funds from borrowing, either from the Treasury or the public, and from revenues derived from the sale of its goods and services. It is authorized to use and reuse its funds. (e) It is generally exempted from most regulatory and prohibitory statutes applicable to expenditure of public funds. (f) It is ordinarily not subject to the budget, accounting and audit laws and procedures applicable to non-corporate agencies. (g) In the majority of cases, employees of public corporations are not civil servants, and are recruited and remunerated under terms and conditions which the 50 United Nations, Report of the Seminar on Organiza- tion and Administration of Public Enterprises in the ! Industrial Field, Seminar on Management of Public Industri al Enterprises, Seminar Paper No. 81 (New Delhi: United Nations, 1959), pp. 8-9. 228 corporation itself determines. Thus, according to the Rangoon Seminar, a government corporation is wholly-owned by the State, is a legal entity, is self-supporting, and is subject to special, i jnon-departmental controls over its budgets, expenditures, jcontracts, purchases, and personnel. Many government i jcorporations, however, do not have all of these charac teristics. The lack of complete ownership by government in many countries has been discussed above. Friedmann Friedmann conducted a comparative study of the structure of government corporations in fourteen coun tries. ^ In connection with this study, he summarized the characteristics of the modern British public corporation. 1. Each public corporation is separately estab lished by statute, or in rare cases, by charter; it is an individual, not a type. 2. The public corporation is an independent corpo ration with separate legal personality. 3. Its administration is in the hands of governing board appointed by the Government, not by representa tive groups of interests. 4. The employees of the public corporation are not civil servants. 5. None of the public industrial corporations have shareholders. Most of them (with the exception of the Friedmann, The Public Corporation, A Compara tive Symposium (Toronto! Carswell Company, 229 i National Coal Board), with ministerial approval can | raise loans, but the holders of the stock have no rights of moreover, is not parliamentary appropriation but permanent revenue-earning assets. They are directed; to balance revenue and expenditure (over a period of j years), and any profits generally have to be ploughed ! back into the development of the enterprise. They are i commercially audited. i i 6. All public corporations are responsible to the Government through the competent Minister and they are subject to his general direction, and through the Minister they are responsible to Parliament. 7. They have in their day-to-day operations the character of other private legal corporate persons. They are fully liable in law, and do not participate in any of the legal privileges and immunities of government. 52 During the early post-war years, the major dif ference between British and French public corporations was the representation of interest groups on the board of directors of French public corporations while interest groups were not represented on the boards of British public corporations.®2 However, the French have now abandoned interest representation. Nevertheless, this early dif ference shows that the unique features of British govern ment corporations are not necessarily present in the government corporations of other countries. Friedmann, "A Theory of Public Industrial Enter prise," Public Enterprise. A. H. Hanson, editor (Brussels: International Institute of Administrative Sciences, 1955), pp. 20—21. 53 Mario Einaudi, Maurice Bye, and Ernesto Rossi, Nationalization in France and Italy (Ithaca, New York: Cornell University Press, 1955), pp. 98-118. 230 j New York State Coordination Commission i In New York, the Temporary State Commission on {Coordination of State Activities recommended that Chapter i I i43-A of the Consolidated Laws, commonly referred to as the i ipublic Authorities Law, should be made a body of law, not i jjust a compilation of statutes. The Commission recom— {mended that, whenever possible, general provisions ] ^applicable to all public authorities should be included in the Public Authorities Law.^ The Commission then identified nine corporate powers which are necessary and desirable for all public authorities. The list includes the power: 1. To sue and be sued. 2. To have a seal and alter same. 3. To make contracts. 4. To borrow money and issue evidences of indebted ness. 5. To fix rates and collect fees, charges or tolls for the use of facilities. 6. To accept public or private gifts or grants of funds or property. 7. To make by-laws for its organization and internal management. 8. To enter on any lands, waters and premises for the purpose of making surveys, soundings, and examina tions . 54The Indian Companies Act relating to government companies is a step in this direction. See V. V. Ramanadham, op. cit., p. 16. 9. To make rules and regulations governing the use of its facilities.55 The Commission held that these powers are implied |or expressed in existing enabling acts and that it is not i Inecessary to repeat these fundamental authority powers in I !the enabling act of each new authority, j In the State of New York, the state and local I jgovernments are not permitted to lend their credit to a i |public corporation and, according to the State Constitution, are not liable for authority debts. However, both state and local governments may provide financial aid through advances and appropriations and, after the State Constitu tion was amended in 1951, the state was permitted to guarantee up to $500,000,000 of bonds and notes of the Thruway Authority. Nevertheless, the state is not liable for the bonds issued by twenty-nine of the thirty-three active authorities. The interest from bonds of all public 'authorities in New York State is exempt from federal income i taxes. Most authorities in New York are exempt from local property taxes and the Commission recommended that this provision be extended to all authorities. In some cases authorities are permitted to make payments in lieu of taxes, particularly when the local communities have 55 State of New York, Staff Report on Public Author ities Under New York State, op. cit., pp. 'suffered an immediate and considerable loss of tax revenue because of property acquisition by an authority. i According to their enabling acts, eighteen of the ! | i j public authorities in New York are liable for tortious I i ' I acts. The Supreme Court has jurisdiction over claims i ; |against fourteen of these authorities. The Commission | : |recommended that a provision should be added to the Public [Authorities Law making all authorities expressly liable jfor actions in tort. The enabling acts of thirty New York authorities contain provisions concerning the duration and termination of the authority. The most common provision, although there is considerable variation among the provisions, occurs in twelve enabling acts and provides that the authority be terminated when the outstanding bonds and liabilities are paid. The Commission recommended that all authorities subsequently created be given a preliminary period of five years to commence operations. If at the end of this period, the authority has no liabilities other than govern ment advances outstanding it should be automatically terminated. In practice, no New York authority has been terminated as a result of retirement of all its bonds and obligations from its own revenues. Nineteen authorities have been terminated through: 56Ibid., pp. 90-91. 233 1. Repeal of the authority enabling act. 2. Consolidation with another authority. 3. Assumption of authority assets and obligations by the State or a municipality or another authority. I i 4. Statutory provisions. * i i I jRobson i - — - - — — I j According to Robson, there are five leading prin- i I ciples, that,is, universal characteristics, of the public I corporation.58 First, is the public corporation's freedom from parliamentary inquiry into day-to-day operational decisions. Parliament, however, regularly discusses the objectives of government corporations and the efficiency and economy with which the objectives are accomplished. Political control is exercised through the Minister, as is indicated above by Friedmann, although this control is limited to those controls given to the Minister by Parlia ment . Second, is the public corporation's disinterested ness in profits because it has no shares or shareholders, either public or private. Even though the public corpora 57Ibid., p. 105. 58 Robson, op. cit., pp. 64-69. For more detail on the characteristics of T£r itain 's nationalized public corporations, see D. N. Chester, "Organization of the Nationalized Industries," Political Quarterly, April, 1950, pp. 122-34. tion is usually required to be financially self-supporting, he notes, it is never required to make a profit. A public corporation in Britain may make a surplus and there is provision in all the enabling acts for the creation of jreserve funds which may be used at the discretion of the 1 s board to accomplish the public purpose of the government I corporation. The third leading principle of the government corpo- i ration, according to Robson, is the personnel system which is outside the civil service. In England, this principle applies to members of the board as well as to the chairman, deputy chairman, the chief executive, and the salaried and wage-earning staff. However, in countries such as India and Pakistan some of the board members in practice, are civil servants.**® The fourth leading principle of the government corporation is its self-contained finance. While subject to considerable control by the Treasury the revenues of the nationalized government corporations do not come from the national budget. Some British public corporations, how ever, such as the Arts Council and the Regional Hospital Boards, depend solely on government appropriations for their funds. 59 United Nations, Public Industrial Management in Asia and the Far East (New York: department of Economic and SocfaT 'Affa"frs7'rgU0T, pp. 66-67. 235 The fifth leading principle of the government corpo ration is the fixed term of office for the chairman and the members of the board. What is true for English public i i ! corporations, however, is not always true of public corpo- : jrations in other countries. India's Sindri Fertilizers i ; jand Chemicals Ltd., for example, had three managing direc- 1 r> a i jtors during one year.60 Thus, there are major exceptions, i \ ' jin other countries, to at least two of Robson's five "leading principles" of the government corporation. III. REASONS FOR THE CREATION OF GOVERNMENT CORPORATIONS As was noted above, the advantages of the government corporation over private enterprise and other forms of public enterprise are the reasons for using the government corporation, rather than some other organizational institu tion, to accomplish certain desired public ends. The New York State Commission on Coordination of State Activities divided the reasons for the creation of public authorities into three broad categories; financial, jurisdictional, and fi 1 administrative. The study by New York State, of course, does not 60Ibid., p. 66. G1 State of New York, op. cit., pp. 43-60. 236 deal with national government corporations. However, the ^advantages of the government corporation to the state government are often the same advantages which accrue to the national government when the public corporation is used at the national level.63 Since the study is the most [complete investigation of the reasons for creating govern- Iment corporations, the categories used by the Commission i [have been adopted and the reasons presented have been included in this study along with other advantages.63 Financial Advantages The Rangoon Seminar pointed out the key financial freedoms of the government corporation from traditional government financial practices and controls.64 1. Freedom from the annual appropriation process, at the very least for operating expenses. 2. Freedom to receive and retain operating revenues. 63Notice the similarity to the advantages discussed in United Nations, Some Problems in the Organization and Administration of Public Enterprises in the Industrial Field (Uew York: United Nations Technical Assistance Administration, 1954), p. 10. 63In an often repeated phrase, Herbert Morrison argued that the public corporation is an effort "to meet the best of both possible worlds— the world of vigorous industrial enterprise without the restriction imposed by civil service methods and treasury control and the world of public service and accountability." Government and Parlia ment: A Survey from the Inside (2nd edition; London: Oxford University Press, 1959) , pp. 364-65. 64Ibid., p. 21. 237 | i 3. Freedom to apply operating revenues to operating! expenses. 4. Freedom from general governmental restrictions, particularly in the field of expenditures. 5. Freedom from normal governmental appropriation ; accounting. j I 6. Freedom from normal governmental audit of opera—' | tions. 7. Freedom from central purchasing and contracting requirements. While the specific freedoms are not identical to those mentioned by the New York State Coordination Commis sion, most of the points similarly involve a freedom from executive or legislative financial restraints. Among the financial reasons for creating government corporations are the following advantages of the government corporation over the department as listed by the New York State Coordination Commission.®® 1. To finance public improvements without resort to additional taxes. 2. To finance improvements through charges upon the users thereof instead of upon the general taxpaying public. 3. To finance improvements without conflicts with constitutional debt limitations. 4. To secure additional revenues and greater financial autonomy for certain activities of regular State agencies. 5. To take advantage of federal loans and grants. /j e State of New York, op. cit., selected from pp. 43- 60. 238 6. To finance improvements through revenue bonds without earmarking taxes. 7. To facilitate financing of enterprises taken over from private ownership. Of the financial reasons indicated by the Commis- I sion, avoidance of the debt limitation on municipalities land the referenda requirements for increasing state debt |seem to be the most common reasons for creating authori ties.66 These obstacles to effective operation could have been changed without adopting a new institution. However, when sufficient exceptions to regular procedures are adopted, the hybrid organization acquires a unique and distinct identity which is usually given another name. This is the case with government corporations which are sufficiently different from private enterprise, and other forms of public enterprise, to have acquired a special organization identity. Avoid tax limitations. Local governments are limited by constitutional restrictions on their power to tax real property. Since local government revenues are inadequate to meet the rising total of expenditures result ing from increased service and the rising cost per unit of service, the local government desires non-tax sources of 66 For support of this view, see The Council of State Government, Public Authorities in the States (Chicago: The Council of State "Government, 1353)',’ Chapters I and II. 239 j | . • ;revenue. Therefore, it prefers to finance projects through revenue bonds to be repaid out of user charges. Even though it is not a stated reason, non-tax I [financing of public projects, according to the benefits- | ; jreceived principle of taxation, avoids whatever redistribu-i jtion effects might occur as a result of financing through [taxation. | | I i ; User charges. The New York Commission is incomplete on this point. They indicate many advantages of user charges but they do not indicate why the user charge is an advantage of the authority over other organizational institutions. The use of user charges is not limited to government corporations. The user charge facilitates measuring the need for and the public demand for a particular project, a function which has never been performed effectively by legislators, according to some critics. However, the benefits-received [principle is not followed closely in the case of multi purpose authorities such as the Port of New York Authority, which often subsidizes one project with the surplus from another project. The consumer sees the special benefit he receives and is willing to pay for it. A primary advantage, of course, is that the user pays for the service rather than non-user taxpayers, thus making the burden of the tax more equitable. In addition, out-of-state or ! 240 ' i j | foreign users pay their share of the costs of the project. I User charges are justified also on the grounds that once the cost of the project has been paid the services will be free thereafter. The Commission noted, however, i that no authorities in New York State have ever voluntarily ! f jbecome toll-free. I ; * * I Avoids debt limitations. The constitutional debt limit on municipalities, in Pennsylvania for example, is a certain per cent of their assessed valuation. In addition, constitutional provisions require a popular referendum for incurring state debt. This has encouraged the creation of authorities whose bonds are not included in the debt of the state, although they are occasionally guaranteed by the state. Usually, however, neither the faith and credit nor the taxing power of the state is pledged to the payment of the principal or interest of the bonds of authorities.67 Thus, the authority is not subject to the debt limitations on municipalities or to the referenda requirement when issuing new bonds. Freedom from departmental appropriation control. 67 See the recent offering of the bonds of the Mass- j achusetts Turnpike Authority dated January 1, 1962. How ever, since World War II both New York and New Jersey have ' [pledged full faith and credit to the bonds issued by toll |road authorities. See, The Council of State Government, Public Authorities in the States (Chicago: The Council of iState Government, 1953), p. 29. 241 Although the trend, at least at the national level, has been toward increased control, the government corporation jis subject to special appropriation controls rather than to I the regular controls imposed on departments. Usually the icontrols give the authority considerably more independence ! ! |than the department in spending out of its revenues. Thus,; although the trend in recent years has been toward addi- i ; | ; |tional restraint on the autonomy of the government corpora tion, it still has more autonomy than the department and is considered a fiscal device for avoiding the appropria tion controls which apply to departments. Usually a government corporation in the United States has the power to determine the character of and the necessity for its expenditures, and the manner in which they are to be incurred, allowed, and paid. Consequently, it is exempt from most of the restraints and prohibitions japplying to the expenditure of public funds. The adminis trative expenses of government corporations are fixed by Congress, however. Commercial accounting system. In the United States, government corporations adopt their own accounting systems following private commercial practice in order to show all costs including interest on the Government's investment, depreciation, and the cost of services provided by other government agencies. Normally, these costs are not 242 1 'included in the accounting system used by agencies. Different budget procedures. Government corpora tions in the United States present a business-type budget jto Congress requesting approval for the entire budget pro- i i jgram rather than for specific appropriations. Business- type budgets include statements of financial condition, ]income and expense, sources and use of funds, programs by j Iroajor types of activity, administrative expenses, funds to be borrowed, and funds to be returned to the Treasury. Freedom from disallowance by Comptroller General. Normally, the Comptroller General does not have the authority to disallow the expenditures of government corporations. Although the Comptroller General has inter preted his authority broadly, he is limited to reporting his findings and recommendations to Congress in a commercial-type audit.68 Freedom to borrow. The government corporation can usually issue its own bonds which the department is not permitted to do. Departmental expenditures require 68 United States Senate Committee on Government Operations, Audit Reports of Government Corporations and Agencies, 83rd Congress , 2nd Uess ion, Report H f ' o " . (Washington: Government Printing Office, 1954), pp. 10-12. Also see the Government Corporation Control Act (59 Stat. 597, Sec. 105 and 202), Appendix H. 243 j [appropriations by the state legislature. Thus, the govern- I [ment corporation has access to a source of revenue which i is not available to departments. The Industrial Exhibit Authority of New York Statj is an example of an authority [established solely to utilize this advantage of the [authority. The Industrial Exhibit Authority was initiated I i j [and is supervised by the Division of the State Fair of the i [Department of Agriculture and Markets. i The authority can acquire private enterprise with out using the credit or tax revenues of the state because it can issue bonds with the anticipated revenues of the enterprise as security. Usually the interest on the bonds of the authority and the property are tax-exempt. This competitive advantage may be sufficient to make the public enterprise self-supporting. Permits federal lending to states. The legal and political difficulties involved in collecting debts and I enforcing payments, as a result of direct loans by the federal government to the state and local governments, were avoided during the 1930’s when the federal government encouraged states to create authorities to undertake such borrowing. Consequently, the federal government encouraged government corporations during this period in order for the states to have greater participation in the public works [program. Alternative to earmarking taxes. States usually ^ ^ i- — - — ~ - r_«xri_L—i i - - — - - - dislike earmarking taxes because it normally involves a higher cost of financing, since the revenue from a single i tax source is inferior as security to the total credit of a state, and because earmarking imposes an inflexible i jfinancial requirement upon the state, which may need the earmarked tax revenues for more important expenditures. The public authority, however, can use the revenue bond without interfering with the debt structure, fiscal policies, of budget procedures of the regular government by pledging its revenues to meet its debt service. Interestingly, multi-purpose authorities also prefer to maintain fiscal flexibility and often issue general obligation bonds rather than bonds secured by specific revenues. Reduces political instability of revenues. Legis lative bodies which pass appropriation bills annually may appropriate more or less funds than are requested by an agency. This hinders the effectiveness of long-run plan ning by the agency. While the authority to spend from its own revenues and the consequent freedom from the unpredic- 1 tability of appropriations may substitute one type of revenue instability for another, officials of government corporations prefer to predict the instability of user- charge revenues rather than the instability of legislators. 245 Government guarantee of bonds. While states in the i | United States do not usually guarantee the bonds of public I authorities, the guarantee of the bonds of government ; corporations by the national government is common in less i ; [developed economies. This not only reduces the cost of j |borrowing but also increases the availability of loanable [funds. That is, the liquidity trap of the lender is lower I for government corporation borrowers than for private borrowers. Government corporations, therefore, can obtain financial capital when private borrowers with the best credit rating cannot borrow and the government corporation can borrow for longer periods.®® Thus, the government corporation has an advantage over the private corporation whose bonds are not guaranteed by the government and an advantage over the department which cannot issue bonds. Jurisdictional Advantages Avoids inter-jurisdictional problems. At all levels of government the government corporation is a device which provides certain public goods and services without involv ing the relevant departments of the different political jurisdictions which are included in the geographic area served. Thus, at the local level, a public authority may be super—imposed on several municipalities in a metropolitan 69 Bryce, op. cit.f p. 45. 246 j |area without annexation, consolidation or confederation of igovernmental jurisdictions, or financing by the municipali ties. This avoids inter-jurisdictional coordination problems. Efficient production of public goods and i [services often requires a scale of operation which includes! i i jseveral political jurisdictions. ! i i In New York State, government corporations serve geographic areas which include international boundaries, ■inter-state boundaries, and local jurisdictions. The Saint Lawrence Seaway Development Authority is an example of the use of a national government corporation which serves two nations.70 Protection from political demands. If the enter prise is under departmental control political pressures are somewhat greater since unwise campaign promises may be made. The enterprise may be regarded as an employment agency as in the case of the Jamaican Railway.7- * * However, there is some question whether government corporations are inherently more free of political pressures than the execu tive department. Protection from changes in administration. The 70 See Luther Gulick, M’Authorities’ and How to Use Them,’' The Tax Review, November, 1947, p. 48. 71 A. H. Hanson, Public Enterprise and Economic Development (London: Routledge & tfegan Paul Ltd., 1959), p. ! 247 policies of government corporations influence more than one 1 ipolitical jurisdiction and the policies are often formed by i : i representatives from each jurisdiction. If a joint commit-; ! i jtee or a commission were used, the policy makers would be | i ; r isubject to more direct supervision by their respective ! i idepartments and a change of administration in a jurisdic tion might change the policy views of the representative from that area. Since the decisions of the government corporation are removed from the executive branch, its policies are not immediately influenced by a change of administration. Consequently, the policies of the public authority are less likely to be campaign issues during elections. Administrative Advantages The New York State Coordination Commission pointed out three major administrative reasons for creating public authorities.^ 1. To remove the administration of enterprises from direct control by politically responsible officers. 2. To provide a more flexible administrative in strument to manage commercial-type public enterprises. 3. To facilitate the transition from private to ^%ew York State, op. cit. , selected from pp. 55-57. Seidman refers to financial and administrative advantages in "The Government Corporation: Organization and Controls," op. cit., p. 184. 248 I j public operation of enterprises. (Some of these major administrative reasons can be usefully subdivided and other reasons can be added.^ j i i ! Reduces influence of pressure groups. Much of the i J jtemptation of elected officials to yield to the demand of j ;special interest groups, for action which is sometimes not i |in the public interest, is removed if such decisions are ’removed from the executive branch of the government. Demands for rates which are below cost, free services, uneconomic extension of services, and special privileges are often difficult for a vote-seeking, elected official to refuse. The greater separation from the executive branch, through the delegation of responsibility and authority to the board, not only reduces the effectiveness of pressure groups but also frees the elected official from the criticism, and the praise, which might be made of the government corporation. The members of the board are appointed for definite, staggered terms of office in order to encourage responsible management. Thus, the government corporation protects the citizenry from pressure groups as well as from irresponsible political actions. Reduces the choices among alternative projects. The 73 See for example The Council of State Government, Public Authorities in the States (Chicago: The Council of State Government, 1953), pp. 22-23. 249 ! I : I department must equate the marginal social product of the j ;last dollar spent on widely different alternative public projects. In the government corporation the number of I |alternative projects, and therefore, the number of I alternative choices, is considerably reduced. The quality !of its decisions, consequently, can be expected to be jbetter than the quality of the decisions of an agency i [which has the same responsibility. The agency has many more competing demands for its limited funds than the government corporation.^ In the number of alternative projects and choices, the multi-purpose government corpora tion falls between the agency and the single-purpose public corporation. Increased efficiency in economic functions. The government corporation has powers and flexibility that the department does not have. These special features usually result in greater efficiency in conducting business func tions. The functions of most government corporations are similar to the functions of private business enterprises and require special powers for maximum efficiency. Thus, the activities of public business enterprises are quite ^^The restricted scope of the government corporation is a disadvantage if the public projects outside its scope have greater social marginal benefit. Nevertheless, the limitation of alternatives normally improves the accuracy of the choice. 250 different from other types of government activities. According to Seidman, these unique characteristics were jidentifiable in the earliest business activities of govern-; i m e n t . 7 5 1 r 1. The government was dealing with the public as a businessman rather than a sovereign. i i 2. Users, rather than the general taxpayer, were ; to pay for the cost of goods and services. j 3. Expenditures necessarily fluctuated with con sumer demand and could not be predicted accurately or realistically kept within annual limitations. 4. Additional expenditures to meet increased demand did not in the long run increase the net outpay from the Treasury. 5. Operations were being conducted within areas in which there were well-established commercial trade practices. The unique characteristics of governmental business- type activities distinguish them from the usual activities of the executive department.^® However, the unique Harold Seidman, "The Government Corporation in the United States," Public Administration, Summer, 1959, p. 104. •See also Seidman^ "The Government Corporation: Organization and Control," Public Administration Review, Summer, 1954, p. 183; and Marshall te. Dimock, "Gove rnm e nt Corporations: A Focus of Policy and Administration,I," The American Politi cal Science Review, October, 1949, pp. 9 ( 5 5 - 9 1 3 . (Trie second installment of Dimock’s article appeared in the December, 1949 issue, pp. 1145-64.) 7fVhe Rangoon Seminar noted similar features of cer tain governmental economic activities which can be per formed more efficiently by a government corporation than by a department. See the United Nations, Report of the i Seminar on Organization and Administration of Public Enter prises in the Industrial Field. Seminar on Management of iPublic Industrial Enterprises, Seminar Paper No. 81 (New 251 | ibusiness-type function cannot be conducted effectively s under departmental budgetary and audit practices which require that departments request specific appropriations and be subject to the disallowance power of the General jAccounting Office. Thus, a primary reason for creating 1 jgovernment corporations and giving them special powers was to increase the effectiveness of the government in i i Conducting business-type activities.^ Freedom in making contracts. Usually the government corporation has more freedom in making contracts and in acquiring and disposing of property than the department. This privilege stems from the fact that it is a separate legal entity. Freedom from departmental personnel policies. The efficiency of an enterprise is greater if the management is to appoint and dismiss personnel and regulate salary scales in accordance with the cost and revenue positions of the enterprise. Many government corporations in the United States are at least partially exempt from the Civil Service and classification laws. Personnel with entrepreneural attitudes. Government Delhi: United Nations, 1959), p. 11. 77 Spencer, op. cit., pp. 185-186. 252 : i jemployees are accustomed to following a fairly well-defined! jset of rules which result in an organization that is rigid,! I ; inflexible, and incapable of responding quickly to the unusual circumstances which commonly occur in public t business enterprises. Thus, the personality of the tradi- j Itional, circumscribed public employee is alleged to be i j unsuited to efficient operation of public enterprises.^8 | ; jThe government corporation often is permitted to select employees from outside the civil service system which tends to increase the efficiency of the enterprise. Facilitates transfer from private to public opera tions . The form of organization, the administrative flexibility, and the autonomy of the public corporation make the transfer of ownership from private to public hands easier. Under departmental procedures service is more likely to be disrupted. Improved methods through association with private enterprise. The traditional department is unaccustomed to performing business activities and often does not have the appropriate skills and knowledge of methods for efficiently conducting these activities. Gorwala and others have sug gested that the role of the government in public enterprise 79 Spencer, op. cit., p. 185. 253 j iis new while private enterprise is old and established.^® 'Thus, through participation with private enterprise the I I : ;public sector can learn the methods which are needed for i ; | efficiently conducting necessary public economic activities., i j ; jHowever, the state company probably has more of this j i . . ; (advantage than the government corporation. t ! i : j IV. THE PUBLIC PURPOSE The public purpose of the government corporation is to provide certain economic goods and services. However, the specific functions of government corporations are not the primary topic of this chapter because they were dis cussed in Chapter II. In the United States, the Supreme Court has firmly established that the purpose of a government corporation is the public objective expressed in the enabling act. In the Cherry Cotton Mills v. U. S. (327 U.S. 536) case the Supreme Court held that a government corporation is an agency selected by the government to accomplish purely governmental purposes. Similarly, in the Trustees of Dart mouth College v. Woodward case the Supreme Court held that public corporations are created for public purposes and that the whole interests belong to the government. The courts in the United States have consistently 79 Gorwala, op. cit., p. 4. [supported th§ right of government to participate in 1 i * • 'business-type activities in order to accomplish a public I ipurpose or promote the general welfare. In the Wolfe I [Packing Company v. Court of Industrial Relations of the jstate of Kansas (262 U.S. 522) case, the court held that i ! • • . . i jthe state may engage in"almost any private business if the ; | « P * 'legislature thinks this wil^L promote the general welfare land is willing to pay the costs of the plant and operation. The Jones v. Portlabd (245 U.S. 217) case and the Standard Oil Company v. .Lincoln (275 U.S. 502) case established tljat oitiesmay operate fuel yards and wholesale and retail gasoline businesses. North Dakota operates banking, grain * > storage, and milling enterprises under the protection of — . . 1 . ' ■ ‘ 'i the Green v. Frazier (253 U.S. 233) case,®® tffce public purpose of the government corporation may be to perform a particular economic activity. In such a t case, the government corporation is a means for accomplish ing this end. In other cases the public objective may be to accomplish a certain economic ideal, such as public [ownership or control. In this case, the government corpo ration is an end in itself since these features are charac- 80 Merle Fainsod, Lincoln Gordon, and Joseph C. Palamountain, Government and the American Economy (3rd edi tion; New York: tf. W. Norton & Company , ' Inc. , 1359), p. 736. Also see Marshall E. Dimock, Government and Business (4th [edition; New York: Holt, Rinehart and Winston, fnc., 1961), ip. 395. I 255 i i iteristics of the usual government corporation and are ! accomplished by its organizational form rather than by its function. Economic ideals such as the ideal of public ownership, however, are commonly accepted means for i i accomplishing certain economic ends and have been called means-ends elsewhere in this study. I j I I CHAPTER VI OTHER FORMS OF PUBLIC ENTERPRISE I I ! There are many public organizational institutions {through which government influences economic activities. i [These include public institutions which regulate private businesses as well as those which own and operate business enterprises. Governmental regulatory institutions include the central bank, treasury departments, tariff agencies, and regulatory commissions. Since government regulatory functions are not the primary concern of this study, the institutions which perform these functions are not dis cussed. The purpose of this chapter is to review the various forms of public enterprise which are alternatives to government corporations. As commonly used, the term "public enterprise" does not include governmental regula tory institutions. Five public organizational institutions which con duct business activities are studied: (1) the departmental enterprises; (2) the trading agency; (3) the state company; (4) the management contract with private companies; and (5) the contract for research and development. 256 257 I I. THE DEPARTMENTAL ENTERPRISE 1 Characteriatics Early public enterprises were usually departments ofj the government. According to the Rangoon Seminar, depart- ; 1 ! ment enterprises have four principal characteristics. 1. The enterprise is financed by annual appropria- ■ tions from the Treasury and all or a major share of its■ revenues are paid into the Treasury; j 2. The enterprise is subject to the budget, accounting and audit controls applicable to other government activities; 3. The permanent staff of the enterprise consists of civil servants, and the methods by which they are recruited, and the conditions of service under which they are employed, are ordinarily the same as for all other civil servants; 4. The enterprise possesses the sovereign immunity of the State and cannot be sued without the consent of the government. United Nations, Report of the Seminar on Organiza tion and Administration of Public Enterprises in ttie fncius- friaX Pield, Seminar on Management of'Public Industrial Ent erprises, Seminar Paper No. 81 (New Delhi: United Nations, Economic Commission for Asia and the Far East, 1 9 5 9 ), p. 6. Other forms of public enterprise are also discussed in this publication. Also see A. H. Hanson, Pub- lic Enterprise and Economic Development (London: Routledge & if egan Paul, Ltd., 1 9 5 9 ), pp. 336-359; W. A. Robson, Nationalized Industry and Public Ownership (Toronto: Uni versity of Toronto Press, I 9 6 0 ), pp. 24-29, 1 1 2 -1 1 8 , 4 9 1 - 493; A. H. Hanson (ed.), Public Enterprise (Brussels: Inter national Institute of Administrative Services, 1 9 5 4 ), 530 pp., which discusses public enterprise in various countries; Einaudi and others, Nationalization in France and Italy !(Ithaca: Cornell University Press, 1955), pp. 51-65, ST -96, 1 7 4 -1 7 7 , 2 3 5 -2 3 6 ; United Nations Technical Assistance Pro gramme, Public Industrial Management in Asia and the Far gast (New Delhi: United Nations, Dept, of Economic and Social Affairs, 1 9 6 0 ) , 138 pp. 258 j t In its final report, the Seminar added another charac teristic: I I | j The enterprise is generally organized as a major j subdivision of one of the control departments of j government and is subject to the direct control of the j head of department.2 These characteristics were implied throughout the previous i : {chapter in which the characteristics of the government [corporation were often contrasted with the characteristics |of the department. Similarity to Government Corporations Both executive departments and government corpora tions are government agencies. This was legally estab lished by the Morgan case and by the many sovereign privileges granted by the courts to government corporations 3 during the 1930fs. Consequently, as agencies of the [government neither departments nor government corporations i [have the legal capacity to enlarge the constitutional authority of the federal government.^ In the United States,; the personnel of departments, of course, are part of the United Nations, Some Problems in the Organization [and Administration of Public Enterprises in the Industrial FieTd (New York: United Nations "Technical Assistance [Administration, 1954), p. 6. 3 Infra, Chapter V, "Executive Responsibility of the President" and "Federal-State Conflicts." 4 Sidney D. Goldberg and Harold D. Seidman, The [Government Corporation: Elements of a Model Charter (.Chicago: fhiblic ’ Administration' Service , TS53T^ 4. i 259 j jcivil service as are roost of the employees of government corporations. However, in Britain the personnel of public corporations are not part of the civil service. Differences between Departments and Corporations Since the differences between departments and government corporations were discussed earlier, it is sufficient to point out that a department: (1) has sovereign immunity from suit; (2) is subject to more expenditure restrictions; (3) normally does not follow a commercial accounting practices; (4) does not submit a business-type budget; (5) is not exempt from the disallow ance authority of the Comptroller General; (6) is not financed from revenues, except for agencies which have revolving funds; and (7) is not exempt from the Civil Service laws or the Classification Act. Disadvantages of Departmental Structure The Rangoon Seminar pointed out several disadvan tages of departmental structure. First, departmental financial and contracting procedures are slow and awkward; second, since departments are financed from appropriations they are not accustomed to computing costs in order to become self-supporting; third, decision-making is too centralized to maximize efficiency; and fourth, deficits of departmental enterprises are often ignored as unimportant 260 i I even though they sometimes indicate inefficiency.^ There are other related disadvantages. A depart mental enterprise, fifth, cannot borrow in private capital j markets; sixth, is subject to expenditure restructions; and; ;seventh, is subject to restricting budget, audit, and » » I i |personnel controls. Although departmental enterprises can ; . i I be given sufficient autonomy to be efficient "the process I i of bending the departmental structure to accommodate activities for which it was not originally designed is iusually a difficult one, particularly in countries where an: 6 entrenched bureaucracy looks askance at innovations." Advantages of Departmental Structure The number of public enterprises operated by govern ment departments indicates that this organizational form has some advantages. The degree of public accountability may be more clearly formulated than for the government corporation. Established channels of communication with other governmental agencies may transfer information more effectively and coordination with other government programs may be easier. 5 United Nations, Report of the Seminar on Organiza tion and Administration of ^ublic ^nterprises . T '.,, t op cit.~ pi 71 0 Hanson, Public Enterprise and Economic Development, pp. cit., p. 338. 261 i | Hanson has pointed out that some public enterprise I j functions do not require much flexibility and initiative i for efficient operation. In such cases, the usual criticisms of departmental structure are not valid. In addition, sufficient autonomy can be given to departmental enterprises.7 i | II. THE TRADING AGENCY Characteristics The trading agency is a Scandinavian institution which has characteristics of both the executive department and the government corporation. It is sometimes called a state administration. Trading agencies have existed in Finland since 1931 and in Norway since 1947. The first of eight existing agencies in Sweden was the post office which was established in 1636. Other trading agencies in Sweden are: the Tele-Communications Board, the Forest (Crown Lands) Board, the State Railways, the State Power Board, the Cartographical Institute, the Ordinance Factory Board, and the Air Transport Board. The trading agencies employ about five per cent of the working population. The existence of various forms of public enterprise 7 Ibid., p. 342. More recently Hanson speaks even more favorably of the departmental enterprise. See iParliament and Public Ownership (London: Cassell and |Company . " , " ' 1061' T7~P• * " — 262 ! ! j ; j in Scandinavia should not lead one to the conclusion that ! a large portion of the economic activities is conducted by public enterprise. In Sweden, over ninety per cent of | | total production is by private companies. In Norway, the ! I ownership-role of the State is somewhat greater than in I ! j other Western European countries. About fourteen per cent I I i i < |of Norwegian share capital is owned by the government. i I However, government consumption was only about thirteen i per cent of GNP in 1960 compared with approximately eight een per cent for the United States.® In Finland, state- owned enterprises produce about fifteen per cent of the net Q national product. Assuming the Swedish trading agency is typical of this type of public enterprise, the trading agency is an autonomous organization created by executive decree and is responsible to the Kings-in-Council rather than to individual ministers or their departments. The director- general of the trading agency is appointed by the Kings-in- Council and may be from outside the civil service although all the other employees are civil servants. The employees of state companies which are trading agency subsidiaries Q United Nations, World Economic Survey, 1960 (New York: United Nations, Department of ^Economic and Social Affairs, 1961), pp. 130-131. 9 Ingvar S. Melin, "Public Enterprise in Scandinavia," an unpublished paper delivered to a group of businessmen in December, 1959, p. 16. 263 |are not civil servants. The board ranges in size from one i jto fourteen members and is appointed by the Kings—in- Council on the recommendation of the director-general. The i jtrading agencies receive their capital requirements from iparliamentary appropriations and annually return any sur- i Iplus to the Exchequer although they are permitted to pay I operating expenses out of operating revenues.^ The trad- i ' ing agency is not a legal entity. Advantages Perhaps the advantages of the trading agency become most apparent when it is compared with the departmental enterprise. The Rangoon Seminar did not discuss the trading agency. Noting this, Verney pointed out the dif ferences between the departmental enterprise and the trading agency. Only one of the characteristics of the departmental enterprise— the sovereign immunity of the state— is completely present in the trading agency. A trading agency is not 'financed by annual appro priations from the Treasury' for its day-to-day operations but uses its own revenues, nor are 'all, or a major share, of its revenues' paid into the Treasury, but only its surplus. Secondly, although it is true that in principle 'the enterprise is subject to budget, accounting, and audit controls applicable to other government activities' in practice this control is much less detailed, as a glance at the Swedish budgets shows. In the third place, although the permanent staff is recruited and employed according to conditions of 10 Douglas Verney, Public Enterprises in Sweden (Liverpool: Liverpool University £ress, 1350), pp. 3TJ-40. 264 service similar to those for other civil servants, the Trading Agencies are given permission to recruit as many people as they wish on a 'temporary' basis and to promote employees without giving them substantive rank. Finally, a trading agency is not, of course, | 'organized as a major subdivision of one of the central j departments of government . . . and subject to the ! direct control of the head of the department.'11 ! i Thus, the trading agency has freedom in financing jday-to-day operations, some freedom from budget and audit [ [control, freedom to hire temporary personnel, and freedom i jfrom direct control by the department head. In fact, the trading agency appears to have more characteristics in common with the public corporation than with the departmental enterprise.12 In only one charac teristic, that it is not a legal entity, is the trading agency distinctly different from the public corporation. Disadvantages There are two major disadvantages of the trading agency. The first disadvantage is the restrictive person nel regulations of the civil service. Although the trading agencies are allowed some exceptions from civil service regulations, they must conform to the regulations on salaries and publicity of decisions, for example. Removal of the employees of trading agencies from the civil service would create some problems, however. Employees who work 1XIbid. 12Ibid., pp. 117-118. 265 ]in less favorable locations could not be attracted unless ! wages were increased, which undoubtedly would be justified. Moreover, since trading agencies perform essential public services, some requirement preventing strikes might be necessary. To correct this problem, Verney has proposed | !that the Public Service be divided into two parts, a Civil i Service Division and a Public Enterprise Division. In this I ; manner employees of trading agencies would retain their status as employees of the Crown but a new code for the Public Enterprise Division could be introduced which would exempt the trading agencies from unnecessary controls. Separate salary scales for public enterprise employees could be adopted, and collective bargaining could be ipermitted. The second disadvantage is the financial restriction imposed on trading agencies. The restrictions which might be modified include the depreciation allowances, the dis tribution of the annual surplus, the purchase and sale of property, and the rate of investment. III. THE STATE COMPANY Characteristics The main distinguishing characteristics of the state 13Ibid., pp. 118-120. 266 i |company are: (1) incorporation under general incorporation 'acts; (2) the common use of mixed ownership, with both pub lic and private shareholders; and (3) the presence of some i |government control, usually through representation on the i |board of directors.^ j The state company is often confused with the mixed corporation. Hanson, for example, asserted that the state company is a "mixed enterprise" that may be wholly-owned by the government. Since he does not discuss mixed corpora tions elsewhere, he implies that the state company and the mixed corporation are synonomous. The term 'state company' is here used to denote an enterprise, established under the ordinary law of the country concerned, in which the government has a controlling interest through its ownership of all or some of the shares. ® Hobson takes the position that mixed corporations are not necessarily state companies. "Some French writers have also postulated that a mixed enterprise must be consti tuted under the ordinary law applying to joint stock ^Robson, op. cit. , p. 27. Other methods of retain ing control are discussed in United Nations, Some Problems in the Organization and Management of Public Enterprises in the' Industrial Field, op. cit. , p. TTI 15Hanson, Public Enterprise and Economic Development, op. cit. , p. 351. 16 i companies; but this condition hardly seems essential.” i In France, mixed corporations are always state companies i ! but this is not true in India where a mixed corporation is not a state company if the government owns less than fifty- j |one per cent of the share capital. i j The only conclusion which can be drawn is that the j :two terms have different meanings but often apply to the i I same corporations. If public enterprises were grouped into mixed corporations and state companies, some corpora tions would appear in both groups. Obviously, for clarity of thinking and ease in exercising public control, new categories which are more exclusive should be adopted. Little but confusion is gained by classifying public enterprises according to the type of owner. This is because classifications are utilized primarily as means of applying public controls. Ownership, however, is not a justifiable primary criterion for the application of con trol. • Consequently, throughout the world ownership classifications for control purposes are defined dif ferently than the ownership classifications commonly used 16 Robson, op. cit.; for a discussion of Sweden's state companies, see Douglas V. Verney, Public Enterprise in Sweden, op. cit., pp. 18-29, 76-85, 9if-100. Ybe boot compares* "the Swedish state company with the trading agency. 17 United Nations, Public Industrial Management in Asia and the Far East, op. cit. . p. 60. Also see Einaudi, op. cit., pp. 91-93, 243-246. In 1955, France had forty mixed corporations. for identification.1® Because state companies are usually mixed-ownership corporations, the characteristics of the mixed corporation, described below, apply also to the state company. The only difference seems to be that the government usually owns a controlling interest in the state company. Therefore, the mixed corporations in which the government owns less than fifty-one per cent of the share capital are not state companies. To make the list of characteristics of mixed corporations apply to state companies only the statement that the government owns a controlling interest must be added. The Rangoon Seminar noted that most government corporations in Britain, Canada, the United States, and Puerto Rico are wholly-owned by the government. This is not true of the United States, however, where the capital iof eighty-one per cent of the national government corpora tions is at least partially provided by private inves tors.19 The Seminar pointed out the principal character- tics of the mixed-ownership corporation.99 18 In the U.S. the government corporations which are defined as wholly-owned in the Government Corporation Con trol Act for purposes of control are sometimes not wholly- owned. 19 Infra, Chapter VII. 20 United Nations, Report of the Seminar on Organiza tion and Administration . . . , op. cit. , pp. 0-1(5. 269 i 1. The capital stock of the corporation is owned by both the government and private shareholders; 2. Both the government and the private shareholders; generally have the right to appoint directors of the corporation; 3. It may be created by a special law or pursuant to general laws authorizing the establishment of | private corporations; | 4. As a body corporate, it is a separate entity for; 1 legal purposes and can sue and be sued, enter into | contracts, and acquire property in its own name; | j | 5. It obtains funds by the sale of stock to the government and the public, by borrowing either from the; Treasury or from the public, and through revenues derived from the sale of goods and services; 6. Even to a greater degree than the public corpo ration, the mixed-ownership corporation is generally exempted from the personnel, budget, accounting and audit laws, and procedures applicable to non-corporate agencies. Mixed corporations and state companies commonly perform manufacturing or other production functions. In India, for example, the functions of public corporations are limited to banking, insurance, transport, and river valley development while joint companies, which are often ;but not always jointly owned, operate defense production plants, posts and telegraphs workshops, railway workshops, locomotive works, and coach factories. Elis Hastad divided the state companies of Scandi navia into three groups: (1) those completely owned by the state; (2) those partly owned by the state and controlled Iby it; and (3) holding companies, created to buy, conduct, I 270 I j 9 * t [and administer subsidiary companies.^ The state company !is used commonly in Scandinavia as well as in the Nether lands, Belgium, Israel, India, and Pakistan.22 According to Hastad, the state does not always own over half of the ishares of state companies. ! j In order to be able to classify these as State | enterprises, the State should really own over half the ! shares, or else have the controlling influence either i by law or de facto.23 i i The holding company form of state company differs | !in function from the other types of state companies. The holding company administers other state companies by buying or selling shares in order to increase or decrease the government's participation in business activities. Austria has many holding companies, each owning state companies within one industry. Hastad noted that even though state companies have considerable independence in their relations with other firms, they may be subject to varying amounts of political ^Elis Hastad, "Types of Nationalized Industry," English translation made available by Ingvar S. Melin, Associate Professor at the Swedish School of Economics, Helsinki, Finland. Also see Verney, op. cit., p. 19. i 2\he Swedish government recently conducted a long and intensive Study of State enterprise. See Rune Tersman, Statsagda aktiebolag i Sverige (Swedish State Companies); and Elis Hastad (ed.), Statsagda foretag i utlandet (State ■ Enterprises Abroad), Swedish State Research Publications j S O U 6 and 24, 1956. 23 Elis Hastad, "Types of Nationalized Industry," op. cit., p. 12. 271 |control, thus confirming the comments made by Hanson and j !others.^ Verney identified three types of state companies: (1) the multiple-shareholder type; (2) the single- J shareholder type; and (3) trading agency subsidiaries. Thej i j jfirst types are equivalent to mixed-ownership and wholly- I ; •owned state companies, respectively. The trading agency [subsidiaries, however, are unique to Sweden. There are i ;eight trading agency subsidiaries~six are wholly-owned by the State Railways, one is wholly-owned by the Power Board, and one, the most important, is wholly-owned by the Forest Board.25 In each case, the parent trading agency is the sole stockholder. According to Verney, the trend in Sweden is toward state companies and away from trading agencies with the multiple shareholder type being replaced by the single-shareholder type. Advantages of State Companies The Rangoon Seminar noted a number of circumstances in which the joint stock company is the most effective form 24 Ingvar S. Melin also has studied the state compan ies of Scandinavia. See "Public Enterprise in Scandi navia," December, 1959, a talk delivered before businessmen [which includes statistical data on state companies in various Scandinavian countries, and "Mojligheterna att Kontrollera den statliga affarsverksambeten i aktibolags- form," Maddelanded Fran Ekonoroisk-Socialvetenskapliga Institutionen vid Svenska Handelshogskolan. Nr 9, 1960, pp. 1-15. . . . . 25verney, op . cit. , pp. 26-29. of public enterprise. Several of the circumstances involve the advantages of mixed ownership. 1. For genuine joint ventures of public and private; interests (for example, where a government wishes to j operate an industrial enterprise with some participa- i tion of foreign firms or private national interests, or where it wishes to open up participation in the enterprise to members of the public); 2. For flexibility of operations including such matters as purchase of raw materials, disposal of manufactured goods, use of liquid funds, elimination of delays and red tape associated with financial con trol in government departments and disciplinary control over the staff; 3. When different public authorities combine in a joint venture; it may then be useful to have the interests determined by shares; 4. When the government sets up an enterprise with the definite prospect and intention of disposing of all or part of it to private interests or to the public; 5. When a public holding company is formed by the acquisition of interests in a number of different enterprises, public, private or both; it is often convenient, in this case, for the holding company to acquire shares in the enterprises. A mixed, state company enables the state to obtain private business managers who have experience in operating commercial enterprises; it has flexibility and, conse quently, efficiency of operation; and can obtain capital ■from private sources. The availability of capital which is not usually available to government corporations is often 26United Nations, "Report of the Seminar on Organi zation and Administration of Public Enterprises in the Industrial Field," op. cit., p. 12. I 273 alleged to be the most significant advantage of the state 1 i company. In underdeveloped countries, it is argued, 'equities are more attractive to investors than bonds, ! - iparticularly if the investment also offers the security i • ! , 'of government participation. Bossi maintains that this i ■ jargument is incorrect. On this point, he contradicts \ •Hanson. | First of all, the state can always borrow at lower costs than private borrowers. In the second place, even if in theory bonds issued by state-controlled corporations that are set up under the 'private' or the mixed 'formula' are not part of the public debt, as would be bonds of public corporations, this is surely an illusory bookkeeping advantage, for ultimately all indebtedness of state-controlled corporations, whether private, mixed, or public, becomes a charge against the Treasury.27 Rossi concludes that the state company should seldom be used unless the state expects to transfer its holdings to private investors. Hanson, who is somewhat less critical, concludes that "at present, there is precious little evidence that the company is either conspicuously better or 28 conspicuously worse than the public corporation." 27 Einaudi, Bye, and Rossi, op. cit., p. 245. Also see Hanson, op. cit., p. 351. 28 Hanson, op. cit., p. 3 5 6 . For an up-to-date review of the advantages of India’s state company form of public enterprise, see V. V. Ramanadham, The Structure of Public Enterprise in India (New York: Asia Publishing Rouse, lR6l), pp. T6S^T7TT Ramanadham stresses the ease of formation as a major advantage of the state company. The government merely needs to meet the requirements for incorporating under the Companies Act. I 274 j Disadvantages of the State Company A few years ago India’s state companies, many of :Which are mixed corporations, were called a fraud on the i l jConstitution by the Comptroller and Auditor-General because i organization as state companies limited their financial f i f jaccountability to the audit authorities and the legisla- j ' jture. The new Companies Act, however, attempted to correct; jthis disadvantage by empowering the Comptroller and Auditor-General to audit state companies in which fifty-one per cent or more of the share capital is held by the government. State companies, like other forms of public enter prise, are perpetually criticized. If they are relatively autonomous, government officials criticize them because there is not enough control for public accountability. If the state companies are subjected to considerable control, especially if this is accomplished through ownership, private owners compalin that their policy-making powers are too restricted for efficient operation. Some writers consider state companies too similar to departments while others feel they are too independent and insulated from parliamentary control. Among the main disadvantages of this device in the case of entirely state-owned enterprises are the fol lowing : 1. The company device evades the constitutional responsibilities which a state-controlled enterprise has, in a democratic society to the government and to Parliament; 2. The use of the company form and of the law ! regulating commercial companies usually becomes a mere fiction because all or most of the functions normally vested in the shareholders and in management are reserved to the government by the statute setting up the company. There is usually no metting of share holders because it would be meaningless, and the profits as well as the appointments to the Board are naturally reserved to the Government. Hanson referred to Gyles who pointed out that the state companies were subject to so many controls in India that they were similar to departments, Hanson concluded that even the government corporation has more flexibility than the Indian state companies.*^9 Rossi, referring to the experiences of Italy, pointed out a related disadvantage. When the state shares ownership, in varying degrees, with private investors, the state lays itself open to the pressures of the private owners, who all too frequently use partial state control as a screen behind which they try to achieve more readily their own private ends.31 Rossi noted that Italy has few laws protecting the share holder from the actions of managers, controlling the 29 United Nations, Some Problems in the Organization and Administration of the”Public Enterprises in the Indus- : trial 'Field, op^ c TfT,~^pp^ 13-54. Also see ’ Nagopal Das’i fndustrial "Enterprise in India (revised edition; Bombay: Orient Longmans, 1956), pp. TSl-154. 30 Hanson, op. cit., p. 354. Also see V. V. Ramanadham, The Structure of Public Enterprise in India, l op, cit., ppT 175—193. 31 Einaudi, Bye, and Rossi, op. cit., pp. 243-246. actions of directors, preventing restraints of trade, or requiring full and accurate disclosure of financial data. 1 On these grounds he advocated the use of public corpora tions which have greater public accountability. j Perhaps the greatest disadvantage of state companies; in Sweden is the excessive participation in the operation of the state companies by Parliament and Ministers. Verney suggested that a new annual general meeting might lessen Ministerial interference and that many companies should be exempted from constant and direct accountability. In addition, the Companies Act which was intended for the incorporation of private companies was not intended for state companies. Consequently, according to Verney, one of the main devices for insuring public accountability, the regulations of the civil service, do not apply to state companies. Since Sweden has no public corporations, Verney suggested giving the state companies some additional characteristics of the government corpora tion by creating a new state company law. A general 'incorporation law for public enterprises, however, may result in problems such as those experienced by Turkey where so many exceptions to the provisions of the general incorporation law were made, when creating new public enterprises, that the law was not useful and would have been detrimental if all enterprises had been given the same characteristics without exception. Numerous problems associated with the state 'companies of India have been pointed out by Ramanadham. i !One problem is the question of whether the government Sactually has, or should have, the protection of limited I |liability as owner of the state company. Another problem i |is the violation of the traditional role of the corporate i ■owner as a non-manager. The government, by appointing I I ■members of the boards, participates in the management of i Iday-to-day operations. In practice, also, few directors oppose the position of the government director. Further more, while the power of control over state companies is in the hands of the government, Parliament does not review their policies. Another problem is the existence of interlocking directorates resulting from government appointment of a director to several boards. Consequently, the state company tends to operate as a departmental organization. The system for selecting the directors, in addition, pre vents the selection of directors who are functional specialists. Finally, directors who are civil servants influence the decisions of the board by their own interpre tations of informal government policies and, moreover, cannot maintain objectivity and avoid conflicts of interest while performing the two roles.^2 32 Ramanadham, op. cit., pp. 175-184. 278 i [ j In a lucidly damning paragraph, Robson summarized |the disadvantages of the state company. | The joint stock company compares unfavorably with the public corporation in almost every respect. It is not created by Parliament or in any answerable to it. j It is not directly under the control of the Government, ! except insofar as Ministers can control the membership | of the board or influence their policy indirectly, i Its activities and policies are sometimes carried on | behind a thick smokescreen of secrecy which conceals much of what should be publicly known. Its policy is | neither openly laid down in an Act of Parliament after public debate nor are there usually opportunities for ! discussing it in the legislature. Its reports and accounts are either not published or are no more informative than those of a commercial undertaking. Its corporate nature is often fictitious, since the ownership is usually vested in the Crown or in the Government. It is in no way an instrument of demo cratic socialism but is rather a device for avoiding public accountability and control.33 In spite of all the criticism, these disadvantages are not inherent in the joint stock company. Most of the criticisms could not be made of American companies, for example, because government regulations are imposed without the use of government ownership. It seems strange that scholars such as Rossi and Robson would tend to discard an institution even though it operates successfully elsewhere in the world in modified form. Hanson has repeatedly stressed that flexibility "is not primarily a function of a particular form of public enterprise, but of the operat ing conventions which are established within it."3^ 33 Robson, op. cit., p. 28. 34Hanson, op. cit., p. 354. 279 IV. THE MANAGEMENT CONTRACT I Characteristics j - - “ I - - — ! ; ! The report of the Rangoon Seminar was one of the i 'first publications to describe the management contract as ia form of public enterprise. I ' i : | A comparatively new device for administration of public enterprises in the operating contract. The ! government enters into a contract with an established j private company for management of a public enterprise and agrees to reimburse the contractor for all costs which he incurs. The contractor is compensated for his services by a ’ ’fixed fee’ ’ set by negotiation. Within the terms of the contract, which is a management con tract, leaving less freedom for the managing company than it would have if it were operating privately, the contractor is given full authority to employ and dis miss personnel, determine rates of compensation, purchase supplies and equipment, determine operating policies, and so forth. Statutes applicable to govern mental agencies do not apply to the contractor; and personnel hired by him are not considered to be public employees. In this way the contractor is able to operate the enterprise to a large extent in the same way as he would if it were a subsidiary of his private company.35 In the United States, the Department of Defense and the Atomic Energy Commission commonly negotiate management jcontracts with private companies, universities, and non -profit organizations. During World War II, the Office of ; Scientific Research and Development pioneered in use of the management contract. The Atomic Energy Commission took over the wartime atomic energy laboratories and equipment United Nations, Some Problems in the Organization land Administration of Public Enterprises in the Industrial field, op. cit., p^ TIT ;which were operated under contract by private organizations, |either industrial companies or universities. |Advantages i I I Of the forms of public enterprise discussed thus i ifar, the management contract provides the greatest amount | !of financial, procurement, and staffing flexibility. The jmanagerial skill and technical knowledge of private ’industry, thus, are available to government without making permanent additions to the number of government employees which might result in wasted manpower or discharges when specific projects have been completed. In the words of a recent report on contracting for research and development in the United States: Contractor-operated Government facilities appear to be effective, in some instances, in securing competent scientific and technical personnel to perform research and development work where very complex and costly facilities are required and the Government desires to maintain control of these facilities. Under such arrangements, it has been possible for the Government to retain most of the controls inherent in direct Federal operations, while at the same time gaining many of the advantages of flexibility with respect to staffing, organization, and management, which are inherent in university and industrial operations.® The President of California Institute of Technology maintains that the primary advantage of the management contract is the separation of military men from research 36 Bureau of the Budget, Report to the President on Government Contracting and for Research and Development. jSenate Document No. 84. 87th Congress, 2nd Session (Wash ington: Government Printing Office, 1962) , p. 11. ; 281 jfunctions. According to him, military research facilities ,are not operated as effectively as privately managed laboratories because military traditions, organization, and rules are made for fighting rather than research. The conflicts which result reduce the efficiency of the mili- | *tary-directed research establishments.^7 I f : Disadvantages j — n— ' ~-I~L-n - n ■ r~- - — - r - - Efficiency. Usually private firms operating under management contract have no short-run competitors because of the unique type of product. Consequently, there is almost no competitive incentive toward efficiency. The major incentive to efficiency is the government's right to terminate the contract. However, this alternative is so extreme and disrupting to the project that it is used only 'in cases of very unsatisfactory performance by the private firm under contract. Cost-plus contracts. Hanson suggested that cost- plus contracts provide the least incentive toward efficiency of the arrangements which might be used. He noted that the contracting firm is more interested in the 37 L. A. Dubridge, "Science and Government," Chemical Engineering News, April 6, 1953, pp. 1384-1390. See his later chapter "Education and Social Consequences," Automa tion and Technological Change, John T. Dunlop, editor (Jingle wood Cliffs: Prentice Ifall Inc., 1962), pp. 26-42. 282 j |successful outcome of the public enterprise if it has invested some of its own capital. Consequently, "an operating contract is likely to work most satisfactorily jin the context of a 'mixed* enterprise partly capitalized I go |by the contracting firm.” Contracts with foreign firms. Less developed countries are likely to use the management contract to iutilize the technical knowledge of foreign firms in the operation of public enterprises. In these cases, the government's lack of control over the performance of the contracting firm is particularly significant because of the peculiar problems which may occur resulting from the foreign firm's casual attitude toward its responsibilities, the difficulty of surmounting cultural problems, and the difficulties of interpreting the contract precisely. Personnel. Since private contractors are not sub jected to governmental salary limitations, the firm under management contract can often bid scarce labor away from government agencies. This problem may occur in any form of public enterprise which is not limited by governmental salary requirements. If uncompetitive salary limitations are imposed on government agencies, the agency is likely 38 Hanson, Public Enterprise and Economic Development, op. cit., p. 358. 283 |to attempt to avoid the limitation by utilizing another t Iform of public enterprise even though the major criteria i i |for using that form of public enterprise are not met. In ! |effect, the legislative bodies in such cases assign to jagencies the responsibility for conducting certain func- ' | jtions without providing the effective authority for executing the functions. ' V. THE CONTRACT FOR RESEARCH AND DEVELOPMENT Characteristics The contract for research and development differs from the management contract in that the company under contract does not operate a public organization.*^® Instead, the company agrees to perform certain research and develop ment activities for a public organization. Non-management contracts, of course, include those that provide goods and services other than research and development. However, since a large portion of the non-management contracts and the problems related to them involve research and develop ment, this term is used to refer to all contracts other 39 This section refers primarily to the experience ;of the United States with contracts for research and devel opment. : 284 |than those for routine procurement and management.40 i In the United States, net budget expenditures for research and development for 1963 are estimated to be $12,365 million, an increase of $2,121 million over 1962 I ; 1 <and $3,074 million over 1961. The research and development i 'expenditures have financed space programs, medical research* (atmospheric studies, research on high and low energy jphysics, materials research and water research. The i i federal agencies contracting for research and development and the estimated amount of their expenditure in 1963 are:4- * - In the federal budget the term "research and development" means the conduct of activities intended to obtain new knowledge or to apply existing knowledge to new uses. For a summary of all federal activities of this type, see Annex 3, "Federal Research and Development Pro grams," reprinted from "The Budget of the United States Government for Fiscal Year 1963," in Bureau of the Budget Report to the President on Government Contracting for Research, pp. 33-44. Also see National Science Foundation, I’ unds for Research and Development in Industry, 1959 OTasfi'ingion: Government Prirrffng Office, 1963/, p. viii. 43Data from Bureau of the Budget Report to the President on Government Contracting for 1fre¥earcii and Devel opment , bp. eft.7 P^ 33. Also see U. S. News and World Report, Aprfl , 1961, pp. 24, 26; National Science founda tion , "Trends in Funds and Personnel for Research and Development, 1953-61," Reviews of Data on Research and Development, Number 33, NSR Document 62-9, April 1962," 8 pp., (available at the Superintendent of Documents, Govern ment Printing Office); and National Science Foundation, i Current Projects on Economics and Social Implications of Science and Technology 196l (.Washington: tioveminent Print- ling "OffTde , ‘ “116 "pp^” 285 : Millions Department of Defense (Military $ 7,148 Functions) National Aeronautics and Space 2,400 Administration i Atomic Energy Commission 1,408 ■ Department of Health, Education, Welfare 680 I Department of Agriculture 171 National Science Foundation 164 Other Agencies 395 TOTAL $12,365 Over two-thirds of the research and development of the nation is financed by the Federal government. About two-thirds of the expenditures are made through contracts with private, industry; over ten per cent through grants and contracts with universities and other non-profit institu tions; and the remainder by scientists working directly for the federal government. Actual national, public and private, research and development expenditures for 1961, by source of funds and 42 performer are: Ibid., p. 45. The latest and most comprehensive data on actual and estimated expenditures and obligations by the federal government is the National Science Founda tion's Federal Funds for Science: Fiscal Years 1960, 1961, and 1962'('Washington: 'Government Printing Office, TSS2TI 145 pp. Part I deals with federal funds for research and development and R & D plant. Also see National Science Foundation, Funds for Research and Development in Industry, 1959 (Washington: Ciovernment Printing Office, 1962). 286 Millions $ 9,220 4,490 i 210 : 120 ! $14,040 $ 2,060 10,500 1,200 280 $14,040 The financing of research and development is a new role for the federal government in the United States. Prior to World War II annual expenditures for this purpose were about $100 million. In fiscal 1950 the expenditure was about $1.1 billion. In fiscal 1963 the total is expected to reach $12.4 billion. Since 1954, the total expenditure by both public and private sources increased by approxi mately 300 per cent. The impace of this dramatic increase on the productivity of the economy has not yet been determined.^ In 1960 nine per cent of the expenditure was 43 J3ee Francis Bello, "The Technology Behind Produc tivity," Automation and Technical Change, op. cit. , pp. 157,; 164. Bello maintains tfiaf federal expenditures "for research and development will not significantly raise pro ductivity. The President's Council of Economic Advisers is noncommittal on the topic. See the Economic Report of the President 1962 (Washington: Government Printing Office, ; 1962). Research conducted at the University of Minnesota suggests that inventive activity in an industry lags rather Source of Funds: Federal Government Industry Universities and University Research Centers Other not-for-profits TOTAL Performer: Federal Government Industry Universities and University Research Centers Other not-for-profits TOTAL for basic research, twenty-three per cent for applied research, and sixty-eight per cent for development. Shultz has pointed out that research financed by j the state and federal government in agriculture has saved as much as double the amount of inputs used for research. i [Undoubtedly, the tremendous increase in agricultural j [productivity can be attributed primarily to government I [participation in research during recent decades.^ The large increase in the amount of federal expendi ture for research and development has greatly changed the structure of the contracting institution and has resulted in the creation of new types of institutions. Instead of contracting directly with a university, the federal agency now often contracts with a university research center than leads investment. See Jacob Schmookler and Oswald Brownlee, "Determinants of Inventive Activity," American Economic Review: Papers and Proceedings, May, 1962, pp. 165-176. A iso £n is issue W. Eric Gustafson holds that the relation of research and development to changes in productivity has not been established conclusively by con- jtemporary research on the topic. See "Research and Devel opment, New Products and Productivity Change," ibid., pp. 177-185. The results of the research at the University of [Minnesota were recently published. See National Bureau of Economic Research, The Rate and Direction of Inventive [ Activity: Economic and 6ociai factors, a conference of the iJniversities-tfational Bureau Committee ^or Economic Re search and the Committee on Economic Growth of the Social Science Research Council (Princeton: Princeton University Press, 1962), 635 pp. ^^Theodore W. Shultz, The Economic Organization of Agriculture (New York: McGraw-Hill Biook Company, 1963) , :PprTGS-r2ff. organized separately from the universities. The Lincoln ■Laboratory of the Massachusetts Institute of Technology and i j the Jet Propulsion Laboratory at California Institute of Technology are illustrations. i i The Rand Corporation is an example of a private j ■corporation incorporated solely to provide operations 'research and other analytical services to the government. The activities of Rand Corporation are limited to the func tions specified within the contract with the Air Force. Another type of private organization, usually not for profit, has been created to provide the government with systems engineering and technical direction. These include the Aerospace Corporation, the MITRE Corporation, the Systems Development Corporation, and the Planning Research Corporation.45 In addition, the Bureau of the Budget in its recent report recommended the creation of a new type of government research and development establishment which would be called a government institute. An institute would be created pursuant to authority granted by Congress and would have some of the attributes of a non-profit corporation, would be a separate legal entity managed by a board of directors, would be supervised by a department or agency head, and would have its own career merit system based on 45 Bureau of the Budget, op. cit., p. 3. 289 j I |the comparability principle. This would provide flexi- i ibility in conducting research and development programs while retaining public accountability and control as is i |done with the government corporation.^® i i i Villard has proposed productivity institutes !sponsored by government in areas of the economy where I I increases in productivity seem especially urgent.47 He [regards government support of research as essential because basic applied research is generally not performed by pri vate industry since, under existing law in the United States, inventions cannot be kept from competitors if it is basic enough, and because research is too expensive for small firms in a very competitive industry. He suggests that (1) the findings of the institute be made available to all firms at the highest fees the market will pay; (2) the institute's funds come from the government through taxes ion the industry or from general revenues; and (3) the institute compete with the research departments of all firms in the industry. He contends that such a program would encourage private research as well as supplement the total research effort through government participation. 46Ibid., p. 24. 47 v Henry H. Villard, Economic Performance (New York: Holt, Rinehart and Winston, pp. 383-85. For a re view of the role of fundamental and practical research in the economy see chapters 24-31, pp. 354-387. i 290 i [Advantages ! [ Each of the various types of contracting institu tions has unique advantages. The government laboratory usually has a close sense of participation in the mission ! [of the agency and provides management personnel with the i i [necessary scientific knowledge. The university is t particularly adapted to conducting undirected applied and [basic research. Not-for-profit organizations have the advantage of disassociation from the government and com mercial influences which might interfere with their objectivity. Profit-making corporations have the advantage of being able to assemble the large amounts of resources and skills needed for complex projects and of being able to apply capabilities developed for private customers. The different types of contracting institutions provide the needed flexibility in establishing, directing, and managing research and development operations. In addition, they act as a kind of competitive yardstick for evaluating performance. Regulatory and some management functions, however, cannot be effectively contracted. Disadvantages A number of criticisms and problems associated with government contracts for research and development were isummarized in the report prepared by the Bureau of the Budget. 291 | i 1. Concern has been expressed that the Government's: ability to perform essential management functions has i diminished because of an increasing dependence on con- \ tractors to determine policies of a technical nature and to exercise the type of management functions which j Government itself should perform. ( 2. Some have criticized the new not-for-profit con-; tractors, performing systems engineering and technical j direction work for the Government, on the grounds that : they are intruding on traditional functions performed j by competitive industry. j 3. Some concern has been expressed that universities are undertaking research and development programs of a I nature and size which may interfere with their tradi tional educational functions. 4. The cost-reimbursement type of contracts the Government uses, particularly with respect to research and development work on weapons and space systems, have been criticized as providing insufficient incentives to keep costs down and insure effective performance. 5. Criticism has been leveled against relying so heavily on contractors to perform research and develop ment work as simply a device for circumventing civil service rules and regulations. ... 6. A number of profound questions affecting the structure of our society are raised by our inability to apply the classical distinctions between what is public and what is private. ... In what sense is a business; corporation doing nearly 100 per cent of its business with the Government engaged in 'free enterprise'?^® 48 Ibid., p. 4 (numbers added). Additional discussion; of the problems of contracting for research and development; :may be found in Harvard University, Harvard and the Federal i Government: A Report to the Faculties and Governing Board l of Harvard University (Cambridge: Harvard University Press, 1961) , 36 pp. ; Victor K. Heyman, "Government by Contract: Boon or Boner," Public Administration Review. Spring, 1961, pp. 59-64. Charles Vincent Kidd, American Universities and I Federal Research (Cambridge: Bleknap Press, 1959), 272 pp.; : ja study by representatives of the Bureau of the Budget, ’ General Accounting Office, Department of the Air Force, and; the Office of the Assistant Secretary of Defense (Comptrol-■ |ler), Management of Research. Development. Test and Evalua- 292 | Other problems were discussed in the report. What jcriteria, for example, should be used for determining what j research and development projects should be contracted? Also, criteria are needed for determining what contracting institution is best suited for conducting the project. Another problem is the need for maintaining research and development institutions as direct government operations and the related problem of not being able to obtain or re tain the ablest researchers because the salaries of govern ment researchers is significantly less than private sal- a q aries for comparable jobs. The inadequacy of salaries tion Programs: U. S. Air Force (Washington, 1960), 249 pp.; tfon'lC. Price.' (Sovernmerif andHScience: Their Dynamic Rela tion in American Democracy (New York: New York University Press, 1954), 203 pp.; Richard A. Tybout, Government Contracting in Atomic Energy (Ann Arbor: University of Michigan Press, 1956), 226 pp.; U. S. Congress. House, Committee on Appropriations, Department of Defense appro priations for 1962, Hearings. 87th Congress, 1st session, Pt. 4: Research, Development. Test, and Evaluation (Wash ington: Government Printing Office, 1961), 548 pp.; U. S. Congress. House, Committee on Armed Services, Hearings Pursuant to Section 4. Public Law 86-89. Special Subcom mittee on Procurement Practices of the Department of Defense, 86th Congress, 2nd Session (Washington: Government Printing Office, 1960), 752 pp.; and U. S. Congress. Senate, Committee on Government Operations, Federal Budgeting for I Research and Development. Hearings before the Subcommittee on Reorganization and International Organization, 87th Congress, 1st Session. Agency Coordination Study, July 26- 27, 1961 (Washington: Government Printing Office, 1961-62), 2 parts. ^The Government Employees Council opposes the in creased use of government contracts for research and development on the grounds that (1) many career civil service have been discharged before retirement because traditional governmental services are now performed by pri- in the government requires agencies to rely too heavily on the technical competence of contracting firms for decisionmaking. Government management functions, in 1 effect, are then performed by the contracting technicians. Conflicts of interest are a special problem. Advice may benefit the advisor if he is part of an organization with which the government has or will have a contract. The; ( i President has already directed that an advisor cannot be employed if his advice will have a direct and predictable effect on the interests of the private organization which he serves. A second conflict of interest problem is the prac tice by private firms of employing the leading representa tives of other firms engaged in similar work to serve on the board of directors. Thus, the advisor's advice may benefit an organization with which he is associated. A third conflict of interest problem arises when an Ivate companies under contract; (2) defense costs are there fore higher; and (3) defense policies are now determined by the profit-making private sector rather than by Congress land the administration. See Government Employees Council, j Presentation of the Government Employees Council, AFL-CID, | t o t h e E x e c u t i v e B r a n c h o f t h e U . E H G o v e r n m e n t i n R e f e r e n c e | t " o " t h e C o u n c i l r s O p p o s i t i o n t o t h e B u r e a u o f t h e b u d g e t b u l l e t i n " G - 2 C V ? a s h i n g t o n T D . C . , 1 9 ( 5 2 ) , 1 3 p p . •^Memorandum of the President, "Preventing Conflicts iof Interest on the Part of Advisors and Consultants to the Government," issued on February 9, 1962. See the Bureau of the Budget report, Ibid., pp. 10, 13. 294 j organization providing technical advice to the government 1 then receives a production contract to manufacture a part j |of the product being developed. i j i Another type of problem involves captive companies I {which wish to sell their services to private firms or other* I ; |government organizations. ! * ; Since the government reviews the cost and renegoti- ; ;ates contracts with excessive fees, conflicts of interest ' 'do not result in excessive profits for the contracting firms. However, in order to obtain contracts for the organization with which they are associated, the advice of advisors may be influenced or prejudiced in favor of the potential contracting firm. The bias, of course, is not necessarily an intentional prejudice. The Bureau’s report pointed out that the increased use of contracts for research and development has reduced the quality of research activities conducted directly by the government. The major detrimental effects were sum- 51This problem involves the government’s patent policy. See U. S. Congress. Senate. Committee on the Judiciary. Government Patent Policy Hearings before the {Subcommittee on Patents, "'Trademarks, and Copyrights, 87th {Congress, 1st session, on S. 1084 and S. 1176, April 18-21, 'May 31-June 2, 1961 (Washington: Government Printing Office, 1961), 2 parts; Patent Policies of Departments and Agencies of the Federal Government— 1959. Hearings before 'a'"sub- committee", 86th Congress, 1st session (Washington: Govern- iment Printing Office, 1960), 454 pp. 295 marized in the report.^2 First, contractors have been able to provide a superior working environment for their scientists and engineers— better salaries, better facilities, better administrative support— making contracting operations attractive alternatives to federal work. | Second, it has often seemed that contractors have i been given the more significant and more interesting | work assignments, leaving government research and development establishments with routine missions and ! static programs which do not attract the best talent. I Third, additional burdens have often been placed on j government research establishments to assist in evalu ating the work of increasing numbers of contractors and to train and educate less skilled contractor personnel — without adding to the total staff and thus detracting from the direct research work which appeals to the most competent personnel. Fourth, scientists in contracting institutions have often had freedom to move ’outside channels’ in the government hierarchy and to participate in program determination and technical advice at the highest levels— freedom frequently not available to the Govern ment’s own scientists. Finally, one of the most serious aspects of the con tracting out process has been that it has provided an alternative to correcting the deficiencies in the government’s own operations. The report suggested proposals for improving the govern- 'ment’s ability to carry out research and development activities directly and for improving contractual arrange ments with the private sector. Suggestions for Improvement The report identified three primary criteria for 52Ibid., p. 21. 296 determining whether to contract out research and develop ment work: (1) efficiency in performing the project; (2) 5 ■ I the long-run strength of the country's scientific and jtechnical resources; and (3) avoidance of conflicts of I interest. I | The first improvement suggested by the Bureau of the i jBudget was enactment of the President's recommendation of comparable pay for comparable work in order to provide jcompetent management control within government agencies. The second major recommendation was for the President to request the head of each department and agency, in consul tation with the Attorney General, to formulate clear-cut standards for avoiding conflicts of interest. The Bureau suggested that incentive-type contracts replace cost-plus- fixed-fee contracts whenever feasible. The fee would vary according to a predetermined schedule which would relate larger fees to lower costs, superior performance, and shorter delivery times. Another suggestion was for im proving the evaluation of the quality of research and development work through better auditing and reporting procedures for administering the contract. Basic research by universities should be financed by grant rather than by contract. More attention should also be given to feasi bility studies and the development of specifications before inviting proposals for major systems development in order to prevent costly duplication of studies by potential con- | 297 |tractors while preparing their proposals. The Bureau |recommended that an office be created in each department, I : jwith the official reporting directly to the department jhead, to control contract policies related to salaries and i jother benefits and to personally approve contract salaries i jover $25,000. This is necessary, the Bureau felt, because i | j - ithe comparability of jobs cannot be established for top jmanagement positions. The Bureau also made recommendations for improving the competence of government research and development establishments. The letter of transmittal to the President briefly summarized these suggestions.^ To insure that government research and development establishments are assigned significant and challenging work; To simplify management controls, eliminate unneces sary echelons of review and supervision, and give to laboratory directors more authority to command resources and make administrative decisions; and To raise salaries, particularly in the higher grades, in order to provide greater comparability with salaries available in private activities. The report of the Bureau indicated that first-class facilities and equipment were needed within government to make program decisions which require scientific and tech nical knowledge and to provide a source of management personnel. The Bureau noted a special problem in the relations 53 Bureau of the Budget, op. cit.. p. ix. ibetween civilian and military personnel and suggested that ; | military men act as technicians rather than "military men" i ; except when there is a need for their military skills. j i i ! Recently the Senate Committee on Government Opera- i ! jtions submitted its report on S. 2771 recommending the jestablishment of a Commission on Science and Technology.^ : |One of the witnesses, Dr. Mortimer Taube, chairman of ! jDocumentation Incorporated, suggested solutions different ifrom those proposed by the Bureau of the B u d g e t . ^5 On the question of competitive bidding for scarce personnel, Dr. Taube held that raising government salaries would not solve the problem because contractors will raise salaries even higher. He proposed that no non-profit organization that exists solely on federal funds, without any capital investment or risk, should be permitted to pay salaries higher than government salaries for comparable work. This, of course, would have the effect of preventing contractors from attracting qualified employees if government pay scales are significantly below the pay scale for comparable work in private industry. 54 United States Senate. Committee on Government Operations, Establishment of a Commission on Science and Technology (Washington: (Government Printing Office, i962), 87th Congress, 2nd Session, Senate Document No. 1828, p. 10.i A new bill S. 816 was introduced in the 88th Congress, 1st Session and the Committee on Government Operations recom- mended that the bill pass. 55Ibid., pp. 46-50. 299 j ;He also proposed a science career service and argued that ja Department of Science and Technology would provide icivilian control of science rather than military control, i Iwhich currently exists. He pointed out that there has I jbeen very little evaluation of research and development i •projects to determine whether the government has received adequate benefit for its expenditure. ° i VI. CONCLUSION The two primary goals of public enterprise are efficiency and public accountability. As with so many other economic goals, these are sometimes conflicting objectives. Vigorous pursuit of public accountability results in uniformity, inflexible rules, resistence to change, and inefficiency. On the other hand, excessive changes to increase efficiency can result in improper pric ing, waste of national resources, and other violations of the public interest. In slightly different form, this dilemma has existed in the private sector of mixed enter prise economic systems for many years. Economies of scale resulted in both efficiency and reduced competition. Pub lic authorities then sought to find ways of insuring the 56 See also, Hearing before the Committee on Govern ment Operations, U. S. Senate, 87th Congress, 2nd Session, on S2771, Create A Commission on Science and Technology, Parts 1 and 2 (Washington: Gove~rnment. T*rinting Of f ice , 1962), 169 pp. j 300 ; i i iregulatory effects of competition without resorting to the i | type of competition which would require inefficient produc- j j ;ing units. ! Regardless of the name of the institution utilized i I to conduct public economic activities, changes have periodically been made to increase efficiency without 'reducing public accountability, and vice versa. In recent i jyears, industrial countries have stressed the need for i greater public accountability while the critics of public enterprise in less developed countries tend to emphasize the need for improved efficiency. CHAPTER VII I : j HISTORY OF NATIONAL GOVERNMENT CORPORATIONS ; I IN THE UNITED STATES ! i ' t ! { l | The purpose of this chapter is to briefly review the 1 1 shistory of national government corporations in the United I jStates. This task, of course, involves government corpora tions with functions which are not directly related to economic development.-^ In this respect, the treatment of the topic is the traditional approach of studying only the government corporations at the level of the national govern ment and including all national government corporations regardless of the diversity of their functions. The history of state and local government corporations is not included. I. THE CORPORATION Several economic institutions with corporate organizational form are older than the modern government corporation which is an adaptation of the modern private ■h^he concept of the government corporation perhaps should be credited to W. F. Willoughby whose article "The National Government as A Holding Corporation," Political Science Quarterly, Vol. 32, 1917, p. 510, was one of the earliest discussions of the topic. 301 302 j jbusiness corporation for the performance of public business I jactivities. The public municipal corporation, for example, jis an older institution than either the modern private or j jpublic business corporation. Similarly, the modern private i business corporation is older than the modern public [business corporation. j Such generalizations are difficult to sustain, how- jever, because of the changing character of the corporation. i During the period of mercantilism corporations performing business activities were considered public bodies conduct ing public functions.^ In view of the evolving character of the corporation, a brief historical sketch may serve as a useful introduction to a history of the government corpo ration. The characteristics of the corporation began to appear in other institutions long before the formal corporate organization emerged. The Greek cities, medieval monastaries, boroughs, and guilds were institutions which had an artificial personality separate from the personality of the individuals composing them. Each institution had individual rights, powers, and duties. Guilds, for example, often had the right to hold property indefinitely, use a o Sidney D. Goldberg and Harold Seidman, The Govern ment Corporation: Elements of A Model Charter (Chicago: ^^br£c^\Administrat£on Service, 1953’ /, pTTT 303 I common seal, swear members to secrecy, lend from a common fund, require members to sell at cost to other members, O establish by-laws and audit procedures, and elect officers.0 i However, while some characteristics of the corpora- I I ition were present in earlier institutions, the guilds were not the direct ancestors of the present-day corporations. i |The guilds sometimes were characterized by perpetual suc- 1 jcession, for example, but transferable shares were not jused for this purpose until the joint stock principle was adopted, which began the history of the modern corporation. Nevertheless, the joint stock company did not have limited liability which characterizes the corporation. In addition, early joint stock companies had some privileges, or franchises, which are no longer granted. The Hudson Bay Company, for example, was granted the exclusive right to trade in the underdeveloped continent of North America. This type of monopoly privilege is no longer granted without corresponding governmental control. Limited liability for the stockholder was granted in England as early as the fifteenth century but the privilege was not common until the seventeenth century. In fact, joint stock companies were not incorporated under general incorporation laws or their charters registered 3 Abram Chayes, The Corporation in Modern Society, Edward S. Mason, editor (Cambridge: Harvard University~ Press, 1959), pp. 32-37. 304 | j : jwith a state official until about 1850. The Crown was i jreluctant to grant limited liability to joint stock i ' jcompanies and required that the word "limited" be used in the title of the company when the privilege was granted. jEven today there are more joint stock companies than corpo- | i ’ rations in Britain. i The corporation and limited liability were more readily adopted in the United States than in Britain. iDuring the eighteenth century> municipal corporations were common but business corporations were not numerous until after the Revolution. However, although no more than six business corporations survived the Revolution, more than three hundred were chartered before 1800. Each was created by special legislative act since no general incorpo ration laws existed. The shareholder usually had one vote iregardless of the number of shares held. Gradually corpo rations replaced the joint stock companies. The Constitution of the United States does not men tion corporations although the topic was discussed during the Constitutional Convention with concern being expressed ■ that state control of business might obstruct the public interest. Opponents of federal incorporation pointed out that the states would oppose giving so much power to the national government.^ ^For a brief history of corporations see Scott [ 305 i In 1795, North Carolina became the first state to i : : charter a corporation. There was considerable debate among, | the state legislatures regarding the wisdom of granting i ; j limited liability to stockholders. Taylor notes an example; j ; I of the debate. | Maine passed a law in 1821, imposing personal lia bility upon stockholders of manufacturing companies. That state changed this law in 1826 to give stock- ! holders limited liability; in 1836 it reversed itself and made shareholders liable for corporate debts; in 1841 it repealed this latter law; in 1843 it repealed the repealing law, reviving unlimited liability. Not until 1856 did Maine give limited liability permanently to stockholders.5 In 1811, New York passed the first general incorpo ration law known in the world. By the middle 1800’s most new states entering the United States had general incorpo ration laws and by 1860 two-thirds of the states had general i ^corporation statutes. Berle and Means later asserted that the change from incorporation by special legislative act to incorporation under general incorporation laws had detri mental social effects because it made corporate charters less subject to public review and gave the incorporating group more centralized power over both the state and the Uuchanan, The Corporation and the Republic (New York: The [Fund for the Republic, 1958), 27 pp. 5 W. Bayard Taylor, Financial Policies of Business Enterprise (D. Appleton-Cehtury Company, 1542J~ pp^ 38-39. j 306 i ! c !stockholders. Haney observed several significant facts regarding !the evolution of the corporate institution. First, he stressed that the central idea of the corporation is its unity of action and perpetual succession rather than the joint-stock principle. Second, the evolution of the corpo- i [ration progressed from the loose association such as the [guilds and regulated companies, to tighter association in which the identity of individual members was less priminent. i Third, the charter came to be regarded as a permit to exercise private initiative rather than a franchise for monopolistic privilege. Fourth, the State originally delegated powers to corporations because it was too weak to solve problems of trade and industry in a different 7 manner.' Today, while numbering about thirteen per cent of all non-agricultural firms, corporations produce about two- thirds of all privately produced income in the United t [States. Their size and political and economic importance have increased, creating new problems while, at the same Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: The MacMillan Company, T933Ti pp. ISS-lSS. 7 Lewis H. Haney, Business Organization and Combina- ition (revised; New York: The MacMillan Company, INTUIT, ppT r n j n = i 9 7 . ! O i time, solving old problems more effectively. 5 According to Chayes, the development of the corpo- I • jration can be divided into three stages. The first stage ■ Iwas characterized by the spread of free incorporation under | : jbroad, permissive incorporation laws. During the second istage the corporate device was used to amalgamate small, i jlocal and regional firms into large enterprises which could iserve national markets. The third stage commenced roughly with the twentieth century during which the corporation began to "revert toward its ancient character as an asso- 9 jciation of people rather than an aggregation of things." 'During the third stage there has been increased recognition among scholars of the unique character of the corporation.1® Warner's recent study corresponds with the second stage identified by Chayes. Warner noted that a trend 1 jobservable in the twentieth century is the emergence of i ■ national corporations along with other complex hierarchical institutions which characterize the emergence of American i Q Adolph A. Berle, Jr., Power Without Property (New York: Harcourt, Brace and Company^ 1959), 184 pp.; Yhe 20th Century Capitalist Revolution (New York: Harcourt, Brace and Company, 1954), 192 pp.; and Thurman W. Arnold and others, The Future of Democratic Capitalism (New York: A.S. Barnes Company, Inc. , 1951), 11i pp. 9 Abram Chayes, Introduction to John P. Davis, Corporations (New York: Capricorn Books, 1961), p. iii. ■^Arnold and others, op. cit., pp. 37-38. Also see Warner's "The Corporation Man,'* The’ Corporation in Modern Society, op. cit., pp. 106-121. ; 308 I ; jsociety into one primary community rather than a group of I autonomous local communities. Local institutions have lessj i ; i 1 1 ' ■influence over individuals than they once had.A t ; | II. CHRONOLOGICAL DEVELOPMENT OF i NATIONAL GOVERNMENT CORPORATIONS 11789-1910 The oldest surviving government corporation in the United States is the Smithsonian Institution which was created in 1846 (20 U.S.C. 41). ^ Its members consist of jthe President, the Vice-President, the Chief Justice, and ;the heads of executive departments. The Smithsonian Institution is financed under the terms of the will of l James Smithson, of London, who bequeathed his fortune to the United States in 1829 for this purpose.1^ Consequently, !the Smithsonian Institution has the unusual distinction of j being owned by the government even though it has issued no i stocks or bonds. However, the Smithsonian Institution receives appropriated funds. j j 11W. Lloyd Warner, The Corporation in the Emergent American Society (New York f Harper ¥ro" the r s" "Pub 1 is he rs , X962)',' ’ 64 “pp.--- 12 Stated in the Supreme Court decision, Kiefer & Kiefer v. Reconstruction Finance Corporation (396 U.S. 391, 352T -------------------------------------------- 13 United States Government Organization Manual, 1961- 62 (Washington: Government Printing Office, 13611J , pp. 497- I5TJ3. 309 : I j The first federally chartered corporation in the I : !United States, however, was the First Bank of the United j : |States which was chartered by Congress in 1791. The Bank i |of North America was authorized in 1781, but by the i jContinental Congress rather than by the first United States Congress, and was considered a private bank although jthe Confederation owned five-eighths of the stock until j1782. The First Bank of the United States was chartered i jfor twenty years and $2,000,000 of the $10,000,000 capital jwas subscribed by the government. The government also owned twenty per cent of the $35,000,000 capital stock of I the Second Bank of the United States which was chartered in 1816. Government corporations were seldom used for public business purposes prior to 1904 when the Panama Railroad Company was purchased. This is indicated not only by their i fewness but also by the fact that the government did not ■control the earliest federally chartered corporations exoeptj Harold U. Faulkner, American Economic History (5th edition; New York: Harper 8s Brothers"J 1943) , pp. I6T^T62. jAlso see Herbert V. Prochnow, American Financial Institu- tions (New York: Prentice-Hall^ Inc. , 1951), pp. 4-6; tl.8. idongress, Senate Committee on Government Operations, Audit jReports of Government Corporations and Agencies (Washing ton: Government Printing Office, X954), p. 2] and John McDiarmid, Government Corporations and Federal Funds KChicago: The University of Chicago Press, 1938), pT 21. jW. G. Friedmann, The Public Corporation, A Comparative jSymposium (TorontoCarsweXl Co. , 1954) also contains an ‘ historical sketch. j 310 | | : i through its financial interest in them. The constitu- | : !tional right of Congress to establish government corpora- ] ; itions was sustained by the Supreme Court in McCulloch v. i ; jMaryland (4 Wheat. 316) in 1819. ] If complete ownership by government is a criterion I of a government corporation, then the First Bank of the iUnited States was not the first government corporation in jthe United States. Neither the First Bank nor the Second I iBank is included in the lists of active and inactive jgovernment corporations prepared by the Senate Committee on Government Operations.15 i The purchase of the Panama Railroad Company, initi ated in 1904 and completed in 1905, made it the first corpo ration wholly-owned by the government of the United States although the charter had been granted to private persons by :New York State in 1849. In addition to railroad transpor tation, the Panama Railroad Company operated many commercial i ^activities including a steamship line, baggage transfer service, stables, docks and piers, coal plants, a telephone J - system and electric clocks, real estage and hotels, cattle industry and dairy farms, commissaries, and plantations.15 15 U. S. Congress, State Committee on Government Operations, op. cit., Appendix A, pp. 88-91. 1 fi Marshall E. Dimock, Government-Operated Enter prises in the Panama Canal Zone \Chicago: The tfnTvers'ffEy of Chicago Fress, 1934), pp. 25-30. I In 1948, the Panama Railroad Company was reincorporated by ! ;act of Congress. It is supervised by the Secretary of the | Army. In July, 1951, the Panama Canal Company absorbed the' i [ |Panama Railroad Company and added many new functions. i i Decade of World War I The twelve Federal Land Banks were established in July, 1916 (12 U.S.C. 644) and are the only existing govern ment corporations of those which were created during the ^decade. The Farm Credit Administration (FCA) which has been an independent agency of the government since 1953, is the supervising agency. Initially the Treasury subscribed to nearly all of the capital but this capital was completely retired in 1934. All subsequent Treasury subscriptions were retired in 1947 and the Federal Land Banks are now entirely 17 privately owned. The Federal Reserve Banks, which were created by the Federal Reserve Act in 1913, are incorporated separately and are popularly regarded as privately owned by the member i ; banks on the grounds that each member bank subscribes to a portion of the capital of the district bank. Congressman Patman, with authoritative support, contends that the 17 See the annual report of the Governor of the FCA to the Speaker of the House, 28th Annual Report of the Farm Credit Administration on the Work of the Cooperative farm Credit System, 196(5-61 (Was hingfdnf Government Printing OnTc^T'TSCTT, 115 pp. I 312 ! ■ I ' [Federal Reserve Banks are entirely owned by the government l land should be subject to the Government Corporation Control |Act.I® i | | Whether properly regarded as public or private corpo rations, ownership without proprietary interest does not I igive member banks control over the Federal Reserve Banks [because the Board of Governors maintains control. The Federal Reserve Banks differ essentially from privately managed banks in that . . . their share holders, the member banks of the Federal Reserve System, do not have proprietorship rights, powers, and privileges that customarily belong to stockholders of privately managed corporations. 9 The main control mechanism of the member banks is the right to select six of the directors of each Federal Reserve Bank. However, this gives the member banks a very ineffective degree of control. Consequently, in view of the fact that they were created by Congress for public rather than private purposes and that private ownership is a misnomer, according to Congressman Patman, and does not provide private control of the policies of the district [banks, the Federal Reserve Banks might be called government lg See Congressman Patman's statement in Amending the Government Corporation Control Act, Hearings before a Sub committee of the dommittee on GoVernment Operations, House of Representatives, 85th Congress, 2nd Session, on H.R.3332, [(Washington: Government Printing Office, 1958), pp. 146-156.1 Congressman Patman cites Wm. McChesney Martin, Chairman of [the Board of Governors of the Federal Reserve System on p. 153. 19Board of Governors, The Federal Reserve System: Purposes and Functions. 1961, p. 69. I 313 i ;corporations. i If the capital stock of the Federal Reserve Banks is retired, as has been suggested by the Commission on Money and Credit, the Federal Reserve System (FRS) would then be privately owned as is the Federal Deposit Insurance Corpo ration (FDIC) , the Federal Land Banks, the Federal Home iLoan Banks, and the Federal Savings and Loan Insurance i Corporation.^ Since these government corporations are iprivately owned, it would be inconsistent to continue calling a self-owned Federal Reserve System a system of private corporations.^ During the emergency period of World War I, seven government corporations were created. They are listed as inactive government corporations by the Senate Committee on Government Operations although they were legally private corporations. In most cases they were initiated by the President or an executive body and were incorporated under state incorporation laws. The government owned the emergency corporations and controlled them through appoint ing the boards of directors. Their temporary active life 20 Commission on Money and Credit, Money and Credit (Englewood Cliffs: Prentice-Hall, Inc., lOST), "p. ETH 21 Harold Seidman holds that public ownership exists pven though the government owns neither stock nor bonds !of public enterprises. He argues that stock has nothing to do with government ownership. 314 S unique among government corporations since they became inactive with the signing of the Armistice. ^ The i emergency corporations, the year each was created and jdissolved, and the amount of capital were as follows: i | U.S. Shipping Board Emergency ! Fleet Corporation, 1917-1936 U.S. Grain Corporation, 1917-1927 War Finance Corporation, 1918-1939 U.S. Housing Corporation, 1918-1952 U.S. Sugar Equalization Board, Inc., 1918-1926 U.S. Spruce Production Corporation 1918-1946 Russian Bureau, Inc., 1918-1919 The U. S. Spruce Corporation Production Corporation had been in actual operation only eleven days when the Armistice was signed November 11, 1918. With the exception iof the Emergency Fleet Corporation, which was dissolved in 1936, all of the emergency corporations commenced liquida tion shortly after the end of the w a r .23 The Emergency Fleet Corporation lost $5,387,000 in 1933 which contributed 22 For a brief resume of each government corporation created prior to 1939, see Ruth G. Weintraub, Government Corporations and State Law (New York: Columbia University Press’ i 1939), Appendix Iff, pp. 180-194. 23 McDiarmid's Government Corporations and Federal Funds. op. cit., provides more detail about the emergency corporations. See pp. 24-30. Harold A. VanDorn's Govern ment-Owned Corporations (New York: Knopf, 1926) is entirely devoted to analysis of the emergency corporations. $ 50,000,000 500.000.000 500.000.000 100. 000.000 5.000.000 10,000,000 5.000.000 315 i s |to Its dissolution in 1936. All of the emergency corpora- tions have now been dissolved. j jThe 1920's !------------- The only government corporations created during the j | j1920's were the Federal intermediate credit banks and the I |Inland Waterways Corporation. 1 IDecade of Depression The 1927 Supreme Court decision (Skinner and Eddy Corporation v. HcCarl, 275 U.S. 1) held that the government corporations in aertain respects were free from accounta bility to the Treasury and from the audit control of the General Accounting Office. The decision encouraged the use of government corporations during the 1930's because it seemed to insure their freedom from extensive govern ment regulation. Twelve of the seventeen types of government corpora tions which are currently active were created during the 1 9 3 0 ' s.24 Twenty of those which were created during the decade are either inactive or have been terminated. Several have been merged with other institutions. The twelve types of active government corporations which were created during the decade of the depression are 24The Federal Home Loan Banks, for example, may be regarded as one type even though there are eleven banks, each separately incorporated. | 316 ' f listed below in the order of their initial incorporation. |An asterisk indicates that no share capital is outstanding. Federal Home Loan Banks (11), 1932 Banks for Cooperatives (1 central bank and 12 i regional banks), 1933 I Commodity Credit Corporation, 1933 | Federal Deposit Insurance Corporation, 1933* Tennessee Valley Authority, 1933* Export-Import Bank of Washington, 1934 Federal Prison Industries, Inc., 1934* Federal Savings and Loan Insurance Corporation, 1934 Virgin Islands Corporation, 1934* Public Housing Administration, 1937* Federal National Mortgage Association, 1938* Federal Crop Insurance Corporation, 1938* The Virgin Islands Corporation, the Public Housing iAdministration, the Federal Crop Insurance Corporation, the Tennessee Valley Authority (TVA), and the Federal Prison Industries, Inc., have no capital stock but the remaining government corporations have stock which is partially or wholly-owned by the United States government. Even though these five enterprises have no capital stock, they are designated wholly-owned government corporations in the Government Corporation Control Act. All Treasury-held !capital of the Federal Deposit Insurance Corporation (FDIC) has been retired although it is designated a mixed-ownership 317 i ^government corporation. The FDIC has authority to borrow |up to three billion dollars, however, from the Treasury. iThus , the Treasury owns no shares in six of the twelve jgroups of active government corporations which were created jduring the decade of depression. ! Six of the government corporations created during i jthe decade were incorporated in the state of Delaware. |One of these was soon reincorporated under the laws of the JDistrict of Columbia. The Commodity Credit Corporation remained incorporated under Delaware laws until 1948, and the remainder were liquidated after only a short existence. In 1938, McDiarmid noted that eight government corporations had been incorporated under the laws of Delaware, three in the District of Columbia, two in New York, and one each in ! ' * the states of Washington, Connecticut, Tennessee, and Mary land. Two export—import banks were chartered by executive L order during 1934, the first in January and the second in March. Both were incorporated in the District of Columbia as was the Federal Prison Industries, Incorporated. The Second Export-Import Bank of Washington was liquidated in 1936 and its functions were transferred to the earlier bank which was reincorporated under federal charter in 1947. In recent years the Export-Import Bank has increas ingly made loans for development purposes. The Bank’s loans are not intended to compete with private capital, are ; 318 !for specific purposes, and must offer reasonable assurance i i iof repayment. The purpose of the Export-Import Bank is to ;aid in financing and facilitating exports and imports ibetween the United States and any foreign country. The i iBank mainly finances private trade which could not be I financed through regular channels at reasonable cost. The loanable funds of the Bank are borrowed from the U. S. ^Treasury up to a maximum of seven billion dollars. The Bank can also guarantee private loans. At the end of 1960, the Export-Import Bank had out standing credits of over thirteen billion dollars repre senting net credit extended since the Bank’s creation in 1934. Total assets were three and three-tenths billion dollars.2® The Tennessee Valley Authority (TVA) was the first use of the government corporation for development purposes in the United States.2® The purpose of TVA is To provide for the unified development of the Ten- j nessee River system, including flood control in the Tennessee River and Mississippi River basins; naviga tion on the Tennessee River; generation of power consistent with flood control and navigation; reforestation and the proper use of marginal lands, and 25 U. S. Bureau of the Census, Statistical Abstract of the United States: 1961 (Washington": Government Printing tiff ice f 'X55rr,“ pp."“f5TrT''?S, 7. 26 Gordon R. Clapp, The TVA (Chicago: The University of Chicago Press, 1955), pi JTT 319 i agricultural and industrial development of the Tennes see Valley; operation of government power and chemical i properties at the near Muscle Shoals, Alabama; and the I economic and social well-being of the people living in the Tennessee drainage basin and adjoining territory.27 |The amount of the government's investment at the end of fiscal year 1952 was $1,358,667,943 and appropriations for j ' TVA at that time amounted to $1,260,707,581. Bonds issued |to the Treasury and the RFC have been retired. In 1959, the Congress authorized TVA to issue up to I i j$750,000,000 in electric revenue bonds in order to finance ithe addition of generating and transmission facilities. The first public issue of bonds, $50,000,000, was made in the fall of 1960. A second $50,000,000 in bonds was issued in July, 1961. The TVA must repay one billion dollars of jthe one and two-tenths billion dollars of the Treasury investment within a fifty-four year period, plus a return or dividend at a rate determined by the average interest j - ‘ ipayable by the Treasury on its total marketable public obligations. At the beginning of fiscal year 1961 this rate was 3.449 per cent. Thus, the amount paid during fiscal 1961 was $41,432,000.28 27 United States Senate Committee on Government Opera tions, op. cit., p. 82. For additional information see The Comptroffer Genera1 of the United States, Audit of Tennes- isee Valley Authority: Fiscal Year 1961. Report to the pongress of the United States (Washington: General Account ing Office, 1962), 85 pp. 28 See John Ed Pearce, "The Creeping Conservatism of TVA," The Reporter, January 4, 1962, pp. 31-35. I 320 i r t ! • | In recent years the installed generating capacity i : [has increased through the use of coal-burning steam plants 1 !until sixty-seven per cent of the entire generating i i |capacity uses coal. TVA has become the nation’s largest | juser of coal. Through the end of 1960 TVA’s total receipts jwere $4,578,000,000 of which $2,087,000,000 was received i OQ from appropriations and bonds. 3 The Government Corpora tions Appropriation Act, 1948, required that TVA repay new [congressional appropriations within forty years, but the 1959 bond amendment superseded this requirement. The Reconstruction Finance Corporation (RFC), created in 1932, was the largest of the depression-created government corporations. The initial capital of |$500,000,000 was entirely subscribed by the United States, jprior to completion of operations on June 30, 1954, the RFC i i jhad loaned about fifty billion dollars and had a small I profit. The purpose of RFC was to aid in financing agri culture, commerce, and industry, to encourage small [business, to help in maintaining the economic stability of I |the country, and to assist in promoting maximum employment and production. The Hoover Commission was favorably j 0 9 For an analysis of TVA’s administrative problems, see Philip Selznick, TVA and the Grass Roots (Berkeley and Los Angeles: The University of California I^ress, 1955). (Also see George Van der Muhte , "The Defense of the TVA,’ ’ Public Policy, Carl Freidrick and Seymour Harris, editors (Cambridge: Ifarvard University Graduate School of Public Administration, 1962), pp. 157-191. 321 impressed with the performance of RFC, but a Senate inves- j tigation during the Truman administration indicated i political influence in granting loans and a decline in the i jquality of the management. The RFC was abolished in 1957 I when the Small Business Administration and other agencies i !took over its functions. 1 The Central Bank for Cooperatives and the twelve district banks for cooperatives were organized and chartered by the governor of the Farm Credit Administration iin 1933. Cooperatives own part of the capital stock of i each bank. The twelve Production Credit Corporations which were I created in 1933 were merged with the Federal intermediate credit banks in 1957. The functions of the Federal Farm Mortgage Corporations, created in 1934, were transferred to jthe Farm Credit Administration in 1939. It has made no new loans since 1947. The Rural Rehabilitation Corporations, which were organized during 1934 and 1935, were state agencies rather ithan federal government corporations although federal officials were often on the boards of directors. These were liquidated in 1950. 1940-1963 The Saint Lawrence Seaway Development Corporation, created in 1954, is the only active national government | 322 1 i ; corporation incorporated during the last twenty-three years. i i ; [Twenty-five other government corporations created during I the period are inactive or have been terminated. The Saint Lawrence Seaway Development Corporation was established by act of Congress in 1954 to construe t the |part of the Saint Lawrence Seaway in the United States 'Territory between Lake Ontario and St. Regis, New York. The act specified that the United States1 share of the Sea lway should be self-liquidating within fifty y e a r s . The I Secretary of Commerce is responsible for the direction and i supervision of general policies. The Seaway pays 3.41 per [cent on $120,746,686 of revenue bonds subscribed by the U. S. Treasury. Deficits were expected during the first ten years. Through the end of 1961, no principal had been repaid and $5,196,558 of actual interest had been deferred. Interest payments of $2,115,000 had been made.^l When originally established under the Mutual Security Act of 1957, the Development Loan Fund was an independent j national government corporation in the International i 30 For a survey of the economic potential of the iSaint Lawrence Seaway in the Saint Lawrence area of New [York State, see Sidney C. Sufrin and Edward E. Palmer, The jSaint Lawrence Frontier (Syracuse: Syracuse University Press‘ d 1957/, 96 pp. 31 Saint Lawrence Seaway Development Corporation, [Annual Report 1961 (Washington: Government Printing Office, i 1962), p. vii. JfTso see, "St. Lawrence Seaway After Four Years: Success or Failure?" U.S. News & World Report, April 22, 1963, p. 58. 323 ! Cooperation Administration (71 Stat. 261). However, it was abolished by the Foreign Assistance Act of 1958 and its functions were redelegated to the Agency for International I Development (AID) pursuant to Executive Order 10973 issued in 1961. The purpose of the Development Loan Fund was to |assist, through self-help and mutual cooperation, the 'efforts of free peoples abroad to develop their economic f jresources and increase productivity. Loans were made to private enterprise or governments after considering the technical soundness of the project, the self-help measures ;adopted by the recipient country, and the effects on the United States. The Development Loan Fund also guaranteed private and government loans to less developed countries. These functions are now conducted by AID. The District of Columbia Redevelopment Land Agency, jestablished by act of Congress in 1946, was included among the government corporations studied by the Senate Committee ion Government Operations in 1954 but is not now included jamong the government corporations listed in the U. S. I Government Organization Manual. The purpose of the District iof Columbia Redevelopment Land Agency is to replan, rebuild, and rehabilitate slum, blighted, and other areas of the District of Columbia. The Agency may accept loans and ^grants from the Housing and Home Finance Administrator in j laddition to other funds and appropriations which are pro vided for it. 324 ; I j The Federal Facilities Corporation existed only a j i t few years after it was created by the Secretary of the iTreasury in 1954 under the authority granted to the Presi dent in the Rubber Act of 1948. Its purpose was to j !administer the synthetic rubber program, replacing the ;Rubber Producing Facilities Disposal Commission which was j first supervised by the Administrator of General Services ‘and later by the Secretary of the Treasury. The Federal Facilities Corporation is now in liquidation. On August 31, 1962, the 87th Congress approved the Communications Satellite Act of 1962. The certificate of incorporation was issued on February 1, 1963, by the Superintendent of Corporations of the District of Columbia. The Communications Satellite Corporation (CSC) is interest ing because it has many features of the typical government corporation although the enabling legislation specifies ;that it "will not be an agency or establishment of the 32 United States Government." The purpose of the act was To establish, in conjunction and in cooperation with i other countries, as expeditiously as practicable a communication commercial communications satellite system, as part of an improved global communications network, which will be responsive to public needs and national objectives, which will serve the communication s needs of the United States and other countries, and gg which will contribute to world peace and understanding. O O 76 Stat. 423; Public Law 87-624. 3376 Stat. 419. 325 The President, the National Aeronautics and Space Administration, and the Federal Communications Commission i (FCC) have major responsibilities for coordinating, plan- |ning, and regulating the activities of the CSC. > The CSC has a fifteen-member board of directors. j Three members are appointed by the President for three- ;year terms from whom the chairman is elected annually. Six i members are elected annually by the stockholders who are jcommunications common carriers and the remaining six are elected annually by the remaining stockholders. The board :members and officers must be citizens of the United States. The CSC will be financed by shares of voting capital stock to be sold for $100 or less to the public and authorized common carriers. One half of the total shares of voting stock is reserved for common carriers but they i |may not own over fifty per cent of the shares. No other stockholder may own more than ten per cent of the voting shares. The CSC is authorized to issue additional nonvot ing securities, bond, debentures and other certificates of ■indebtedness.^ In addition to appointing three members of the board, the President is responsible for coordination, review, planning and development, and supervision of inter- 34 76 Stat. 424-5. Also see "Satellite Firm Problem: :How to Sell Stock So as to Please both Public and Congress,1 1 IWall Street Journal, March 20, 1963, p. 4. national relationships. The National Aeronautics and Space Administration advises the FCC on technical matters, cooperates in research and development, consults with the CSC on tech nical characteristics, and furnishes satellite launching i iand associated services. ! The FCC administers the Communications Act of 1934 as it applies to the CSC. It is responsible for insuring competitive bidding in procurement, insuring equitable ■access to facilities by common carriers, requiring the jestablishment of satellite terminal stations when recom mended by the Secretary of State, prescribing accounting and ratemaking procedures, authorizing any additional issue j of shares of capital stock, and making any rules and regu lations necessary for implementing the legislation. These features make CSC a privately-owned public i utility. It is not subject to the provisions of the Government Corporation Control Act. The relatively large number of government corpora tions (24) which were terminated or became inactive after 1940 is partly the result of the Government Corporation 1 Control Act of 1945 which required reincorporation of all wholly-owned government corporations which were not already chartered by Congress. Sometimes, as was the case of the Institute of Inter-American Affairs, the new government corporation absorbed the functions of several previous 327 government corporations. No functions of government corpo- i : i Irations were terminated by the Government Corporation iControl Act. i The primary reason for the large number of govern ment corporations which ceased active operations, however, was the termination of World War II which made their war functions unnecessary. Because of these reasons, more public corporations were terminated than were created dur ing the period, thus reducing the total number. Since the extensive use of government corporations for defense purposes during World War II is not commonly recognized, those which were created, but are no longer active, are listed alphabetically below along with the years indicating the duration of their active life. Cargoes, Inc., 1941-45 Colonial Mica Corporation, 1942-45 Copper Recovery Corporation, 1940-45 Defense Homes Corporation, 1940-49 Defense Plant Corporation, 1940-45 Defense Supplies Corporation, 1940-45 Food Administration Grain Corporation, 1947-47 Institute of Inter-American Affairs, 1942-55 Institute of Inter-American Transportation, 1943-49 Inter-American Educational Foundation, Inc., 1943-47 Inter-American Navigation Corporation, 1942-47 Metals Reserve Company, 1940-45 Petroleum Reserves Corporation, 1943-45 Prencinradio, Inc., 1942-49 Rubber Development Corporation, 1940-47 Rubber Reserve Company, 1940-45 Smaller War Plant Corporation, 1942-47 Steel Recovery Corporation, 1942-45 U. S. Commercial Company, 1942-48 War Assets Corporation, 1943-46 War Damage Corporation, 1941-47 War Emergency Pipelines, Inc., 1941-45 War Hemp Industries, Inc., 1943-47 328 War Materials, Inc., 1942-45 ;Of the twenty-six government corporations created since 1940, only one is currently active. The wartime government corporations were liquidated without major investigation, i jsuggesting that, contrary to popular belief, government iprograms sometimes end. Summary A total of 144 government corporations have been created in the United States since 1846. There are now sixty-one active government corporations and eighty-two inactive or terminated government corporations. In 1945, there were 101 public corporations subject to the Government Corporation Control Act. Since then, six new public corporations have been incorporated, several have become inactive, and several have been merged. All of the active government corporations have been chartered or rechartered by act of Congress. At the expense of some repetition, the existing active government corporations in the United States, the amount of their assets, and the number of their employees are listed in the order of their creation in Table XVII. While there are sixty-one existing, separate govern ment corporations, there are only seventeen different types 35 See Appendix E. 329 TABLE XVII ACTIVE NATIONAL GOVERNMENT CORPORATIONS Government Corporation8- Smithsonian Institution, 1846 Panama Canal Company, 1849 Federal Land Banks (12), 1916 Federal Intermediate Credit Banks (12), 1923 Federal Home Loan Banks (ll), 1932 Banks for Cooperatives (13), 1933 Commodity Credit Corporation, 1933 Federal Deposit Insurance Corporation, 1933 Tennessee Valley Authority, 1933 Export-Import Bank of Washington, 1934 Federal Prison Industries, Inc., 1934 Federal Savings and Loan Insurance Corporation, 193^ Virgin Islands Corporation, 1934 Public Housing Administration, 1937 Federal National Mortgage Association, 1938 Federal Crop Insurance Corporation, 1938 Saint Lawrence Seaway Development Corporation, 195^ Assets^1 Employees $ 16 1,463 474 14,409 2,904 (f) !,981 (f) 3,06ld 1,139 668 (f) 5; 729 (e) 2,308d 1,275 2,182 18,545 3; 304 258 26 375 375d 95 9 531 143 1,501 3,4l4 981 56 1,079 128 161 aThe year of original incorporation rather than the year of re- incorporation is used when reincorporation has occurred. : tjn most cases, assets in millions as June 30; 19&1. Data from U.S. Bureau of the Census, Statistical Abstract of the United States: 1981 (eighty-second edition; Washington, D.C.: Annual reports or other government publications, Government Printing Office, 1961). cDataibr January 1, 1962 from United States Senate Committee on Govern ment Operations, Organization of Federal Executive Departments and Agencies, Committee Report No. 22 with accompanying chart, 87th Congress, 2nd Session, Washington, 1962, and other govern ment publications. dAll capital held by the U. S. Treasury has been retired. eCommodity Credit Corporation programs are carried out through the facilities and personnel of the Agricultural Stabilization and Conservation Service. fData not readily available. The agricultural credit banks which are supervised by the Farm Credit Administration have 1500 employees. The participating associations have 5b60 employees, (information provided by letter dated June 13, 1962) 330 because four groups have approximately twelve decentralized, ;regional government corporations in each group. These in clude eleven Federal Loan Banks, twelve Federal Land Banks, :twelve Federal Intermediate Credit Banks, and thirteen i Banks for Cooperatives. Thus, forty-eight of the sixty-one; active government corporations are in four functional groups. Twelve (69 per cent) of the seventeen types of government corporations were established during the 1930's as a result of depressed economic conditions. Thirty-four (55 per cent) of the sixty-one existing government corpo rations were created during this decade. Four (24 per cent) of the seventeen types were created before the 1930's and three (16 per cent) were created after that period. However, twenty-six (43 per cent) of the active government corporations were created before 1930 while only one (6 per cent) was created after 1940. The function of thirty-eight (62 per cent) of the existing government corporations is to provide agricultural credit. However, this involves only four (23 per cent) of the seventeen major types, all of which were created before 1934. Fifty-six (92 per cent) of the total number of government corporations provide either credit or insurance. Only one, the Export-Import Bank of Washington, lends to groups or individuals in less developed countries. The government owns no share capital in twenty-five 331 (41 per cent) of the government corporations. These are: i Federal Land Banks (12) Federal Home Loan Banks (11) Federal Deposit Insurance Corporation Federal Savings and Loan Insurance Corporation Twenty-six (43 per cent) of the sixty-one government 'corporations have mixed-ownership. These are: Federal National Mortgage Association Federal Intermediate Credit Banks (12) Banks for Cooperatives (13) The remaining ten government corporations are wholly-owned by the government of the United States. Thus, sixteen per cent of the existing public corporations are wholly-owned. The wholly-owned government corporations are as follows:^® Smithsonian Institution, 1846 Panama Canal Company, 1849 Commodity Credit Corporation, 1933 Tennessee Valley Authority, 1933 Export-Import Bank of Washington, 1934 Federal Prison Industries, Inc., 1934 Virgin Islands Corporation, 1934 Public Housing Administration, 1937 Federal Crop Insurance Corporation, 1938 Saint Lawrence Seaway Development Corporation, 1954 However, several of the wholly-owned government corpora tions have only non-stock capital.^7 Off Under the Government Corporation Control Act some government corporations which are not wholly owned by the government, such as the Federal National Mortgage Associa tion, are subject to the same audit and budget controls as wholly-owned government corporations and are called wholly- owned corporations in the Act. 37 See Appendix E. 332 III. FEDERAL-STATE CONFLICTS Prior to 1945 many government corporations viere incorporated under state general incorporation laws or under the laws of the District of Columbia. This practice led to many federal-state conflicts, particularly because Congress failed to specify the relationship of government corporations to state laws and because the administrators \o± government corporations insisted on federal exemption from state laws. Weintraub noted that the General Accounting Office, the United States Department of Justice, and Congress share the blame for these conflicts.^® The General Accounting Office insisted that federal government corporations were exempt from state taxes and regulation. Congress did not foresee the conflicts and made no clarifying specifications ■in the enabling legislation. Eventually legislation giving the states jurisdiction in civil and criminal matters, and permitting payments to localities in lieu of taxes, was enacted which solved some of the conflicts. In the absence of specific statements in the enabling acts the federal courts usually permitted government corporations to main tain federal privileges. The courts permitted state taxa- 38 Ruth G. Weintraub, Government Corporations and State Law, op. cit. , pp. 165-1WI 333 tion and regulation only when congressional consent was written into the legislation.*^® These practices had the ironic effect of nullifying :the corporate advantage of independence from the controls i ;of the federal government. After becoming free, the government corporations claimed the privileges of federal organizations, which eventually led to a well-established recognition that government corporations were part of the executive branch, subject to the will of the President. Subsequent to the recommendations of the Joint Committee on Reduction of Nonessential Federal Expenditures in 1944, Congress enacted the Government Corporation Con trol Act which required the reincorporation of all federal government corporations which had been chartered by political bodies other than Congress. Section 304 reads: (a) No corporation shall be created, organized, or acquired hereafter by any officer or agency of the Federal Government or by any Government corporation for the purpose of acting as an agency or instrumentality of the United States, except by Act of Congress specifically authorizing such action. (b) No wholly owned Government corporation created by or under the laws of any State, Territory, or pos session of the United States or any political subdivi sion thereof, or under the laws of the District of Columbia, shall continue after June 30, 1948, as an agency or instrumentality of the United States, and no funds of, or obtained from, the United States or any agency thereof, including corporations, shall be 39 Lilienthal and Marquis, "The Conduct of Business Enterprises by the Federal Government," Harvard Law Review, February, 1941, pp. 596-601. 334 invested in or employed by any such corporation after that date, except for purposes of liquidation. The proper corporate authority of every such corporation shall take the necessary steps to institute dissolution or liquidation proceedings on or before that date: Provided, That prior thereto any such corporation may j be reincorporated by Act of Congress for such purposes and term of existence and with such powers, privileges, and duties as authorized by such Act, including the power to take over the assets and assume the liabili ties of its respective predecessor corporation.^ There has been very little discussion about the wisdom of Section 304 in professional journals, suggesting that rein- 41 corporation by Congress was generally considered desirable. IV. CONTROLS FOR PUBLIC RESPONSIBILITY The history of controls for maintaining the public responsibility of national government corporations in the United States reveals two regular practices— the use of controls which are (1) general rather than specific and (2) positive rather than negative. ^Section 304, Government Corporation Control Act approved December 6, 1945 (59 Stat. 597; 31 USC 841). ^For several years after passage of the Government Corporation Control Act, the Island Trading Company of Micronesia, which was incorporated by Special Proclamation jof the Governor of Guam in 1947, existed in violation of Section 304. Instead of being reincorporated under congressional legislation, the corporation was terminated on December 31, 1954. For an interesting review of this government corporation, see Garth Nelson Jones, "Adminis tration of the Trust Territory of the Pacific Islands" (un published Doctoral dissertation, University of Utah, 1954), pp. 406-32, 511-24. ^^Harold Seidroan, "The Government Corporation in the United States," Public Administration, Summer, 1959, p. 110. General controls set policy objectives which may be implemented independently by the management of an agency. Congress, for example, often places a maximum limit on administrative expenses. In exercising general monetary controls, the Board of Governors of the Federal Reserve System similarly sets the minimum legal reserve requirement for member commercial banks, thus establishing the maximum amount of bank lending in a way which does not interfere with specific lending decisions. Government corporations in other countries are usually subject to many specific controls. In the United States specific controls have been used only when actions of public corporations involve national policy, or require international or interagency coordination. The Treasury, for example, coordinates the issue of bonds of public corporations in order to avoid competition in the marketing of government securities but does not judge whether the ;bond issue is desirable. "Controls are not concerned primarily with assuring 'compliance' with applicable laws 43 and regulations." Emphasis has shifted from negative controls, which were designed to prevent overobligation of appropriated funds, to positive controls, which are designed to provide 4*^ Ibid. , p. 110. 336 complete financial data about the operation of public enter prises. The Budget and Accounting Procedures Act of 1950, for example, indicated that accounting procedures should facilitate management decision-making.44 During the early history of national government corporations many proponents seemed to assume that balance- sheet accounting brought about increased efficiency. This overemphasizes the advantages of balance-sheet accounting which provides neither the incentive of the profit motive nor sufficient control for public accountability. The main advantage of balance-sheet accounting is the information it provides Congress for determining whether the enterprise is self-supporting and the amount of subsidy it receives, if any. Other controls are necessary for sufficient public accountability. Other means of encouraging efficiency are equally essential.45 All of the special advantages of government corpora tions except their legal entity could have been granted to 44 Sidney D. Goldberg and Harold Seidman, The Govern- ment Corporation: Elements of a Model Charter (cKicago: Pub XlcAd m inistration Service, X95t), p. 3. 45 Audit and budget controls are not applied uni formly to all government corporations which suggests that public accountability is not maintained uniformly among all government corporations. For an example of the assumed efficiency resulting from balance-sheet accounting, see President’s Committee on Administrative Management, Report with Special Studies, 1937 (Washington: Government Printing <5Tffce, " '19377 " p . " ---- 337 ispecial, independent departments, but the nomenclature i would have been most c o n f u s i n g . 46 The earliest government corporations were given many of the freedoms of private j corporations from government controls, but in most cases j !no competitive controls of the free enterprise system replaced the withdrawn government controls. Thus, "many government corporations were really not held to account by anybody.Consequently, the evolution of the government corporation has been characterized by the development of central controls which are the approximate equivalent of the decentralized competitive controls which promote public; responsibility within private corporations. During most of the history of government corporations there has been little assurance of efficiency other than the integrity of the personnel and the alertness of the press. While some limitations have been placed on the decisions which can be made by the management of the government corporation, many of the controls are intended to inform the legislative and the executive branches of the decisions taken by the management. This permits an evalua tion of the public responsibility of the enterprises and 46 Seidman, op. cit., p. 105. 47 V. O. Key, Elements of Public Administration, Fritz Morstein Marx, editor (2nd edition;^Englewood Cliffs: Prentice Hall, Inc., 1959), p. 222. 338 iconsideration of corrective action which may be necessary. Legislative Controls Legislative controls can be grouped into four cate gories: (1) auditing by the General Accounting Office; (2) i limitation of administrative expenses; (3) review of the budget; and (4) review and investigation by standing congressional committees. Auditing by the General Accounting Office. Ever since the first general use of government corporations in the United States during World War I, the General Account ing Office has opposed their exemption from financial and accounting controls.^® Moreover, the Comptroller General has opposed the use of government corporations except for the most necessary functions on the grounds that they weaken essential congressional controls.^® Section 305 of the Budget and Accounting Act of 1921 provided that: All claims and demands whatever by the Government of the United States or against it, and all accounts what ever in which the Government of the United States is concerned either as debtor or creditor, shall be settled and adjusted in the General Accounting Office. ^ Under this provision the Comptroller General may take 48 John McDiarmid, Government Corporations and Federal Funds (Chicago: University of Chicago Press, 1938) , pp. 18—20. 49 Seidman, op. cit., p. 112. 5042 Stat. 23, 1921. 339 j exception to a disbursement with the disbursing officer ‘being held personally liable for recovery of the amount. In controlling expenditures, the General Accounting Office j interprets appropriation acts and regulations and requires ! ; | strict compliance with them.®-*- Thus, the final authority of the General Accounting Office over the expenditures of i agencies within his jurisdiction is extremely significant. During the 1920Ts, the Comptroller General held that a private audit was essentially the same as a government audit while officials of government corporations held that government audits verified statutory authorization rather than determining the honesty and expediency of expenditures. The controversy came to a climax in the Supreme Court decision in 1927 (Skinner and Eddy Corporation v. McCarl, 275 U.S. 1) which held that a primary and proper advantage of government corporations was their freedom from audit and ‘ expenditure control. In addition, the decision held that public corporations were free of congressional control over expenditures for administrative and operating expenses. As a result of the Supreme Court decision in 1927, most government corporations did not submit their accounts to the General Accounting Office even though President Roosevelt specifically directed in 1934 (Executive Order 51 For a review of the immense number and variety of controls see McDiarmid, ibid., pp. 8-12. ! 340 i 6549) that governmental agencies, including government 'corporations created after March 3, 1933, submit accounts :to the General Accounting Office for settlement.®^ The number of government corporations increased dur- jing the 1930's and concern about their public responsibility also increased. The Joint Committee on Reduction of Non- essential Federal Expenditures devoted two years to a study of the problem and on August 1, 1944, issued its report which recommended that every government corporation be audited by the General Accounting Office and be required to submit a business-type budget to be acted upon by Congress.®^ As a result of this recommendation Congress approved an act on February 24, 1945 providing for an audit of the financial transactions of all government corpora tions by the General Accounting Office in accordance with the principles and procedures applicable to commercial corporate transactions (59 Stat. 5). This act has been called "an outstanding milestone in control and improve ment of the financial corporate system of the Federal 52U nited States Senate Committee on Government Opera tions, Financial Management in the Federal Government, 87th Congress^ 1st Session,* Document TT o' . 11 (<f ashing ton: Govern ment Printing Office, 1961), p. 22. 53 Senate Document 227, 78th Congress, Report on Government Corporations. Also see Joint Committee on Seduction of Non-Essential Federal Expenditures, Hearings, 78th Congress, 1st Session, 1943. Government."54 On December 6 , 1945, the Government Corporation Control Act (59 Stat. 597), which included most of the jremaining provisions recommended by the Joint Committee, | jwas approved.55 The Act provided for an annual financial review and current financial control by Congress through a ; icommercial-type audit and a report to Congress by the Comptroller General on the compliance of public corpora tions with congressional directives and restrictions. A commercial-type audit differs from a comprehensive audit in that the latter involves the allowance or disallowance of individual items of expenditure. The Government Corporation Control Act did not ;remove the disallowance power of the Comptroller General lover specific government corporations such as the Federal Prison Industries, Inc., which were placed unde-r his juris diction by the enabling act or other legislation, but it required an additional commercial-type audit. Thus, the Act maintained the status quo supplemented by an audit which 54 Senate Document No. 11, 87th Congress, op. cit.. p. 23. Under this Act the General Accounting Office pre pared the Reference Manual of Government Corporations (Senate Document 86, 79th Congress), August, 1945, and Supplement I to the Reference Manual of Government Corpora tions (Senate Document No. 74, 80th Congress), 1947. 55See Appendix H. i...................... 342 i i I !applied to all government corporations as long as the a government had a financial interest. The "status quo" l I I I - . . - I * - - - - - - — ■ — — — — j was established by executive order 6549 which specified that government corporations created after March 3, 1933 i ishould submit accounts to the Comptroller General for i settlement as prescribed by him unless different accounting procedures were prescribed in the enabling act or appropri ation act. In practice, these acts usually exempt govern ment corporations from the disallowance powers of the Comptroller General. Section 106 of the Government Corporation Control Act requires that the Comptroller General make a report of each audit to Congress each fiscal year.^ This report is submitted to the Committee on Government Operations which is required to review and examine the reports and make Marx (ed.), op. cit., p. 238. See C. Herman Pritchett, "The Government Corporation Control Act of 1945,” American Political Science Review. June, 1946, pp. 495-509. ^(Section 106) "The report shall set forth the scope of the audit and shall include a statement (showing inter corporate relations) of assets and liabilities, capital and surplus or deficit; a statement of surplus or deficit analysis; a statement of income and expense; a statement of application and sources of funds; and such comments and information as may be deemed necessary to keep Congress informed of the operations and financial condition of the several corporations, together with such recommendations with respect thereto as the Comptroller General may deem ladvisable, including a report of any impairment of capital noted in the audit and recommendations for the return of such Government capital or the payment of such dividends as, in his judgment, should be accomplished." 343 whatever recommendations to the Senate and House that are i : I CQ ;considered necessary or desirable. ° The Government Corporation Control Act provides for , I audits of wholly-owned and mixed-ownership government corporations as long as the government owns any capital. Consequently, the federal land banks are not audited because they have been privately owned since July, 1947, although the General Accounting Office has regularly recommended that they be included among the agencies audited. The Federal Deposit Insurance Corporation also retired all of the Government's capital but legislation was drafted and approved at the request of FDIC which provided for the permanent continuation of audits by the GAO (64 Stat. 873). Similarly, the audits of the Federal Home Loan Banks were continued through enactment of special legislation (64 Stat. 256) after the Treasury's capital was retired in July, 1952. The Federal Savings and Loan Insurance Corporation also has retired Treasury-held stock but it is still i audited regularly. Thus, the federal land banks are the only government corporations which have avoided audits by becoming privately owned. In 1959 Congressman Patman introduced H. R. 8302 which directed the Comptroller General to conduct audits of 5®This duty is designated in subsection (g)(2)(A) of rule XXV of the Standing Rules of the Senate Legislative Reorganization Act of 1946, as amended, 60 Stat. 812,816. ! 344 I the Federal Reserve System, the Federal Reserve Banks, and ; i |the Federal Open Market Committee, but the bill was not i enacted. The action of Congress in continuing audit control i 1 even though the government has no financial interest in the government corporation suggests that legislation eventually ;may be enacted to provide for a commercial audit of all government corporations. The issue will become more apparent as various additional government corporations escape audit control by retiring the Treasury’s investment. The federal intermediate credit banks and the Banks for Cooperatives currently are gradually retiring Treasury capital stock. Continuation of audit control while having no financial interest indicates recognition of the conten tion that is made later in this study that ownership is 59 In the cases of the Federal Home Loan Banks, the Federal Savings and Loan Insurance Corporation, and the Federal Deposit Insurance Corporation, continuation of au- jdits after retirement of Treasury-held capital was accom- plished by amending the incorporating acts in order to exempt these government corporations from the provisions of the Government Corporation Control Act. The Federal Home Loan Bank Act was amended by Sec. 4, Public Law 576 (64 Stat. 256), 81st Congress, which exempted the Federal Home Loan Banks. The Federal Deposit Insurance Act was amended by the act of September 21, 1950 (12 USC 1811). The Sav ings and Loan Insurance Corporation was exempted by Public Law 576 (64 Stat. 256), 81st Congress, Sec. 4, which amended Sec. 11 of the Federal Home Loan Bank Act, adding subsection1 "(h) The retirement of such capital stock shall not affect the applicability to said Corporation (Federal Savings and Loan Insurance Corporation) of the Government Corporation Control Act, as amended." 345 neither a necessary nor adequate means of control and is ;not a good measure of the need for control. Limitation of administrative expenditures. Before the Government Corporation Control Act, both the legislative and executive branches of government imposed limitations on |the administrative expenditures of government corporations with the exception of TVA. Currently, control over admin- i istrative expenditures is exercised by the legislature through restrictions in the appropriations acts. However, the first control over administrative expenses was executive order 7126 in 1935 which required three government corpora tions to submit annual estimates of administrative expenses to the Bureau of the Budget and prevented them from incur ring obligations in excess of the estimates. Later, these restrictions were applied to all government corporations by executive order 9159 in 1942. In 1936, Congress passed an extremely restricted appropriation act which required that annual appropriations be enacted for administrative expenditures. Under this act the General Accounting Office had the same disallowance powers over the administrative expenditures of government corporations that it had over departmental expenditures. Since this requirement eliminated a key advantage of the government corporation Congress, in later appropriation acts, adopted the practice of placing a limit on total administrative expenditures but permitting the government corporation to spend out of its own revenues. This illus trates the emerging practice of using general rather than specific controls. Administrative expenses usually have been roughly equivalent to fixed costs although the distinction between administrative costs and nonadministrative expenses has not been distinct. Variable costs have usually been considered nonadministrative expenses. Since about eighty per cent of the total expenditures of government corporations are nonadministrative, variable costs, the congressional restriction on administrative expenditures only applies to the remaining twenty per cent of total expenditures.®® The present system of limiting total administrative expenditures is unique because it permits a government corporation to make fixed-cost expenditures out of its revenues, rather than out of special annual appropriations. The language of the charter usually exempts the government corporation from disallowance by the GAO. This administra tive device gives Congress effective control over the size of a government corporation, thereby leaving the policy decision regarding the marginal social benefit of the government corporation, relative to other public programs, in the hands of the policy-making legislative body. By S O Marx (ed.), op. cit., p. 233. 347 centralizing only capital-expenditure decisions the iefficiencies of decentralized financial decision-making are obtained. The Bureau of the Budget has never advocated limita tion of administrative expenditures. Such limitations have always been congressional restrictions. With annual budget review, limitation of administrative expenses may be unnecessary. Elimination of this restriction would provide additional operating flexibility while retaining in the hands of Congress, through the budget process, control over the general policies of government corporations. Review of the budget. An effective control over the policies of government corporations is exercised by Congress through its approval or disapproval of the budgets proposed by the government corporations. Congress does not appro priate funds for the programs of most government corpora tions but retains the authority to grant permission to government corporations to spend out of their revenues on specific programs which are outlined in the proposed budget. In the review of the budget, therefore, Congress permits the management of government corporations to make expendi tures out of revenues, while it normally directs agencies ®*Testimony of Harold Seidman on H. R. 8332, Amend ing the Government Corporation Control Act, op. cit., p. ;ts5_ --------- 348 to spend out of appropriated funds. In this way, Congress i can prevent government corporations from undertaking any program which, in its judgment, is not in the public interest. Review and investigation by standing congressional ;committees. At least three standing committees of Congress review the activities of government corporations: (1) the Committees on Appropriations; (2) Committees on Government Operations; and (3) legislative committees concerned with the activities of the enterprise. The operations commit tees and the legislative committees have the authority to investigate.62 The appropriations committees review and approve or disapprove the annual budget submitted by the government corporation. When hearings are conducted the committees sometimes study all aspects of operation and management and the Committee Report indicates the important conclusions. Consequently the budget review by the appropriations commit tees usually does not alter the current budget but influences subsequent budgets and management policy because government corporations usually adopt the recommendations of the committees. Since passage of the Legislative Reorganization Act ®2Seidman, op. cit., pp. 112-113. j 349 of 1946 the Senate Committee on Government Operations has 1 * ^had the duty of reviewing and examining the reports of the Comptroller General and submitting recommendations to the CO ; Senate. In 1958, the House Committee on Government 1 ; Operations held hearings on a bill to amend the Government i iCorporation Control Act which would have included mixed- ownership government corporations within the budget require ments of the Act.®^ Congressional investigations have been made of the Reconstruction Finance Corporation, which was consequently abolished, the Commodity Credit Corporation, the Federal Housing Administration, and the Tennessee Valley Authority. Seidman notes that two committees may disagree on some issues. As a result the government corporation may not follow either recommendation.®® Executive Controls 63 The reports of the Senate Committee on Government Operations include: Audit Reports of Government Corpora tions and Agencies, Senate Report No. 861, 83rd Congress, 1954; Audits of Government Corporations, Senate Report No. 2685, 81st Congress, 1950; Review of Audit Reports of the Comptroller General, Senate Report No. 1572, 84th Congress, 1956; Organization of Federal Executive Departments and Agencies, Committee Report No. 19, 86th Congress, 1959; and Committee Report No. 22, 87th Congress, 1962. 64 U. S. House of Representatives, Amending the Government Corporation Control Act, Hearings before a Sub committee of the Committee on Government Operations, 1958. / » c Seidman, op. cit.. p. 113. ! 3 50 Executive controls over government corporations can ibe grouped into seven categories: (1) executive responsi bility of the President; (2) budget requirements; (3) Ireports to the Treasury; (4) appointment and removal of I iofficers; (5) executive clearance of policy statements; (6) departmental supervision; and (7) personnel. Executive responsibility of the President. Since ■government corporations are included in the executive branch of the government, the President is responsible to the electorate for their activities. However, the Presi dent has not exercised supervision of the daily operations of government corporations. His directives usually deal with the public interest rather than the specific actions of his subordinates. The only major test of the President's general executive authority over government corporations occurred in 1938 when the first director of the Tennessee Valley Authority, Arthur E. Morgan, who maintained that the directors of TVA were responsible only to Congress, was removed from office by President Roosevelt. This action by i the President, which was upheld by the courts, established the general executive authority and responsibility of the President.®® In fact, government corporations have never ®®Morgan v. TVA, 115 Fed. (2d) 990 (1940). been regarded as entities separate from the federal govern ment. Early administrators accentuated the sovereign nature of national government corporations by insisting on "every possible exemption of state law to which they believed the government of the United States was entitled upon grounds of strict legal theory." Budget requirements. The first budget requirement, mentioned above, was executive order 7126 of 1935 which limited the administrative expenditures of the Federal Sav ings and Loan Insurance Corporation, the Home Owners Loan Corporation, and the Federal Farm Mortgage Corporation, to the annual estimates submitted to the Bureau of the Budget. Limitation of administrative expenditures is now accomplished through restrictions within the appropriation acts, however, rather than by executive order. By 1942, all major government corporations were included in this executive restriction on administrative expenditures. The Government Corporation Control Act of 1945 required only wholly-owned government corporations to sub mit annual budgets.®® As amended through the 79th Congress, 67 Ruth C. Weintraub, Government Corporations and State Law (New York: Columbia University Press, 1939), p. T6br. 68 Section 102, as amended, reads: "Each wholly owned Government corporation shall cause to be prepared iannually a business-type budget which shall be submitted to the Bureau of the Budget, under such rules and regulations 352 forty wholly-owned government corporations listed in the Government Corporation Control Act were required to submit business-type budgets. T h u s , mixed-ownership government ;corporations are exempt from all budget control. The budget of government corporations serves a some what different function from the budget of an executive I agency. While Congress appropriates funds to the executive ! agency, the appropriation acts for government corporations ;merely authorize the government corporation to spend its own revenues. However, Congress and the President lend as the President may establish as to the date of submission, the form and content, the classifications of data, and the manner in which such budget program shall be prepared and presented. The budget program shall be a business-type budget or plan of operations, with due allowance given to the need for flexibility, including provision for emergencies and contingencies, in order that the corpora tion may properly carry out its activities as authorized by law. The budget program shall contain estimates of the financial condition and operations of the corporation for the current and ensuing fiscal years and the actual condi tion and results of operation for the last completed fiscal year. Such budget program shall include a statement of financial condition, a statement of income and expense, an analysis of surplus or deficit, a statement of sources and application of funds, and such other supplementary state ments and information as are necessary or desirable to make known the financial condition and operations of the corporation. Such statements shall include estimates of operations by major types of activities, together with estimates of administrative expenses, estimates of borrow ings, and estimates of the amount of Government capital funds which shall be returned to the Treasury during the fiscal year or the appropriations required to provide for restoration of capital impairments.'' 69 U. S. Senate, Financial Management in the Federal Government, op. cit., Appendix C. 353 their approval or disapproval of proposed programs in the same manner as for executive agencies. "Their budget pre- jsentations constitute more nearly reports and analyses of I |the results of business operations (and forecasts of the 'results of future operations) than they do conventional 70 ibudget requests by government agencies." The business- type budget, therefore, constitutes qualitative rather than quantitative control. The qualitative control is influ enced by the executive branch but the legislative branch exercises the final approval or disapproval of the entire program of government corporations. Furthermore, the Bureau of the Budget does not have the broad authority to change budget estimates of govern ment corporations as it does the budget requests of agencies although it can change the estimate of capital expenditure. The recommendations of the Bureau are for warded to the President. The recommendations that are made by the Budget Bureau are taken up with the President as in the case of other budgets. If an agency or corporation should disagree with whatever recommendation is made by the Bureau of Budget, they may appeal to the President. Then these recommendations are transmitted to the Congress as part of the President's budget and are handled by the Appropriations Committee which really is the representative of the stockholders or you might even say the bondholders. . . . The budget provides the mechanism by which the Congress makes sure that the corporations come in and meet with the representatives 70 Marx (ed,), op. cit., p. 234. of the stockholders at least once a year. . . . The action on the budget as expressed in the law is In the Appropriations Act, not by action by the Budget Bureau.71 Thus, the Appropriations Committee receives the budget estimates of the government corporations along with the recommendations of the President.72 A bill (H.R. 8332) to amend the Government Corpora tion Control Act was introduced in the 85th Congress, 1st Session. The intent of the proposed legislation was to carry out President Eisenhower's recommendation in the 1958 budget message that the Government Corporation Control Act be amended "to provide for budget and audit control over Government Corporations which are authorized, directly or indirectly, to obtain or utilize Federal funds." It has been asserted that the Hoover Commission initially proposed the amendment but this is incorrect, since it was initiated by the Bureau of the Budget. The bill, which was not enacted, proposed that the test for maintaining budget review, as well as the annual 71Testimony of Harold Seidman on H.R. 8332, Amending the Government Corporation Control Act, op. cit., ppT 133—" Ts r .----------------- -------- ------ ------ 72The text of appropriation estimates proposed for the consideration of Congress together with specific refer ence materials on the various appropriations and funds are included in The Budget of the United States Government. 1963 '(Washington: Government Printing Office, 1962), Appendix. For an illustration see Appendix K. The annual budget document contains a special analysis of public enterprise fund operations. See Appendix G. audit by the General Accounting Office and the controls exercised by the Secretary of the Treasury, should be determined by the government corporation's use of federal funds and the financial responsibilities assumed by the United States Government, rather than by the private owner ship of capital stock. Consequently, the bill would have brought the mixed-ownership government corporations under annual budget review. The mixed-ownership corporations, as defined by the Government Corporation Control Act, included the Central Bank for Cooperatives, the twelve regional banks for cooperatives, the FDIC, and the twelve federal intermediate credit banks. The Bureau of the Budget pointed out that ninety per cent of the capital stock of the intermediate credit banks, which already sub mitted an annual budget, and the banks for cooperatives, was owned by the Government, a total investment of about $237 million. The Treasury, in addition, has a financial responsibility to the FDIC which has the authority to obtain three billion dollars whenever the funds are needed. The Bureau of the Budget also suggested that the Treasury assumes the informal responsibility for guaranteeing the deposits insured by FDIC. ’’ The Federal Deposit Insurance Corporation has a three billion dollar call on the Treasury, and its insurance operations involve a potential Government 73 exposure of over $112 billion." The bill proposed that all agencies and instru mentalities subject to the Government Corporation Control Act be known as government corporations, thus eliminating I Ithe distinction between "wholly-owned" and "mixed-ownership"! : i government corporations. Both the Bureau of the Budget and the Comptroller General agreed that experience indi cates that budgetary control can be exercised without interfering with the necessary financial and operating flexibility of government corporations.^ The Comptroller General favored expanding the proposed legislation in order to include the federal land banks on the grounds that they can borrow federal funds, from either the Federal Farm Mortgage Corporation or the Federal Intermediate Credit Banks, and are part of the permanent federal agricultural credit system. The Farm Credit Administration and other farm organizations opposed the bill largely because, according to the FCA, it conflicted with the policy of the Farm Credit Acts of 1953, 1955, and 1956 to increase borrower partici pation in the management and control of farm credit banks, 73 U. S. House of Representatives, Amending the Government Corporation Control Act, op. cTf., Appendix 1A, ___ ' ’ ^Ibid. , pp. 184, 187. thus breaking faith with farmers who anticipate owning and 7 ^ managing their own credit system. The FCA also held that the bill rescinded other policies established by Congress in 1956 which exempted the federal intermediate credit banks from budget control when at least fifteen per cent of the capital stock was owned by the production credit associations. The FCA noted that they already submitted an annual budget to the President and Congress, a process that will continue after all government capital is retired, and that this is sufficient opportunity for Congress to scrutinize the operations of the banks. The FDIC opposed the bill, giving five major reasons, the most important of which was the necessity of remaining bipartisan and free from political pressures and control when repaying depositors of failed banks. The major reasons, without the supporting arguments, are listed be low. 1. Subjection of Corporation to budget control because of its three billion dollar borrowing authority is inconsistent with the proposed exclusion from such control of other corporations with authority to borrow from the government or with obligations which are direct obligations of the Treasury. 2. There is no "potential exposure" to the Govern ment in the operation of deposit insurance beyond the three billion dollar borrowing authority. 75 See the testimony of R. B. Tootell, Governor of the Farm Credit Administration, ibid., pp. 47-66; and Herschel D. Newson, Master, NationaT Grange, pp. 103-108. 358 3. The Corporation should not be regarded as a wholly-owned Government corporation and subjected to the same budget control as such corporations. 4. Subjection of the Corporation to budget control is inconsistent with the principle of keeping a monetary agency free from political interference.76 5. Since 1933 the Congress has repeatedly affirmed its original decision to establish an independent corporation and has rejected every attempt or proposal to subordinate the Corporation to any other agency. The testimony of the Chairman of the FDIC, Jesse P. Wolcott, from whose statements the above quotations were selected, when added to the opposition of R. B. Tootell, Governor of |the Farm Credit Administration and others, seemed to be very convincing to the subcommittee and left at least one member asking who had originated the bill and whether there 7ft was any reason for reporting it out. ° Because of its success, the business-type budget has been extended to unincorporated public business activities. i [The performance budget is an adaptation of the business-type budget for nonbusiness programs.7^ Thus, experience with the independence of government corporations has resulted in improved techniques for executive control over depart- 76 Seidman argues that this point is invalid because many bipartisan agencies are subject to budget control including all the regulatory agencies. 77Ibid., pp. 192-196. 78 Seidman contends the bill failed because of strong politics rather than weak arguments. 79 Goldberg and Seidman, op. cit., p. 3. 359 jments. Reports to the Treasury. Since August 1956, current i _ ----- — - - - ■ ---— — ------ ^financial statements of corporations and certain other ;business-type activities of the United States Government j |have been published in the Treasury Bulletin from the t Ireports required under the provisions of Department Circu lar No. 966, issued January 30, 1956 and Supplement No. 1, issued June 1, 1956. These regulations were issued pursuant to Section 114 of the Budget and Accounting Pro cedures Act of 1950 (31 U.S.C. 66b), which provided for comprehensive and integrated government accounting and financial reporting. The reports submitted to the Treasury Department under these regulations provide the data for the financial statements published in the Treasury Bulletin. Department Circular No. 966 requires four types of financial statements: statements of financial condition, income and expense, source and application of funds, and certain commitments and contingencies. The statements of financial condition are published quarterly. Statements of income and expense and source and application of funds are published semiannually for June 30 and December 31.^ All wholly-owned and mixed-ownership government ®^Treasury Department, "Corporations and Certain Other Business-Type Activities," Treasury Bulletin. June, 1962, pp. 89-121. This issue contains only the statements of financial condition. 360 corporations, as designated by the Government Corporation iControl Act, as amended (31 U.S.C. 846,856), are required to submit financial statements. All other activities of the government operating as revolving funds, for which business-type public enterprise or intragovernmental fund budgets are required by the Bureau of the Budget, also must submit financial statements. The current reporting procedure replaced the pro cedure established by Budget-Treasury Regulation No. 3, issued by Executive Order No. 8512 on August 14, 1940, as amended by Executive Order No. 9084 of March 3, 1942 under which the financial statements previously published in the Treasury Bulletin were submitted. Appointment and removal of officers. The adminis trators and the members of the boards of directors of wholly-owned government corporations are appointed by the President or the head of the supervising department. Privately owned and mixed-ownership government corporations also are subject to varying degrees of Presidential power of appointment. The Federal Home Loan Bank Board, for example, which supervises the Federal Savings and Loan Insurance Corpora tion (FSLIC) and the Federal Home Loan Banks (FHLB), con sists of three members who are appointed by the President with the advice and consent of the Senate. Four of the 361 directors of the Federal Horae Loan Banks are appointed by the Federal Home Loan Bank Board. The FSLIC has no board of directors, but the general manager is appointed by the 'Federal Home Loan Bank Board. j | The Farm Credit Administration, which supervises the Federal Land banks, the Federal intermediate credit banks, and the banks for cooperatives, is headed by the thirteen- member Farm Credit Board. The President appoints twelve -members of the Farm Credit Board from those nominated by j ithe FCA, with the advice and consent of the Senate. The thirteenth member is appointed by the Secretary of Agricul ture. The Governor of the Farm Credit Administration appoints seven of the thirteen directors of the central bank for cooperatives. The board of directors of the Federal Deposit Insur ance Corporation consists of three members, the Comptroller of Currency and two additional members who are appointed by the President with the advice and consent of the Senate. The Federal National Mortgage Association (FNMA) is super vised by the Housing and Home Finance Administrator who is appointed by the President and is the chairman of the board of directors of FNMA.®^ 81 For Marshall C. Dimock’s view on the trend toward weaker boards, see "Government Corporations: A Focus of Policy and Administration," The American Political Science Review, October, 1959, pp. 914-920. Also see Seidman, nfFKe government Corporation in the United States," op. cit., p. The authority of the President to remove the officials of government corporations was discussed in the previous section. Executive clearance of policy statements. Before ^releasing policy statements, government corporations, along with other executive agencies, must submit them to the 'Bureau of the Budget for clearance in order to insure that ;the statements are in accord with the official program of the President. Seidman has noted that ’’the legislative clearance process is a comparatively little known but extremely effective device for coordinating executive 82 branch policies and exercising Presidential supervision.” Departmental supervision. Government corporations ;are usually supervised by the head of the executive depart ment whose public services are the most closely associated with the type of economic function performed by the govern ment corporation. Although the department head issues verbal directives he may issue written directives as he does to his departmental subordinates. The amount of supervision is determined by the personal interest of the department head and the degree of coordination needed 109; and ”A Theory of "the Autonomous Government Corporation A Critical Appraisal,” Public Administration Review, Spring, 1952, p. 92. 82 Seidman, op. cit., p. 111. 363 ! I ] I between departmental programs and the activities of govern-, jment corporations. Seidman has noted that the President has stressed that the government corporation, in most leases, rather than the department head, is responsible i jfor the details of daily operation. Consequently, since ! ; ;the amount of supervision to be exercised by the department 'head has not always been expressed by law, the "limits of supervisory authority are dictated more by sound management 83 principles." In most cases the incorporating statute designates the supervising official. In some cases, however, the President retains the power to change the responsibility for supervision in accordance with his programs. Freedom from departmental supervision over daily operations has consistently resulted in exemption of government corporations from reorganization plans, transfer iof any or all functions to departmental bureaus, or aboli tion of the government corporation by the department supervisor. Thus, the government corporation has consider able freedom from some types of supervision over depart mental bodies. Personnel. Quite unlike the British system, in 83 Seidman, op. cit., p. 112. I 364 which the personnel of public corporations are not part of i |the Civil Service, therefore giving the Treasury, Parlia ment, and the Civil Service Commission little or no control lover personnel policies, the personnel of government i I corporations in the United States are employees of the United States.The present status of the employees of i government corporations, however, is the result of a trend away from earlier, more independent personnel systems.®® Currently, the employees of TVA, the Panama Canal Company, and the Virgin Islands Corporation, are exempt from civil service regulations. A major restriction of the independence of the personnel of public corporations from the Civil Service was Executive Order 7915 in 1938 which brought the positions iof all government corporations, which were wholly-owned or controlled by the United States, into the competitive civil service unless the positions were specifically exempted by statute.®® By Executive Order 8743 in 1941, the President exercised his additional authority under the Ramspeck Act of 1940 which permitted him to bring the employees of 84 Robson, Nationalized Industry and Public Ownership (Toronto: University ~of “'Toronto Press, i 9 6 0 ) , pi 6 7 . 85Marx (ed.), op. cit., p. 238. Q / J Executive Order 7915 applied to the Commodity Credit Corporation, the Electric Home and Farm Authority, the Export-Import Bank of Washington, and the Federal Deposit Insurance Corporation. 365 government—owned corporations, except the Tennessee Valley ^Authority, into the classified service. Thus, most of the positions which Congress permitted within the civil service |by the Ramspeck Act were made classified positions in 1941 iby executive order. The Classification Act of 1949 (54 ;Stat. 211) brought government corporations under the classification system but it permitted the exemption of specific government corporations, including TVA, and also exempted employees if any part of their compensation is 87 paid out of non-appropriated funds. In the enabling act, congress exempted the employees of TVA from the civil service although the act specified that appointments, promotions, and selections should be determined by merit and efficiency. Although the personnel system of TVA is widely recognized for its excellence, according to V. O. Key, freedom from civil service pro- I cedures does not guarantee good personnel practices and, QQ in some cases, has permitted spoils practices. ° V. CONCLUSIONS In this section some of the most significant trends which have emerged during the history of government corpo rations in the United States are identified. 87 Goldberg and Seidman, op. cit., pp. 25-26. 88Marx (ed.), op. cit., p. 239. 366 1. Government corporations have become less autono mous and more accountable to the public through additional executive and legislative controls, introduced mainly by | < jthe Government Corporation Control Act of 1945. 2. Government corporations have become firmly estab-* i I ilished as part of the executive branch, subject to the i ’ authority and responsibility of the President. ! : ; 3. Additional controls have been general controls, i ! over matters such as total administrative expenditures, rather than specific controls over individual expenditures. 4. The early controversial nature of government corporations has gradually disappeared except for continued opposition by the General Accounting Office, on the grounds that Congress does not have adequate audit control over them. The advantages of government corporation for per forming some public business activities are widely acknowledged. 5. The executive branch of the federal government opposes the creation of additional mixed-ownership govern ment corporations because there are inadequate budget con trols over them.®^ 6. Ownership has been the major criterion for apply ing controls. Complete private ownership exempts government corporations from the audit and budget controls. A bill 89 Seidman, op. cit., p. 112. 367 : proposed in 1958 would have made the government corpora- i tion’s access to federal funds the criterion of control. 7. The personnel of an increasing number of govern- i jment corporations have been included under the Classifica- j ! ;tion Act and the Civil Service laws since 1938. Neverthe- ; iless, many exceptions are permitted. j t j 8. Single administrators, or single administrators ; land advisory boards, are gradually replacing boards of directors. 9. The practice of incorporating national govern ment corporations under the general incorporation laws of states was abandoned in 1945 and has been replaced by incorporation solely by congressional legislation. 10. Congress has given additional emphasis to making government corporations self-supporting and has altered accounting procedures in order to inform Congress whether the enterprise is self-supporting. All costs of operations, interest, depreciation, and the cost of services provided i by other government agencies must be paid out of user charges in order for a government corporation to be considered self-supporting. Thus, TVA, for example, now pays interest on appropriated funds. 11. Nearly ninety per cent of the permanent federal government corporations in the United States provide credit or credit—related services. 12. An increased use of departmental revolving funds ihas resulted from successful experience with the financial autonomy of government corporations. 13. Innovations in organizational autonomy for i I ; government corporations have resulted in suggestions that 'some of the innovations be adopted by executive depart- iments. ; 14. Since the creation of TVA in 1933, national i iregional development programs have been performed by executive departments rather than by government corpora tions . 15. In recent years, national government corpora tions, such as the Export-Import Bank, the Saint Lawrence Seaway Development Corporation, and the Development Loan Fund, have been used to promote international economic development. 16. The elimination of "mixed-ownership” and "wholly-owned” classifications for control purposes would avoid redefining the popular meaning of these terms and undoubtedly would have the effect of eventually clarifying the criteria for applying controls. 17. Over half of the currently active government corporations were established during the 1930's. Only one 90 John Thurston, "Government Economic Enterprises,” Public Administrative Review, Summer, 1960, pp. 168-169; andTtTT ffimock, ’'Gove’ rnment Corporations: A Focus of Policy and Administration,” American Political Science Review, December, 1949, p. IICkT! — — —- ■ - 369 has been incorporated since 1945 which suggests that the day of national government corporation is over in the United States. CHAPTER VIII THE PRICE AND PROFIT POLICIES OF PUBLIC ENTERPRISE I. INTRODUCTION AND DEFINITION ; The purpose of this chapter is to review the advan tages and disadvantages of profits, deficits, or neither profits nor deficits for public enterprises. Of course, profits in public enterprises are not necessarily an indi cation of efficiency. Profits may be the result of high, regulated prices rather than the result of reduced costs. In each enterprise the desirability of a profit, a deficit, or neither, must be made after weighing the advantages and disadvantages of each alternative. A given alternative may not be appropriate in another economy, for another public enterprise, or for the same enterprise at another time. A satisfactory definition of profit is difficult to compose.^ Ramanadham defines profit as the excess of For discussions of price and profits policies see V. V. Ramanadham, The Structure of Public Enterprise in India (New York: Asia "Publishing" House, 1961), ppl SE>—Il8 , 155-T57, and Problems of Public Enterprise (Chicago: Quad rangle Books, 1959), pp. 75-86; Maurice iSobb, Economic Growth and Planning (New York: Monthly Review Press, T960), ipp." 76-104; ‘ United "Nations, Public Industrial Management iin Asia and the Far East (New York: Un ited Nations,'Dept. of Economic and Social "Affairs, 1960), p. 132; Murray D. Bryce, Industrial Development (New York: McGraw-Hill Book 371 |revenue over cost, including taxes, maintenance, replace ment, interest, a reserve for interest or dividend equali zation, and the workers' share of reduced costs resulting I 0 from increased productivity. The last item of cost i 'indicates Ramanadham's view that a portion of increased [ [profits caused by increased productivity is attributable i ito the efforts of workers and should be distributed to [Company, Inc., 1960), pp. 141-146; Mario Einaudi, Maurice Bye, and Ernesto Rossi, Nationalization in France .and Italy (Ithaca: Cornell University Press, 1955), pp. 44-50; Shirley Boskey, Problems and Practices of Development Banks (Balti more: The Johns Hopkins Press, 1959), pp. 53-55; Government of Turkey, A Study on the Operation of State Economic [Enterprises in Turkey (Ankara: Government of Turkey, 1961), |pp. 107-111; A. H. Hanson, Publip Enterprise and Economic Development. (London: Routledge & Kegan Paul Ltd., 1959), pp. 379-84, 434-46; Wm. A. Robson, Nationalized Industry and Public Ownership (Toronto: University of Toronto Press, I960), pp. 278-318; A. H. Hanson, Parliament and.Publlc. Ownership (London: Cassell & Company, Ltd., 1961), pp. 223- 231; I.M.D. Little, A Critique of Welfare Economics. (2nd edition; London: Oxford University Press, 1957), pp. 185- 216; W. A. Lewis, "The Price Policy of Public Corporations," Political Quarterly. April, 1950, pp. 184-196; Kenneth E. Moulding and Pritam Singh, "The Role of the Price Structure in Economic Development," American Economic Review, Papers and Proceedings. May, 1962, pp. 28-37; and Tillo E. Kuhn, Public Enterprise Economics and Transport Problems (Berke ley: University of California Press, 1962); C.A.R. Crosland, "Prices and Costs in Nationalized Undertakings," Oxford Economic Papers f January, 1950, p. 63; D. T. Lakdawala, "Contribution of Public Enterprises,” Indian Economic Journal. April, 1960, pp. 395-404. Marcus Fleming, "Pro duction and Price Policy in Public Enterprise," Economica, February, 1950, pp. 1-22; H. M. Henderson, "Prices and Pro fits in State Enterprise/'The Review of Economic Studies, XVI(l), No. 39 (1948-1949), 13-24; Stephen Enke, Economics for Development (Englewood Cliffs: Prentice-Hall, Inc., 1963), pp. 285-289. 2 Ramanadham, The Structure of Public Enterprise in India, op. cit., p. 88. |them. In this he differs from V. K. R. V. Rao who holds that all reductions in costs because of increased |productivity should be matched by increases in wage costs.^ i 1 Rao makes other distinctions. Planned profit, for I t jexample, is the difference between the social price, the i ' ' " 'socially just price, and the economic price, which is the jmarket price including a normal profit. What might be I icalled the productivity profit results from a fall in costs and the economic price, under competitive c o n d i t i o n s .^ Under the assumptions of both Ramanadham and Rao, an acceptable measurement of productivity is necessary. Both agree, also, that the disposition of productivity profit should be determined by national economic policy rather than by the management of individual public enterprises in order to obtain the optimum allocation of resources through reinvestment. Actual profits, of course, may differ from planned profit because of unplanned changes in sales, costs, and prices. Some critics point out that public enterprises are usually monopolistic and, therefore, can charge prices 3 Florence and Walker hold that ’’profit as a method of payment has largely disappeared. ..." and that the word "profit" should be dropped in favor of "surplus." See "Efficiency Under Nationalization and Its Management," Political Quarterly, April, 1950, p. 197. ^Ramanadham, op. cit., p. 86, which refers to Rao's "Prices, Income, Wages and” Prof its in a Socialist Society," Votz Seminar, Congress Planning Sub-Committee, pp. 172-174. which yield substantial profits. Robson vigorously attacks j I this conclusion while tacitly accepting the premise. Pub lic enterprises, he contends, are subject to much more public and legislative scrutiny than private firms and, in ieffect, are not able to exercise their monopoly status in ■ 5 ipricing policies. Since public enterprises borrow at lower rates than 'private enterprises, because of government guarantee of their bonds, the actual profit rate exceeds the profit rate of private firms by the amount which the interest rate on private, unguaranteed bonds exceeds the rate paid by public enterprises. In other words, public enterprises which have identical efficiency should have profit rates which are comparably higher than the profit rates of private enter prise because of the lower interest costs. According to Ramanadham, profit rates should be computed as a per cent of total investment rather than of capital because of ploughed-back profits during earlier periods. Henderson suggested four major characteristics of a good pricing system for public enterprises.® First, the price system should determine the consumption pattern of consumers. Second, prices should serve as a guide to indi- 5 Robson, op. cit., p. 308. Galbraith has made a similar observation. See Economic Development in Perspec tive (Cambridge: Harvard University Press, 1962), p. TXT g Henderson, op. cit., pp. 15-16. 374 j |cate the direction in which output should be changed. Third, pricing rules should be understandable, clear, and compliance with them measurable. Fourth, the pricing j 'system should not reduce incentives. Henderson noted that | [ ; Jthe price system can do little to encourage efficiency in jnationalized enterprises but that excessively centralized Ipricing decisions may positively reduce incentives and efficiency. II. THE NEED FOR PROFITS Some of the arguments for profits are discussed in the following paragraphs. Many of the arguments rest on the assumption that the profits of public enterprises accrue by one means or another to the government. ' 7 Diamond summarizes "several good reasons for insisting that a development bank, government-owned or not, should be a profit-making venture. ..." (1) Profits are needed to cover unexpected losses on unsuccessful invest ments; (2) profits expand the bank's investment resources; (3) the bank's portfolio can be sold to obtain additional loanable funds if the initial loan is potentially profit able; (4) the bank can borrow from the capital market with out government guarantee if the bank^ projects are profit able; (5) losses are usually criticized by the public and parliaments; and (6) profits demonstrate to private financial institutions that long-term loans can be sound and profitable. See Development Banks (Baltimore: Johns Hopkins Press, 1957), pp. 53-34. A number of the following topics are restatements and expansion of points made by Ramanadham in The Structure of Public Enterprise in India, op. cit., pp. 55-Xr5i 375 Increased public revenue. Profits of public enter prises can be an important source of public revenues with which to provide a larger share of the economy's goods and services through the public sector. Since the public |sector has expanded, relative to the private sector, in I most underdeveloped economies, additional revenues are I needed.8 In India, planned GNP is to double during the next twenty-five years, indicating the rate of growth to be sus tained, in part, by the public sector. The effect of profits is to reduce real consumption, or prevent it from rising as rapidly as would otherwise occur in the short run, increase real saving, and transfer some of the onus of the imposed sacrifices necessary for economic development from the government to the public enterprises. If the public enterprises are primarily pub lic utilities whose services are consumed by the general public, the incidence of this method of financing (taxing) economic development is undoubtedly regressive.® In the United States over one hundred municipalities are tax-free because of revenues from the sale of electricity. The post office in Great Britain and state liquor monopolies in the O Some of the reasons for the expanded relative role of the public sector were discussed in Chapter VI. Q Marshall E. Dimock, Business and Government (4th edition; New York: Holt, Rinehart" and” Winston, Inc. , 1961), pp. 392-393. 376 ! United States also contribute to the revenues of govern ment. In underdeveloped economies which are consumption— |oriented but are also seeking rapid economic growth, a !relatively heavy tax on consumption is probably desirable. Furthermore, the taxation of profits, the incidence of |which may be borne largely by the consumer, is perhaps s ;administratively simpler and more effective than other 1 ; taxes. Loss of tax revenue from private firms. Nationali zation results in the loss of tax revenues from private firms. Continuation of a policy of profit replaces private tax payments with public "tax1' payments. Legislators, however, tend to regard profits as socially undesirable and enact requirements imposing low or negative profits. This practice suggests the need for insuring that price decisions of public enterprises are not unduely influenced by political pressures. Otherwise some progress toward a conflicting national goal, rapid economic development, may be sacrificed. Equitable distribution of the burden of development. If public enterprises do not obtain profits which are used for capital formation, either the burden of economic development falls disproportionately on the private sector or the targets of the economic plans cannot be reached. On these grounds, Ramanadham argues that the rate of capital i 377 | ; jformation in the public sector should be roughly the same as in the private sector.10 In the absence of a rate of profit in the public sector which is comparable to the rate; ! I in the private sector, investment resources would be i E jmisallocated in the direction of the public sector. This * ; ;is because of public investment being financed out of tax I ‘ jpayments from private firms, thus, drawing potential j * 1 " I :private investment funds into the public sector. I. M. D. Little supports this line of reasoning. He argues ’’that the larger the nationalized sector the more important it becomes that this sector taken as a whole should make profits (and/or that some of its products should be taxed).11!*2 In fact, however, the nationalized industries in Britain do not save at all and probably dis save even though they are large investors. Consequently, the saving of the private sector, which is acquired by the government through indirect taxation, finances public investment. Moreover, he contends, a system of taxation which excludes public enterprises is likely to be less equitable than one which taxes them. Consumer sovereignty and optimum resource allocation. ^Ramanadham, op. cit., p. 91. 11This part of Ramanadhamfs reasoning is implied but not expressed. ■^Little, op. cit. , p. 214. In the previous section, the point was made that comparable profit rates were necessary in the public and private sec tors in order to prevent misallocation of investment resources to the public sector because of a government fiscal policy of financing the public sector from the private sector. Misallocation can occur also as a result of elimination or interference with profits as an indica tion of the expression of consumer sovereignty in the market. When prices are determined competitively, the expansion or contraction of industries is indicated by the presence or absence of profits showing the will of the consumers. Of course, the propensity to consume may be so high that disposable income must be reduced to provide the necessary resources for economic development. Nevertheless disposable income can be used in accordance with the desires of consumers. To the extent that consumers buy public sector goods and services, profits indicate the need for expansion among the industries in the public sec tor if prices are not regulated. Unfortunately, political objectives interfere with the operation of the market allocation of resources in the public sector, particularly when low or negative profits indicate the desirability of the contraction of an industry Ramanadham pointed out a number of reasons why public enterprises are slow to contract even though profits are low or negative. 379 Firstly, there is no urge on the part of managers of the undertaking to recommend such a course; in fact, many are afraid that it amounts to a self-condemnation. Secondly, the administrative processes entailed in the passage of the recommendation to Parliament are too elaborate and dilatory to be of prompt value. Thirdly, arguments tend to arise in Parliament that a subsidized or low-profit operation is the real test of public enterprise and contraction of investment under such a condition reflects the abandonement of a vital principle of philosophy. Lastly, support comes from the fact that the capital of the enterprise is probably guaranteed by the govern ment as regards both principal and interest and that financial reorganization, therefore, leads to no real advantage to the government. Efficiency. A government requirement that managers of public enterprises made maximum profits provides an incentive toward efficiency similar to the incentive of managers of private firms. Since an absolute measurement of maximum profits is impossible, a government may estab lish administrative procedures to insure "efforts in the direction of the highest possible profits.The adminis trative machinery would require an agency staffed with economists, accountants, statisticians, and businessmen to evaluate the efforts of management toward maximum profits. A government directive that the public enterprise operate with maximum efficiency (decreased costs), however, might 13 Ramanadham, op. cit., p. 93. 14Ibid., p. 113. !be more satisfactory because profits result from increased jprices as well as from decreased costs. Increased prices |in enterprises resembling public utilities may not be j [desirable. Nevertheless, in the absence of competition, the measurement of costs must be regulated. This reasoning is supported by Florence and Walker. j Now that the spur of competition has either failed or been removed, breaking even or a surplus over costs consistent with our four provisos, is not enough to guarantee economic efficiency. Such a measure requires reinforcement by the threat that, at any moment, the cost structure may be examined by capable, well- informed and thorough inquisitors.15 The proper test of efficiency, according to Florence and Walker, is the reduction of costs with prices set by an exogenous agency.1® In Britain, this measure of efficiency is currently emphasized by Britain's impending entry into the common market after which the nationalized industries would compete directly with public and private enterprises in the common market. ^ Economic growth. Recently, John Kenneth Galbraith defended a policy of profits on the grounds that the most 15 Florence and Walker, op. cit., p. 207. 16 Ibid., p. 203. Paul Sweezy discusses incentives to efficiency in Socialism (New York: McGraw-Hill Book Co., Inc., 1949), chapter 10, esp. pp. 205-206, 211-212. 17 Richard Bailey, "Nationalization and Professor Hallstein," The Spectator, April 6, 1962, p. 434. 381 j isuccessful government corporation is the one with the most rapid rate of growth. i If I had to lay down a measure for performance for ! the publicly owned corporation in the developing | country it would be the earnings that it provides to put into its own expansion, in the given or related i field and within the framework of the plan, would be ; j considered the prime goal of the public-sector firm. 8 j iGalbraith emphasizes that the goal should be measurable, i ;widely known, and rigorously enforced. He maintains that ! autonomy means more, rather than less, public accountability because it accomplishes the goal of growth more effectively. This thought is similar to Ramanadham's suggestion that all corporations can be thought of as public corporations if they allocate resources in a pattern which maximizes the public welfare.Galbraith, it should be noted, supports a policy of direct reinvestment by the public enterprise rather than collection of profits in a government pool for redistribution in accordance with the priorities estab lished by the planning agency.^® 18 John Kenneth Galbraith, Economic Development in Perspective (Cambridge: Harvard Univ. Press, 2), p. 73. 19 Ramanadham, The Structure of Public Enterprise in India, op. cit. , p. 20The United Nations Seminar in New Delhi supported direct reinvestment of profits; see United Nations, ’ ’Public Industrial Management in Asia and the Far East," op. cit., p. 132. The Herbert Report in Britain opposed reinvestment on the grounds that present consumers subsidize future con sumers . See Hanson, Public Enterprise and Economic Pevel- opment, op. cit. , p. 382 | Attract private lenders. The decision of private j ; investors to participate in financing public development projects is determined by the marginal efficiency of capi- I ; jtal. Estimates of profitability have been devised for I 1 'informing potential investors of the expected rate of ' 21 return. The absence of profits requires that the project !be financed entirely from public funds. However, private funds can be obtained even if the project has no expected profits if the government is willing to subsidize the project which would be necessary in either case, at least to the extent of any deficit. The charters of public development banks do not usually specify the necessity of profits but provisions are made for the allocation of profits, indicating that profits are expected. The Government of India guarantees a 2\ per cent dividend to private shareholders of the Industrial Finance Corporation which requires the enterprise to obtain 22 profits. When there are private shareholders, a dividend limitation is often imposed on them. Retirement of stock. An argument for profits is that the outstanding bonds eventually should be retired through payments from profits. In England, the capital of public 21 Murray D. Bryce, op. cit., p. 141. 22 Shirley Boskey, op. cit., p. 17. 383 i jenterprises consists of government bonds. Such a policy, in other words, would be a tax on the profits of public t enterprises for the purpose of retiring the public debt. It would be equivalent to a requirement that private firms i ! jretire all outstanding capital. Lewis observes that iretiring the public debt may be advantageous but there is little assurance that public enterprises should be taxed t for this purpose.2** He contends that profits should be used for reinvestment in a manner similar to the use of undistributed profits in private businesses. Otherwise, distortion of investment would occur. Payment of welfare costs. In India and other under developed countries, public enterprises are expected to be model employers which, means "that job security is the inherent prerogative of labour in the public sector."2^ As a result of this belief, workers who become technologically unemployed are retained and paid as employees of the public enterprise. The public enterprise, in effect, bears the entire burden of unemployment "insurance" for workers who become unemployed. The policy can obviously be criticized on the grounds of discouraging technological innovation. It is equivalent to complete featherbedding. Nevertheless, the prevalence of the practice requires a surplus of funds ~~ 23 ^ ^ Lewis, op. cit. P p. 186. ^Ramanadham, op. cit., p. 95. ; 384 i ' i ! jto be used to support the surplus labor resulting from the i : I jintroduction of new innovations. There are, of course, jmany other kinds of social welfare payments paid by the {public enterprises, such as paid holidays, the use of lautomobiles, and other allowances. Thus, profits may be i ' ■ i justified as a source of funds for making welfare payments.j Ramanadham suggests that the policy of providing jextensive welfare benefits to public employees leads to higher prices for public goods and services. Therefore, he concludes, the price of the product of public enter prises should be determined by a government agency rather than by the management of the enterprise.^5 This reasoning is similar to the logic used to justify public regulation of utility rates in the United States in that the demand for the product is sufficiently inelastic that prices can be raised without proportional reduction of sales. However, in the case of high welfare payments the necessity of central regulation results from a cost-push inflation which is tolerated because of the popular expectation that public enterprises should be model employers. The lack of compe- 25The increase in welfare costs has been a long standing problem in Britain's nationalized industries. See Florence and Walker, op. cit., pp. 205-208. Mexico, in ;late 1962, enacted legislation making it mandatory for jcompanies to share profits annually with their employees. Paul Kennedy, "Profit-Split Law Argued in Mexico," New York Times, December 22, 1962, p. 7. 385 ; ! I [titive substitutes for the product and its essential nature j jcombine to make increased prices possible, and to prevent the necessity under competitive conditions for management ! to successfully resist demands for increased welfare costs.\ Apparently, workers and legislators in underdeveloped coun-j jtries do not recognize that public enterprises cannot be imodel employers, if this is interpreted to mean that public jemployees will have an exceptionally high real wage, unless: the economy is more productive or the authorities are will ing to redistribute income toward the public sector and public employees. Low cost of borrowing encourages expansion of the public sector. In underdeveloped countries such as India, public investment has become an increasing per cent of GNP, in part, because public enterprises can borrow at lower rates of interest than private enterprises. Consequently, the government loses tax revenue from private firms. The competitive advantage of public enterprises in the market for loanable funds, in effect, encourages public enter prise and discourages private enterprise. In countries such as Pakistan, this policy would be inconsistent with the official policy of promoting private enterprise. Relative to the need for profits, the reasoning pro-! ceeds as follows: the competitive advantages given to public enterprises increases the size of the public sector I 386 jrelative to the private sector; the relative increase in l ; jthe public sector reduces government revenues from private jsources; the decrease of government revenues from private i ; I • ■ - i sources requires increased revenues from public enterprises j i I j jor other sources. There are, of course, other reasons for Ithe increased size of the public sector. ■ Loss of national tax revenues to the states. In India, the states have "nationalized" some industries, such as road transport, which has reduced the revenues of the central government. Thus, the central government must obtain other sources of revenue in order to sustain or augment its development program. Subsidies for public enterprises with deficits. Some public enterprises regularly incur deficits which require subsidization from other sources of revenue. Other enterprises occasionally incur deficits. The profits of other public enterprises are a ready source of funds with 26 which to subsidize public enterprises with deficits. 26 In Turkey public enterprises have been directed to sell below cost even though they have not received subsidies from appropriations to cover losses. Enterprises have also been required to transfer products to government agencies without sufficient payment to cover costs. In addition, ithe government grants tax privileges. See Government of Turkey, op. cit., pp. 108-109. Dimock holds that every major public enterprise should be separately financed and implies that each should be self-supporting. See Dimock, op. cit., p. 394. 337 i | Loss of revenue because of reduced incentive. If | ^nationalization reduces profits because of reduced incen tives, then tax revenues based on profits would be reduced jrequiring other revenue sources. The elimination of profit |in public enterprises would require even more revenue from I jthe alternative sources. A policy of maximum profit from i jthe public enterprises would minimize the amount of revenue !needed from other sources. III. ARGUMENTS AGAINST PROFITS The following points are reasons sometimes advanced as criticism of profits in public enterprises. These arguments do not support a deficit-subsidy policy. Argu ments in favor of deficits are included in the next section Social inequity. The Fabians in England developed ithe logic which concluded that public enterprises should break even— incurring neither profits nor losses. This reasoning was generally adopted by cities engaged in municipal trading. The nationalized industries, however, are required by statute to break even, "taking one year with another," but profits are permitted. The argument of the Fabians that profits are socially unjust rests on neo classical analysis which indicates that revenues in excess of normal profits under imperfect competition cause a misallocation of resources and an undesirable redistribu- 388 i ition of income. Profits cause price instability. W. Arthur Lewis Jhas argued that any price policy other than a break-even i jpolicy would contribute to either inflation or deflation. j A corporation puts money into circulation by paying S for services, materials, etc., and takes money out of | circulation by charging for its services. Any deficit | is inflationary in effect unless it is being deliber ately offset in some other part of the economic | system. ^ Conversely, a profit would be deflationary. This argument against a policy of profits is accurate but not very convincing because it assumes an unlikely economic condi tion-- namely, that there are no offsetting changes in another part of the economic system. A deficit results in a transfer of funds from general tax revenues which reduces government expenditures on other projects, countering the inflationary effect of the deficit of the public corpora tion. If the government adds to its total debt in order to maintain its expenditures on other projects the effect would be inflationary. This is perhaps the most realistic assumption. In the case of profits, the public corporation does not hoard the profits. They increase income as dividends or are reinvested either directly by the public enterprise or by the government if the profits are trans- 97 W. Arthur Lewis, "The Price Policy of Public Corporations," Political Quarterly, April, 1950, p. 184. 389 jferred to a pool of funds for economic development. ] I ’Consequently, this argument against a policy of profits i 'contains a fallacious assumption which destroys its i ;validity. ! ! ' Distortion of investment. Under a policy of profits jthe price of the public good or service is higher than { lunder a break-even policy, thus limiting the size of the industry and interfering with the optimum pattern of resource substitution in other industries. If prices were below the average cost of production, the industry would expand excessively. The distortion occurs most in indus tries where the demand for the product is very elastic and a slight change in price causes a large change in the quantity of the product used. IV. ARGUMENTS FOR DEFICITS AND SUBSIDIZATION Over-capitalization. If the government pays more for a nationalized industry than the assets are worth a loss may be permissible. The going rate of interest on the market value of the assets could be paid by the industry to the government. The amount by which the actual interest on the bonds issued to purchase the industry exceeds the interest on the market price of the assets would be a 390 j legitimate loss to the government.2** ! New competing products. The introduction of a new i I jcompeting product into an economy beaause of technological j i j jadvances, which makes a public product less useful or obso-; jlete, causes a justifiable loss of revenues and a deficit |in the public enterprise. The most common example of this ! ! |type of loss is the introduction of truck and bus trans- j i portation which competes successfully with the railroads causing chronic deficits in this industry throughout the world. Often the poliay which is adopted to cope with deficits in the railroad industry is to restrict the commercial use of highways, thus preventing an increase in the productivity of the economy. According to Lewis, the innovation should not be restricted and the value of the assets in the less efficient industry should be reduced to their actual market value, with the government incurring the loss which results from the fact that the value of the liquidated assets is not sufficient to repay the debt held by the bondholders.2** Inflation. A deficit may be tolerated on the grounds that raising the price of the public good or service is 28 Ibid., p. 185. Among his reasons for ignoring the jbreak-even principle Lewis discusses a number of justifica tions for deficits in public enterprises. See pp. 185-192. 29 Ibid., p. 187. | 391 |inflationary. Lewis argues that not raising prices is also iinflationary because the industry spends more than it ! on ireceives in revenues. u In a full employment economy, a I ■ |deficit represents an increase in demand in another industry |which cannot produce more. This results in inflation. If • jthe government reduced its spending in order to reimburse ! : ■the deficit industry for its loss, the inflationary effect jwould be offset. However, if the government increased its spending by the amount of the deficit by issuing bonds to reimburse the deficit industry there would be inflation. The government could prevent the inflation caused by increasing its spending while reimbursing the deficit industry if it increased taxes by the amount of the deficit. The conclusion, thus, is that a deficit is not necessarily inflationary although the most likely government policy would not offset the inflationary effect. Reduction of balance of payments deficit. Under developed economies commonly have unfavorable trade balances. In order to encourage domestic producers to buy domestic products rather than cheaper foreign products, the prices of the products of public enterprises may be set below average cost. Under this policy the government sub sidizes the deficit industry and sustains a relatively *30 Ibid., p. 188. | inefficient public enterprise. However, the policy has the temporary advantage of conserving foreign exchange although, in effect, it constitutes a protective tariff on iimports. | Equating average revenue with marginal cost. Vari- j - _ - _ ^ ^ — -i..— . — 11 n i- — r- t ■ — 1 — . - i «- <- _1 - 1 ' - I lous economists have argued that the price of a product I jshould be equal to the marginal cost of producing it in l I jorder to maximize public welfare.^ This policy would be relevant in an industry with increasing returns. Since the average revenue would then be less than the average cost, the industry would incur a deficit. Lewis, Bye and others argue against this policy on the grounds that there are conceivable cases of zero marginal cost in which non-users would entirely bear the cost of production and users would be completely subsidized.^2 Since a deficit must be made up by a subsidy financed by taxation the incidence of the 31 For a review of the history of the marginal cost pricing principle as well as an analysis of the current status of the controversy, see the two articles by Nancy Ruggles, "The Welfare Basis of the Marginal Cost Pricing Principle," The Review of Economic Studies, XVIII(l), No. 42 (1949-1950), 29—4 6 and ' r ftecent developments in the Theory of Marginal Cost Pricing," ibid., XVII(2), No. 43 (1949-1950), 107-126. 3 2 Ibid., p. 190. Maurice Bye discusses the marginal cost controversy. See Einaudi, Bye, and Rossi, op. cit., pp. 123-126. Also see Abram Bergson, "SocialistHEcanomics,' in Howard S. Ellis (ed.), Survey of Contemporary Economics '(Homewood: Richard D. Irwilf^ Inc., f94tJT> pp. 424-428. 393 i , | j |tax roust be weighed when determining the merit of marginal ' I 1 I 33 cost pricing. Fleming argued that losses by public enterprises i i would not be as great as suggested by opponents of the j marginal cost pricing rule if socialized industries j | restricted output, as they should according to him, in jorder to prevent an excessive diversion of resources | j jtowards public enterprises. A tax to subsidize any remain- I j ing deficit would have less disincentive effect, he contended, than a price which would be high enough to avoid the deficit.^ Low productivity regions. The public enterprises in some regions have lower productivity than those in other areas. While the economy would become more productive if 33 John F. Due, Intermediate Economic Analysis (Home wood: Richard D. Irwin, Inc., 1956), pp. 560-561. Also see Emery Troxel, Economics, _of Public Utilities (New York: Rinehart &Company, Inc., 1947), pp. 441-463. Henderson notes several complications resulting from marginal cost pricing and concludes that "under current conditions the straight-forward instruction to nationalized industries to apply the marginal cost principle would be impracticable and that, if it were practicable, it would produce the wrong results. Indeed as a policy the marginal cost prin ciple fails on all four criteria for a good pricing system." Op. cit., p. 19. ^^Marcus Fleming, "Production and Price Policy in Public Enterprise," Economica. February, 1950, pp. 4, 13- 14. Theodor Thiemeyer has recently reviewed the arguments pro and con average cost and marginal cost pricing. See |"Theories Concerning the Problem of Price Setting in Public Undertakings," Annals of Collective Economy. July-September, 1962, pp. 251-269. 394 | i I | jthe workers were re-employed in other industries, there may! i : I I be justification for a temporary loss in the public enter- |prise while the transition occurs. The current subsidy to ; ! agriculture in the United States is perhaps a similar j i circumstance. The temporary alternative would be unemploy-; ment, zero production, and complete support of the workers j i Iby others in the economy. Instead, the public enterprise imay continue production even though the average cost is ! higher than the average cost throughout the industry and higher than the price of the product, thus resulting in a deficit which the government is temporarily willing to subsidize. Preference for special users. The government may wish to subsidize certain consumers of the products of public enterprises such as users of electricity and trans portation in outlying areas. This would create a loss in the enterprise. Conversely, the government might reduce consumption of the item by taxing it, thus creating a profit.35 Self-sufficiency in the event of war. The government may wish to encourage an industry, such as the sugar beet industry in the United States or Britain, which does not 3\his is done in New York State and many other iareas. See infra, "Price Policies of Public Authorities in New York State.,r" 395 ; i ■ Shave a comparative advantage, in order to obtain the pro duct from domestic sources during wartime when other sources are restricted. Losses on railway systems are often justified on these grounds. I i 1 j V. PRICING PROBLEMS i ! j i Price discrimination. Public enterprises are likely1 j i— i_rt .-r r n r- . - - - - “ i | to be in industries requiring large amounts of capital with consequent economies of scale and monopoly characteristics in the market for the product. These features permit price discrimination which is equivalent to a tax on the con sumers in the low-price market. Since buyers in competitive markets all pay the same price regardless of their willing ness to pay more per unit for fewer units, discrimination is often considered inequitable and in private enterprise is usually prevented by government regulation. Price dis crimination is even more likely in the markets of public enterprises and similar regulations are required.^® In addition, the price discrimination of public enterprises may alter the distribution of income in a direction opposite to that desired by the government. In such a case, the maximum profits of the public enterprise would be reduced by government regulation in the interest n / » See Lewis, "The Price Policy of Public Corpora tions," op. cit. , pp. 192-194. jof equity. On the other hand, the government may favor i jdiscrimination which maximizes profits if the income distribution is altered favorably. I ! i i Ex^ernal economies. Because of external economies jthe government may wish to give investment priority to i |industries such as transport, communication, education, and j lelectric power.^ A policy of profits in these industries i iwould limit the external economies in user industries. Thus, profits may be sacrificed in order to increase external economies. A policy of profits imposes a greater burden for financing the development program on other sectors of the economy. Deficit industries. Some industries are undertaken by government because of low profit prospects or inadequate demand. Such industries often incur regular deficits or contribute low or no profits. These industries, such as the railroad industry, are likely to be a large portion of the public enterprises and absorb large amounts of the pro fits of other public enterprises. This procedure, in effect, places high priority on investment in the deficit industry. In other words, pricing policies can not be formulated which would provide a profit in all public 37 Charles P. Kindleberger, Economic Development (New York: McGraw-Hill Book Company, fnc. , 155S)"," "pp. 153- 154. j 397 I ! I 3 ienterprises. j Cost-push inflation. The rising cost of welfare i | payments to public enterprise employees was discussed above; } i ias one of the reasons for a policy of profits. Profits in i : t . ‘public enterprises tend to be regarded as solely the spoils; I jof the workers in the industry. This has occurred in ! ! 1 o q : •Britain, India, Yugoslavia, and other economies. ° Conse- ! jquently, a pricing policy which provides profits may increase the real wage of public employees and consumption rather than providing investment resources. Taxation of profits. Since profits are likely to be used for welfare expenditures, a tax on profits is one way of insuring that these financial resources are devoted to investment although pooling of the profits of public enter prises results in the subsidization of some industries by others. Taxation of profits, thus, is a device for indirect but compulsory limitation of consumption. Rate of profits. The nationalization acts of Britain do not specify the rate of profit that public enter prises should obtain but require that receipts should not ^®The problem is even more severe in Italy. See ’’ Uneasy Italy," The Wall Street Journal, July 30, 1962, p. 1. 398 I be less than expenses.39 In India, also, the rate of pro- ; i |fits is not specified but many of the acts require that the I net profits be transferred to the government which suggests; [Parliament's desire for profits.1 ^9 In both Britain and i jlndia, the acts do not specify the size of surpluses or I [accumulated reserves which gives management considerable i ; jdiscretion in determining the amount of net profit. Thus, jin Britain and India nationalized enterprises must be self-supporting and are relatively free to determine the rate of profit. Competitive profits. Some public enterprises, such as oil refineries, lending institutions, and some manufac turing companies, compete with private enterprise and, therefore, cannot make profits in excess of the profits in private companies unless they are more efficient. Conse quently, prices and the absolute amount of profits cannot 39 W. A. Robson, Nationalized Industry and Public Ownership, op. cit., pp. 306-311. 40 Ramanadham, The Structure of Public Enterprise in India, op. cit. , pp. 155-157. In Denmark, profit regula tions have been reconsidered recently. The Minister of Commerce submitted a bill to Parliament which extends the responsibilities of the Monopoly Control Authority. Under the new bill the Authority could initiate inquiries into prices and profits in branches of the economy where a pub lic statement on price formation seems necessary. If prices appear unduly high, the Authority could fix price and profit ceilings. See "Price and Profit Regulations in [Denmark," InternationalFinancial News Survey. November 9, 11962, p. 359. 399 t ; |be determined independent of the market price. VI. THE REPORT OF THE ICRICE THEORY COMMITTEE ON PRICE SETTING IN PUBLIC UNDERTAKINGS 1 i In 1962, the Theory Committee of the International i j !Committee for Research and Information on Collective i jEconomy published its final resolution in price setting jin public undertakings.41 Some of the most salient fea- I j ;tures of the report are discussed below. Assumptions The Committee assumed that public undertakings operate within competitive, market economies and recognized that price competition may work toward the public interest. The report stressed that the primary public goals of price policies in public enterprises include the solution of several types of problems: distribution, settlement, local, short-term economic, and employment problems. "Price policy is one of the main weapons with which public under- 42 takings fulfill their specific collective economy tasks." ^ICRICE Theory Committee, "Price Setting in Public Undertakings," Annals of Collective Economy. July-September, 11962, pp. 270-282. In the same issue see Theo Thiemeyer, ‘ "Theories Concerning the Problem of Price Setting in Public ■Undertakings," pp. 251-269. Also see Gerhard Weisser, "Price Setting in Public Undertakings," and Georgio Stefani, ;"Prices and Production Costs in Public Enterprises,” l Annals of Collective Economy, July—December, 1961. 42Ibid., p. 271. j 400 Since all price decisions involve the public interest, i I according to the Committee, there are no non-political methods of setting prices, | One of the main assumptions of the Committee has j l questionable validity. This is the contention that regu- ■ ! j i !lated private enterprise cannot achieve the public interest! ! las well as public undertakings. In support of this state- ; |ment, the Committee argued: I Comprehensive systems of public control require for their application equally comprehensive administrative machinery; as the latter cannot directly influence the operational policies of public undertakings, its role will more or less be confined to that of auditor. Moreover, if the economic structure is very large and complex, it is doubtful whether adequate control is possible or whether the machinery of audit can be sufficiently independent. The subjection of undertak ings to the service of the public interest is not primarily~a problem of auditing.^ Two reservations may be noted. First, if "operational policies" is intended to mean policies over day-to-day operations, the experience of many countries indicates that this kind of control is unnecessary and undesirable. Second, the administrative machinery required for the con trol of public undertakings may be just as comprehensive as that needed to control private enterprises. This study has indicated that action in the public interest is not inherent in public enterprises. Furthermore, public control 43Ibid., p. 272. Underlines added. This observa tion is not fully explored within the report. over private enterprise is not necessarily limited to auditing. The Committee also assumed that profits and losses I are not an adequate measure of the success or failure of public enterprises and that firms should not attempt to obtain maximum profits but, instead, should operate to promote the public interest. Statutory provisions requir- ; ing profits "are survivals of old tradition or symptoms of the decay of the spirit of public economy. Commonly Used Price Policies The Committee held that the most commonly used price policy--that prices should cover costs— is inappli cable because of the difficulty of determining average unit costs. On these grounds, the Committee resolution asserted that the recommendation of the Kapteyn report by European supranational authorities, which concluded that prices in Europe's transport industry should be fixed in terms of average costs, is unworkable. The chief difficulty, according to the Committee, is the problem of allocating costs according to their origin. Allocation will always involve the requisite amount of assessment. For these reasons no attempt to esti mate "correct" average unit costs can give satisfactory results. ^ 44Ibid., p. 273. 45Ibid., p. 274. 402 ; j j |The larger the undertaking and the larger the variety of ! goods and services produced, the more difficult the alloca-. ■ ] ! i tion of costs will be. The Committee observed that criteria | are still needed for allocating costs among the different j branches of the economy as well as for their allocation ' i ! r I within individual economic units. i 1 : The report indicates that price policies should be !sufficiently flexible to permit replacement of equipment ;at inflated prices. Nevertheless, in spite of all the difficulties and shortcomings associated with the average cost method of pricing, the report asserts that "in under takings in a collective economy operating primarily to satisfy needs the average unit cost should be the starting 46 point of all considerations relating to price setting.’* The Committee argued that profits for the purpose of reinvestment are not justified because the consumer should not be required to finance expansion within the industry.^ However, if investment is not financed from other sources prices should be set to provide profits for reinvestment. This reasoning is logical only if general taxss are more equitable than the additional burden of a higher price 46Ibid., p. 274. 47 For a statement on the reinvestment of profits see Thiemeyer, op. cit., pp. 267-269. He contends that, in principle, self-£inaneing is undesirable and that legisla tion requiring surpluses should be repealed or amended. 403 ; I borne by the consumer. The Committee made a very meaning ful observation to the effect that public undertakings in underdeveloped countries usually must obtain investment funds from profits because, in practice, governments do not! | jhave tax revenues for reinvestment. The report, thus, con-; ! • icedes the necessity of profits in practice. The second commonly used price policy considered iby the Committee is the policy of setting prices at marginal ' 48 costs. At levels of output below the optimum level, marginal cost is below average cost and losses are incurred. According to the Committee report, losses are typical because public enterprises normally operate below the optimum level of output. As the majority of public undertakings must keep substantial reserves of productive capacity, so as to be able to meet all needs, one may conclude that they will be as a rule operated at a loss. ® In its final resolution, the Theory Committee spoke dis paragingly of the AR»MC method of pricing although the reasons for discrediting it are unclear.5® Among the Com- ^^Thiemeyer deals quite extensively with this topic. See QP» cit., pp. 254-262. 49 ICRICE Theory Committee, op. cit. . p. 275. 50 Alan S. Mann has argued that important qualifica tions to the marginal-cost rule have been made and that the; "full-cost" rule is reasonable on fiscal grounds. However, he contends that the "full-cost" rule is not adequate for multiple-purpose public enterprises and suggests that net social product should be maximized subject to the restraints resulting from the prohibition of losses. Consequently, 404 I ■mittee’s objections to welfare theory was the claim that the term "full utilization" is either insignificant or iundefined, and the assertion that total utilization cannot ■ r i be calculated from the sum of individual utilizations. i i ; |Recommendations of the ICRICE Theory Committee ' The predominant conclusion of the Committee was that1 i j |no uniform price rule could effectively satisfy the needs Iwithin all public undertakings. Therefore, the price- setting process whould be decentralized and prices within individual enterprises should be flexible particularly when the product must compete with substitute items. Decentra lized, flexible pricing permits price discrimination, which may be desirable for redistribution, and the introduction The optimum price will exceed the marginal cost of each commodity by an amount proportional to the excess of its marginal cost over marginal revenue. See Mann, "Multiple- |Purpose Public Enterprises--Criteria for Pricing," Economica, August, 1952, pp. 322—326. ■ Nancy Ruggles concludes that, because of the neces sity of subsidizing decreasing cost industries out of the Iconsumers' surplus of purchasers, a special form of price idiscrimination must be used and marginal cost pricing must be abandoned. Interpersonal comparisons are necessary, she maintains, in spite of contrary claims by advocates of mar ginal pricing. She contends also that some of the arguments for marginal cost pricing support pricing at other than marginal cost equally well. Therefore, for these and other reasons, the marginal cost pricing system cannot be applied in all public enterprises. However, it should not be dis regarded altogether, she argues. Some railway and utility rates could increase welfare if set at marginal cost. See Nancy Ruggles, "Recent Developments in the Theory of Mar ginal Cost Pricing," Review of Economic Studies, XVII(2), No. 43 (1949-1950), l2T^T25T “ 405 l jof competition against monopolies and oligopolies. The i I Committee again qualified its position against reinvestment; |out of profits by suggesting that flexible pricing would I ■ > i (permit price increases where demand elasticity is low in i ;order to subsidize other enterprises where demand is elastic i ( j : land small decreases in costs would increase the quantity j |demanded substantially. | The Committee stressed that the fundamental pricing ; (rule for public undertakings is to use differential prices while covering costs, including interest payments on borrowed capital, but avoiding profits.^ When surpluses occur, production should be increased. This rule is called the rule of "economic viability." Such a pricing practice, without profits, permits production to "satisfy needs." The price will be determined by trial and error as in profit-seeking enterprises. The Committee seemed to oppose regulation of prices by government directive. However, the working of the recommendation makes its meaning uncertain. If public undertakings are required to comply with government regulations on price levels, such regula tions should not be of a nature to affect their char-; acter. ' " ~ — — Elsewhere the Committee reinforced this statement of the 51 Ibid., p* 278. This conclusion seems to conflict with the Committee’ s observations regarding the Kapteyn (Report. Ibid. , p. 279. Underlines added. 406 I need for financial autonomy in public enterprises. If public undertakings have primary objectives related to social policy, price adjustments should not be imposed from above, as the3fulfillment of these objectives will be hindered. j The final resolution of the Committee concluded that! social costs and benefits should be considered when prices : j \ jare determined but the report gave very little attention toj i ; l i jthis topic. Conclusion The tone of the final resolution of the ICRICE Theory Committee on Price Setting in Public Undertakings implies that the Committee conscientiously attempted to consider and recommend price policies which would avoid the most difficult problems of profit-seeking, capitalist enterprises. The content of the report, however, indicates that the recommended price practices would constitute some what less of a departure from the usual practices of private ienterprise than would be expected. Price and profit idecisions would be made by the management of individual public enterprises with a degree of autonomy similar to that of private enterprises. The main differences are that profits would be avoided unless investment could not be financed from tax funds and price differentials would be intentionally designed to redistribute income and promote S'? Ibid., p. 278. Underlines added. 407 other national goals regardless of whether consumers recognized them. Another evidence of the Committee’s desire for auton-r i omy among public enterprises is its insistence on the j | i |independence of management from governmental price direc- ; i jtives which might affect the character of prices. Even in ; times of depression the management of public enterprises would be free to decide upon the best method for promoting the social interest. Thus, the public enterprise would be a relatively independent judge of what constitutes the public interest. This is consistent with the great responsibility which the Committee assigned to heads of public undertakings for acting as "dedicated promoters of the general welfare." The Committee acknowledged that flexibility or "elasticity" in pricing practices consti tuted a "non-doctrinaire" policy for setting prices. VII. ADMINISTRATIVE PROBLEMS Control. Once a profits policy has been adopted, a government organization must be assigned the responsibility for insuring that public enterprises exert sufficient effort in the proper direction to achieve the desired rate of pro fit. The government, of course, rather than private stock holders, evaluates the proficiency of management. Such an organization would investigate and evaluate the efficiency of the enterprise and its pricing policy. 408 i j ! Ramanadham recommends the creation of a public enter prise commission in India to make recommendations to jparliament regarding the financial policies and efficiency ; of public enterprises. He also favors a parliamentary icommittee on public enterprises, to provide expert informa-j i ' ition to parliament. ^ This is similar to the investigating; jagency, recommended by Hanson, which is discussed below. Advisors to the Ministers. Hanson maintains that in England the Ministers, the Select Committees, and the Con sumers’ Councils do not have access to adequate informa tion. He proposes, therefore, that an investigatory agency similar to the French Commission de Verification should be created.Among other responsibilities the agency would study pricing and profits problems and, if Hanson's recom mendations were accepted, might be the final authority on price policy. The agency would consist of a small number of full-time members with a full-time staff. In this way, Parliament would obtain professional information rather than amateur responses to its questions. Hanson is criti cal of the Tribunal system of rate-fixing on the grounds that it makes decisions too slowly. 54Ibid., pp. 113-114. 55 Hanson, Parliament and Public Ownership, op. cit. , pp. 223-231. ----- 409 Replacement of managers and board members. In the absence of the incentive to private-enterprise managers who must satisfy the stockholders or suffer the penalty of removal, a central government agency must have the power to ! !remove the managers of public enterprises who do not i |achieve sufficient profits or otherwise perform their ;responsibilities unsatisfactorily. The central agency also imust be able to remove members of the board of directors if necessary. This raises a special problem in India where the board members are usually high government officials. In actual practice, the failure of a government official to obtain the desired results in a given enterprise is not regarded as grounds for dismissal from government service and the government does not remove officials from boards very often. Thus, the threat of removal is apparently not a very effective incentive for responsible management. Ramanadham implies that board members should not be govern ment officials and that managers should be given sufficient autonomy to attract private businessmen to accept these positions.'*® Other disadvantages of having government members on the boards of directors are discussed below. Direct reinvestment versus pooling of profits. Ramanadham, The Structure of Public Enterprise in India, op. cit., p. 115. 410 : jRamanadham questions the wisdom of direct reinvestment of :profits by public enterprises on the grounds that the allo cation of investment is a parliamentary responsibility in ' C7 | ja constitutional democracy. * He recognizes, however, that! i ! j the consumers of the products of one public enterprise sub-, i : jsidize the consumers in other public enterprises whenever |profits are redirected into another industry regardless of |whether this is accomplished through taxation or another administrative device. As was mentioned above, Galbraith has argued in favor of direct reinvestment.58 Boulding and Singh favor monopoly profits and direct reinvestment. It would be a proper use of monopoly power to aban don unnecessary fidelity to costs and to make super normal profits, providing that the pricing policy is not designed to screen inefficiency and that the sur pluses are to be utilized for reinvestment.59 Another criticism of direct reinvestment is the alleged unfairness of subsidizing future consumers in the industry. Robson defends reinvestment on the grounds that subsidizing future consumers repeatedly occurs with the 57 Ibid., p. 110. For additional support of this view see Problems of Public Enterprise, op. cit., pp. 73-86. K. Galbraith, "Public Administration and the Public Corporation," Indian Journal of Public Administra tion . October-December, 1961, pp. 438-446; and Economic Development in Perspective (Cambridge: Harvard University Press, 1962), p. 73. 59 Boulding and Singh, op. cit., p. 35. Thiemeyer came to no conclusion on this topic. See op. cit.. pp. 267- 269. ! 411 I | construction of roads, bridges, schools and hospitals.®® i Although Robson does not utilize the argument, there is also precedent for subsidizing the consumers in another j : ;industry which is commonly done when general tax revenues j t ! 1 j are used to develop a regional project such as the Tennes- |see Valley Authority. Other less controversial projects I jcould be cited. The British Parliament, however, has i ; iopposed subsidizing the railroads from the profits of other' i public enterprises. Nevertheless, the profitable activi ties of a particular nationalized industry are expected to subsidize the unprofitable activities.®^ Managers of public enterprises tend to prefer the taxation of profit rather than direct reinvestment. 1. It tells them clearly what is to be earned over and above the costs; 2. It relieves them of the uncertainty faced under the profit method as to what profits exactly to aim at so as to satisfy the government on the one hand and be free, simultaneously, from the public criticism of high prices; 3. It has no adverse effect on their consumer rela tions as the consumers know that the high prices are due to the tax and not because of the managers' discre tion; and 4. It does not land them in demands by labour for profit-sharing since by hypothesis they reap no profit, apart from the tax raised by the g o v e r n m e n t . 62 60 Robson, op. cit., p. 310. 61Ibid., p. 393. ^^Raraanadham, op. cit., p. 109. Unfortunately, the pooling of profits for redistri- j 'bution among public enterprises may result in no improve- j ; ment in the allocation of investment resources because of political interferences. While external economies and other development priorities may be considered by the plan- i Ining agency, political pressures may more than offset the I !improvement in social welfare resulting from such consid- jerations. Such a policy also has the disadvantage of i reducing incentive and efficiency. Ramanadham speaks as if the tax would take all profits of the public enterprise but this would not be necessary and, in the case of profits remaining after taxes, the policy would retain most of the problems discussed in the quotation above. In Britain, slightly over thirty per cent of the capital investment of the major national industries, excluding atomic energy and the BBC, is financed from I internal sources.This is far less than the amount of jinternal investment in the private sector which, according i :to Robson, was about seventy-five per cent of total investment between 1949 and 1953. In the United States the comparable figure was sixty-four per cent. Data for India shows that public enterprises are not iprimarily financed by profits. In recent years the average profit in public enterprises was 1.8 per cent of the total ! CO i Robson, op. cit., p. 307. 413 : i ^ I j |outlay for capital while in private enterprises was about I CA twenty per cent of paid up capital before taxes. Raman adham cites three major reasons for the low level of 1 profits in public enterprises. \ | | (a) managerial (including cost) efficiency is low— i a proposition which it is not easy to prove; (b) many ] of the enterprises belong to the category of industries' that yield a profit in the long run and one of too recent origin to record good profits; and (c) the policy of profits has not been enjoined by Parliament ; on the enterprises unequivocally yet.®5 Thus, Indian public enterprises do not reinvest substantial amounts of profit. VIII. PRICE AND PROFIT POLICIES OF PUBLIC AUTHORITIES IN NEW YORK STATE New York State has both single purpose and multi purpose authorities. As would be expected, pricing procedures are more complicated in multipurpose than in jsingle purpose authorities. If the product of the author ity is sold to more than one state the rate-setting problems t • are also more acute. The usual policy has required that public authorities by self-supporting. There has been no consistent policy requiring profits. In New York State the legislature has given public 64 Ramanadham, op. cit., pp. 98, 103. The figure for the private sector is a rough average of the figures for ipublic and private limited companies cited by Ramanadham. 65Ibid., p. 105. ; 414 j jauthorities considerable discretion in setting rates, with |the rate being specifically established by the enabling act i |in only one case.®® However, several of the statutes jcreating authorities give directions or guidance to the iauthority in determining its rates. Other authorities must I have their rates approved by another agency or officer i jbefore they become effective. I Most of the public utility authorities have been exempted from the regulations of other state and local bodies, such as the Public Service Department, the Public Service Commission, the Conservation Department, and county authorities. Some of the enabling acts contain provisions subsidizing certain users. Generally no public hearing is required before changing rates. The Commission, however, recommended that public hearings always be held before changing rates or terminating services permanently. The Commission observed that authorities usually do ■not change their rates once the rate structure has been established and proposed five probably reasons for the inertia in rate setting. 1. The satisfactory revenue yield of the rates initially set for the facility; 2. The loss of revenue for possible new ventures if ®®State of New York, Staff Report on Public Author ities Under New York State (Albany: Temporary State Commission on Coordination of State Activities, 1956), pp. 503-543. rates are lowered; 3. The public relations difficulty of raising rates once they have been lowered; 4. Bondholder agreements; and 5. The possible effect of rate reduction on the use of the facilities, on existing traffic patterns and on related and contingent activities.67 xhe report of the Commission indicated that private water companies cannot compete with public water authori ties, primarily because the fixed costs of providing water to outlying areas are high and the marginal efficiency of the capital low. The Commission concluded that water rates could not be raised high enough to pay for the expansion of water systems and that water companies must be subsi dized from tax or other revenue sources as the population expands. Under present procedures the counties commonly contract with water authorities to provide them water facilities, thus subsidizing the users. The price policy of the transit system of New York City was always a political issue and the primary reason for the creation of the New York City Transit Authority was the removal of rate-setting from campaign politics. The system uses a uniform rate for all passengers which has had a significant influence on the distribution of the population and business firms in the metropolitan area. 67Ibid., p. 519. I 416 | j The power rates of New York give statutory preference 5to domestic and rural consumers with industry paying higher; jrates and holding secondary priority on the available power. Since some of the power is resold to private iutilities who are regulated by the Public Service Commis- jsion and the Public Service Law, the rate provisions of [ |the Power Authority may conflict with the rate requirements jof the regulatory agencies. The Coordinating Commission suggested several alternatives for removing the possible C O conflict in power rates. Multi-purpose authorities require some users to subsidize the users of other services of the authority. The person, for example, who pays a Bronx-Whitestone Bridge toll helps pay for the New York Coliseum. There has been little complaint about the inequity of this arrangement and there is little likelihood that the subsidy of some users by others will be altered. New York has an interest ing subsidy on bridge tolls. The tolls must all be the same and must be collected on all bridges until all bridges become toll free. Rates of authorities tend to become tradition, as was noted above, and are usually not changed once they are established. This sometimes results in revenues in excess of costs. Surpluses occur because tolls are continued in 68Ibid., p. 536. 417 | I iorder to regulate the volume of traffic, finance other ! i i !projects, and because they tend to become habit-forming. Multi-purpose authorities in New York have usually followed a policy of being self-supporting. The Coordinat-; jing Commission recommended that rates continue to be set by; ;the authority, rather than by statute or another agency, I but that authorities should annually report their price I policies and revenue status to the legislature and the governor in a budget report. In summary, the public authorities in New York State have been self-supporting and have rejected proposed pro jects which did not appear to be self-supporting. They have generally been free from interference in rate-setting and the rates usually have not been changed after initially being established. The expension of single-purpose water authorities has required subsidization of the new users by the taxpayers in larger political bodies such as the county. Such cross-subsidization is common in multi purpose authorities where user charges do not cover the full cost of some services. Cross-subsidization is a generally accepted practice. The enabling statute, in the case of power, gives a rate and availability preference to 69 Ramanadham uses the term "cross-subsidization." See Problems of Public Enterprise (Chicago: Quadrangle Books'; T959T; ' pp r T07-rrr:------ 418 j !domestic users at the expense of industrial users. Uni- i I form rates also subsidize the outlying users of transit !services and have influenced the location of families and firms. j | IX. PROFIT POLICIES IN DEVELOPMENT BANKS i j \ Development banks, particularly private banks, usu- i i I ally are expected to be profitable. Private banks must build reserves and obtain capital from the market which requires a positive average return on its investments sufficient to pay the costs of operation. If the develop ment bank hopes to attract capital from private investors it must obtain their confidence by applying strict standards of profitability to projects proposed for f i n a n c i n g . Some public banks, such as the Industrial Development Corporation of South Africa, are equally insistent on profits. Boskey noted that the borrowing firm's credit reputation is damaged also if the bank's flending requirements are too low.^-*- The amount of profit which can be obtained is limited in some development banks by a requirement that the bank must not compete with private lenders; in other words, 70 Boskey, op. cit., pp. 53-54. Also see Diamond, op. cit., pp. 83-84. 71 See supra, footnote number 7. that the bank lend only to those profit-making or self- liquidating borrowers who cannot obtain financing else where. This feature was adopted in the agricultural credit i I system of the United States. A similar feature was placed j in the charter of the Industrial Finance Corporation of India. Public development banks are likely to also consider non-profit criteria for making loans. These include loans to small borrowers even though the return does not cover the costs of lending, the anticipation of future demand, the effect on the balance of payments, the amount of technological innovations involved, external economies, the effect on tax revenues, and the location of the project.^ X. PROFITS IN CENTRALLY PLANNED ECONOMIES During the last decade the centrally planned econo mies of east Europe and Russia have adopted changes which provide more consumer sovereignty, particularly in the pro duction of consumer goods. Stalin initiated this movement in Economic Problems of Socialism in the U.S.S.R., published in 1952. Maurice Dobb refers to the change of emphasis. It marks a shift of preoccupation towards questions of micro-economic adjustment and the relation of these to the market mechanism—“nothing like a complete shift, of course, but nonetheless a genuine attempt to find some modus vivendi between planning and the market, 79 Ibid., p. 55. 420 j | between care for the macro-relations of socialist i ; development and for micro-adjustments, especially with-; ; in the consumer goods sector, between rapid growth and giving consumers the 'assortment* of goods they desire. ^ i Payments out of profits for bonuses and projects beneficial; ! to the members of the enterprise, such as housing, have ! jbeen restored in many centrally planned economies including: ; i Russia. In Yugoslavia, where the enterprises buy and sell : iproducts without major restrictions and determine prices i independently, the use of the entire profit or net income is determined by the enterprise. Dobb concludes that a policy of profits encourages efficiency if the selling price is pre-fixed but does not necessarily allocate resources optimally. Recent information indicates that detailed central planning in Russia may be dropped for most industrial operations except for output and delivery schedules and be replaced by incentive payments based on profit. The pro posed change is patterned after the experience of 7 R Yugoslavia.'° 73 Maurice Dobb, Economic Growth and Planning (New York: Monthly Review Press, 1960), pp. 79-80. 74Ibid., p. 82. 75 Editorial in the New York Times, Western Edition, October 18, 1962. Professor Yacov G. Liberman of Kharkov is the leading proponent of the new system which would drastically reduce state directives issued to the factories. ;See Theodore Shabad, "Russia Defends Profit Incentive," and Arthur J. Olson, "Russians Discuss Profit as Spur," ibid.. i 421'j i • j xi. conclusion ; i j I I The virtue of profit in public enterprises depends primarily on the desired amount of public revenues and the j desired distribution of the burden of payment among the | | [enterprises. In other words, the need for profit depends jon the share of the burden of public expenditure which is |assigned by the government to public enterprises. Thus, f [profits of public enterprises may be usefully regarded as a tax. The desirability of profits, therefore, is deter mined by the desired incidence of the tax. If the govern ment wishes the development burden to be borne in part by the users of public goods and services, prices can be set at the level which will yield the desired profit, assuming the demand for the product is inelastic. In effect, the development program would be financed primarily by taxing the profits of public utilities. On the other hand, the government may wish other segments of the economy to bear the burden of financing capital formation. Corporate and personal income taxes, excise taxes, tariffs, property taxes, and other fiscal policies may be utilized. October 20, 1962, p. 2. However, an editorial on Novem- jber 23, 1962, pointed out that the reorganization proposed by Premier Khrushchev also substantially tightens direct Communist Party supervision and control of the Soviet economy. CHAPTER IX INVESTMENT CRITERIA AND PRIORITIES i i I. INTRODUCTION AND DEFINITIONS The purpose of this chapter is to consider the criteria for the selection of investment projects and the procedures for ranking investment projects in descending order of priority. The allocation of resources in develop ing economies has been a topic of considerable discussion since World War II.-*- This chapter is an attempt to review and assess the debate. In order to adequately evaluate alternative criteria which might be appropriate, the analysis is not limited to the investment criteria of government corporations or public enterprise. Definitions A criterion is a standard or test by which facts, principles, opinions, and conduct are measured in order to form a correct judgment about them. In the case of invest ment projects, the criteria are the national economic goals Arnold C. Harber ger concludes that the national welfare costs of resource misallocation in countries like Chile, Brazil, and Argentina is not over fifteen per cent. See "Using the Resources at Hand More Effectively," Ameri can Economic Review. Papers and Proceedings. May 1959, p. 140. 422 423 j j i jand the sub-goals, the means—ends, or, in other words, the \ ] j I _ policies for economic development*2 On the other hand, the; i j |requirements which investment projects must meet in order | |to be selected for implementation may be called the cri- j j j teria. Thus, investment criteria might be defined as the specific essential characteristics of investment projects jwhich must be present in order for the desired economic i j !goals to be achieved. I : The priority of investment projects refers to the rank of order of precedence assigned to potential projects for the purpose of selecting the most important new under takings.3 The process is called project evaluation by the 2 As with other national policies, investment policies are divided and sub-divided as they are inter preted and implemented by subordinate organizational units. Paul Appleby refers to this phenomena as a policy contimuum. In other words, each decision maker in the organization participates to some degree in policy formulation. See Policy and Administration (University: University of Ala bama Press, 1949), p. 15. It should be noted that a policy in the literature of public administration is a rule or ^guideline for directing the actions of subordinates, where— 'as in the literature of economics a policy is defined as a program of action. 3 In recent years numerous books and articles dealing with investment criteria and investment priorities have been written. Some of these are: Hurray D. Bryce, Industrial Development (New York: McGraw-Hill Book Company, Inc., jl960), ch. 2, 9, 10; Harvey Leibenstein, Economic Backward ness and Economic Growth (New York: Johnn, Wiley & Sons, Inc., 1957), ch. 15; Ragnar Nurkse, Problems of Capital [ Formation in Underdeveloped Countries (Oxford: Basil Black- jwell, 1953), 163 pp.; Y. V. Ramanadham, The Structure of j Public Enterprise in India (New York: Asia Publishing House, 11961), pp. 57-62; Colin Clark, Conditions of Economic 'Progress (2nd edition; London: Macmillan and Co., Ltd., I 1951), pp. 500-504; M. F. Millikan (ed.), Investment Cri- ! jteria and Economic Growth (Cambridge: Mass ac tiuseits ’ !Institute of Technology, 1955); Tillo E. Kugh, Public I XQ.QnmX.QA -3*l4 XK&&mxX JBtai&SWa (Berkeley: University of California Press, 1962), pp. 12-30, 99-101, ■ 124-127, 210-233; Gerald M. Meir and Robert E. Baldwin, j Economic Development (New York: John Wiley and Sons, Inc., ! 1957), pp. 343-51; Charles P. Kindleberger, Economic Devel-i opment (New York: The McGraw-Hill Book Company, Inc., 1958),1 jch. 9, 10; Benjamin Higgins, Economic Development (New j jYork: W. W. Norton and Company, Inc., 1959), ch. 27; Wm. j jDiamond, Development Banks (Baltimore: Johns Hopkins Press,; 1957), pp. 41-88; Walter Krause, Economic Development (San | Francisco: Wadsworth Publishing Company, Inc., 1961), ch. ■ 8, 9; International Bank for Reconstruction and Develop ment, The_ jfarld .Bank.;.-EoAiaiqa . a n . d . (Washington: \ IBRD, 1957), ch. 1, 5, 6; Shirley Boskey, Problems and Practices o£ Jle.v_elopme.nt .Banks (Baltimore: Johns Hopkins ; Press, 1959), pp. 49-65; Maurice Dobb, Economic Qrowth and Planning (New York: Monthly Review Press, 1960), ch. 1, 2, 5; W. A. Lewis, The Theory of Economic Growth (Homewood: :Richard D. Irwin, 1955), pp. 351-354, 275-283, 129-131; jpeter T. Bauer and Basil S. Yamey, The Economics of Under- Ideveloped Countries (Chicago: University "Press",- 1957),’ P P ~ ! 559-53i), 547-55(j, 210-213; Jan Tinbergen, Shaping the World Economy (New York: The Twentieth Century Fund, f965)^pP* 119-155; United Nations, Manual on Economic Development I Projects (New York: United Nations, 1958), Pt. II, pp. 193- :542; V. V. Ramanadham, Problems of Public Enterprise (Chicago: Quadrangle Books, 1959), pp. 145—166; United Nations, Integrated River B^sin Development (New York: United Nations, 1957), pp. 55-23, Annex iff, pp. 55-56; J. M. Letiche, Balance of Payments and Economic Growth (New York: Harper Brothers, Publishers, 1956), pp. 16^-520; Paul G. Hoffman, World Without Want (New York: Harper and Row, 1962), 144 pp.; Kenneth A. Bohr, "Investment Criteria for Manufacturing Industries in Underdeveloped Countries," Underdeveloped Areas, Lyle W. Shannon, ed. (New York: Harper and Brothers Publishers, 1957), pp. 225—232; A. 0. Hirschman, "Investment Policies and 'Dualism' in Underdevel oped Countries," American Economic Review, September, 1957, Ipp. 555-570 and The Strategy of Economic Development (New iHaven: Yale University Press, 1958), ch. 51 John A. Buttrick, j"The Formation of Capital," Economic Development, Harold F. Williamson and John A. Bu11rfc k, " *e ds. CNew York: Prentice- Hall, Inc., 1954), ch. 5; A. E. Kahn, "Investment Criteria in Development," Quarterly Journal of Economics, February, 11951, pp. 38-61; H. B. Chenery, "The Application of Invest ment Criteria," Quarterly Journal of Economics, February, |1953, pp. 76-96; B. J. Johnston and J. W. Mellor, "Agricul ture in Economic Development," American Economic Review, i 425 1 United Nations.^ | Investment Criteria and the Definition of Economic Develop- ment \ I The criteria of investment projects vary with the j | i jgoals of economic development. The criteria will be dif- I 1 I . [ferent, for example, if the goal is to increase per capita ; j | I income, from what they would be if the goal is to increase ' national income. Thus, the specific criteria for invest- iment projects depend, in part, on the definition of September, 1961, pp. 566-593; Arnold C. Harbinger, "Using the Resources at Hand More Effectively," American Economic [Review, Papers and Proceedings, May, 19597 pp. j.34—±4t>; Wilfred Owen, "Transportation and Economic Development," ibid., pp. 179-188; Goran Ohlin, "Balanced Growth in History," ibid., pp. 338—353; Tibor Scitovsky, "Two Con cepts of External Economies," The Journal of Political [Economy, April, 1954, p. 143; H. B. Chenery, "C om par at iv e Advantage and Development Policy," American Economic Re- [ view., March, 1961, pp. 18-48; Gustav Ranis, "Investment* Criteria, Productivity and Economic Development: An Empir ical Comment," Quarterly Journal of Economics, May, 1962, I pp. 298-302; R. S. Eckaus, "The Factor-Proportions Problem in Underdeveloped Areas," American Economic Review, September, 1955; Alfred E. Kahn, ' rInveVtment Criteria in Development Programs," Quarterly Journal of Economics, February, 1951, pp. 38—61; Michael Lipton, "Balanced and Unbalanced Growth in Underdeveloped Countries," The Eco nomic Journal, September, 1962, pp. 641-657; J. Black, "Investment Criteria Under Capitalism and Socialism," Ox ford Economic Papers, June, 1962, pp. 154—157; T. Bologh, "Equity and Efficiency: The Problem of Optimal Investment in a Framework of Underdevelopment," Oxford Economic Papers, February, 1962, pp. 25-35. United Nations, Manual on Economic Development Pro jects , op. cit., p. 193. c I economic development which is in use. j |Macro and Micro Criteria i i j National economic goals. The macro criteria of !investment projects are the national economic objectives ( which have been established by various political processes as means of conducting economic development. These means- j lends are roughly equivalent to the objectives of economic development. According to Bryce, the major macro criterion is national economic profitability. A more commonly used term is social marginal productivity.7 In this chapter the Iterm "macro criteria" refers to national investment poli cies regarding foreign exchange requirements, the inter national comparative advantage of industries and firms, Ithe proper intensity of factor use, the degree of balance in economic growth, the contribution to social marginal product, external economies, the level of employment, com- Iroercial profitability, and the relief of bottlenecks. I The goals of individual enterprises. The micro cri teria of investment projects undertaken by individual enterprises may be included within a single term— the 5 Meier and Baldwin, op._ cit. , p. 345. C Bryce, op. cit.» p. 23. 7 Albert 0. Hirschman, The Strategy of Economic [ Development, op. cit., pp. 76-77. [marginal efficiency of capital. Admittedly, the firm, i jwhether public or private, may consider either the long- i run or short-run marginal efficiency of capital. Likewise, [the management of the enterprise may either consider or [ignore the social benefits and costs involved.® Thus, the Igoals of individual public and private enterprises may conflict with national economic goals. i IConflicting Criteria Conflicts of interest among institutions. As the history of public control of private business shows, there are many illustrations of conflicts between the objectives of private enterprises and national economic goals— between the interests of the individual and the public. However, this conflict is not unique to private-public relation- ^There is considerable evidence that private enter- Iprises in developed economies have come of age in the ;sense that their investment decisions include an evaluation of social benefits and costs. "The uncontrolled exercise :of monopoly power, of total success in defeating competi tors, now is not a 'natural' right in the American mores." W. Lloyd Warner, The_ Corporation in the Emergent American Society (New York: Harper and Brothers, 1962), p. 40. This iargument is supported by Adolph A. Berle, Jr., "Corpora- jtions and the Modern State," The Future of Democratic [ Capitalism, Thurman W. Arnold and others, eds. (New York: |A. S. Barnes & Company, Inc., 1950), pp. 35-62. Keynes Irecognized this trend in 1926. "One of the most interest ing and unnoticed development in recent decades has been [the tending for big enterprise to socialize itself." J.M. ‘ Keynes, Essays in Persuasion (New York: W. W. Norton & Company, Inc., 1963), p^ 314. j ' 428 : !ships and is not caused by the existence of private owner- ■ i Q ;ship of the factors of production.v i i The conflict arises from the fact that the goals of j the component parts of an organization are not always ! ; [identical to the goals of the organization and is present whenever decentralized decision-making exists. Thus, a child’s desires may be detrimental to the family; the !family's desires detrimental to the community; and the i community's desires detrimental to the state or nation. The employee of a public or private enterprise may have objectives which conflict with the goals of the enter- i ■prise.10 There are, of course, many other economic illus 9 Wm. Ebenstein implies this in his observation that "psychologically, there is less difference between large- scale capitalist enterprise and large-scale socialized enterprise on the one hand than between small-scale capita list enterprise and large-scale capitalist enterprise on |the other." Italics omitted. See Today’s Isms (3rd ed.; lEnglewood Cliffs: Prentice-Hall, Inc., 1961), p. 168. The possibility of conflict between national goals and the 'goals of subordinate government organizations was illus trated in a report on the Communication Satellite Corpora tion by Rand Corporation. The report pointed out that Ithere were conflicts between the desire to be first in es tablishing a space communications system for reasons of national prestige and the desire to have a truly inter national system, between the interest of the corporation in Imaking profits and the requirement that the system serve jail areas of the world. John W. Finney, "Satellite Corp. jSeeks to Expand," New York Times Western Edition. Febru ary 13, 1963, pp. 13, 18. ^John M. Pfiffner and Frank P. Sherwood, Adminis- I tration Organization (Englewood Cliffs: Prentice-Hall, Inc., 11960), pp. 34-36. Pfiffner and Sherwood indicate two pri mary reasons for conflict in organizations: (1) differ ences in perceptions of reality among individuals; and (2) j 429 trations of such fallacies of composition. Similarly, the 'investment criteria of an individual enterprise, either | ; public or private, may conflict with the investment cri- jteria of the larger economic group— local, regional, nation-! lal, or international. The more the individual enterprise i ignores the long-run effects of its investment policies, the greater the probability of conflict with national investment policies. However, the marginal efficiency of capital, as the goal of individual enterprises, does not necessarily conflict with a national goal of maximum social jmarginal productivity. As has been discovered by private corporations, the maximum marginal efficiency of capital in the long-run may require less-than-maximum profits in the short-run.Thus, the long-run objective of individual (the need for participation in decision-making. Hirschman (discusses some aspects of the problem in ’’Investment (Policies and Dualism in Underdeveloped Countries,” op. cit., pp. 563-564. ■^For an interesting analysis and illustrations of this problem see Herbert A. Simon, Administrative Behavior :(2nd ed.; New York: Macmillan Co., 1958), esp. ch. 10 on (loyalties and organizational identification. Simon indi cates that the social value system may conflict with val- (ues held by the organization, creating divided loyalty in jthe decider. Identification is the process by which the (individual substitutes organizational objectives for his (own aims. Amitai uses the term "compliance” which is a relationship consisting of the power employed by superiors (to control subordinates and the orientation of the subor dinates to this power.” See A Comparative Analysis of Com plex Organizations (New York: Free Press of Glencoe, 1961), Ip. xv. .enterprises to maximize the marginal efficiency of capital ! Imay be identical to the national objective of maximizing j ;the social marginal product because public opinion and Apolitical procedures are introduced which insure conformity I jwith national goals.^ National economic goals, thus, might be voluntarily adopted by individual enterprises or they might be imposed on enterprises by directive or legislation. In this way, effective conflicts of interest can be minimized to the extent that enterprises comply with the laws and directives.13 Conflicting criteria within institutions. The previous paragraphs pointed out the presence of conflicting criteria held by institutions at differing hierarchical levels within the economic and political structure. In addition, any particular institution may adhere to cri teria which conflict with other criteria. At the national 12 A major problem in developing economies is the ^difficulty of resolving such conflicts by means other than nationalization, the effectiveness of which is question able. 13 For further analysis of conflicts of interest among organizations see J. K. Galbraith, American Capital ism: The Concept of Countervailing Power (Boston: Houghton Miffiin Co., 1952). The United Nations has also stressed |the possible conflicts between the criteria and priorities of the project-maker and those of the central authority. See Manual on Economic Development Projects, op. cit., p. 193. 431 i ;level the foreign exchange criterion, for example, may j ^conflict with the criterion for balanced growth. Competing Investment Projects i The fact that more than one investment project may satisfy general investment criteria requires a method for j establishing the priority of individual projects. The solution of this problem involves the relative weight, or importance of each criterion. This type of problem is illustrated by Frankel's frustration over the use of income aggregates as a criterion for investment. It is not a possible criterion of action because it does not tell us which of the many alleged or real diseases shall (or shall not) be cured, and at what cost, e.g. whether at the expense of better housing (which might prevent some 'disease'); or at the expense of old-age pensions which might keep old people alive longer; . . . .I5 The use of more detailed criteria assists in the solution of the problem but whenever more than one criter- 14 Another illustration is given by Meier and Bald win, op. cit., p. 344. For additional discussion of con- j f licts of interest within organizations see Kenneth E. Boulding, The Organizational Revolution (New York: Harper & BrothersT953T, 2£6 pp. Chenery ‘ discusses the conflict [between investment criteria derived by growth theorists and those derived from considerations of comparative advantage. See "Comparative Advantages and Development Policy," op. |cit., pp. 19-25. 15 S. Herbert Frankel, The Economic Impact on Under- ■ developed Societies (Cambridge! Harvard University Press, 1953), p. 60. ion is used, it is necessary to assign weights to each. Non-Economic Criteria Investment projects may be selected because of non- leconomic characteristics. If traditional village life is an obstacle to social and economic change, priority may be given to investment activities which draw workers and fam- lies away from villages. Other sociocultural criteria, such as the need to increase and improve the supply of 16 entrepreneurship, might justify investment projects. "The great growth of capital in the eighteenth and nine teenth centuries in Europe was not due to mechanical forces but to the evolution of new patterns in social relationships. This fact suggests that human investment is an essential prerequisite to an economic takeoff into sustained economic growth and that a measurable rise in real national product per capita may not occur in the short run. Universal Investment Criteria 1 fi Meier and Baldwin, op. cit., p. 357. 17 Frankel, op. cit., p. 69. See Marian Crites Alexander-Frutschi (ed.), Human Resources and Economic ■ Growth (Menlo Park: Stanford Research Institute, 1963); this work is an annotated bibliography on the role of edu cation and training in economic and social development. 433 j i ! I | During the nineteenth century the welfare of the ;individual investor was assumed to be identical with the I welfare of the public. Thus, there were few recognized i . ; conflicts between the criteria of the individual firm and investor and national criteria. Furthermore, the national i government adopted investment policies— propaganda, subtle jpolitical pressures, controls and other economic devices— j which encouraged businessmen to invest in projects with ' the highest marginal efficiency of capital. In practice, the criteria of the national government were identical to the criteria of the individual enterprise* Frankel maintains that the conflicts between the criteria for investment in private and public enterprises are exaggerated and that the criteria relevant for economic development is much more universal than is usually assumed. The issue here is not that between private and pub lic investment. The issue is, on the one hand, between the supply of capital for purposes chosen in accordance with criteria suited to the enterprise per se (and in one region rather than in another in accordance with generally accepted comparative criteria of economy) and on the other hand the supply of capital for purposes which cannot be comparatively assessed at all in economic terms. The issue is further between the supply of capital to 'enterprise1 whether private or public which is, rather than to enterprise "which is not, cap- able of pursuing a defined economic aim in the sense of being likely to lead to continuous growth capable of yielding recorded net income.18 Governments sometimes act as if investment automat- 18 Ibid., p. 80. Underlines added. I 434 ; ically increased real income when in fact the economies are; junable to make the social and cultural changes necessary for economic development. In such cases, the investment idoes not increase real income, according to Frankel. Thus, ;he concludes that national income criteria have usually :been over-emphasized while prerequisite social and cultural: changes have been underemphasized. Frankel suggests that many new international insti tutions, which are independent of political pressures, are needed to provide international investment in accordance with universal economic criteria. Once again there must be developed criteria of inter national investment which can be independently applied and independently put into operation by appropriate industrial and commercial institutions, freed from the haphazard interference of governmental or national political influences. ^ Toward this end, he argues that the International Bank should be . . . given the opportunity to develop agreed com parative criteria of world investment; criteria which would be recognized as taking the place of vague demands for action to further every conceivable nation al objective; criteria which would be related to specific purposes. ® As is indicated above Frankel believes that these criteria are the same regardless of whether the borrowing institution is public or private and that macro- and micro- 19Ibid. 20Ibid., p. 81. ! 435 | i ! jcriteria are identical in most cases. i While Frankel is undoubtedly correct in stressing |that many investment projects are insufficiently studied (with the result that loans are often not productive, he has' | i supported the case for human investment which often would not meet the micro-criteria of private lenders.^ The social, political, and economic character of institutions which were already present in emergent, borrowing economies during the nineteenth century must be created in today's developing economies. Even though the macro- and micro- criteria of investment in projects producing goods may be the same, whether the enterprise is public or private, they are not the same for projects involving human capital and social overhead. II. MACRO-CRITERIA FOR SELECTING INVESTMENT PROJECTS Numerous macro-criteria have been proposed and used : as tests when selecting investment projects for implements- 21 Although not primarily devoted to analysis of in vestment in human capital in underdeveloped economies, recent research conducted by the Universities-National Bureau Committee for Economic Research has resulted in worthwhile conclusions. See Theodore W. Schultz (ed.), "Investment in Human Beings," The Journal of Political l Economy. Supplement, October, 1962, 157 pp. Also see Paul ;D. Zook (ed.), Foreign Trade and Human Capital (Dallas: ;Southern Methodist University Press, 1962). This publica tion includes a selection, "Investment in Human Capital in *Poor Countries,” by Theodore Schultz. jtion. The micro-criteria are not discussed separately but i jare included in the section dealing with the methods of determining the priorities of investment projects. Some of | jthe macro-criteria are studied in this section. j Comparative Advantage Criterion According to the principle of comparative advantage, i an economy, except for certain special circumstances, should Iproduce those items for which the country has the greatest icomparative advantage (greatest absolute advantage or jleast absolute disadvantage) in order to maximize real jincome within the economy and within the trading area. Since the principle of comparative advantage is a well established, fundamental economic law, scholars of economic i development have studied this criterion extensively. How- 'ever, practitioners give it less, or at least different, iemphasis.22 Krause pointed out three criticisms of this criterion: (1) that the law rests on the assumption of ‘ full employment which is usually incorrect; (2) that incor rect policies are followed because policy makers confuse absolute advantage with comparative advantage; and (3) that investment in industries which have comparative advantage 22Bryce, for example, does not include comparative .advantage in his chapter on the criteria for judging the lvalue of industrial projects. Instead, he includes it in a discussion of the technical feasibility of investment Iprojects. See Bryce, op. cit., pp. 117-119, 437 | 23^ prevents primary-producing economies from industrializing. iOther criticisms involve the short-run instability and (inelastic demand in export markets, the possibility of j increasing returns, the change in the quality and quantity of factors through time, and the change of tastes which |occurs over a period of time.^ ; Criticism of the classical principle of comparative advantage rests primarily on the fact that it is a static model which ignores many dynamic characteristics. The modern version of the classical principle has been criti- icized by Viner and others on the above points and others including the fact that external economies may exist, and market prices of commodities and factors may not be equal OK to their opportunity cost. J 22Krause, op. cit. , pp. 129-138. 2^Kindleberger, op. cit. , pp. 239-245. Also see Chenery, "Comparative Advantage and Development Policy," op. cit. , pp. 22-25. Harberger estimated that the welfare cost of misallocated resources resulting from restrictions ion international trade in Chile were not more than per |cent of national income. See Harberger, op. cit., p. 135. 25 ; Jacob Viner, International Trade and Economic De- i velopment (Oxford; The Clarendon Press, 1953), p. 16. Also jsee "Stability and Progress: The Poorer Countries* Prob lem," Stability and Progress in the World Economy. Douglas jC. Hague, editor (New York: St. Martin's Press, 1958), 266 pp. Myrdal discusses these problems in An International l Economy (New York: Harper & Brothers, 1956), pp. 267-279. [Also see Chenery, "Comparative Advantage and Development [policy," op. cit., pp. 18-25. I 438 ! | | The first two criticisms reviewed by Krause are t !probably self-explanatory to economists. The third | icriticism is perhaps less familiar. There are two lines ! |of reasoning supporting the contention that investment in i | industries which have comparative advantage prevents pri- I jmary-producing economies from industrializing. The first I line of reasoning is simply that investment solely in I |industries which currently have comparative advantage would prevent investment in non-existent or small industries j ■which would have comparative advantage if they existed and ireached the optimum scale. The increasing returns argument inot only supports investment in industries which do not currently have comparative advantage but also defends pro tective tariffs for infant industries. The second line of reasoning, which holds that use of the comparative advantage criterion would keep poor countries poor, relies on evidence that the trend of the jterms of trade has historically been against countries specializing in the production of raw materials. Initially economists held that increasing costs prevailed in Iprimary-producing economies and decreasing costs in manu facturing economies with the expected result that the terms of trade would move in favor of the primary-producing jeconoroies. In fact, however, this has not been the i j 439 |case.26 The terms of trade have moved against the under developed economies. Prebisch explains this phenomenon by referring to the fact that prices are flexible upward and inflexible downward in industrial economies because of unions, while they are flexible in both directions in raw- materials-producing countries.27 Kindleberger concludes |that the terms of trade may have turned against under developed economies but "there is no necessary trend in the terms of trade between manufactures and raw materials. . . ,"28 He points out that this trend does not imply a policy of less specialization in foreign trade, but, instead, a policy of greater flexibility in the allocation 26 There is some disagreement regarding the reliabil ity of the data from which this conclusion is reached. 27 United Nations, The Economic Development of Latin America (New York: United Nations, 1950), pp. 1-8. Also see Haul Prebisch, "The Role of Commercial Policies in Underdeveloped Countries," American Economic Review. Papers l and Proceedings. Hay, 1959, pp. 251-273. Similar arguments 'were advanced by H. W. Singer in "The Distribution of Gains {Between Investing and Borrowing Countries," American Eco nomic Review. May, 1950, pp. 473-485. In World Without i want Hoffman accepts the tenet held by Prebisch and other 'economists of the Economic Commission for Latin America jthat the terms of trade have moved against the less indus trialized nations. In his review of the book Samual P. Hayes of the Foreign Policy Association questions the {validity of the tenet; see "Give Now— It Pays Later," Sat- l urdav Review. December 29, 1962, pp. 33-34. For a general treatment of the relations between industrial and primary- producing countries, see J. H. Letiche, Balance of Payments and Economic Growth, op. cit., pp. 155-177. 28 Kindleberger, op. cit.. p. 241. I of resources in order to compete in foreign markets. i ! Myrdal has argued that the demand for industrial i |products is elastic while the demand for raw materials is i inelastic. Therefore, an increase of supply in industrial and raw-material economies increases revenues in the former but decreases them in the latter case while the decrease of | prices is proportionally greater in the raw-material economies,^ Thus, as populations and production have increased rapidly in underdeveloped economies the terms of trade have moved against them. The existence of short-run instability and inelastic demand in the export markets of underdeveloped economies provides other arguments against the comparative advantage criterion. Commodity prices fluctuate widely which dis- Icourages investment and slows economic development. The jdegree of instability is greater than if demand were more elastic. Consequently, national income, the money supply, and government revenues are less predictable than when i i prices and output are more stable. Perhaps the most significant criticism of the comparative advantage criterion is the fact that the quantity and quality of factors change as factors flow 29 Gunnar Myrdal also contends that the backwash ieffects from the developing economy tend to outweigh the Ispread effects; see Rich Lands and Poor (New York: Harper & Brothers, 1957), ppT 54-65. jacross national boundaries and trade encourages technolog- ; jical innovation and labor training. Schumpeter has 'pointed out the unpredictableness and irregularity of i ; ! innovations which indicates that the comparative advantage , | jcriterion may not be very helpful in identifying the in- I dustry which will have a comparative advantage in the future.^® Furthermore, if the preferences of consumers change, the industry which once had comparative advantage may acquire a comparative disadvantage. This criticism is particularly relevant if international trade sets off the demonstration effect. The ommission of dynamic elements from the theory of comparative costs has been corrected by theorists of economic growth, according to Ch6nery.^l He contends that even with perfect competition resources would not neces- : sarily be allocated optimally if the classical criterion iof comparative advantage were used under dynamic condi tions. Growth theorists argue in favor of unbalanced growth, with investment being concentrated in one industry in order to gain the benefits of economies of scale and 30 Higgins reviews Schumpeter’s theory in chapter 5, ’ ’ Unstable Growth: Schumpeter," Economic Development, :op. cit., pp. 122-143. 31 Chenery, "Comparative Advantage and Development iPolicy," op. ci_t. . pp. 20-25. According to Chenery growth theorists include Rosenstein-Rodan, Lewis, Nurkse, Myrdal, Rostow, Dobb, and Hirschman. 442 I 32 [external economies. ! i In order to make the comparative advantage criterion more relevant to the actual growth of emerging economies jgrowth theorists have included four major modifications: | 1. Recognition of the possibility of structural ! disequilibrium in factor markets; 2. The inclusion of indirect (market and nonmarket) effects of expanding a given type of production; 3. Simultaneous determination of levels of consump tion, imports, and production in interrelated sectors over time when increasing costs result from the expan sion of output; and 4. Allowance for variation in the demand for exports and other data over time. Factor costs do not equal opportunity costs because of market imperfections. Therefore, correction for dis equilibrium of factor prices substantially alters compara- itive advantage data. Adjustment for market instability and inelastic demand can be made by reducing the value of export earnings but emerging economies probably would still have an advantage in primary exports. Changes in the productivity of labor because of technological advances and training can also be introduced into a computation of the I comparative advantage of industries. The inclusion of external economies in the formula is useful because they are more important in industrial sectors, where investments 32Ibid., p. 20. 33Ibid., p. 22. ! 443 | ! . ! i ! ; may only be profitable when undertaken together, than in s i i I the primary sector. The omission of external economies, |therefore, would result in investment policies which dis- i S i i criminate against manufacturing. Finally, changes in demand and supply often cannot be anticipated which suggests: ! ' i * i !that a diversified economic structure is needed to permit ;shifts into new types of production. The absence of a diversified economic structure is responsible, according to Kindleberger, for the historical shift of the terms of itrade against developing economies.34 With these qualifications, the criterion of compara tive advantage is useful in determining the degree of specialization in economic development but would probably 35 not indicate the degree of balance anticipated by critics. Without these qualifications "the traditional law of com parative advantage is subject to important shortcomings as i | a guide in determining the types of industries a present- day country might reasonably contemplate in the course of i 36 jits efforts to achieve development." * 5 /i Kindleberger, op. cit., pp. 23-25. 35Ibid., p. 47. 36 Krause, op. cit., p. 142. Krause favors the foreign exchange criterion as the most practical test in the short-run for the selection of specific industries which jean survive and prosper. Balanced Growth Criterion As was suggested in the discussion of the compara tive advantage criterion above, advocates of both balanced; I and unbalanced growth have criticized the traditional j interpretation of the comparative advantage principle. Investment in industries with comparative advantage would j i result in unbalanced growth. However, some growth i theorists argue that the character of the unbalance should i be modified by consideration of qualifying criteria where as extreme balanced—growth theorists hold that investment in each industry should produce output equal to the quantity demanded.^ 37 The literature on this topic has been voluminous. See J.R.T. Hughes, "Foreign Trade and Balanced Growth: The Historical Framework," and Goran Ohlin, "Balanced Economic Growth in History," American Economic Review. Papers and Proceedings t May, 1959, pp.333-337 and 338-353; Hans W. Singer, "The Concept of Balanced Growth in Economic Devel opment," Economic Growth, op. cit.. Eastin Nelson, ed., pp. 71-85; Charles P. Kindelberger, Economic Development, op. cit., pp. 149-167; Albert O. Hirschman, The Strategy of Economic Development, op. cit. , pp. 50-75; Benjamin Higgins,; Economic Development, op. cit. . pp. 397-408; Hirschman, "Investment Policies and ’Dualism' in Underdeveloped Coun- j tries," op,, cit. , pp. 550-570; A. Pepelasis, Leon Mears, and Irman Adelman, Economic Development (New York: Harper & Brothers, 1961), pp. 125-131; W. A. Lewis, The Theory of Economic Growth. (Homewood: Richard D. Irwin, 1955), pp. 276-283; Marcus Fleming, "External Economies and the Doc trine of Balanced Growth," Economic Journal. June, 1955, pp. 241—256; Michael Lipton, "Balanced and Unbalanced Growth in Underdeveloped Countries," The Economic Journal, September, 1962, pp. 641-657; Tibor Scitovsky, "Two Con cepts of External Economies,” Journal of Political Economy. April, 1954, pp. 143-152; Bauer and Yamey, op. cit., pp. 247-250; Roberto de Oliveira Campos, "Inflation and Bal anced Growth," Economic Development for Latin America, H.S. 445 Definitions. There are several variations of the balanced-growth criterion. Lipton identified three forms of balanced growth~the extreme, moderate, and sophisti cated forms.The extreme definition holds that the out put of all industries should expand at the same rate. Rosenstein-Hodan, for example, argued that all industries are complementary and therefore basic.This definition assumes that all industries have identical economies of scale. The moderate definition holds that all industries should expand simultaneously but not necessarily at the same rate. This view has been supported by Lewis. Nurkse illustrated the sophisticated definition which holds that the pattern of sectoral growth should be such that new incomes exactly absorb new output, given the income elas ticities of demand.^® Tinbergen has introduced a new Ellis, ed. (New York: St. Martin's Press, 1961), pp. 82- 109; S. K. Voth, "The Theory of Balanced Growth,” Oxford Economic Papers, June, 1962, pp. 138—153. 38 Lipton, op. cjt., p. 641. 39 P. N. Rosenstein-Rodan, "Problems of Industriali zation of Eastern and South-Eastern Europe," Economic Journal, June-September, 1943, pp. 202-211. For Higgins' review of this concept see Economic Development, op. cit., pp. 385-388. Also see Hirschman, op. cit.. pp. 40-44, 66- 69; Kindleberger has criticized Rosenstein-Rodan's argu ment, op. cit.. p. 153. 40 Nurkse, Problems of Capital Formation in Underde veloped Countries, op. cit., p. 9. Kindleberger dis cusses the numerous definitions of balanced growth, op. cit., pp. 149-150. He concludes "my own predilection for transport and education as top priorities rests on the 446 j application of the balanced growth criterion in a set of ; international investment criteria for obtaining and allo cating investment funds among various national economies^ I I Historical evidence. Hughes argued that there was j I an element of balance in the economic growth of industrialj economies but that this does not mean that all economic sectors expanded simultaneously.^2 He contended that long-run balanced growth was achieved in Western nations, through investment in mutually supporting industries, by a process of creating and correcting short-run imbalances.^3 The imbalances resulted from specialization, trade, and increased factor mobility. The main function of this pro cess, he argued, was to eliminate restrictions to factor mobility which were not removed by international trade in primary products. This concept is similar to Nurtsse's idea of equilibrium balanced growth. There were three main causes of imbalance: one, derived demand, in which an belief, or possibly the feeling, that the road to balance is through priorities for investments which change people," p. 166. See the discussion of Hughes' findings below. ^^Tinbergen, Shaping the World Economy, op. cit., pp. 119-135. Infra, "InternatIona1 Ynvestment Criteria." 42 Hughes, op. cit.. pp. 330—331. 43 P. S. Sreeten also agrees with this interpretation of historical growth patterns. See "Unbalanced Growth," Oxford .Economic Papers. June, 1959, p. 170. 447i ; innovation which reduced costs and the price of the end product increased factor demand; two, complementarity, in which demand increased for products which were comple mentary to new innovations; and three, competitive pressurej ; I - I resulting from the introduction of more efficient methods j I ' of production.^ ! Ohlin concluded that the balanced growth concept is ' not supported by economic history. External economies help explain sudden changes in the rate of growth in individual sectors and the accompanying growth pattern involving leading sectors and specialization during the early stages of economic development. However, "there is no evidence, historically, that sudden forward movements along all the fronts of the economy have played an important part in releasing economic growth."^5 Instead, overall growth has usually been gradual and continuous as the growing points shifted from one sector to another. Ohlin pointed out that consumer demand has not usually been the dynamic sector and Hughes, op. cit.. pp. 336-338. Nurkse refers to horizontal complementarity in which another industry bene fits from external economies. Nurkse, op. cit.. p. 11; Ohlin refers to vertical complementarity as external econ omies benefiting an industry at another stage in the pro duction of an end product. Ohlin, op. cit.. pp. 339. Also, see Kindleberger, op. cit. , p. 151. 45 Ohlin, op. cit. , p. 352. |that other components of aggregate demand~-exports, invest ment, and occasionally government spending—-have set the pace of economic growth. Assumptions. Lipton criticized the assumptions of ;the balanced growth theory contending that theorists of balanced and unbalanced growth assume different time peri- 47 ods and different degrees of competition. The differ ences between theories of balance and unbalance are dif ferences of time to the extent that short-run imbalance is necessary in order to achieve long-run balance. Writers supporting unbalanced growth usually assume that the industrial portion of emerging economies is oligopolistic whereas balanced growth theorists tend to assume perfect competition. There has been little discussion of market characteristics in the literature except for the introduc tion of income elasticities by Nurkse. Singer criticized :the assumption that every developing economy starts with zero investment although each has some accumulated capital. Therefore, past investment decisions which led to imbalance may perpetuate unbalanced growth. 46 Hirschman and Rostow agree with the conclusions of Ohlin and Hughes that historical evidence does not support a crude theory of balanced growth. Hirschman says, "I think it only fair to warn the reader that I heartily disagree with the 'balanced growth1 doctrine." The Strategy of Economic Development, op. cit., p. 50. 47 Lipton, op. cit. , p. 648. The most serious error, according to Lipton, is the incorrect assumption that the government plays no role after initiating economic activities which stimulate economic development. This is necessary for static analy sis but is an obviously unreal assumption. Both theories . . . assume once-for-all State intervention, radi cal by Western standards; but they ignore the possi bility of sustained reforms, initiated by the State, during the proposed development p r o c e s s . 48 An additional error results from the assumption that generalizations can be made regarding the development of all economies. Balanced growth might conceivably be appropriate for one economy but inappropriate for another, for example, Lipton asserted that the generalizations of balanced and unbalanced growth theory are irrelevant for development policy.48 Arguments in the debate. The major discussants in the debate over balanced growth have been Rodan, Hirschman, Singer, and Nurkse, Lewis, and Scitovsky.50 Nurkse formu- 48Ibid., pp. 647-648. 49 Ibid., p. 652. Singer's criticism of the assump tion that there are sufficient available resources for investment in many industries was discussed above. Lipton gives considerable emphasis to this point. See Lipton, op. cit., pp. 649-651. 50 Singer, "The Concept of Balanced Growth in Eco nomic Development: Theory and Practice," Ecomonic Growth, Nelson, ed., op. cit. . pp. 71-86. lated the idea that a critical minimum amount of investment; in a number of different industries was needed in order to i initiate sustained economic development. He reasoned that j the way out of vicious circles of poverty and limited mar- ! kets is to increase investment on a broad front. He also ' maintained (1) that either private or public enterprise ; can conduct economic development, and (2) that an increase ! t in international trade does not audomatically result in economic growth. Singer, on the other hand, criticized Nurkse's posi tion. ^ He pointed out that investment in non-agricultural industries is relatively unattractive in agricultural economies and that the big push in industry may have to be accompanied by a big push in agriculture as well. The roost serious flaw in the balanced growth doctrine, according to Singer, is the fact that it assumes underdeveloped econo mies have enough available resources to initiate balanced investment in many industries. He concluded that strategic investment in social overhead and the removal of bottle necks was a better policy for initiating economic develop ment than balanced investment in many industries which is more characteristic of stages subsequent to the economic take-off. 51 Lipton1s article is the most recent contribution to the debate. Hirschman stressed intentional unbalanced growth. He agreed that a big push is needed and that the major problem is the ability to invest which is a function of the1 amount of previous investment. Consequently, he recom- j 1 mended that the big push be concentrated in a few strategic: | industries. This, he argued, is the process of developroentj | which was experienced by developed economies. The planning! task consists primarily of selecting investment projects in the sequence which maximizes induced investment and output.52 Thus, the project with the highest priority would be the one with the greatest combined forward and backward linkage. Hirschman defined forward linkage as characteristics which encourage investment in subsequent stages of production and backward linkage as character istics which encourage investment in preceeding stages of production.52 Liptonfs criticisms of the balanced growth con cept . 5^ The extreme concept of balanced growth is illogical, according to Lipton, because some industries operate under decreasing cost while others are increasing 52 Hirschman, The Strategy of Economic Development, op. cit., pp. 70-71. Ibid., pp. 98-103. 54 Lipton, "Balanced and Unbalanced Growth in Under developed Countries," Economic Journal. September, 1962, ;pp. 651-657. cost industries. Furthermore, some techniques and products become obsolete as an economy develops which indicates that the moderate theory of balanced growth is inaccurate. Neither theory specifies whether employment, output, or investment are to be expanded simultaneously or at equal rates in spite of the fact that each policy would produce different results. Moreover, balanced growth can not remain balanced because of mutual supply-demand relations, such as between steel and electric power production, unless ri; the government intervenes. J The sophisticated theory of balanced growth is a short-run theory, according to Lipton, because no short- run pattern of investment, in which final products are absorbed by new incomes, would accomplish this kind of balance in the long-run since income-elasticities constant ly change as sustained increases in income occur. In addition, increased incomes will influence entrepreneurial effort which unbalances the initial balance. Such a policy would have disastrous results in countries such as India because production would be determined by income-elastici ties which in turn are determined by the inequality in the distribution of income. Since the income distribution is skewed toward the rich, such a criterion for allocating 55This point is attributed to Kindleberger. 453 resources is not likely to maximize output or welfare. Undoubtedly, the severest criticism of the balanced growth hypothesis is that it unwittingly fortifies policies for national self-sufficiency in underdeveloped economies with a corresponding disregard for international speciali zation. South Asia is full of 'balanced' supply plans, in which every country, ignoring comparative advantages, produces everything . . . everybody doing everything, nobody exchanging anything, and all without foreign exchange.56 Although Lipton supports unbalanced growth, he feels that Hirschman's development model of unbalanced growth is too complex to be unworkable. "Any set of planning cri teria based on the search for UG of the Hirschman variety," 57 he says, "would require a frighteningly involved model." Other criticisms. Hirschman criticized the balanced growth theory on the grounds that it is inadequate as a theory of development which must explain the change in an economy from one type to another. He also pointed out that centralized direction of balanced growth is not likely to be aggressive and is likely to be biased against innova tions whose introduction might cause losses to existing ^ Ibid. , p. 655. ^ Ibid. , p. 657. 454 operators.58 Kindleberger, among others, stressed that the existence of external economies in supply leads to priori ties rather than balance in those industries where the external economies are greatest.59 He criticized Nurkse1s idea of balanced consumer demand for ignoring price elas ticity and for the possibility of starting with cost reductions rather than with new industries.89 Fleming concluded that the balanced growth argument, as usually presented, overemphasizes demand and underem- phasizes external economies and the inelastic supply of factors.61 Chenery, of course, emphasized that the bal anced growth theory ignores the criteria of foreign exchange and comparative advantage. In his article on dualism in underdeveloped economies, Hirschman concluded that uneven internal growth is typical of the growth pro cess although this may have some undesirable effects if the split between the advanced and traditional sectors is 58 Hirshcman, op cit., p. 61. Hirschman may be criticized for introducing a concept of induced investment which is entirely different from the traditional meaning of the term. His term means increased investment resulting from external economies; see p. 71. 59 Kindleberger, op. cit., p. 153. 60_. . . , _. Ibid., p. 154. 6 X J. Marcus Fleming, op. cit., Agarwala and Singh, editors, pp. 279, 290. | 455 ! 1 fiQ ! large. Pepelesis, Mears, and Adelman do not take a strong stand but appear to support the theory of unbalanced growth. Although criticizing a number of points, Higgins itakes a strong stand in favor of balanced growth.®® i / I Conclusion. Although the initial statements of the j fr"“l ~l—' — i — ( 1 balanced growth doctrine contained elements of truth, the j i I elimination of their weaknesses leaves them nearly unrecog-| nizable. The claim to validity has been rescued, however, by Hughes who has argued that long-run balance can only be achieved through a series of short-run imbalances. The balanced growth doctrine is undoubtedly justifiably criti cal of excessive imbalance, such as in economies which emphasize industrial expansion to the exclusion of agricul ture, but the concept of balance has not been defined satisfactorily.®4 From the discussion thus far, balance ^^Hirschman, "Investment Policies and ’Dualism' in Underdeveloped Countries," op. cit., p. 569. 63 Higgins, Economic Development, op. cit.. p. 455. 64 See Bruce F. Johnston and John W. Mellor, "The Role of Agriculture in Economic Development," American Economic Review. September, 1961, p. 593. Higgins illus trates this generalization. "Only a rapid change to exten sive, mechanized agriculture, with enough industrialization to absorb the population displaced from the rural sector, will assure a take-off into steady growth. . . . It is not a question of balanced growth or unbalanced growth, but one of balanced growth or no growth at all." See Higgins, "Elements in a Theory of Undervelopment," Economic Growth. Eastin Nelson, ed., op. cit., p. 65. Here Higgins seems to be paraphrasing Lewis. "But even an economy which has no chronic tendency towards deficiency of marginal demand, 456 I I i ;seems to be defined as the absence of excessive imbalance, j On the other hand, balance is sometimes interpreted to mean that the economy should produce substitutes for all imports and become self-sufficient. In practice, there arej extremist advocates of both balanced and unbalanced growth. I ; ! Factor Intensity Criterion j Underdeveloped economies may adopt either a labor- ! intensive criterion or a capital-intensive criterion, depending on other criteria which have been adopted. The factor intensity problem arises because the price of labor in underdeveloped economies is so low that labor-intensive methods of production are often more efficient than the capital-intensive methods used in more advanced economies where the factor proportions are different; e.g., where capital is more plentiful and labor more scarce. The j labor-intensive method is usually obsolete in industrialized economies. The problem arises also from the fact that some capital-intensive methods of production are more efficient than obsolete, labor-intensive methods which results in the adoption of labor-saving innovations that augment unemployment and perpetuate underemployment. The and which is well disposed towards innovation and competi tive struggles in the home market, has yet another hurdle ito jump, namely, that the various sectors of the economy must grow in the right relationship to each other, or they cannot grow at all." Op. cit., p. 276. j 457 i l } ;problem is known by a variety of names—-the factor propor- j i tions problem, the problem of labor-intensive versus up-to-j date technology, the conflict of output and employment, the employment absorption problem, and the factor intensity ! problem.65 \ i The problem of whether capital-intensive methods i j ;which would maximize output should be used rather than j : I labor-intensive methods which would maximize employment, I but not output, is an example of the conflict which some times occurs among the criteria for investment.®® This problem was studied by Eckaus who concluded that because of the limited amount of available capital, the limited technical substitutability of factors, and the character of the market which demands goods more rapidly than they can be supplied, capital-intensive methods are used which per- 0 5 A number of scholars have examined this problem. See R. S. Eckaus, "The Factor-Proportions Problem in Under developed Areas,” The Economics of Underdevelopment. Agar- i wala and Singh, eds., op. cit.; Charles Kindleberger, Economic Development, op. cit.. esp. chapter 10, "Labor- Intensive Versus Up-To-Date Technology"; Benjamin Higgins, I Economic Development, op. cit. . pp. 330-333; Harvey Leiben- stein, Economic Backwardness and Economic Growth, op. cit.. pp. 259-261; Murray D. Bryce, Industrial Development, op. cit., pp. 23-26; John H. Power, "Laborsaving in Economic Growth," American Economic Review, Papers and Proceedings. May, 1962, pp. 39-45; Albert O. Hirschman, The Strategy of iEconomic Development, op. cit. . pp. 150-153; Paul Baran, ;On the Political Economy of Growth (New York: Monthly Review Press, 1957), pp. 285-288. 66 Krause, op. cit, . pp. 163-166. mit relatively unproductive redundant labor to remain in ! the agricultural sector of the economy. Consequently, It is possible in this case of two sectors, one of ; fixed and one of variable co-efficients, for a diver- f gence to exist between the full-employment output and i the output with maximum value. . . . 67 i Kindelberger recognized the problem and pointed out j i that economists cannot solve such dilemmas although they j can indicate the sacrifices involved in each choice. In addition, he mentioned some reasons why maximum output might be sacrificed in favor of maximum employment and labor-intensive methods. Where unemployment is destroying morals and under mining the society, a strong argument can be made for modifying the usual goal of economic development, which is highest possible output.®8 Such a choice, however, does not alter the necessity of using capital as efficiently as possible. Liebenstein cautioned that if the employment absorption criterion were carried to its logical extreme, no labor-saving technology would ever be introduced in overpopulated areas.He suggested that labor-saving capital may be so productive that per capita output might rise even though excess capacity were created. Nurkse noted the disguised unemployment in backward 67 Eckaus, op. cit.. p. 372. 6ft Kindelberger, op. cit. . pp. 177-178. ^Liebenstein, op. cit. , pp. 259-260. 459 | countries and concluded that this is a blessing in disguise1 because the possibility of increased saving and capital accumulation is very limited. He proposed that the excess capacity in the labor force be used directly for the pro- i i duction of capital goods. The proposal suggests, thus, j that investment be used in a way to absorb as much of the I disguised unemployed as possible and that the output of the formerly excess labor, less their minimum maintenance costs, be used entirely for the production of capital goods. The proposal has the advantage of compulsory sav ings without reduction of the level of living of the excess-labor group but it disregards the scarcity of capi tal and the fact that less labor-intensive methods might be more productive when capital is available. The proposal appears reasonable, nevertheless, for providing local capital projects such as artesian wells. When additional capital is unavailable, a labor-intensive production tech nique is economically sound. Thus, the use of obsolete capital-saving techniques are often the most efficient method of production. According to John H. Power, the natural rate of capital formation, the rate made possible by the supply of available labor, in underdeveloped economies typically 70 Nurkse, op. cit., pp. 32-49. | 460 exceeds the warranted rate, the rate made possible by the savings function. This is another way of describing the emerging economy’s characteristic problems of unemployment, underemployment, and inflation.71 In summary, with limited capital labor-intensive methods, which are less efficient per unit of labor than capital-intensive techniques in industrial economies, will be used for some investment projects. However, with given resources this allocation will maximize output per unit of labor in the economy. When labor-saving capital is avail able and more efficient than labor-using techniques, its introduction will create technological unemployment although output per capita will be maximized. An invest ment policy giving priority to employment in preference to output would misallocate resources, reduce the efficiency of the economy, and lower the real per capita level of living. If the policy were justified on the grounds of redistribution, it could be criticized as an unwise and unnecessary method of redistribution.^ 71 Power, op. cit., p. 41. ^^Hirschman concluded: "The criteria developed here do point toward certain highly capital-intensive pursuits as particularly well suited for underdeveloped countries. The list includes thus far: large-scale ventures, activi ties that must be maintained in top working order, that ;must observe high quality standards for their output, machine-paced operations, and process-centered industries," 'pp. cit., p. 152. Foreign Exchange Criterion A high-priority criterion in many developing economies is that the investment project add to the coun try's foreign currency holdings or reduce the deficit in ‘the balance of payments. Lewis emphasized that production for export is usually the stimulus which initiates the economic take-off for underdeveloped economies.^ He assumed that the marginal propensity to spend on domestic output is insufficient to initiate the take-off because of leakages into saving, taxes, and imports. Thus, exports may be intentionally fostered in order to promote economic growth.7 4 Two characteristics of developing economies result in balance-of-payments deficits— the need for large capital ;imports, and the instability of demand and prices in com- i modity markets. Consequently, industrial projects which 73 N. Arthur Lewis, The Theory of Economic Growth. op. cit.. pp. 75-78. Also see Kindelberger, op. cit. . pp. 260-279; Hirschman, The Strategy of Economic Development. op. cit., pp. 166-169; Hollis Chenery, "The Role of Indus trialization in Development Programs," Agarwala and Singh, eds., op. cit., pp. 463-467. For an analysis of the effects of foreign investment on the balanced payments, see Celso Furtado, "Capital Formation and Economic Development," op. cit., pp. 331-337. 74 Paul G. Hoffman estimates that during the decade of the 1960's, underdeveloped economies will need $70 bil lion more in foreign exchange than will be obtained from export earnings. See World Without Want (New York: Harper and Row, 1952), pp. 79, 130. 462 ! i I ; may be justified on the grounds of diversification or pro- | tection from instability in export markets, can be considered illustrations of the application of the foreign exchange criterion. In addition, the exchange rate in underdeveloped economies is often too high relative to ' , i major currencies. This also encourages imports and an j unfavorable balance of trade. Consequently, the signifi cance of earning and saving foreign exchange would be more important than indicated by calculations using the official exchange rate.^5 An investment project will meet the foreign exchange criterion even though its output is not exported if the product is an import substitute. In such a case, the enterprise is a foreign-exchange-saving undertaking. If the product is exported, the firm is called a foreign- exchange-earning enterprise. Underdeveloped economies often prefer foreign-exchange-saving enterprises which encourage self-sufficiency, through less dependence on exports, and promote national pride. However, the amount of foreign exchange which can be saved depends on the volume of imports for which substitutes may be produced. "Foreign- exchange-saving enterprises can save foreign exchange only 75 Bryce, op. cit., p. 29. 76 insofar as imports occurred previously." According to Krause, the academic disagreement regarding the conflict between the criteria of comparative advantage and foreign exchange is not as important as the amount written about it suggests. In practice, no great conflict springs from the status of export-type enterprises. Foreign-exchange- earning enterprises must be able to compete in an international market in order to survive; hence, tests of efficiency, stemming from some interpretation of the law of comparative advantage, are not entirely pre cluded. 77 Krause continued, however, to argue that the foreign exchange criterion should have priority in the short-run, "pending that time when evolution of an environment akin to that assumed by the law of comparative advantage serves 78 to give meaning to its application as the ultimate test." Social Marginal Product Criterion The social marginal product criterion (SMP) has a higher order of comprehensiveness than the other national economic criteria discussed in this chapter.7® An equiva- Krause, op. cit. , p. 140. For his defense of ex change controls, see pp. 179-184. 77 Ibid., p. 141. 78 Ibid., p. 142. 79 Meier and Baldwin hold that the social marginal productivity criterion can be subdivided into three cri teria, all of which are discussed elsewhere in this chapter under separate headings. "(1) A given volume of investment should be allocated in a manner that maximizes the ratio of lent terra, "national economic profitability," is used by Bryce who defines it as "the total net measurable rate of 80 return to the econoray on an investment." He points out that this definition excludes economic costs and benefits which are not measurable and non-economic costs and bene fits which involve value judgments. However, some social costs and benefits which are omitted from market prices, are included in computation of national economic profit- current output to investment; (2) those investment pro jects should be selected that will maximize the ratio of labor to investment; and (3) to reduce pressures on the balance of payments, investment should be allocated in a manner that will maximize the ratio of export goods to investment." See Meier and Baldwin, op. cit., p. 344. For measuring the productivity of a single factor the United Nations uses several social criteria: (1) the product-capital ratio (the ratio between capital and value added); (2) capital intensity; (3) employment per unit of capital; (4) labor productivity; (5) marginal social pro ductivity of capital and its contribution to national income; and (6) the foreign exchange factor. See Manual on Economic Development Projects, op. cit., pp. 219-23T. For measuring the productivity of all inputs other partial criteria are proposed including: (1) the benefits-costs ratio; (2) direct and indirect value added per unit of total input; (3) qualitative weighting of partial evalua tion criteria (devised by Stanford Research Institute); (4) Bohr’s criterion for manufacturing industries. See ibid.. pp. 234—242. 80 Bryce, op. cit.. pp. 31-33; 141-147. Also see Chenery, "Comparative Advantage and Development Policy," op. cit.. pp. 28-31; Tillo E. Kuhn, Public Enterprise Economics and Transport Problems, op. cit., pp. 8-31, 210- 232; Higgins, Economic Development, op. cit.. pp. 450-456; Celso Furtado, op. cit. . pp. 329-330; Leibenstein, op. cit.. pp. 257-259. 81 ability. Social costs, such as air and water pollution, i and social benefits, such as foreign exchange earnings, are' not included in the market’s measure of costs and Q 2 revenues. The ideal, of course, would be an equilibrium j i I pattern of investment expenditure in which the social ! marginal product from the last unit of expenditure on each ; ! project would be identical. Usually the marginal produc- ! tivity criteria are applied to investment projects rather than to the last unit of account expended on the invest ment project. Furtado defended the use of the SMP criterion on the grounds that the market of underdeveloped economies is so much less perfect than the markets of industrialized econ omies that prices do not measure social benefits as well. In advanced economies, he argues, natural resources are known, and factors are sufficiently mobile that "marginal productivity is approximately the same in all sectors and hence wages for the same levels of skill and degrees of QO effort are approximately equal. . . ." Kuhn used this 81 The methods used for computing social marginal product are discussed in a later section. 82 For an analysis of external and internal values, and market and non-market values see chapter 2 of Kuhn’s Public Enterprise Economics and Transport Problems, op." "eft . , ~pp» 7-32. ' 83 Furtado, op. cit., p. 330. Chenery supports this reasoning. See Hollis (Thenery, "The Application of Invest ment Criteria," op. cit., p. 76. reasoning to discredit the simple capital-intensity criter ion by pointing out that even when there is substantial rural underemployment and unemployment, considerable amounts of capital and other inputs are needed to trans port, train, and house laborers who are to be channeled 84 into other industries, Galbraith, in effect, utilized the SMP criterion in his argument that stability of government and education of the advantaged group are prerequisites of investment in technology and other forms of social overhead. Conse quently, in newly emerging African nations which do not have a history of stable government or adequate education for the advantaged group, investment in improved public administration and education for the select few should have 85 priority over other forms of investment. Although the same criteria are applicable in most economies, the importance of an individual criterion may be much greater in one economy than in others because of the different level and character of economic development. Numerous criticisms have been made of the SMP cri terion. Leibenstein summarized some of the criticisms: 1, The SMP criterion usually emphasizes the multi- 34 Chenery, "Comparative Advantage and Development Policy," op. cit., pp. 28-29. 35 John K. Galbraith, Economic Development in Per spective, op. cit., pp. 46-55r 467 plier effect of investment on national income rather than its effect on induced investment, which is more important for long-run growth. 2. SMP does not take into account changes in the nature and quality of the factors of production that 1 may, in part, be an indirect consequence of the current investment allocation. I 3. It does not include the indirect effect of the j investment allocation on the expansion of the growth j factors, that is, on the expansion of entrepreneurship,; on the increase in the quality of the labor force, and j on the expansion of skills. j 4. It does not consider the effect of the invest ment allocation on future savings habits and, there fore, on the future rate of investment. 5. It does not allow for the effect of the invest ment allocation and policy on the future consumption pattern, which, in turn, determines whether the con sumption is simply on population maintenance or on the expansion of the growth agents. 6. The SMP criterion does not include the indirect effect of the investment allocation on the rate of population growth, which in turn, is a consideration in determining what happens to per capita output.87 Bryce added that: (1) although the measurement of national economic profitability is more complete than other measures, it cannot be absolutely complete; (2) it is sub- j ject to a margin of error similar to the error in other financial estimates; and (3) it is not generally known or used.87 86 Leibenstein, op. cit.; selected and condensed from pp. 258—259. 87 Bryce, op. cit., p. 33. Meier and Baldwin observed that the SMP criterion does not distinguish between long-run and short-run SMP; op. cit., p. 345. 468 ! The Efficient Sequences Criterion Hirschman noted Leibenstein's criticisms of the SMP criterion and observed that "it seriously impairs the use fulness of the SMP criterion without replacing it by a 88 * manageable new instrument." Hirschman then proceeded to , introduce a sequential or chain criterion which permits j "a comparative appraisal of the strength with which pro gress in one of these areas will induce progress in the other."®® The traditional investment criteria are neces sary for deciding among alternate production techniques, according to Hirschman, because all the alternates except the one chosen are permanently discarded. He refers to such decisions as substitution choices. However, post ponement choices are also necessary since one sequence of project accomplishment may be more efficient than another. If we suppose that our goal is to have both A and B, but that 'now' we can undertake only either A or B, leaving B or A, respectively, for ’later,' then it is clear that the only conceivable reason for preferring AB to BA is that B will be possible sooner once A is in place than vice versa.9° Essential to Hirschman's reasoning is his assumption that the gain from the correct ordering of investment projects is much more important than the gain in productivity from 88 Hirschman, The Strategy of Economic Development. op. cit., p. 77. 89Ibid., p. 79. "ibid., p. 78. 469 adopting.the most productive project first. Conceivably, some output might be sacrificed in order to adopt invest ment projects in the most efficient sequence. Hirschman then proceeded to identify the optimum degree of disorderliness in development which would accomplish a given number of investment projects with the least amount of scarce resources. He concluded that the optimum sequence was somewhere between maximum orderliness 91 and maximum disorderliness. The logic of this conclusion is unclear because in prvious discussion of the concept he seemed to equate the most efficient sequence with maximum orderliness. Hirschman himself questioned the usefulness of his formulation and observed that its main purpose was to show that efficient sequences will vary widely among regions and countries, depending on the location and dif ficulty of major development problems. The Capital-Output Criterion The capital-output criterion holds that the invest ment project with the lowest capital-output ratio should be 92 undertaken first in order to maximize output. In the Ibid., p. 81 92 Leibenstein and Kindleberger have devoted more attention to this criterion than most other authors. See Leibenstein, op. cit., ch. 11, and Kindleberger, op. cit.. pp. 40-47. Also see Higgins, Economic Development, op. cit. pp. 642-653; Hirschman, The Strategy of Economic Develop ment , op. cit. , pp. 30-33; Meier and Baldwin, op. cit., pp. literature, however, a distinction usually has not been j made between short-run and long-run maximum output. A project with a high ratio of capital to annual output may have a low ratio of capital to total output because of a j 93 ■ long economic life. Moreover, a conflict with other criteria, such as the need for foreign exchange, may sub- | i I ordinate the capital-output criterion to others which are more important. The marginal capital output ratio is more relevant than the average capital output ratio because in measure ment of the marginal or incremental capital-output ratio (ICOR) is necessary for planning the least cost combination 339-340; Henry J. Burton, "Growth Models and Underdeveloped Economies," Agarwala and Singh, editors, op. cit.. pp. 223- 230. 93 Higgins has expressed this by saying that the capital-output ratio should not be used for determining the priority of investment projects, but that the contribution of the project to income during the crucial period should determine the priority. This is because a low or high capital-output ratio does not indicate the economic life of the capital. See Economic Development, op. cit., pp. 643- 644. Also see Tillo Kuhn, op. cit. . ch. 6. Thus, social overhead investment may have a low ratio of capital to total output. 94 A recent study by the Organization for Economic Cooperation shows that a high I/GDP ratio does not neces sarily indicate a rapid rate of economic growth because of variations in the capital-output ratio. Sweden, for example, invests approximately as much of GDP as Germany, but has a slow rate of growth and a high capital-output ratio. See "Investment and Growth," International Finan cial News Survey. December 21, 1962, p. 405. ' of factors. Higgins cautioned that national income data, particularly for short periods of time, is unreliable for determining the incremental capital-output ratio. More ; specific data for individual sectors of the economy are < needed. Kindleberger also holds that the capital-output Q C ratio is not identical throughout the economy. J Higgins noted that the Center for International Studies at Massa chusetts Institute of Technology found data to be reliable in only five countries. The data shows some indication that the ICOR 96 declines as economies industrialize. This contention is supported by Colin Clark who argued that capital-output ratios are lower in tertiary industries as the composition of output shifts away from the primary toward the tertiary 97 industries as per capita income grows. There is also indication that the ICOR was low in war-damaged countries during the reconstruction period. The ICOR also seems to 95 Kindleberger distinguishes clearly between the capital-output ratio and the marginal efficiency of capital. "The capital/output ratio represents the relationship be tween all or increments of capital with total or incremen tal output, without regard to other factors, whether un changed or variable. The marginal efficiency of capital, on the other hand, is the incremental output associated with an increment of investment when all other factors are held constant." Economic Development, op. cit., p. 55. 96 Higgins, op. cit., p. 647. 97 Colin Clark, Conditions of Economic Progress (2nd edition; London: Macmillan and Co., Ltd., 1951), pp. 500- 504. 472 | I vary inversely with the ratio of population to natural ! resources. Bruton referred to empirical studies which show that; there have been no significant changes in the capital- | : f ;output ratio which cannot be explained by business cycles j or wars. He argues that the major innovations in the j i United States and Great Britain were capital-using and increased the capital-output ratio. These capital-using innovations were a prerequisite to the minor, routine, capital-saving innovations which came later and tended to reduce the ratio and keep it stable in the long-run. He suggests that the capital-output ratio in emerging econ omies is high, in part, because imported production tech niques are easier to adopt than imported organizational changes.98 Most authorities are quite critical of the capital- output criterion. One problem is the difficulty of disting uishing capital from land and labor. There are numerous problems related to inclusion and exclusion of depreciation and interest in computing the ratio. Other problems involve the possibility of unused capacity which might be utilized for reasons unrelated to the introduction of new investment projects and the dependence of the capital- ®®Bruton, loc. cit. 473 ! ! 99 output ratio on non-capital factors. Kindleberger con- ; eludes that the concept is analytically useful but is not an effective planning device. I Agricultural Criterion I Not all scholars have given equal emphasis on investment in agriculture.100 Kindleberger, Higgins, and Lewis, for example, give only slight recognition of the importance of agriculture. A characteristic observation, perhaps, is the point made by Higgins that economic develop ment is the process of getting people out of agriculture and into industry.101 A few advocates of balanced growth, however, have stressed a balance of investment between industry and agriculture. 99 Leibenstein, op. cit., pp. 77-78; Kindleberger, op. cit., pp. 42-47. 100See B. F. Johnston and J. W. Mellor, "The Role of Agriculture in Economic Development," American Economic Review, September, 1961, pp. 566-593; Krause, op. eft". , pp. BE>-ffO; Leibenstein, op. cit. . pp. 261-264; P. T'. Bauer, "Lewis’ Theory of Economic Growth." American Economic Re- view. September, 1956, pp. 632-641; Eugene Staley, The Future of .Underdeveloped Countries (revised ed., New York: Harper & Brothers, 1961), pp. 301-304; Bauer and Yamey, op. cit.. esp. ch. 14; Wm. H. Nichols, "Investment in Agricul ture in Underdeveloped Countries," American Economic Review Papers and Proceedings. May, 1955; P. R. Bramananda, "Agri culture Versus Industrial Development," Economic Develop ment for Latin America. H. S. Ellis, ed. (New York: St. Martin’s Press, Inc., 1961), pp. 399-429. 101 Higgins, Economic Development, op. cit., p. 455. P. T. Bauer is a lucid proponent of investment in agriculture. Perhaps his most concise defense of agricul ture investment appeared in his review and criticism of Lewis1 Theory of Economic Growth. Bauer's first criticism j | was of the characteristics which Lewis ascribed to the two | | sectors of his development model— the capitalist and sub- ! | sistence sectors, the latter being stagnant at a low level ; of output and investment. But Lewis’ distinction between the two sectors is too sharp. The emergence of the production of cash crops by individual producers has often been a key instrument in economic development; and there is often important capital formation in this type of agricul ture . 102 The assumption of stagnation in the agricultural sector makes the model static, according to Bauer, although it was intended to be dynamic. Moreover, it neglects the stimu- :lating effect of the prospect of improved and varied con sumption on investment in small-scale agriculture. Bauer also criticizes Lewis' repeated assertion that agricultural saving is small and does not result in invest ment because it is used to buy land. When people save they consume less than their income and thus make resources available to the rest of the community. There must be corresponding net capital formation, unless their action is offset by dissaving by others. . . . Nor is it clear that the volume of saving and investment by agriculturalists is negligible. As is usual, Lewis' discussion of capital formation ignores the establishment, extension, and improvement "^^Lewis, op. ci_t_. , p. 633. 475 | ; j of agricultural properties as well as certain other less important categories of agricultural investment. Most of this is direct investment. . . . Such activ ities have frequently increased output greatly within a few years or decades. They are often an essential factor in economic growth at the early stages of the exchange economy.. Their disregard vitiates much cur rent discussion of underdeveloped countries.103 i Bauer contends that the common practice of measuring! economic progress by the increase in the per cent saved, from five to twelve per cent, does not adequately identify ; the causes of economic growth. „ A statistical association, even if it is significant, does not indicate a functional relationship and "even where there is a functional relationship the statisti cal association cannot distinguish the dependent from the independent variable.134 The proportion of the labor force in agriculture and manu facturing, according to Bauer, also is not a reliable indi cator of economic growth because Canada, New Zealand, and Sweden, for exzmple, have 500 per cent more of their labor forces in agriculture than Britain, but have per capita incomes which are higher than Britain's. Bauer recognizes that the priority of agricultural investment varies from one economy to another, but he suggests the paradox that rapid industrialization may be promoted best by devoting more resources, rather than less, to the agricultural sector. 103Ibid., p. 635. •^^Ibid. , p. 636. However, it may be suggested with some confidence that in the earliest stages of development suitable assistance to agriculture may be the best safeguard for the establishment and growth of a viable industrial ! sector.105 Johnston and Mellor, who have conducted the most comprehensive recent survey of the role of agriculture in economic development, emphasize the contribution of devel- j opmental services or unconventional inputs. These include ' agricultural research, extension-education programs, strategic inputs such as fertilizers and pesticides, and education.Such expenditures yielded high marginal productivity in Japan and Taiwan. They do not agree that 105 Bauer and Yamey, op. cit.. p. 236. In the pro ceeding chapter Bauer and Yamey analyze the effects of various agricultural policies— compulsory revision of con tracts and prescription of contract terms, agricultural extension work, conservation of natural resources, promotion of cooperative enterprise, and the stabilization of income and prices. See chapter 14. Staley similarly supports the argument that agricultural and industrial development are interdependent and refers to Argentina as an illustration of an economy in which manufacturing has been excessively subsidized by agriculture. "Improvement in the productiv ity of agriculture is one of the most solid means of pro moting industrialization; industrial expansion in most underdeveloped countries is likely to be cut short by lack of markets, for the great majority of the population will not have the necessary purchasing power. Conversely, agri cultural improvements cannot go very far unless there is industrial development to take up the released manpower and to provide a solid technical base for the equipment and services essential to modernized agriculture. See Staley, op. cit. , p. 304. For additional support see Paul S. Hoff man, World Without Want (New York: Harper &Row, 1962), p. 67, and Krause, op. cit.. pp. 121-122. 106 Johnston and Mellor, op. cit.. pp. 581-590. marginal productivity is higher in agriculture than in industry. Consequently, Johnston and Mellor disagree with scholars such as Sayigh who argue that agriculture should be given priority over industry. They hold "that ’bal anced growth* is needed in the sense of simultaneous efforts to promote agricultural and industrial develop- + ,,107 ment." Leibenstein also concludes that even though initial marginal productivity appears to be greater in agriculture than elsewhere this "does not necessarily imply that the correct investment policy is to concentrate on agricultural 108 investment." He argues that the urban environment is more conducive to creating an entrepreneural class and to the spread of knowledge and the development of technical inventions and innovations. Leibenstein also contends that increased productivity in agriculture is more likely to increase consumption than investment. In addition, invest ment in agriculture will result in a faster rate of popula tion growth than investment in industry. Thus, in his treatment of this criterion Leibenstein seems to support the priority of industrial investment over capital forma tion in agriculture although, as indicated above, he asserts that he is arguing against concentration of investment in 107Ibid., p. 590. 1 OR Leibenstein, op. cit., p. 264. 478 ithe agricultural sector. Benefit-Cost Criterion | The national-economic-profitability method of select ing investment projects, used by Bryce, is a specific appli cation of the benefit-cost criterion which has been widely I I ^adopted by federal and state government agencies in the i fJnited States. I ! Various expressions of the benefit-cost criterion have been advanced. Most scholars, including Kuhn, hold that the correct policy in both public and private enter prise is to maximize V - C, when V is the present value of the future gain or benefit and C is the present value of the future total cost.-*-®® c may be expressed as K (capital cost) plus 0 (present value of the operating costs). However, some scholars prefer the maximization of V/C.11® With some variations, all the scholars and insti tutions studied by Kuhn would establish the priority of investment projects by comparing the V/C ratios, with the highest ratio having the highest priority if, as Eckstein cautions, economic evaluations were the only criterion. The contributions of Chenery and Ahumada were not included in _ Kuhn, op. cit., p. 174. 110 For a review of various expressions of the bene fit-cost criterion, see Appendix E, "Summary Comparison of Analytical Procedures and Criteria Proposed in Prominent Public Enterprise Documents," ibid., pp. 210-232. Kuhn's summary. Most scholars regard the benefit-cost approach as a means of correcting inadequacies of the profit maximiza tion criterion. Thus, while the particular methods have not been indicated in detail, each would undoubtedly be similar to the national-economic-profitability method whichj i makes adjustments to commercial estimates of costs and operating revenues in order to accurately reflect the real costs and benefits of a project to an economy. III. INTERNATIONAL INVESTMENT CRITERIA Recently Jan Tinbergen proposed a set of inter national criteria for obtaining and allocating inter- 113 national investment funds among various economies. These criteria are divided into six major groups: (1) the Chenery, "The Application of Investment Criteria," op. cit.; and Jorge Ahumada, "Investment Priorities," Eco nomic Development for Latin America, H. S. Ellis, ed. (New York: St. Martin's Press, 1961), pp. 366-398. ■^^The United Nations regards the benefit-cost cri terion a criteria of economic efficiency. For a brief review see United Nations, Integrated River Basin Develop m e n t . op. cit., pp. 22-23, Annex III contains an illustra tion of the method used to determine the benefits and costs of investment projects. The formulas used in the Soviet Union are also reviewed; see pp. 55-56. The Manual on Eco nomic Development Projects, op. cit., gives much greater detail regarding the specific criteria used; see especially pp. 234-242. 113 Jan Tinbergen, Shaping the World Economy (New York: The Twentieth Century Fund, 1962), pp. 119-135. 1 480 j I i absolute level of investment needed; (2) balanced contri bution of investment funds; (3) balanced use of investment funds; (4) factor use in accordance with the comparative advantage principle; (5) specialized training, as opposed to mass, general education; and (6) economic efficiency fori determining the relative roles of the public and private sectors. Absolute Level of Investment Needed Initially Tinbergen clarified that investment means both physical and human investment, the latter referring primarily to investment and planning in education which, according to him, has lagged behind investment in material assets. The size of the investment effort is determined by the rate at which the gap between per capita incomes of developed and developing economies is to be closed. With: annual income increasing about two per cent in developed economies, Tinbergen estimates that per capita incomes in developing economies should be increased from 1.5 per cent to 3.5 per cent or more annually. This would require doubling the amount of international investment from seven billion or eight billion dollars to approximately fifteen billion dollars annually which would be about two per cent of the income of developed countries. Balanced Contribution of Investment Funds Tinbergen rather casually dismisses the unbalanced- 481 | growth criterion, with the exception of unusual economies, ! on the grounds that it is a pejorative concept. He sug gests the adoption of Rosenstein-Rodan1s proposal, under which contributions are determined by the progressive income tax rate used in the United States, applied to either real or nominal family income. The Tinbergen pro posal, however, differs in that all countries would contri bute to the international investment fund whereas Rosenstein-Rodan exempted countries with the lowest incomes per capita. Balanced Use of Investment Funds The concentration of investment expenditures on those economies with high development potential would have unfavorable political effects, according to Tinbergen. Therefore, he rejects Rosenstein-Rodan1s absorptive- capacity criterion for the unbalanced distribution of investment expenditures. Instead, he proposes criteria such as the existence of a development plan, the use of shadow prices for equating supply and demand, and the importance of complementary investment in infrastructure. Comparative Advantage Principle In his treatment of this criterion Tinbergen is quite traditional. The optimum pattern of division of labor can be achieved by specialized production in indus tries with comparative advantage. His major concern is the 482 fact that the introduction of industries which have sub- i stantial economies of scale requires regional planning agencies in order to coordinate the location and size of the production units. Specialized Training j Specialized training increases economic development I 114 more than mass, general education. This requires coordination for training instructors, determining whether the trainers should move to the trainees or vice versa, and introducing on-the-job training. Economic Efficiency The relative size of the public and private sectors should be determined by the economic efficiency of each sector measured by the benefit-cost method. Tinbergen ■assigns infrastructure activity to the public sector and superstructure activities— manufacturing, agriculture, and mining— to the private sector. He notes that mixed and joint investment may be advantageous in certain cases. In order to promote the flow of private foreign investment to developing countries, Tinbergen has proposed a multi lateral scheme of insurance similar to the Mutual Invest ment Insurance Corporation, a proposed affiliate of the ^Galbraith has stressed this point. See Economic Development in Perspective, op. cit., pp. 46-52. IBRD. IV. INVESTMENT CRITERIA OF DEVELOPMENT BANKS The purpose of development banks is to assist in financing the development of the private sector. Probably ■ i the most important unique characteristic of development ! banks is the fact that they combine macro- and micro- criteria. According to Boskey, the "combination of banking! and development criteria in investment decisions is the distinguishing mark of a development bank."-*--*-^ However, no formal procedure is used for selecting investment proposals which meet the macro-criteria. The investment criteria of development banks differ 115 Shirley Boskey, Problems and Practices of Devel opment Banks. op. cit.. p. 50. The background material for! this section is primarily from Boskey, chapters 5 and 6, and from Wm. Diamond, Development Banks, op. cit.. pp. 71- 83. 116 There is very little evidence in the charters of development banks that they apply both macro- and micro criteria. Boskey is somewhat incomplete. After emphasiz ing that development banks apply both banking and develop mental criteria, she points out that the macro-criteria are applied informally. "Most banks, however, do not formally apply an economic priority test. That is, they do not establish preferred categories of industries nor do they require as a condition of financing that, for example, in a country with surplus labor, the enterprise be employment- creating, or that, in a country with balance of payment difficulties, it earn foreign exchange or replace imports." Op. cit., p. 51. This cannot be interpreted to mean that macro-criteria are not applied. However, the studies by Boskey and Diamond, which are devoted primarily to the formal procedures of development banks, do not indicate the; significance of macro-criteria. from the criteria of the International Bank which has ! become widely known for insisting on profitable or "bank able” investment projects and for lending only to govern- i ments or with government guarantee. The International Bank also reviews the entire development program of borrow-! i ing governments, which development banks cannot do, and may! suggest other projects with higher priority for financing. ' Usually the charters of development banks specify criteria which must be applied by the directors when making loans. Consequently, the investment criteria used in selecting investment projects vary from bank to bank. Predetermined Priority of Investment Projects In some cases the charters of development banks specify the order of priority among industries. In Brazil^ |the priority among industries, arranged in descending order,I is: (1) railway transport; (2) ports and shipping; (3) electric power; and (4) basic industries. This does not seem to be a widespread practice in other countries, how ever. In addition, other macro-criteria, such as the foreign exchange, employment, and comparative advantage cri teria, are not usually applied in a formal manner. 1 1 7 In some cases, the criteria are applied informally by the government. This is illustrated by the Pakistan Industrial Development Corporation which must submit each investment project in certain high-priority industries to the government for approval. The government provides separate budget allocations for each project. See Diamond,! In practice, most development projects which are profitable without tariff protection are financed by development banks. The most effective application of pri ority is applied by government agencies rather than devel opment banks. This is accomplished through withholding official licenses and sanctions without which investment projects cannot be undertaken. In some cases, investment projects with low priority are not financed because of the limited amount of loanable funds available to the development bank. Political pres sures also may influence the selection of investment pro jects. Usually the charters of investment banks make some attempt to isolate the selection process from political pressures but "if the government is determined to force the hand of a development bank, experience suggests that it is 118 all too likely to succeed," Ownership The charters of many banks specify that only private enterprises may obtain loans. The charters vary greatly, however, in the amount of discretion which the board of directors is permitted to exercise in defining a private enterprise. In some cases a modest amount of privately op. cit., p. 73. 118. . . • , r - j - Ibxd., p. 55. owned capital in the borrowing firm makes it eligible for a loan. Sometimes the charters explicitly state that the existence of public ownership does not disqualify a firm i from borrowing. In cases where the board is permitted widej discretion in interpreting the ownership criterion, i development banks often will not lend to firms which obtain; i significant amounts of share capital from public sources. i The International Finance Corporation, however, objects more strongly to government ownership of voting stock than to government ownership of the borrowing firm's bonds. The most experienced applicants are likely to receive preference from development banks. In practice, the enter prises managed by foreign personnel are most experienced. Thus, foreign firms appear to receive priority in obtaining investment funds. Incorporated firms are usually given preference over unincorporated enterprises because of ;continuity of management. Size of Borrowing Enterprise Usually large borrowing enterprises receive prefer ence over smaller firms because they have better management and planning. The economic gains from a given amount of invested resources is assumed to be greater when invested in large firms than when invested in small firms. Many development banks will not make loans smaller than a specified minimum amount although a few intentionally 487 encourage small borrowers. The Government Development Bank of Puerto Rico uses a revolving fund for financing small loans while the Pakistan Industrial Credit and Investment Corporation rediscounts the commercial paper of the Small Industries Corporation, another government corporation which lends directly to small borrowers. Age Generally development banks invest predominantly in new enterprises although the charters permit investment in both new and expanding firms. The role of the development bank, in practice, has been to supply both the entre preneurial initiative and the capital for new undertakings. As a result, some development banks have become research centers for particular industries. Loan Requirements11^ Although the charters normally do not limit the size of loans, the boards often establish maximum and minimum limits. These, however, vary widely. The loan, also, is usually no more than fifty per cent of the total capital on the grounds that the owners should provide at least half of the capital. Generally, development banks feel that com mercial banks should provide temporary working capital but 119 Ibid., ch. 6. | 488 | !are willing to lend at least part of permanent working capital requirements. The proportion of the permanent working capital provided by development banks varies widely. Development banks prefer to purchase equities rather than make loans because inflation in the typical ; ( underdeveloped economy substantially reduces the yield on j ■ | bonds. However, they do not like to buy equities with borrowed funds. New development banks prefer bonds which provide immediate and regular income but when a bank has become well-established it usually prefers equities which permit the bank to participate in the profits of success ful enterprises. Although the development bank may find equities advantageous, the borrowing firm often does not want to share ownership with a government corporation because of the possibility of government intervention. On the other ;hand, an enterprise may borrow from a development bank in order to improve its credit reputation. The borrowing firm's willingness to pay the required; interest and other charges is, of course, a primary cri terion of obtaining a loan. The rates tend to be higher in inflationary than stable economies and sometimes are lower than the market rate of interest because the development bank can borrow more cheaply than other borrowers. The charters normally permit development banks to make unsecured loans although they obtain maximum security in practice. The mortgage protects the assets of the ! development bank and serves as a device for influencing management policies when necessary. In some cases the market value of the collateral is more than the amount of the loan. Development banks which borrow capital abroad and j i have foreign exchange obligations to repay bear a consider-! able risk of exchange depreciation of devaluation. Normally banks adopt a criterion which will shift the risk to another individual or institution. Most banks try to pass the risk to the borrower, requiring that a loan in foreign exchange be repaid in foreign currency. In other cases, the government has borne the risk of foreign exchange losses.120 Conclusion The most striking feature of the investment cri teria actually used by development banks is the conspicuous 120 In Appendices B through E Boskey illustrates other investment criteria of selected development banks. The appendices include sample loan agreement provisions, a statement of operational policy, sample charters, proced ures for appraising proposals, and procedures for supervis ing investments. See ibid., pp. 133-195. Diamond gives summary descriptions of the Industrial Development Bank (Turkey), the Industrial Finance Corporation (India), the National Industrial Development Corporation (India), the Industrial Credit and Investment Corporation (India), the Nacional Financiara (Mexico); see Diamond op. cit.. pp. 95-124. absence of those criteria which have been of most concern to scholars of economic development. Macro-criteria are not entirely absent, however. The charters of some devel opment banks specify the relative priority of various industries, for example. However, most of the criteria discussed by Boskey and Diamond are in the "banking" classification. When macro-criteria are applied this is done by informal methods. Undoubtedly, developmental criteria are applied chiefly through the development bank's typical emphasis on initiating new enterprises. Investigation of the incorpo rating acts of development banks would probably show that the government has delegated the responsibility for exer cising and, possibly, selecting development criteria to the management of development banks. If this surmise is correct, a significant portion of the project selection process has been omitted from the analysis of Boskey and ( Diamond. V. INVESTMENT CRITERIA OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT The Articles of Agreement of the International Bank for Reconstruction and Development, formally accepted on December 27, 1945, specify both criteria which the Bank must apply when making loans as well as criteria which must not be used. Briefly, loans must be for productive pur- poses, and, except in special circumstances, must finance the foreign exchange requirements of specific projects of reconstruction and development. The loan must be guaranteed by the government, if the borrower is not the j j government, or by the central bank or some comparable i agency. The Bank is required to act prudently in select ing projects which will yield sufficient revenue to permit repayment of the loan. In addition, the Bank must insure that the proceeds of the loan are used only for the pur poses for which the loan was granted. The borrower also must prove that he was unable to obtain the loan from private sources at reasonable terms under current market conditions. The major criterion which the Bank cannot apply is the use of tied loans. The borrower cannot be required to spend the proceeds of the loan in any particular member country. The following sections review these points briefly, but in somewhat more detail. Repayment Criterion In the interest of both the borrowing country and the members of the IBRD, the Bank lends only where there 121 International Bank for Reconstruction and Devel opment, World Bank: Operations and Policies (Washington: IBRD, 1957). See chapters 1, 5] and 6. Also see Inter national Bank for Reconstruction and Development: Seven teenth Annual Report, 1961-1962 (Washington: IBRD), 62 pp. 492 I j ~] o o are reasonable prospects for repayment. ^ This is neces- | sary in order for the Bank's funds to remain undiminished in amount and available for relending when repaid and in order for the Bank to borrow in private capital markets. ' However, the IBRD accepts unusual risks. It does not | necessarily lend to the most productive project, but lends j only if the project cannot be reasonably financed else where. Consequently, if a country's investment projects were arranged in descending order of social marginal product (SMP), the Bank might finance projects from the bottom of the scale. The Bank also must make an appraisal of the amount of debt which the prospective borrowing country can reasonably expect to service. In assessing the borrowing country's ability to meet the repayment criterion, the Bank makes an economic survey as well as a study of the government's attitude toward foreign debts, internal stability, and economic develop ment. In effect, then, the repayment criterion is a profit criterion. In order to repay the principle and interest the investment must yield positive provits. On his retire ment as president of the World Bank, Eugene R. Black stressed two criteria for the dispensation of aid. First, the aid project should be worthy on its own merit. Aid 122Ibid., pp. 37-39. 493 should not he given, according to Black, to win friends, combat Russians, or sell goods. Second, the recipient 123 country should follow reasonably sound fiscal policies. These criteria are consistent with those which have been practiced by the Bank. Specific Project Criterion In an effort to insure that loans will be used for the most productive projects which otherwise qualify for financing, the IBRD makes a clear agreement, before the loan is granted, on how the proceeds of the loan are to be spent and on the results which are expected. During its early years the Bank examined each project separately, but this policy was criticized because the entire development program was not studied. Consequently, the current pro cedure is to review the total development needs and estab lish the priorities of all investment projects. This safeguard is not unnecessary. In the early experience of the Bank project proposals were often inade- Black prefers multi-lateral to bilateral aid be cause the criterion that the projects promote economic development can be applied whereas the primary criterion of bilateral aid is the ability of the project to accomplish political or commercial goals. Black and the World Bank have emphasized the quality of aid projects and the manner in which aid funds are spent. "I don't think you can com bat Communism, no matter how much money you give, unless the money is properly spent," Richard E. Mooney, "Black Says Merit Should Decide Aid," New York Times Western Edition, December 10, 1962, p. TT 494 quate. The proposals sometimes contained cost errors, deficient financial or administrative arrangements, and technical mistakes. However, the specific project pro vision of the charter is not intended to restrict the Bank to an inflexible lending technique. Early postwar recon struction loans to France, Denmark, and the Netherlands did not require detailed project investigations. The Bank has established the practice of not financ ing the entire cost of any project or program in order to insure that the foreign exchange provided through the loan will be used for productive import requirements. Social Marginal Benefit Criterion As is widely recognized, the annual rate of profit yielded by an investment project is not a reliable test of the project's benefit to the economy. Social overhead investment is the major type of investment expenditure which yields high indirect benefits but low direct bene fits . The indirect benefits properly attributable to these basic investments may be very great even though the direct earnings of the activities, at least in the short run, are not high or may even be nonexistent. Projects such as public utilities, transportation and ports, flood control, reclamation, irrigation, and high ways are necessary before other more directly profitable 24Ibid., p. 43. 495 projects can be developed. However, the Bank does not ; lend to finance community social projects such as schools, water supplies, housing, street-paving, and hospitals although it recognizes that such social investment is necessary. The Bank's emphasis on projects with high social marginal product but relatively low commercial profitabil ity is indicated by the types of development loans the Bank had made through June 30, 1962. Approximately one-third of the development loans were for the generation and dis tribution of electric power. Another one-third financed transportation, including railroads, roads, shipping, ports and waterways, airlines and airports, and pipelines. Approximately one-sixth of the development loans were for industry, with the largest portion for iron and steel, mining, paper and pulp, and development banks. The bulk of the remaining loans were for agriculture and forestry with only about one per cent of the development loans for com munications. The agricultural loans were for farm mechanization, irrigation and flood control, land clearance and improvement, crop processing and storage, and livestock improvement.1^® Thus, over two-thirds of the Bank's devel- 125 International Bank for Reconstruction and Devel opment, Seventeenth Annual Report, 1961-1962, op. cit., p. !6. 496 opment loans were for basic public utilities. Organization Structure In some cases the Bank has insisted on the reorgani zation of the borrowing institution in order to insure that it is sufficiently free of political pressures and administrative inflexibilities. In these cases, quasi- autonomous authorities similar to government corporations have been established with the assistance of the Bank. Tied Loans The Bank applies the negative criterion that loans must not be tied to use in any particular member country. However, it insists that the terms of the purchase contract be reasonable. The Bank does not designate or suggest sup pliers but requires that the goods be suitable. Thus, borrowers are encouraged to invite competitive international bids. Sound Economic and Financial Procedures If unsound economic or financial procedures exist which would jeopardize the country's ability to use the loan for productive purposes or reduce the prospect of repayment, the Bank may require the borrowing country to introduce measures to restore stability in the economy. The measures need not be completed at the time the loan is granted but specific evidence that the government has taken the appro- 497 priate steps is required. If the country has defaulted on any of its foreign obligations, the Bank requires that a fair and equitable settlement of the debts be made before a loan can be granted. The Bank disapproves of the use of scarce foreign exchange to nationalize public utilities or foreign private firms and opposes the adoption of rate policies which result in operating deficits in public utilities. Encouragement of Private Investment The Bank has held that there are many needs for its funds among projects which are unattractive for private investment capital and that competitive industry should be left to private enterprise. The Bank, however, has no absolute prohibition against lending to government-owned competitive industries although it does not undertake such financing unless it is convinced that the government owner ship will not reduce efficiency and incentive within the enterprise. In spite of the Bank's expressed intent to assist the private sector, it has been unable to lend much to private borrowers. This is because private borrowers are reluctant to accept the required guarantee by the govern ment and the government's reluctance to make the guarantee in view of the usual charges of favoring one private firm over another. At the end of 1956 only about twelve per cent 498 TABLE XVIII LOANS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT, CLASSIFIED BY PURPOSEa j Purpose Electric Power i Generation and distribution i f Transportation ; Railroads Roads Shipping Ports and Waterways Airlines and Airports Pipelines Communications ! Telephone, Telegraph, Radio Agriculture and Forestry Farm Mechanization Irrigation, Flood Control Land Clearance, Improvement Crop Processing and Storage Livestock Improvement Forestry Industry Iron and Steel Paper and Pulp Fertilizer, Other Chemicals Other Industries Mining Development Banks General Development Total Development Loans Total (Millions) $1,740.9 1,823.3 956.0 480.6 12.0 258.3 56.9 64.0 23.9 496.3 121.1 306. 5 40.9 7.0 12.6 8.2 882.6 350.3 113.7 57.0 94.0 149.0 118.6 205. 0 $5,172.0 Per Cent of Total* 33.7 35.3 .5 9.6 17.1 4.0 100.0 ^Derived from International Bank for Reconstruction and Development, Sixteenth Annual Report, 1960-1961 (Wash- ■w ington: IBRD, "1*961), p. 16. ““ iDo not add to 100 because of rounding. 499 of total loans had been made to private industrial enter prises and public utilities. In recognition of the need for more loans direct to private enterprises without govern ment guarantee, the International Finance Corporation was created on July 20, 1956. Conelusion The most outstanding characteristic of the applica tion of investment criteria by the International Bank for Reconstruction and Development is the priority given to basic public utilities which are projects with high social marginal product but relatively low commercial profitabil ity. This is particularly interesting in view of the fact that the Bank has been criticized for lending only for profitable "bankable" projects. In spite of this criticism, however, the World Bank has emphasized macro-criteria almost exclusively. Admittedly, it has not financed local, social investment projects, but this is because the Bank has pre ferred to use its limited funds for more directly productive investment rather than because social investment, such as for education, housing, and water systems, is regarded as unnecessary. In other words, the Bank gives a higher priority to basic public utilities than to community social investment. This is in contrast to development banks which give priority to private industrial enterprises. Although Boskey maintains that development banks 500 combine both macro- and micro-criteria, this is not evident in the charters of most development banks. Boskey con cedes that macro-criteria are applied informally. However, further investigation of the incorporation acts might show that the government has delegated the responsibility for exercising and, possibly, selecting development criteria, to the management of development banks. In contrast to the common criticism that the IBRD selects only bankable or profitable projects, implying that projects with low profitability but high social marginal productivity are not financed, the IBRD has formally emphasized macro-criteria and basic public utilities more than development banks which give priority to private industrial enterprises. One-third of the loans by IBRD have been for transportation, one-third for the generation and distribution of electric power, with the remaining loans for industry and agriculture. Admittedly, however, the World Bank has not financed local, social investment projects such as for education, housing, and water systems, not because they are unnecessary, but because higher priority has been assigned to directly productive projects. VI. INVESTMENT CRITERIA OF THE UNITED NATIONS SPECIAL FUND The United Nations Special Fund was formally created on January 1, 1959 to increase the production and produc- 501 itivity of low-income economies by identifying, through pre investment studies, the investment projects which have the highest priority. While the Special Fund does not lend, it provides the data needed by public and private lending agencies for evaluating the feasibility of investment, and makes investment more effective by directing it toward high-priority projects. Three types of pre-investment studies are conducted by the Special Fund: (1) resource surveys and feasibility studies; (2) manpower training and technological education; (3) applied research and advisory 1 services. The expenditure of the Special Fund is called "seed money" because it results in investment which on the average is one hundred times the amount of the initial pre- 127 investment expenditure. General Criteria The criteria used by the Special Fund were estab lished by the United Nations General Assembly and the eighteen-nation Government Council of the Special Fund. ■^®United Nations Special Fund, "The Priorities of Progress" (New York: United Nations, 1961), 48 pp. Also see the recent book by the Managing Director of the United Nations Special Fund, Paul G. Hoffman, World Without Want (New York: Harper &Row, 1962), especially 'pp. 84-97^ 109,* 115, 135-36. 127 A recent survey of the profitability of investment in electric power in Argentina resulted in investment which was 2,000 times larger than the amount of seed money ex pended. See Hoffman, ibid., p. 85. 502 These criteria were summarized in the 1961 report of the Special Fund.3-28 1. Full partnership between the advanced and the less developed countries in the mobilization of money, men, and equipment for approved projects. 2. Co-ordinated use of the experience and facilities of organizations in the UN family concerned with eco nomic and social development. 3. A high degree of selectivity in projects to ensure that they are part of a consistent national economic policy, will contribute substantially to the country’s economic growth, and are harmonized with other multi-lateral and bilateral assistance programs. 4. A heavy contribution by the recipient Govern ments to the cost of the projects and their assumption of firm obligations for the successful follow-up of projects— (1) to demonstrate the readiness of the country to help itself to the maximum; (2) to establish its priority interest in the project; and (3) to spread among more projects the "seed" effects of international funds. Although the studies conducted by the Special Fund are comprehensive to the extent of insuring coordination with the overall development program, they are not intended to be complete economic surveys such as those conducted by the World Bank. Hoffman suggests that two criteria, in addition to those listed above, are that the pre-investment studies (1) prevent the waste of investment on projects without adequate investigation and preparation, and (2) prevent the waste of potential production resulting from 128 United Nations Special Fund, op. cit., p. 4. Each criterion has been separately numbered, the initial letter capitalized, and the concluding punctuation changed to a period. unused and unknown resources. 503 Types of Projects Adopted While the detailed criteria and the method establish ing the priorities of projects are not readily available, the types of studies performed by the Special Fund and the proportion of the available resources devoted to each type give an indication of the criteria used in selecting pro jects and the priority assigned. Each proposed study is evaluated individually; that is, no priority for specific industries has been established as is done by the charters of some development banks. The key criterion is that the project contribute substantially to the country's economic growth. The remaining criteria are to insure that capital formation occurs in the roost effective manner. The Special Fund's projects seem to emphasize water and land development, research within the extractive indus tries, and training in industry. Nearly forty per cent of the available financing was for training, thirty-six per cent for surveys related primarily to water, and twenty- five per cent for research and advisory services.1^ 129 According to Hoffman the most significant unmet investment needs are in underdeveloped economies’ infra structure. Loans of soft currency are needed to finance "facilities and services which may not produce identifiable and recoverable revenues but which must exist if private capital is to be attracted into productive enterprise, or if public investment in production is to pay off." He re fers to schools, hospitals, garbage collection services, 504 TABLE XIX TYPES OF PROJECTS APPROVED 195D-1961a Item •Surveys j Mineral and Geological I Water Power, Hydrological, and Meteorlogical | River Basin Other Land and Water Use Transport and Communication Industrial and Other Research and Advisory Services 24.7 Agricultural, Forestry, Veterinary and Fishing 15.2 Industrial and Other 9.5 Training 39.6 Agricultural, Forestry, Veterinary and Fishing 5.3 Industrial 25.1 Transport and Communication 5. 5 Other 3.7 Per Cent of Total 35.7 5.8 6.2 7.3 11.8 1.7 2.9 ' aSelected from United Nations Special Fund, op. cit., p. 9. Conclusion The Special Fund has adopted the macro-criterion of economic growth and seems to have emphasized the high social marginal product of some basic public utilities. However, very little stress has been placed on the various types of transportation which receive one-third of the loans of the World Bank. The surveys for water development do not appear to emphasize the generation and distribution of electricity as much as the World Bank. The Special Fund seems to have given much more emphasis than the World Bank to research and training, although the classifications of the World Bank do not indicate the portion of its loans which are used for research and training. No formal recog nition is given to macro-criteria such as comparative advantage, balanced growth, factor intensity, foreign exchange, efficient sequences, capital-output ratios, or social marginal product although agricultural projects apparently have high priority. telegraph and telephone services, postal systems, agricul tural extension services, credit facilities, pilot housing, power development, irrigation, and transportation. See Hoffman, op. cit., p. 132. 130 The general criteria discussed in the published documents of the Special Fund do not explain the details of the project-selection process. Consequently, macro criteria considered earlier in this chapter may be used more formally than is indicated in the available documents. 506 VII. INVESTMENT CRITERIA IN PAKISTAN Pakistan's Second Five Year Plan (FYP) for the years 1960 through 1965 postulated six criteria for determining what new industries should be established and what existing industries should be expanded. The Government of Pakistan previously indicated that the allocation of resources would be determined primarily by the market system and private enterprise. The Second FYP reaffirmed this objective. No industries are reserved for the public sector; public investment is provided only in those activities which are not ordinarily developed with private capital or where, on present indications, private investment will not be forthcoming. Disabilities of the private sector are now being steadily removed. Indigenous and foreign private capital will receive positive encouragement.131 In addition, the Second FYP placed a greater emphasis on fiscal and monetary policies in preference to direct profit, price, and allocation controls on the grounds that direct controls favor consumption and discourage investment. The following criteria for industrial investment were adopted in the Second FYP.^^ 1. Industries have been favored which are expected to make the largest net contribution to national income per unit of investment. Indirect effects on income arising from purchases of goods and services from other 131 Government of Pakistan, The Second Five Year Plan (1960-1965) (Karachi: Planning Commission, 1960), p. 8. 132Ibid.. p. 222. 507 industries or sectors have also been considered in applying this criterion. 2. Industries have been preferred which result in net increases of foreign exchange earnings per unit of investment, taking into account the foreign exchange needed to establish the industry and the cost of fuels and raw materials which will have to be imported, or which, if not used in the industry, will be exported. Similarly, priority has been given to industries which can produce goods which replace imports and save foreign exchange. 3. Preference has been given to industries which use indigenous raw materials which otherwise would be under-utilized or wasted. 4. Provision has been made for industries which are expected to become important to the economy in the fu ture even though their immediate contribution to income and employment per unit of investment may not be large; for example, industries which produce certain types of producer goods which will have the effect of reducing the import component of future development expenditure. 5. Consumer goods industries which produce neces sities have been preferred to those which produce non- essential or luxury items, even in cases where the latter may be very profitable. 6 . Although fuller utilization of existing indus trial capacity has, in general, been given preference over creation of new capacity or the establishment of new industries, in some cases complete utilization of capacity, has not been aimed at because of large recur ring foreign exchange costs, or insufficient demand for products, or poor management and organization for existing units, or comparative non-essentiality of the goods produced. Of the macro-criteria discussed above, the Planning Commission included the capital-output ratio, the foreign exchange criterion, and the social marginal product cri teria. The employment and raw-material absorption criteria, which were not discussed separately above, were also included. Thus, the Pakistan Planning Commission has not 508 given special emphasis to criteria such as comparative advantage, balanced growth, factor intensity, efficient sequences, or cost-benefit. Such a conclusion, however, is somewhat superficial because one criterion often involves others. Since the criteria for industrial investment quoted above excludes criteria for agricultural investment, the increased importance attributed to agriculture in the Second FYP is not indicated. The criterion adopted is 133 self-sufficiency in agricultural output. The Second FYP> however, does not specify the reasons for adopting the self- sufficiency criterion. Beading between the lines, one might reasonably conclude that the self-sufficiency cri terion was adopted to conserve foreign exchange and can be regarded as the foreign exchange criterion. During the First Plan agriculture failed to meet production expecta tions. Consequently, food imports were seventy-five per cent higher than anticipated. In the Second FYP, there fore , The highest priority is attached to increasing agri cultural production. It is stipulated that the present gap in food supply should be closed and food-grains production raised to the level of self-sufficiency. This will require a major effort. - 1 -34 133Ibid., p. 5. 134Ibid., p. 8. 509 VIII. METHODS FOR DETERMINING THE PRIORITY OF INVESTMENT PROJECTS According to the United Nations three types of priority decisions are necessary for planning economic development: (1) the ranking of alternative uses of resources; (2) the selection of the most appropriate pro duction technique; and (3) the assignment of priority dates 135 for the actual execution of projects. A key problem involved in determining the priority of investment projects is the difficulty of measuring the monetary and non monetary costs and benefits while using a single measuring device.A number of alternative approaches are dis cussed below. Private Profit The private entrepreneur's major evaluation criter ion is the profit per unit of capital employed in the project. Obviously, the highest priority would be assigned to the project which yielded the greatest profit per unit 13 5 United Nations, Manual on Economic Development Projects, op. cit., p. 193. See ibid., pp. 198-215. For practical purposes only four major factors need be considered when calculating social pricing: (1) exchange rates; (2) indirect taxes and customs tariffs; (5) special subsidies and transfer pay ments; and (4) opportunity cost of labor and capital, and, in some cases, of natural resources, p. 207. 510 ! 137 of capital. Nevertheless, the entrepreneur does not ignore other criteria such as market uncertainties, the adequacy of the labor supply, credit facilities, the site, and technical risks. Another criterion which gives an Indication of the rate of profit per unit of capital is the capital-turnover criterion. This is a partial evaluation co-efficient although it indicates the production value that can be obtained from a given amount of investment and, 138 thus, indirectly reflects the possible level of profits. Ramanadham advocates the use of the profitability criterion although he admits that it is . . . crude and inadequate, unless the necessary adjustments are made for the special influences at work on the profitability of each nationalized industry. 39 He concludes that acceptance of the profitability criterion does not prohibit allocation based on other criteria. Ramanadham qualifies this conclusion by insisting that non- autonomous allocations which result in deficits should be reimbursed, to the extent of the deficit, out of general tax 137 Profit is a micro-criterion. See United Nations, Manual on Economic Development Projects, op. cit., pp. 216- 2T9f "BFyffgy ~dp~. ' "tffcr; pp. I21-139; Ramanadham"Problems of Public Enterprise^ op. cit. , pp. 142-166. Many of the arguments for profit in public enterprises were discussed in the preceeding chapter. However, the adequacy of profit as a criterion for allocating investment resources was not discussed. 138United Nations, ibid.. p. 219. 139 Ramanadham, op. cit., p. 159. 511 ; revenues in order to place the burden on the taxpayer and to inform the public of the cost of non-autonomous alloca tions. National Economic Profitability Bryce describes the national-economic-profitability method of numerically determining the priority of an invest ment project. This method adjusts commercial estimates of costs, operating revenues and new operating revenues in order to more accurately reflect the real costs and bene fits of a project to the economy.-^O Operating cost adjustments. The commercial estimates of operating costs are reduced when the real costs of pro duction are less than the operating costs, such as when import tariffs and other taxes are included in the commer cial cost of production or when the cost of inputs is greater than the opportunity cost, as is commonly the case when unemployed or underemployed labor is used. Conversely, the commercial estimates of operating costs are increased when the real costs are greater than the money costs of production, such as when an enterprise receives income from subsidies or the local currency is 140 Bryce, op., cit. , ch. 10 and pp. 224-226. Bryce has been associated with the World Bank and Arthur D. Little, Inc., although he does not identify this method with either organization. 512 overvalued as a result of the official exchange rate being 'higher than the free exchange rate. Operating income adjustments. The commercial esti mates of operating income are increased when the benefits to the economy are greater than the money income of an investment project, such as when the project increases foreign exchange holdings by increasing exports or produc ing import-substitutes. Furthermore, if the additional foreign exchange is undervalued at the official exchange rate, the money income expressed in domestic currency is increased to reflect the real value of foreign exchange earnings or savings. On the other hand, the commercial estimates of operating income are decreased when the real benefits to the economy are less than the money income. This reduction is most likely when import-substitutes are produced with tariff protection. In such cases the domestic product is produced at costs higher than the cost of the imported item. Consequently, the money income from the domestic production of the item is reduced correspondingly. Adjustments to net operating income. Adjustments to net operating income are necessary if a project yields bene fits or costs which are not included in commercial estimates of income and costs at all. Such a gain would occur if enterprises related to the initial project developed. 513 Reductions to reflect social costs occur less often. This !type of reduction is illustrated by a new plant which makes an older plant obsolete and unused. In such a case the return on the old plant is deducted from the gain from the new plant. Conelusion. The national-economic-profitability method of determining the priority of investment projects utilizes the social marginal product criterion, or the benefit cost criterion, in a formal and comprehensive man ner by applying it to all proposed investment projects. It considers the comparative advantage criterion by adjusting for protective tariffs. However, it makes no particular use of the balanced growth or the agricultural criterion although application of the national-economic-profitability method to all proposed investment projects would undoubtedly result in the simultaneous development of all sectors of the economy. The method seems to be particularly sensitive to foreign exchange requirements but, as explained by Bryce, does not adjust for external economies. The capital-output criterion is not considered except indirectly through the commercial profitability criterion. The unique feature of this method of determining the priority of investment pro jects, of course, is the fact that it starts with the costs and revenues compiled through ordinary business accounting procedures and then makes adjustments for inaccuracies in the measurement of social benefits and costs. 514 Benefit-Cost Method As was mentioned above, the national-economic- prof it-ability method is a specific application of the benefit-cost criterion. Under the benefit—cost method, the investment policy is to establish the priority of invest ment projects by ranking them in descending order of the V/C ratios, assuming only economic variables are con sidered. The Philippine Formula The Philippine government adopted five investment criteria in a formula intended to indicate industrial priority. These were: 1. To direct resources toward the most productive uses; 2. To conserve foreign exchange; 3. To reduce unemployment; 4. To improve the distribution of real income; and 5. To promote economic growth. From these criteria a formula with four variables of indus trial priority was developed. IP equals R^ plus R2 plus R3 plus R4 Rl equals the value added to the national income by 141 Undoubtedly the most complete review of this method is in United Nations, Manual on Economic Development Projects, op. cit., pp. 234-237. 142 Higgins, Economic Development, op. cit. , p. 654. 515 the factors of production involved in the project in cluding labor, land, capital, and entrepreneur, as corrected by an essentiality factor to account for the impact of the project on external economies and for other social benefit considerations, the whole per unit of capital resources utilized. R2 equals the impact of the operations of the firm on the country's balance of payments position. H3 equals the extent of additional economic values derived from the use of domestic raw materials and supplies, R4 equals the social value derived from employment of Filipino labor. ^ In the Philippine system, foreign exchange and capital were considered scarce. An employment factor was used in order to give higher priority to investment pro jects that reduced unemployment and domestic materials were treated as a cost which varied according to the scarcity of the material. The purpose of the formula was to compare the ratio of annual benefits received with the annual cost of scarce resources, both figures expressed in pesos. The main weakness of the formula, according to Higgins, was its omission of a direct measure of external economies and the effect of the investment project on the distribution of income. The first weakness, he asserts, is a serious defect because an enterprise may contribute more Ibid., p. 655. 144 For a more complete review of the Philippine method see Higgins, pp. 655-653. 516 to the economy through its external economies than through its direct output. In addition, the formula did not adequately measure the priority of imported consumer goods since they do not produce anything, or measure the benefit derived from government commitments to businesses on matters such as the future repatriation of profits on pro jects developed with foreign capital. Another weakness was the value judgment inherent in the essentiality multi plier, which was a device for giving priority to goods consumed by the lower—income groups rather than to those consumed by upper-income groups. Another problem was the inadequate measurement of the linkage effects of an investment project which creates demand for other invest ment projects, such as when a steel plant encourages invest ment in manufacturing and consequent improvements in trans portation facilities. Investment Priorities in Pakistan. The Second FYP does not specify the method of determining the priorities of investment projects. The agricultural sector is to receive Rs. 1,660 million of the Rs. 11,500 million of revenues accruing to the public sec tor during the Plan. The largest volume of expenditure is to be for manures and fertilizers, plant protection, food- 145 Government of Pakistan, op. cit., p. 192. 517 ; grain storage, colonization, forestry, and animal husbandry, 145 in descending order. Within the industrial sector the highest priority has been given to increased utilization of existing capacity. Toward this end, the efficient use of capital is given priority over saving of manpower. The second highest priority has been given to investment projects needed to utilize the capacity of existing, idle plant. The third level of priority has been assigned to moderniz ing existing units when this permits more effective use of managerial talent, human skills, and existing installations. In cases where expansion of an industry is necessary, but the existing installations are obsolete or poorly managed, new units are created.^® IX. SUMMARY AND CONCLUSIONS Investment criteria are the essential characteris tics of investment projects which roust be present in order for the desired economic goals to be accomplished. The priority of investment projects is the rank or order of precedence assigned to potential projects for the purpose of selecting the most important new undertakings. Since economic goals vary from economy to economy, investment criteria vary similarly. 146 Ibid., p. 223. 518 The investment criteria may be divided into two groups— macro-criteria and micro-criteria. Individual enterprises, whether public or private, are likely to adopt micro-criteria. National and international organiza tions are also concerned with macro-criteria. Thus, some investment criteria of national and international organiza tions are likely to conflict with the investment criteria of individual enterprises. In addition, any particular institution may adhere to criteria which conflict with other criteria. Moreover, macro-criteria may include non economic sociocultural qualifications for proposed invest ment projects. Some writers, such as Frankel, de-emphasize the conflicts among investment criteria and stress the adoption of universal criteria such as those applied by the World Bank. However, the World Bank would undoubtedly be the first to recognize conflicts among various criteria. Within the literature on investment criteria atten tion has been devoted primarily to: (1) the selection of projects which have or will have comparative advantage; (2) the issue of whether economic growth should be balanced or unbalanced; (3) the question of whether capital-intensive or labor-intensive methods should be used; (4) the impor tance of foreign exchange earnings and savings; (5) the need for considering the social marginal product; (6) the desirability of adopting projects in an efficient sequence; (7) the usefulness of the capital-output ratio; (8) the ; 519 ; significance of agricultural investment; and (9) the rele vance of benefit-cost analysis. In a recent book, Jan Tinberger proposed a set of criteria for obtaining and allocating international invest ment funds among various economies. He emphasized the balanced contribution and use of investment funds, factor use in accordance with the comparative advantage principle, specialized training rather than mass general education, and economic efficiency for determining the relative roles of the public and private sectors. In addition, Tinbergen proposed a scheme for encouraging private foreign invest ment through an international insurance corporation. The proposal is undoubtedly the most comprehensive and syste matic scheme which has yet been advanced for obtaining and allocating international investment funds. In spite of repeated criticism that it finances only bankable projects, with the implication that macro-criteria are ignored, the IBRD emphasizes high social marginal pro duct projects as much or more than other institutions which have been considered in this chapter. In fact, the basic public utility projects financed by the World Bank are widely recognized to have low commercial profitability. The Bank has not used its limited funds for social invest ment projects such as education, housing and water systems, not because such social overhead expenditures are unneces sary or unimportant, but because higher priority has been 520 to basic public utilities. One-third of the Bank’s loans have been for transportation and one-third for the develop ment and distribution of electric power. To some extent, international institutions have specialized in providing for particular development needs. Since no institution has sufficient financial resources to satisfy all development needs, new institutions specialize in financing the pro jects which have the highest priority. The criteria adopted by the United Nations Special Fund has resulted in the assignment of high priority to water development, research, and training, with considerably less emphasis on transportation and the generation and distribution of electricity than is given by the IBRD. The research has been primarily in agriculture while the train ing has been largely in industry. Although agricultural projects have high priority, some macro-criteria, such as comparative advantage, balanced growth, factor intensity, foreign exchange, efficient sequences, capital-output ratios, and social marginal product receive no formal recognition. Development banks have been more concerned with micro—criteria than the other institutions under considera tion. Nevertheless, Boskey holds that the key character istic of development banks is their adoption of development criteria. However, development banks lend largely to pri vate borrowers and usually their charters do not specify the macro-criteria to be applied. The application of macro- 521 criteria appears to be through the delegation of this responsibility to the management of development banks. In Pakistan’s Second Five Year Plan (FYP), the Plan ning Commission adopted several macro-criteria for indus trial investment including the capital-output ratio, the foreign exchange criterion, the social marginal product criteria, and the raw-material absorption criterion. Criteria such as factor intensity, balanced growth, and comparative advantage were not considered directly. High priority was given to agricultural investment in order to conserve foreign exchange and satisfy the criterion of self-sufficiency in agricultural output. Three criteria— the social marginal product cri terion, the national economic profitability criterion, and the benefit-cost criterion— appear to be roughly equivalent concepts. However, the two latter terms also apply to methods for determining the priority of investment pro jects. These methods adjust commercial estimates of costs and revenues, compiled through ordinary business accounting procedures, in order to correct for inaccuracies in the measurement of social benefits and costs. Since the appli cation of a specific method may differ from one economy to another, the weaknesses of one procedure may not be present in another. Nevertheless, the accurate evaluation of external economies is a widespread, if not universal, difficulty. An unquestionably universal problem is the 522 necessity of subjective weighting of some of the real costs and benefits of investment projects. CHAPTER X THE PUBLIC ACCOUNTABILITY OF GOVERNMENT CORPORATIONS I. INTRODUCTION Public accountability is the control process which is intended to insure that organizations make an optimum contribution to public welfare. The control process involves two methods of control: (1) the communication of information, to the government and the public, about an organization's contribution to social welfare; and (2) direct limitation of the decision-making powers of manage ment.^ The concept, as commonly used, implies that the accountable organization actually complies with require ments that it contribute to the public welfare.2 Conse- For a recent general treatment of the public interest see Glendon Schubert, The Public Interest (Glen coe: The Free Press, 1960), 244 pp. o In a mimeographed paper presented to the Rome Cong ress of the International Political Science Association, September, 1958, W. A. Robson discussed the meaning of accountability. "To account for one's actions means that one gives a report of what one has done during a specified period of time, together with whatever explanations may be necessary to justify the actions performed or the ends pur sued," p. 24. According to this definition, which is nar rower than the one used in this chapter, public accounta- 523 524 quently, government corporations which must report their actions in a systematic way and are otherwise regulated are assumed to be acting in the public interest. Both public and private enterprises, for example, are often said to be accountable if they are responsive to the public interest. The introduction of new controls is said to increase accountability, meaning that, as result, government corporations are more responsive to the public interest. Within the strict meaning of the term as defined above, this is an incorrect application of the word "accountable." It is quite possible that, in the short-run, an accountable government corporation is not acting in the public interest. This distinction emphasizes that public accountability is the control process rather than the organization’s contri bution to the public welfare. A private corporation might be acting in the public interest although it is not accountable, in the strict sense, because it does not make extensive reports to the government and the public and is not subject to other direct decision-making restrictions and penalties. Nevertheless, in common usage, such an enterprise may be considered responsive to the public interest and, therefore, accountable. The selection of the appropriate amount and kinds of bility is only the reporting process and reporting controls, thus, excluding decision-making controls. 525 public control for achieving democratic accountability has been the most difficult problem to solve in connection with the administration of government corporations.^ The pre dominant issue in the past in Britain, Canada, the United States, and other countries, both developed and under- ^ developed, had been the proper degree and form of corporate autonomy. The issue has been largely resolved in advanced economies but in underdeveloped economies, it is currently being re-argued. The recent trend in developed countries 4 has been toward more control and less autonomy, while in 3 This point is affirmed by Robson. "One of the most difficult problems in the field of public enterprise is to determine the degree and character of the control which Ministers should exercise over nationalized industries. Too much ministerial control will reduce the public corpo ration to the status of a government department, with a consequent loss of managerial freedom of parliamentary interpolation. Too little government control will place !the nationalized industries outside the democratic regime and be a step towards the cooperative state." Nationalized Industry and Public Ownership (Toronto: University'of Toronto Press, 1960), p. 139. Wolfgang Friedman agrees. "The most important of the many problems with which every country under study struggles, mostly with indifferent success, is that of the proper balance of managerial auton omy and political responsibility, which later involves a measure of public direction.” The Public Corporation (Toronto: The Carswell Company, 1954), p. 591. 4 Lloyd D. Musolf, Public Ownership and Accountabil ity (Cambridge: Harvard University Press, 1959), p. 27, Nevertheless, Britain’s nationalized government corporations are more autonomous than the government corporations in the United States, according to Musolf. 526 underdeveloped economies the problem has been extensive control and little autonomy.® A trend toward greater corporate autonomy in the latter is perhaps forthcoming. Corporate autonomy and public accountability appear to be and, to some extent are, contradictory objectives. Corporate autonomy is alleged to be essential for incentive and efficiency of operation in public enterprises. Public accountability is held to be necessary for accomplishing the public interest.® An increase in control increases accountability but decreases autonomy. Conversely, an increase in corporate autonomy requires less control and public accountability. Fortunately, however, these goals are not necessar ily incompatible and the contradiction pointed out above is actually the result of a faulty premise. A control device, which by definition reduces autonomy because it is a restriction, does not necessarily reduce incentive and efficiency.^ Therefore, the broad premise that corporate 5 V. V. Ramanadham, The Structure of Public Enter prise in India (New York: Asia Publishing House, 1961), p. 254. g Ernest Davies, ’’Ministerial Control and Parlia mentary Responsibility of Nationalized Industries," Politi cal Quarterly. April, 1950, p. 150. 7 United Nations, Some Problems in the Organization and Administration of Public Enterprises in the Indus_trial Field (New York: United Nations, 1954), p. 31. 527 autonomy is essential for incentive and efficiency of oper ation is faulty,® Complete autonomy is not essential for economic efficiency. Nevertheless, controls may reduce efficiency. Consequently, controls which do not reduce efficiency should be selected if possible.® If controls which reduce efficiency and incentive are necessary, com pensating devices might be adopted whenever possible. It is conceivable, of course, that efficiency and incentive might be intentionally sacrificed for greater responsive ness to the public interest. On the other hand, priority might be given to economic efficiency and incentive. A major observation of this study is that public accounta bility, in the everyday sense of responsiveness to the public interest, and corporate autonomy, efficiency, and economy, are not incompatible if controls used are primar ily reporting controls rather than decision-making controls. A legal expression of autonomy for government corporations does not necessarily indicate that they are actually independent. Financial, departmental, and Q Absolute autonomy is not essential but more inde pendence than is possessed by the typical government department is necessary for efficient operation of business activities. 9 Speaking of increased ministerial controls in Bri tain, Hanson says: "This is one way but not necessarily the best way. In trying to get the best of both possible worlds, we may have got the worst: red tape without responsibility." Parliament and Public Ownership (London: Cassell and Company, Ltd., 1961), p. 50. 528 personnal controls over them can substantially reduce the autonomy pledged elsewhere within the law.*® This chapter is an attempt to make an international, topical comparison of control devices used to insure that government corporations are responsive to the public interest. The approach is new in that most other studies have been limited in scope to the controls used within a particular country. Unfortunately, a thorough comparison of all types of control would require more than one dis sertation. Therefore three forms of control are given most attention in this chapter: (1) ministerial control; (2) control over the board of directors; and (3) control through ownership. The controls selected for primary con sideration are decision-making controls and are most likely' to conflict with a goal of economic efficiency. The re maining control devices are treated briefly. II. THE PURPOSE OF PUBLIC CONTROLS The ultimate, long-run objective to be accomplished through the use of public controls is action in the public interest. The short-run purpose of public controls over 10United Nations, Public Industrial Management in Asia and the Far East (New York: United Nations, 1960), p. 12. Also see the Council of State Governments, Public Authorities in the States (Chicago: The Council of State Governmeritf 1953) , p. 108. 529 government corporations is to: (1) inform the public and the government about their contribution toward the achieve ment of certain public objectives; and (2) prevent pos sible violations of the public interest through the use of penalties and restrictions on the decision-making powers of the management. Therefore, public controls can be use fully divided into two categories: (1) reporting controls; and (2) decision-making controls.12 jn this chapter, how- The achievement of desired social objectives are the criteria for the use of public controls. Effective controls must promote the achievement of public goals. An evaluation of the government corporation's contribution to social welfare requires a measurement of the degree to which the desired social objectives have been accomplished. 12 Controls over government corporations might be grouped according to the institution administering them. However, a given institution may administer more than one type of control. Obviously, many controls apply to indi vidual government corporations. In New York State, for example, state or local officials apply twelve different controls to public authorities. A brief review indicates that each falls clearly into one of the two categories sug gested above: 1. Appointment and removal of authority board mem bers . 2. Affiliation of authorities with regular depart ments or agencies. 3. Veto of action of authority boards. 4. Civil service regulation of authority personnel practices. 5. Authorization of new authority projects. 6. Approval of authority contracts or leases. 7. Specific statutory controls over authority f inances. 8. Approval of authority bond issues. 9. Appropriation of funds to authorities. 10. Regulation of authority rates and services. 11. Auditing of authority finances. 12. Submission of annual reports by authorities. See State of New York, Staff Report on Public Authorities 530 ever, each control device is considered individually. In practice, the purpose of public controls has not been clearly expressed. Ramanadham included one social goal and three control procedures in his list of actions necessary for an enterprise to be accountable to the public. 1. That the commercial performance of the corpora tion is efficient, both in the short-run and the long- run; 2. That the Board's decision shall not contain implications of social policy but shall be based on commercial criteria in the main; 3. That any parliamentarily approved or ministerial ly directed decisions are implemented in practice; 4. That the Minister, as distinct from the Board, shall be accountable for his own influence on the Board's working.13 The United Nations' Rangoon Seminar also pointed out the purpose of controls relating to public enterprises. The report indicated that responsible political officials should have adequate means to ensure that: 1. Policy directives are implemented; 2. Operations and policies of public enterprises are consistent with and in furtherance of basic objec tives established by the government; 3. Public enterprises and non-business programmes operating within the same area of subject matter and having the same major purpose are effectively Under New York State (Albany: Temporary State Commission on Coordination of State Activities, 1956), p. 555. 13 V. V. Ramanadham, Problems of Public Enterprise. (Chicago: Quadrangle Books, 1959), p. 114. 531 coordinated; 4. Operations are conducted with maximum efficiency and economy and in accordance with law; and 5. Sufficient information is provided to enable appropriate authorities and the public to appraise the effectiveness of o p e r a t i o n s . 14 Einaudi summarized the purpose of public controls by stressing that autonomy and public accountability are twin social objectives, both of which must be achieved in order to avoid confusion, corruption, and, in the long run, economic decline. For what is required is a body sufficiently free from day-to-day interference by Cabinets and bureau cratic machines, yet accountable to the politically responsible organs of the country and staffed by both experienced servants and industrial and economic states men so as to have under one roof, so far as it is humanly possible to do so, both efficiency and impartial a d m i n i s t r a t i o n . I S Robson identified three fundamental purposes of 10 public controls. One is to satisfy the Government, Parliament, and the public, that the nationalized industries are being run efficiently and progressively. The second is to prevent consumers from being exploited by an undue use of the monopolistic position enjoyed by the public 14 United Nations, Some Problems in the Organization and Administration of Public Enterprises in the Industrial Field, op. cit., p. 17. 15 Mario Einaudi, Maurice Bye, and Ernesto Rossi, Nationalization in France and Italy (Ithaca: Cornell Uni versity Press, 1955), p. 53. 16 Robson, Nationalized Industry and Public Ownership, op. cit., p. 210. 532 corporations. The third is to ensure that labour rela tions and personnel management are sufficiently good to avoid large-scale stoppages of work owing to trade disputes from occurring. From the foregoing quotations, one can observe that both the public goals of government corporations, including the means-ends, and the procedures for insuring that the public goals are accomplished are included in lists which review the purposes of public controls.17 The short-run purpose of formal, reporting control is to inform the government and the people about the operations of the enter prises. The purpose of decision-making control is to review the management proposals which are most likely to violate the public interest. The long-run objective of each type of control is the maximization of social marginal product. The Temporary State Commission on the Coordination 17 The confusion of public goals with the procedures for reporting whether the goals have been accomplished should be clarified. The reporting procedure may inform the public and the government that the government corpora tion has not achieved the desired social goals. In the def in it ion of public accountability above and in the state ment of the purpose of public controls, an attempt has been made to avoid this confusion. In his definition, Robson does not fall into this conceptual trap. Similarly, his statement of the purposes of public controls does not in clude control procedures. Ramanadham and the United Nations fall into the error, by including procedures, of saying that the purpose of public controls is the use of public controls. 533 of State Activities in New York State gave considerable attention to the importance of reporting controls. The Commission suggested that the more autonomy (freedom from decision-making control) a public authority has, the more comprehensive its reporting should be.18 The Commission recommended six reporting controls which are summarized below.I® First, the statutes should require an annual report by every authority of its operations, fiscal trans actions, financial condition, receipts and expendi tures in a comprehensive form to be prescribed by the Comptroller. Second, every authority should be required to submit annually before the beginning of its fiscal year and in a form or forms prescribed by the State Budget Director budget information on operations and capital construction which will indicate the estimated income and expenditures for operations and capital construc tion for the next fiscal year and the current fiscal year as well as the actual income and expenditures for the last completed fiscal year. This information will give the Governor, the Legislature and the Comptroller essential data on proposed authority finances and plans. Third, every public authority should be required to submit to the State Comptroller a copy of every exter nal post-audit or examination of its accounts other than those made by the Comptroller. Fourth, the State Comptroller should be required, not merely authorized, to audit every public authority in the State not less than once in every five years or in his discretion to accept an external audit in lieu thereof if he is satisfied as to its form and suf ficiency. 18New York State, op. cit., p. 576. ■^Ibid., pp. 576-577. 534 Fifth, every authority should be required to include in its annual submission of budget information and in its annual reports its contracts, rates, revenues and specific sources of revenues. Sixth, every public authority not included under the Civil Service Law should be required to file with the Governor and the Legislature its plan of personnel administration including its policies and practices on recruitment, selection, promotion, classification, com pensation, transfer, separation, employee relations, employee services and related personnel matters. The Commission argued that these reports would not require great effort or expense for well-organized authori ties and that they involved no other kinds of control. If anything, the recruitment of high calibre persons for board members should be easier because prospective board members could expect better information with which to formulate and evaluate policies. III. CRITERIA FOR CONTROL If the purpose of control over government corpora tions is to insure that their action is in the public interest, then controls should be used to: (1) prevent actions which are detrimental in the long-run to the public interest; and (2) stimulate and require positive contribu tions to public welfare. Therefore, the criteria for the use of control are: (1) the high probability and the importance of potential violations of the public interest, and (2) the amount of external stimulus or compulsion needed to guarantee positive contributions to the public wel— 535 fare.20 In this study, no attempt is made to categorize the controls over government corporations in various countries according to the types of potential violations of the public interest which have been anticipated. A thorough statistical analysis of numerous countries would be a substantial research project. If governments have adopted controls without adequate study of the criteria for control, as Ramanadham suggests, the optimum achievement of efficiency and accountability is likely to be impossible because of the improper, excessive, or insufficient use of controls. The following sections describe several major con trol devices applied to government corporations within various countries throughout the world and identify opera tional problems and other effects of using each type of Ramanadham has expressed the need for more careful formulation of the criteria for the application of controls. "On the whole, relatively small emphasis has been placed on the more important requisite, viz., the establishment of criteria or canons by which the corporations are expected to be accountable. In short, the question has been treated, by and large, in terms of to which body the corporation shall be accountable rather than by what criteria it shall be held accountable. . . . This is not a plea against the setting up of an agency to express opinions on the public accountability of a corporation; on the other hand, the suggestion is that even such a body must be provided with the criteria on which it may base its judgments." Problems of Public Enterprise, op. cit., p. 113. 536 trol.21 IV. MINISTERIAL CONTROL Britain t In Britain, ministerial control over nationalized corporations is exercised primarily through directions of a general character regarding the functions of government 22 corporations which will affect the national interest. The statutes indicate that Ministers may give directions "relating to the establishment and management of a reserve fund, the allocation of funds to reserve, and the applica- 21 Friedman groups the controls over public corpora tions into four categories: "ministerial direction; par liamentary control; audit control, or other ex post control by independent public authorities; and finally jfidlc ial control." Op. cit., p. 576. Ford P. Hallfs book contains a chapter rev few'frig the kinds of regulations applied by government in the United States to businesses affected with the public interest. See Concept of Public Business, (Bloomington: The Principia Press, Inc., 1940), pp. 56-69. For a review of the controls used in the United States, see David E. Lilienthal and Robert H. Marquis, "The Conduct of Business Enterprises by the Federal Government," Harvard Law Review. February, 1941, pp. 568-586. 2^The Rangoon Seminar pointed out five common minis terial controls: "(i) issue of general policy directives; (ii) issue of specific directions; (iii) approval and veto of specified categories of actions and policies; (iv) par ticipation in management as a member of the governing board; and (v) appointment of governing board and managers of an enterprise." See United Nations. Some Problems . . .. op. cit., p. 23. This report cites the French Coal Nationalization Act of 1946 as an illustration of specific ministerial directions. In Britain, the approval of Minis ters is required for large capital outlays, pensions, edu cation, training, research, the form of accounts, and the issue of new stock. 537 tion of the reserve fund, notwithstanding that the direc tions may be of a specific character.”^ The nationalized corporations are required to implement the directions of Ministers.^ Three major problems arise from the exercise of ministerial control in Britain.^5 First, the phrase "directions of a general character" has not been defined. Consequently, there is no way to clearly distinguish between general and specific controls. Since the defini tion is not likely to be determined in the courts, it is determined by the Ministers who, as a result, have a wide range of potential discretionary control over the policies of government corporations. The second major problem is related to the definition of the national interest. In the absence of a specific statutory definition, the Ministers must judge what actions of government corporations affect the public interest. In Britain, for example, the Minister 23 Robson, Nationalized Industry and Public Ownership, op. cit., p. 140. Prior to 1945 and the nationalization acts, Ministers were not given general powers of direction. For a discussion of the public sector in Britain, see Calvin B. Hoover, Economic Systems of the Commonwealth (Dur ham: Duke University Press, 1962), pp. 153-160. 24 Some ministerial controls, such as the appointment of board members, are treated separately below. 25 For an early discussion of ministerial control in Britain, see Ernest Davies, National Enterprise (London: Victor Gollany, Ltd., 1946), pp. 74-94. 538 of Supply has participated in the setting of prices of iron and steel. This has led to a discussion of whether, in some instances, the political motivations of the Minister obscured the public interest. Nevertheless, democratic procedure requires that the Minister be the judge of the O C national interest.The third major problem, and prob ably the most significant, is the tendency for the Minis ters to assume that the boards of government corporations are responsible to them for all matters rather than to Parliament.2^ The practice reduces the managerial inde pendence of the boards and violates the intent of Parlia ment that government corporations be independent in day- to-day operations.2® This is accomplished through exten sive use of informal consultation with the boards. There is wide agreement that Ministers should be accountable to Parliament for the major policies of government corpora tions but that the management of the ©nterprises should be accountable for all other, day-to-day, decisions.29 Through informal control without the issuance of 26 Robson, Nationalized Industry and Public Ownership, op. cit., p. 158. 27 Davies, "Ministerial Control and Parliamentary Responsibility of Nationalized Industries," op. cit., p. 151. 28 Robson, op. cit., pp. 142, 145. 29 United Nations, Some Problems . . .. op. cit., p. 23. 539 directions, Ministers in Britain have significant power 30 over government corporations. According to Robson, the formal means of ministerial control are "of far less importance in the relations between the government and the nationalized industries than the influence exercised in- 31 formally through discussion,negotiation, and pressure." Formal directions are issued only infrequently. He also contends that Ministers have tended to exercise informal power without being willing to defend their actions to the . t 32 public. Robson concludes that, with the exception of the BBC, Ministers have imposed rather specific controls on the management of government corporations which have seriously hampered their effectiveness.*^ h6 supports Morrison’s view that a board has the right to refuse to comply with directions which are not written, published, and general. Ministers, he argues, should not normally be concerned with the determination of wages and prices in nationalized 30 Hanson, Parliament and Public Ownership, op. cit., pp. 47—50. In this section Hanson gives an illustration of early "old boy" methods. Up to 1952, no general direc tives of significance had been issued. 31 Robson, op. cit. , p. 142. Also see Davies, op. cit., p. 150. 32Ibid., p. 160. 33Ibid., p. 159. 540 industries. Sweden Unlike Britain, Sweden and the United States do not hold individual ministers responsible for the policies of public enterprises. In Sweden, responsibility is borne by the King-in-Council and in the United States by the legis lature which has assigned responsibilities to the President and various departments. In Sweden, the dislike of account ability to an individual Minister is long standing and the direct responsibility of trading agencies to the Crown is 34 firmly established. State companies are controlled primarily by the Crown through its power to issue direc tives concerning any field of business activity. Canada In Canada, the Financial Administration Act speci fies that Crown corporations are ultimately accountable, through a Minister, to Parliament for the conduct of their affairs. Ministers possess statutory powers to appoint and dismiss members of boards, issue directives, approve or veto certain corporate actions, and require information. The power to issue directives, however, is not the major means of formal ministerial control in Canada as it is in Verney, Public Enterprise in Sweden (Liverpool: Liverpool University Press, 1959), pp. 62—63. 541 the British nationalized industries.55 Ministerial control over Crown companies, in practice, seems to be limited to the responsibility for proper and sensible management of the corporation. Nevertheless, corporations consult with Ministers and the Minister of Finance, for example, can register his disapproval of actions by the Bank of Canada, which in practice follows its independently formulated policies. In a serious conflict between the goals of the bank and the government, it is widely agreed that the policy 36 of the government would predominate. Australia In Australia, Ministers are given statutory power to approve certain acts of government corporations and to give directions on particular matters. Kewly notes a trend toward increased ministerial control over the boards which is most pronounced in Queensland and New South Wales where some of the corporations have been placed under complete ministerial direction.5^ Ministers are responsible to 35 This power was recently granted to Canadian Minis ters by the Financial Administration Act of 1951, Statutes of Canada, 15-16 Geo. VI, c. 12 (2nd sess., 1951), Part VIII. See Appendix J. 36 Musolf, op. cit.. p. 60. 37 T. H. Kewly, "The Control of Public Enterprise in Australia," a mimeographed paper presented at the Rome Con gress of the International Political Science Association, p. 2 2. 542 Parliament for the exercise, or non-exercise, or their statutory powers. Italy In Italy, ministers appoint their representatives to the boards of government corporations or may appoint the entire board. Sometimes the Minister serves on the board. This practice is also common in underdeveloped countries and creates a serious problem because the Minister serves 38 as both controller and the controlled. As controller he might be required to reverse his decision as board mem- 39 ber. In 1956, a new ministry for state holdings was 38 Giuseppino Treves, ’’ The Control of Public Enter prise in Italy,11 a mimeographed paper presented to the Rome Congress of the International Political Science Association, p. 8. The practice of assigning a Minister to the board was tried and abandoned in Canada. See Musolf, op. cit.t. pp. 95—96. 39 For an interesting story of a large oil-producing government corporation which, until recently, was dominated by an individual see Indro Mantanelli, "Power Octopus," Atlas. September, 1962, pp. 194-209. "In the example of Mattei we have a spectacle of a government, a Parliament and a bureaucracy impotent before a ’civil servant’ who, though subject to removal every three years, names the min ister who is placed over him, places his own monopoly over ones that he is supposed to combat, deals directly with foreign governments and dictates a foreign policy of his own, often in contradiction to that of the State." P. 209. Following the death of Enrico Mattei in November, 1952, in a plane crash, 72-year-old Marcello Boldrini was temporar ily appointed president of Ente Nazionale Idrocarburi (ENI). For a review of ENI’s disruptive policies see Robert Keat- ley, "Italian Oil Agency Appears Tamer but Still Vexes International Firms," The flail Street Journal, February 4, 1963, p. 22. 543 created which assigned to the Minister all the powers previously held by the Council of Ministers, Ministers' committees, and individual Ministers. According to Treves, a coordination problem exists because the Minister for state holdings has no power to interfere with economic policies required by the individual appropriate ministers. United States In the United States departmental controls over government corporations can be grouped into three cate gories: (1) appointment and removal of officers; (2) exec utive clearance of policy statements; and (3) departmental supervision. Administrators and the members of the boards of wholly-owned government corporations are appointed by the head of the supervising department, usually designated in the corporation's charter, or by the President. Depart ment heads do not issue directives to government corpora tions as they do within their departments. The amount of departmental supervision depends on the degree of personal interest of the department head and on the need for coordi nation between departmental programs and the activities of government corporations. The President has stressed that government corporations should be free from departmental supervision over day-to-day operations. In addition, government corporations must submit policy statements to the Bureau of the Budget for clearance in order to insure 544 that they are in accord with the official program of the President. Departmental officials have relatively little dis cretionary control over public authorities in New York State. However, there are several cases of government officials serving on the boards of authorities and at least one case in which a government commission serves as the board of an authority.In cases where the incorpo rating statute requires approval of authority actions, the governor or the legislature is usually the approving body. Generally, public authority rates and services have been exempt from regulation by public regulatory bodies. Summary Although the Minister has more power over the poli cies of government corporations in Britain than in the United States or Canada, they appear to be somewhat less influential than Ministers in Australia. According to Rob son, three major problems of ministerial control have emerged in Britain: (1) the difficulty of distinguishing between general and specific controls because "directions of a general character" have not been defined; (2) the Minister’s interpretation of national interest has been so 40 _ New York State, op. cit., p. 556. The Temporary State Coordinating Commission strongly criticizes this practice. See p. 558. 545 broad that price setting policies, for example, are held to be in the public interest; and (3) informal consultation, about which the minister does not report to parliament, has lessened democratic control and reduced efficiency be interfering with routine, day to day activities. The latter is the most important form of ministerial control in Britain. In Sweden, responsibility for the policies of public enterprises is borne by the King-in-Council rather than by Ministers. Therefore, government corporations are responsible to the Crown, which can issue directives. Although Ministers are responsible to Parliament for the conduct of government corporations in Canada, the primary control devices are board appointments and dismis sals, approval or veto of corporate actions, and information requirements, rather than the issuance of directives which was first permitted by the Financial Administration Act of 1951. The practice of assigning Ministers or government officials to the boards of government corporations some times occurs in Italy, Australia, and New York State and was tried and abandoned in Canada. This practice has been widely criticized. In conclusion, departmental officials in the United States have relatively little discretionary control over government corporations. However, government officials 546 exercise much more discretionary control in Britain and in some Australian government corporations. V. THE BOARD OF DIRECTORS Boards of directors are nearly universal among government corporations although the board, as an adminis trative device, has been widely studied, criticized, and 41 defended. Pfiffner recommended that boards should be used when (1) there is seemingly irreconcilable differences in community opinion; (2) technology has not developed to the point of complete lay acceptance; and (3) deliberation is necessary, such as in policy determination and in quasi legislative and quasi-judicial decisions. A single head For an analysis and summary of the debate see John M. Pfiffner, Public Administration (New York: Ronald Press Company, 1946), pp. 99-112. Proponents hold that the use of boards (1) provides competent lay advice and service; (2) promotes civic responsibility and cooperation; (3) con tributes to continuity in policy when political officials change; (4) frees their activities from political influence; (5) permits representation of differing views and interests; and (6) reduces the likelihood of arbitrary and officious action by single heads. Critics point out that (1) boards often do not limit themselves to policy but interfere in administration; (2) the personnel on boards are usually mediocre or inferior; (3) appointments are based on patronage rather than merit; (4) responsibility cannot be fixed on an individual; and (5) board decisions are delayed and sometimes prevented by dissension. See pp. 104—106. The latest edition gives less attention to boards. See John M. Pfiffner and Robert V. Presthus, Public Administration (4th edition; New York: Ronald Press Company, 1960), p. 210. should be used, according to Pfiffner, when (1) quick decisions and action are necessary; (2) well-developed technology inspires lay confidence; (3) discipline is nec essary, such as in policy departments; and (4) action in the organization is nearly always routine. Britain* The Minister's appointment of the boards of direc tors in Britain is universal among the government corpora tions. The responsibilities of the boards of public corporations are, therefore, much more inclusive than those of the private business corporation because of democratic obligations to consider the public interest in making decisions.^2 The size of the boards in England varies among the enterprises and may change within an enterprise from time to time. The statutes set the maximum and minimum limits to the size of boards which permits the Ministers to add members with particular qualifications if they are needed. Generally, the British Parliament has made wide experience and demonstrated capacity in the field the primary quali- A Q fication for appointment. There has been some use of "42 “ "" For an early treatment of the use of boards in England, see Ernest Davies, National Enterprise (London: Victor Gollancz, Ltd., 1946), pp. 49-73. 43 Maurice Bye, Nationalization in France and Italy (Ithaca: Cornell University Press, 1955), pp. 98-100. 548 geographic representation which is common in the United States. A unity of purpose is necessary within the boards which is usually not accomplished by special interest representation such as the tripartite arrangement used in 44 France. Robson asserts "the conception of a board as the meeting place for the representatives of divergent interests 45 is wholly mistaken." Members of the House of Commons cannot be appointed to board membership and union members resign their posi tions on appointment in order to avoid conflicts of interest. Numerous civil servants have been appointed although there has been some opposition to this practice. A political test requiring membership in a particular political party is not considered necessary, in that this could be a spoils system, but experienced men within a r party are probably available and there is no legislation preventing appointment from only one party. In the early days of nationalization in England, 44 Davies, op. cit., p. 49. 45 Robson, Nationalized Industry and Public Ownership, op. cit. , p. 217. For Robson's views on boards at the beginning of the 1950's, see "The Governing Board of the Public Corporation,” Political Quarterly, April, 1950, pp. 135-149. 46 Since the board of the British Broadcasting Corpo ration directly influences public opinion, its freedom from political bias is especially important. See Davies, op. cit., p. 63. 549 board members were selected from among the executives in the industry prior to nationalization. The practice of appointing board members from within the industry is still common.^ The Fleck Report and the Labour Party supported this practice.^® However, in cases of mismanagement with in the industry, new talent may be needed. For this reason, Robson supports the practice of interchange of executives ACk among the nationalized industries. Although the early practice was to have board members act as heads of depart ments, this procedure was discouraged by the Fleck Commit tee. Nevertheless, the Committee recommended that each full-time member should have a special field of responsi bility and interest. The present practice is for the board to be composed of both full-time and part-time members with the full-time members having areas of special responsibility and the part- time members having wide experience from outside the industry. The boards are intended to be policy formation 47 Lord Simon, The Boards of Nationalized Industries (New York: Longmans, Green and Co., Inc., 1957), pp. 42-43. Davies pointed out that the main defect of this practice was the appointees' lack of belief in socialized industry. See Davies, op. cit. , pp. 52-53. 48 Fleck Committee, Report of the Advisory Committee on Organization (London: National Coal Board, 1955), par a. 56-57. 49 Robson, op. cit.. p. 223. 550 bodies rather than functional bodies which conduct detailed administrative duties. In England, as in other countries in which the pay for government employees is not always comparable to the pay for equal work in private industry, a salary level attractive to the most talented and skilled potential board members has been difficult to determine. The salary cannot be excessively above the salary of civil servants nor sub stantially below those of the chairmen of leading commercial firms.^ The Fleck Report and the Herbert Report recom mended higher salaries for board members. The Minister’s power to dismiss any member is widely defined to include any member who, in the Minister's judg ment, is unfit or incapable of performing his duties. Although the Minister must have the authority to dismiss members who do not comply with declared policy there is considerable question whether the Minister does or should have the authority to arbitrarily dismiss or "force the resignation of an individual member of the board owing to disagreement with his attitude, dislike of his personality, or disbelief in his ability."^1 Too much arbitrariness on the part of the Minister may result in the entire board 5 0 Lord Simon, op. cit.. pp. 32, 44; Robson, op. cit., pp. 230-232. 51 Robson, op._ cit. , p. 241. 551 being replaced when a new Minister takes office. Board appointments are usually for five years with reappointments the normal practice. Canada Canadian public corporations may be headed by either policy-making boards or operating (functioning) boards. Relative few, such as the Canadian Wheat Board, the St. Lawrence Seaway Authority, and the National Harbors Board, have operating boards. Operating boards have been used in corporations whose functions can be divided easily among 53 the board members. This has resulted in coordination problems which have been particularly evident in the Canadian Radio Broadcasting Corporation. Part-time members usually outnumber permanent members. With policy boards, the problem has been inadequate communication with the management of the corporation. The boards primarily have part-time members and often meet rarely. The problem resulted from an early and extreme separation of policy-making from administration which, in effect, forced administrators to formulate policy. The 52 Robson maintains that dismissal should only be for reasonable cause which can be shown. See ibid., p. 242. 53 Musolf, op. cit. . p. 74. Also see J. E. Hodgetts, "The Public Corporation in Canada." The Public Corporation. W. Friedmann (Toronto: The Carswell Co., Ltd., 1954), pp. 74-78. problems of extreme separation of administration from policy-making and of direct participation in administration by functional boards have been partly resolved, in prac tice, by having the chief executive officer serve on the board of directors. This practice is illustrated by the Bank of Canada. Musolf notes that executives apparently also make important use of informal communication with the directors.^4 Hodgetts refers to the problems which result from appointing senior permanent departmental officials to the 55 boards. However, it should be noted that this practice has not taken the form of appointing a Minister to the board. Clearly, no senior civil servant should be placed in a position where, as a member of a corporation, he is compelled to join in an opinion that may be opposed to that of his own political chief. ® 54Ibid., p. 77. 55 J. E. Hodgetts, "The Control of Public Enterprise in Canada," a mimeographed paper presented at the Rome Congress of the International Political Science Association p. 10. Musolf says: "The most controversial aspect of representation . . . is the matter of assigning membership on boards to departmental representatives," ibid., p. 93. Hodgetts has also pointed out that senior departmental officers cannot feel responsible to a corporation. See J. E. Hodgetts, "Responsibility of the Government Corporation to the Governing Body," Proceedings, 5th Annual Conference Institute of Public Administration of Canada, 1953, p. 395. 50 J. E. Hodgetts, "The Public Corporation in Canada, op. cit., p. 76. 553 There are few formal statutory provisions regarding repre sentation on the boards of Canadian government corporations but regional representation is widely practiced. To some extent, advisory committees serve to represent special interests to the boards. In some cases, the Minister’s appointees have served on several boards at the same time which, in effect, created an interlocking directorate 57 headed by the Minister. Musolf concludes that Ministers "with perhaps a few notable exceptions, are in a strong position to put a check-rein on corporate activities and even to influence the way these activities are conducted in the first place. "88 France In the nationalization legislation of 1946, the eighteen-member boards of French government corporations were representative boards which included representatives of consumers, workers, and the state. Through the decrees of 1953, the board membership was reduced to twelve with four representing the state, four representing consumers but selected by the Cabinet, and four representing the workers. The change in the composition of the board made 57 Musolf, op. cit. , p. 94. For criticisms of the practice of assigning Ministers to boards see pp. 95-98. Also see J. E. Hodgetts, "The Public Corporation in Canada," op. c.it. , p. 78. 58Ibid., p. 101. 554 the government dominant and was a significant retreat from the prevailing syndicalist doctrine. If a vote which is unfavorable to the state is not permitted or if interest conflicts excessively restrict progress, the advantages of a board are limited to tech nical specialization among the board members. Perhaps this will become more widely recognized as the primary, legiti mate advantage of boards over single administrators. New York State The Temporary State Coordination Commission advo cated the use of boards in preference to single member boards which might result in overconcentration of power in the hands of one individual. This conclusion, of course, implies the Commission's acceptance of the policy-making responsibilities of the board. In fact, according to the Commission, a board is "a deliberative body facilitating policy discussion by a representative group of public- spirited citizens.Twenty-three of the thirty-three active authority boards in New York State have either three or five members. Inter-state authorities have an even number of members in order that neither state may have con trol. The Commission recommended that all boards have five CQ New York State, op. cit., p. 145. Chapter V is entirely devoted to the organization of authority boards. See pp. 113—154. 555 members. Although some authority board members do not have fixed terms, the Commission argued that fixed terms help separate authority policies from political influences. Most of the terms are staggered. The terms-Should be either five or six years in length, according to the Com mission. Several boards in New York State are appointed by county officials. The Commission held that members of the boards of public authorities whose activities are regional in character should be appointed by the governor. The acts creating two authorities contain provisions requiring political affiliation. This, strangely enough, insures that the board will be partisan rather than politically independent and nonpartisan. Four authority boards had membership which was identical to the membership of the parent commissions. According to the Commission's findings, this practice led to reduction of authority independence and confusion of authority functions with government functions. They recom mended that tiie practice be dropped. The Commission frowned on excessive participation on boards by government officials, either through direct mem bership or in ex-officio capacity. No more than half of the board should consist of state or local officers serving in an ex-officio capacity or directly as members. In this 556 connection, the Commission pointed out that the duties of public officers may conflict with their duties as board members. This possibility was noted in the proceeding chapter. The appointment of such public officers is likely to weaken business-like management because of the diffi culty they may have in differentiating between the goals of an authority and those of their regular govern mental positions.60 This view is particularly interesting in the light of the widespread practice in other countries of appointing government officials to the boards of government corpora tions. The Commission’s report concluded that no public officer whose regular duties give him a direct interest in the operation of the authority should be appointed to the board. This solution recognizes that an individual’s loyalties to a group should not conflict with loyalties to another group, a conflict which may occur if the goals of the two groups are competing goals. On the issue of salaries for board members, the Com mission held that the payment of salaries increases the possibility of patronage although the expenses of board members should be paid. The payment of salaries also is likely to increase board participation in day-to-day admin istration of authority activities. If the board is a part- time board, the Commission held, it should appoint its own ^ Ibid. , p. 149. Also see pp. 129-131. 557 chairman. However, if the board is a full-time board, with the chairman acting as chief executive officer, the appoint ing agency should select the chairman.®^ The acts creating nearly half of New York State’s active authorities do not contain provisions for removal of board members. According to the Commission, the power to remove board members for cause is an important device for the assurance of responsible government and should reside in the office of the governor. Australia The boards of government corporations in Canada are appointed by the Governor-in—Council on the recommenda tions, in practice, of the Cabinet. Tenure is for a specified time and there are statutory causes for removal, such as inability, inefficiency, and misbehavior. The Minister has more influence over board members in cases where the statute does not specify the minimum term because he then can appoint for very short terms. Most government corporations have boards ranging in size from three to seven members but there are several single-member boards. The qualifications for members are not usually stated except for vague references to the appointee being a fit and proper person. Political quali— reasons for this procedure are discussed in ibid., pp. 133-136. 61The detail. See 558 fications are not excluded and the quality of appointees depends primarily on judgment of the Ministers. While there are some exceptions, there usually has been no representation of interests on the boards. Accord ing to Kewley, Australian policy was influenced by Britain's Labour Party which opposed trade union represen tation on the boards.®2 Unlike Britain, no substitute devices, such as joint consultation, consumers' councils, and advisory committees, have emerged to represent the views of the workers. The practice of appointing public servants to the boards is common in Australia, although this is not done in Britain. Treasury officials on the boards are especially common.®2 The boards are usually part-time policy-making bodies. Summary Board members are usually appointed by the highest political official within the incorporating jurisdiction or by his immediate subordinate, with the exception of some appointments by county officials in New York State. The size of the boards is not uniform in any country. Geo- ®^Kewley, op. cit., p. 11. 63 Although the practice has not created much criti cism, it is frowned on by Kewley. For his comments see ibid., p. 12. 559 graphic representation is common in the United States and Canada but much more emphasis has been placed in skill and experience in Britain than in the other countries studied. In Australia, very few qualifications have been specified. In France, interest representation has been characteristic of the boards as a result of the syndicalist doctrine. However, after the reforms instituted in 1953, the govern ment dominates the boards although interest representation is still practiced. In the early days of nationalization in Britain, operating boards were common but this practice has been abandoned. In Canada, a few operating boards exist as is true of Australia where they are usually single-member boards. Some New York State authorities have had adminis trative boards but they have generally been unsatisfactory. The practice of appointing political officials to the boards has occurred in New York State, Canada, Aus tralia and has been severely criticized by most scholars. The New York Commission concluded that not over half of the board should be public officials. In Britain and Canada, boards have some full-time and some part-time members. In Australia, boards consist of part-time members. In New York, the board usually con sists of either all full-time or all part-time members. In Canada, Australia, and Britain, provisions for removing board members have been included in the legislation 560 although these provisions are too broad in Britain, accord ing to Robson. In New York State, numerous authorities have no provision for removing board members. In conclusion, authorities appear to be widely regarded as responsible to the government for matters of policy. Although boards are responsible, they usually do not participate in day-to-day decisions. The similarities among the boards of the government corporations in the different political jurisdictions considered are probably more striking than the differences. VI. THE OWNERSHIP-CONTROL DOCTRINE Background During the progress of industrialization in western economies, ownership has been regarded as the primary means of controlling enterprises. The study by Berle and Means which showed that ownership of private firms was not, in most cases, an effective means of control reversed a long standing assumption that corporation policies were demo- 64 cratically formulated by the owners. Social reformers during the nineteenth century attributed many social evils to the existence of private property and usually advocated public ownership as the means for correcting the evils. 64 A. A. Berle and Gardiner C. Means, The Modern Corporation and Private Property (New York: The Macmillan Co., 1932)• 561 Thus, the early assumption that ownership was the primary means.of control in private enterprise was easily extended to public enterprises. This doctrine, which proved to be false when applied to modern private business corporations, is also false when applied to public enterprises, although the reasons for the fallacy are different in each case. In the case of private corporations, the owners do not control because of the technical expertise of the managers. In the case of public enterprises, the private owners usually do not control (such as in the district banks of the Federal Reserve System) because other control devices are predominant. When there are only public owners the ownership device for control, the annual meeting, becomes perfunctory, unused, and unnecessary. In practice, therefore, ownership is neither a necessary nor primary device for control of public enterprises. In England, many leaders of the Labour Party have discarded ownership as a means of accomplishing traditional socialist goals. Nationalization is now considered an inferior means, rather than an end in itself.®^ The late Hugh Gaitskill and the Labour Party advocate ownership, without control, as a means of redistributing income. — ----- For an earlier discussion see Chapter III. 66 Hugh Gaitskill, Recent Developments in British Socialist Thinking (London: Cooperative Union, 1956. Also see Labour Party7 Industry and Society. Labour’s Policy on 562 Nevertheless, the preference for nationalization prevails in many underdeveloped economies. The British experience suggests that ownership is not a reliable criteria for con trol. Subsequent discussion will indicate that the use of ownership for purposes of control has created severe prob lems . Earlier writers recognized that ownership was not the dominant means of control. Thurston said, "This device of stock ownership is quite unnecessary, however, since 67 stock is merely one form of evidence of power to control." He noted that the Tennessee Valley Authority and all the British proprietry corporations had no stock. McDiarmid pointed out that there was no consistent pattern of owner ship and that the government did not own all the government corporations which it controlled. Of primary importance is the extent of government ownership and/or control. Here we find a considerable graduation, ranging from entire ownership and control to part control without ownership and part ownership without control. . . . Government-controlled non—stock corporations, with assets acquired through appropriated or allocated federal funds, are a recent phenomenon. ° the Future of Public Ownership (London: Labour Party, 1957). John Thurston, Government Proprietary Corporations in English-Speaking Countries (Cambridge: Harvard University Press, 1937), p. 37. John McDiarmid, Government Corporations and Federal Funds (Chicago: University of Chicago Press, 1938), pp. 48-49. 563 Several existing government corporations in the United 69 States have no share capital. In the United States, thus, ownership has not been a universal criteria for the appli cation of controls. Similarly, in all of the French postwar nationaliza tion acts there was evidence of a desire to have the industries pass into public ownership without giving the government direct control over them. This principle is 70 known as "Nationaliser sans etatiser." The consultants at the Rangoon Seminar held that an enterprise should be organized as a government corporation when it is completely owned by the government in order to 71 provide adequate control. Both Hanson and the consult ants spoke of the government corporation as being wholly- owned by the government.^ Apparently they assumed that the larger the amount of capital contributed by the govern ment, the less autonomy the organization should have in order to protect the investment of the government. The 69See Chapter VII. 70 Bye, Nationalization in France and Italy, op. cit., p. 94. 71 United Nations, Report of the Seminar Organization and Administration of Public Enterprise in the Industrial Field (New Delhi: United Nations^ 1959), p. lTI 72 Hanson, Public Enterprise and Economic Develop ment , op. cit., p. 343. 564 findings of this study suggest that the size of the govern ment’s contribution of capital should not be the primary criterion for the application of control. The mixed government corporation, in which the government provides part of the capital, is another indi cation that ownership is considered a means of control. In Turkey, for example, an enterprise is considered a gov ernment corporation if the government owns fifty—one per cent or more of the capital. Italy has one hundred or more public enterprises controlled by the government through financial o w n e r s h i p . The United States has twenty-four mixed corporations but control is not usually achieved through ownership. The essential errors of the reasoning of Hanson and Rangoon consultants are: (1) the belief that stock or debt ownership is a significant means of control over the organ ization; (2) the belief that government participation in management has no serious disadvantages; (3) the belief that the size of the government’s loan or ownership should determine the form of the recipient organization; (4) dis regard of more important reasons, such as the need for autonomy, for creating government corporations. 73 Oscar Ornati, American Economic Review, December, 1955, pp. 1032-1033. Review"of Emilio Paciera, Nuovi Studi di Economica Aziendale: La Macroziende (Palermo: AtJHaco, X953X, pp. 359. " i 565 j Central Devices for Control Control through ownership refers to the owner’s ability to share in the formulation of the policies of the government corporation. The owner shares in policy deter mination when given the privilege of selecting one or more ! I directors or in voting directly on policy issues. When the! board or administrator is appointed by the responsible minister, department head, or chief executive, as in the case of wholly-owned government corporations, there is no traditional control through ownership because the control over the board or administrator is established by the initial statute and the owners do not participate in policy decisions. However, in the case of mixed government corporations the private owners are often represented on the board. In France, the boards of directors of the new public enterprises are composed of representatives of the state, the workers, and the consumers. The fifteen member board of Regie Ranault, for example, is appointed by the Minister of Industrial Production for a six-year term, the terms of five members expiring every two years. Interest represen tation in the tripartite composition of the managerial boards of the French nationalized industries is an essential feature of French syndicalist doctrine. The Minister appoints the seven members who represent the consumers and selects six representatives of workers who have been elected: by the workers to the central shop committee. In addition,: the Minister also appoints the chairman and the general manager.The syndicalist doctrine has "tended to make directors partisans of particular interests, with the re— ■ | suit that boards are unable to provide unity of purpose, 7 ^ ' energetic administration, and coherent policies."' Colum-: i I bia also uses interest representation on the board of directors. In Sweden, there are minority private stockholders in four of the state companies. In three state companies the private owners hold three per cent or less of the stock but elect half of the directors. In the remaining companies the government holds all the stock but elects the directors at an annual meeting even though the election is perfunctory. Seidman indicates that the disproportionate representation of private interests on the board is a major weakness of control through ownership because it gives private interest groups undue influence in making decisions regarding the use of public funds and national policies. He notes that the United States, Great Britain, and Canada have encouraged the development of new industries 74 Einaudi and others, op. cit.. pp. 109-110. 75 Harold Seidman, "The Government Corporation: Organization and Controls," Public Administration Review, Summer, 1954, p. 191. i 567 through subsidies, loans, and other incentives rather than by joint ownership.76 In cases of private ownership, the government tends to increase the direct controls, such as wage and price controls, which are used in France. In Turkey and Pakistan, the proportion of government : and private ownership determines whether the organization i is a government corporation or a joint company. Private investors, however, often own less than ten per cent of the capital. In Belgium, the private investors of Sabena have a majority on the board of directors although the government holds a majority of the shares and appoints the administra tors who have the right to vote. The illustrations above suggest that, while private ownership often gives representation of private interest on the board of directors, central control by the govern- 77 ment is maintained through other control devices. Thus, government ownership of fifty-one per cent or more of the capital of mixed government corporations is unnecessary, in practice, for achieving sufficient control to insure performance in the public interest. 76Ibid. 77Marshall E. Dimock notes that "ownership requires independent representation if it is to exercise any degree of control." See "These Government Corporations," Harpers. May, 1945, p. 57 5. ! 568 | Control through ownership is not only unnecessary, j but also requires different controls for corporations dominated by private investors from those required for ’ corporations in which the government owns over fifty per ; ^cent of the capital. This is because the corporations ! dominated by private owners legally may not be government i corporations and, thus, may not be subject to the laws con trolling government corporations. Consequently, the arbitrary division of corporations, financed in part by government, into two groups, government corporations and private corporations, unnecessarily complicates the admin istration of controls. Sherwood supports the conclusion, that control through ownership is unnecessary and unwise, in his observations of control over Turkish public enter prises. There is no middle ground between public and private ’ control. If government control is required in the public interest, that control should essentially be the same from one self-supporting enterprise to another. 8 With these points in mind, control through ownership is significant for its detrimental effects rather than its favorable effects. This conclusion does not imply that private investors should not be represented on the board of directors, but, rather, that such control through ownership 78 Frank Sherwood, "Forms of State Enterprise," report of a consulting assignment in Turkey, April 26, 1961. Unpublished. is neither a device for final control by private investors I nor a necessary control device for the government. Repre sentation of private investors may promote efficiency. .However, control through ownership implies that the govern-; ment must have fifty per cent of the share votes to main- j tain voting control and that control by government would j be precluded if private investors owned more than fifty per! cent of the capital. Obviously, the government does not need to depend on ownership for control. The problem of control through ownership could undoubtedly be avoided if the governments of the less developed countries preferred to establish government corporations headed by single administrators. Government Participation in Management Control through ownership suggests that representa- ! tives of the government should continually watch over opera-1 tions of the government corporations, through membership on the board of directors, the use of government observers, or administrators with veto power who have access to board activities and to the records of the organization. Corwin Edwards has lucidly analyzed this problem. The objections to government participation are over whelming. Such arrangements are frankly based upon an inability to prescribe in advance the public poliaies to which business shall conform, for if prescription is possible other methods of regulation are sufficient. In the absence of a definite public policy, the govern ment officials who assume managerial responsibility of their acts, and surrounded with a protective cloak of | 570 I ; secrecy which conceals their errors and misdeeds.^® ! Edwards noted that the only way to avoid these objections is for the government observers to not partici- ' Ipate in board decisions. Thus, the government observer’s ; function is to obtain more information than can be obtained j I through reporting. However, other methods of obtaining j ^information could be employed. Government officials, for j example, might have unlimited right to examine records and investigatory powers might be given to government bodies when charges are made of unproper acts that are not suf ficient to constitute a violation of law and, hence, would not support an ordinary use of supoena power.®® Seidman supports Edwards' view that government par ticipation in management has serious weaknesses. In Columbia, he notes, Ministers are sometimes burdened with attending as many as twelve board meetings a week. In addition, a Minister, who is also a director, may be 79 Corwin D. Edwards, Maintaining Comoetition (New York: McGraw-Hill Book Company, Inc., 1949), pp. 182-183. 80 Ibid.; Diamond points out other disadvantages of participation in management by development banks. "The bank may become a powerful director of a large sector of the nation's industry; the institution’s personnel may be spread so thinly over many enterprises as to make it difficult for it to do its job effectively: the clients management may not be allowed the authority it must have if it is to direct the enterprise effectively; good money may be thrown after bad if things go wrong with the firm; and there is a tendency not to finance competitive enterprise." See Development Banks, (Baltimore: John Hopkins Press, 1957), p. 77. required to approve or disapprove, in his capacity as an agency of control, his own actions as a director of the board.^ Continuous surveillance may have other disadvantages J Corrupt government officials may use their special informa-i I tion to increase their own wealth and may permit undesirable I ;activities to continue. This type of control facilitates graft and corrupt practices. According to Edwards, the most effective control device is public disclosure with unusually comprehensive reporting required for large and powerful organizations being given to a government agency. In cases where surveillance is considered necessary, pre cautions may be taken to prevent the information from .82 remaining secret. Government participation in management decisions also tends to reduce the availability of private capital .because of the tendency to interfere in day-to-day opera tions and to centralize decision-making. Murray Bryce adds his support to criticisms of government participation in management. Managers . . . have never been given the freedom, the scope, and the power to manage. This is particu larly true of government-owned projects. In many countries they are notorious for preventing the managers 81 Seidman, op. cit., p. 1S8. Q p Edwards, op. cit., pp. 134-185. 572 | , ! from doing their jobs, surrounding them with regula- ! tions and restrictions which make it utterly impossible i for them to make management decisions on their own. The inevitable result of making a manager ask for sane-; tion on every question is that, as he is not allowed the autonomy to manage* he cannot be held accountable when things go wrong. ! The disadvantages then of government participation in management are (1) it often is an ineffective substitutej t for clearly defined public policies; (2) corruption is often; encouraged because there is little control over the govern ment director; (3) a minister is likely to use too much of his time acting as a director of different corporations; (4) neither a director nor manager can be held responsible for acts of the corporation if he does not have the authority to make decisions; and (5) it is not the most effective method of obtaining information about the opera tion of the corporation. Undoubtedly some of these weak nesses could be overcome while retaining a government representative on the board of directors. However, some writers argue that government control through participation in management is unnecessary and that the easiest way of avoiding its disadvantages is to use other controls. Government Ownership and the Form of Corporate Organization In Turkey, consultants recently recommended that wholly-owned state companies, joint companies with more than 83 Bryce, op. cit., p. 159. fifty per cent public ownership, and establishments, j created by Law 3460, should be reorganized as government corporations or operating units within government corpora- 84 tions. The consultants, therefore, made the size of the j government's debt or equity ownership determine the form of ; the corporate organization. However, they regarded the : i recommendation as a temporary expedient. We therefore recommend that a major effort be made to reduce the number of "mixed enterprises" with a view to their ultimate elimination, except in cases where the investment of foreign capital may depend on the use of such an organization form. 5 The consultants pointed out that the government corporation form is needed when substantial public interest is involved in order to have government control over the enterprise through general controls applying to all government corpo rations. However, when a bank lends to a private or public enterprise it does not acquire control through ownership of ; shares. The fact that the national Treasury provided the capital for public enterprises similarly requires no greater participation in policy decisions through ownership-control. Such control and participation creates unnecessary problems. The error of permitting the size of the government's financial participation to determine the form of the corpo rate organization lies in the assumption that the corpora- 84 Sherwood, op. cit., p. 31. 85Ibid., pp. 28-29. ! 574 | tion's capacity for violating the public interest is pro portional to the amount of the government's financial involvement in the corporation. Actually, however, the amount of the government's financial ownership bears no dependable relationship to the amount of the corporation's j involvement in the public interest. The corporation might ; be an ordinary business enterprise financed entirely by government funds or it might be an extraordinary enterprise, highly involved with the public interest, but entirely financed by private funds. If such a rule were adopted in the United States, the FDIC and the Federal Land Banks would not be regarded as government corporations because they are entirely self-owned. Thus, such a policy might not control corporations that most need control and might carefully control corporations which need wry little con trol. Consequently, the amount of government debt or equity ownership is not a reliable measure of the amount of con trol needed to protect the public interest and, therefore, is not a good device for determining whether or not an enterprise is to be classified a government corporation for purposes of control. This conclusion contradicts the asser tion of the Rangoon Seminar that completely owned public enterprises should be government corporations in order to be adequately controlled. More Important Reasons for Government Corporations i 575 j Robson confined the reasons for creating government corporations to four leading principles: freedom from legislative inquiry into management of day-to-day opera tions; disinterestedness of profits; a personal system which! |is outside the civil service; and a self-contained financial! Q C ; System. These characteristics are largely ignored when a ; government corporation is created because the government provides over fifty per cent of the capital. The primary purpose of a government corporation is to provide a public good or service which has not been pro vided by private enterprise. Creation of a government corporation because of an arbitrary amount of capital subscribed by government, ignores more important characteristics involved in the government corporation’s autonomy. Some types of corporate autonomy are necessary regardless of the amount of capital provided by government. Therefore, one might conclude that the need for corporate autonomy, rather than the amount of government-provided capital, should determine the form of the organization.^ Ofl Robson, op. cit., pp. 64-69. 87 Keynes summarized all this by saying, in 1926: "We must aim at separating those services which are tech nically social from those which are technically individual. J. M. Keynes, Essays in Persuasion (New York: W. W. Norton and Company, IncTT 136'SJ, pT HIT! : 576 I I I : ; The Ownership-Control Doctrine in the United States H. R. 8332, a bill to amend the Government Corpora tion Control Act, which was submitted to the first session of the 85th Congress, was an unsuccessful attempt to ; i correct some of the inadequacies of the ownership-control ! 88 ^ doctrine in the United States. Under the Government Corporation Control Act as amended, government corporations 1 designated as wholly-owned are subject to audit and budget controls. Mixed-ownership government corporations are audited but do not submit budgets. The new bill proposed to eliminate Title II of the Act, which applies to mixed- ownership government corporations, thus eliminating the distinction, for control purposes, between wholly-owned and mixed-ownership government corporations. In this way, the mixed-ownership government corporations were to be sub jected to the controls which applied to wholly-owned corpo rations. The originators of the bill, in effect, recog nized that ownership is not an adequate criteria for the exercise of control. Ironically, however, proponents of the bill justi fied extension of control on the grounds that the govern ment actually owned mixed-ownership government corporations, 88 U. S. House of Representatives, Amending the Gov ernment Corporation Control Act. Hearings before a Sub committee of the Committee on Government Operations, 85th Congress, Second Session (Washington: Government Printing Office, 1958), pp. 1-3. See Appendix I. ;even though the government owned no shares in them, because (1) the assets would return to the United States Treasury 89 in the event of liquidation, and (2) the government has a potential financial responsibility for the obligations of QA the government corporations. u Thus, while retaining the ilanguage of the ownership-control doctrine, that the Act would not apply to Government corporations which had repaid the capital invested by the government qualifications were added subsequently in which the ownership concept was broadened, in order to include more government corporations and a non-ownership criteria for control was introduced, namely— the potential financial responsibility of the gov ernment. Although the bill was not enacted, its language indicated considerable dissatisfaction with the ownership- 89 Expressed in conversation by Harold Seidman, Bur eau of the Budget. The argument assumes that ownership is la legitimate criteria of control because of the financial risk borne by the government. In this sense, the word "ownership" has been extended to mean ownership of the assets. 9(^The bill proposed that Section 102 of the Act Should state that "this Act shall not apply to any Govern ment corporation which shall have repaid all of the Govern ment capital invested therein, but it shall apply to any such corporation during any period which it possesses sta tutory authority to (1) issue or have outstanding obliga tions guaranteed in whole or in part by the United States, or (2) obtain government funds by appropriations, borrow ings, subscriptions to capital stock, or otherwise, or (3) utilize government funds which have been obtained in any manner covered by clause (2) of this sentence which have not been repaid to the government in full." ;control doctrine. Conclusion The widespread acceptance of the doctrine that ownership is a primary criterion for control, particularly in underdeveloped economies, is one of the most significant defects in the administration of public enterprises. The preference for control through public ownership not only creates special problems but is indirectly detrimental be cause it diverts attention from more appropriate adminis trative devices for control. No specific amount of govern ment can always control by other means. Control based on the criterion of ownership unnecessarily complicates the administration of control because the government does not always hold a sufficient amount of capital in the enter prise which needs regulation. The size of the government's financial participation should not determine the organiza tional form of public enterprise because the capacity of an enterprise to violate the public interest is not necessarily proportional to the amount of the government's financial investment. Moreover, control through ownership has created numerous problems associated with government par ticipation in management. Control should be determined by the need for autonomy and the necessity of insuring that public enterprises act in the public interest. England, France, and the United States have begun to recognize the i '.”” ’ 579 I I i l i fallacy of the ownership-control doctrine but most under- j developed economies still adhere to it. VII. OTHER METHODS OF CONTROL I The methods of control which have been omitted from ■ i i i bonsideration are perhaps as important as those which have i I jbeen considered. They are treated briefly in order that the chapter be reasonably comprehensive. i Competition Competition among public enterprises can act as a control over inefficiency and monopoly profits. Ownership, at the same time, may be used to redistribute wealth and 91 income. There also may be competition between public and private enterprise. In practice, according to Crosland, competition among public enterprises requires competitive managerial salaries, freedom to develop as private enter prises, and freedom to reinvest profit, negotiate wage agreements, and determine price and output policies.^ 91 Crosland, The Future of Socialism (New York: The Macmillan Company, 1957), pp. 486-487. Such a policy would require nationalization of the most prosperous industries first and would probably reduce efficiency. Crosland argues that the British electorate would not support wholesale nationalization for the purpose of redistribution. 92 See Robson, Nationalized Industry and Public Enter prise . op. cit. , pp. 122-123. Chapter V deals with compe tition and monopoly in Britain— there is relatively little competition between public and private enterprise in Eng land. : 580 j i i The next condition is that competition between pub- j lie and private firms should be, and should be seen to be, scrupulously fair. There must be no favouritism in the allocation of contracts, raw materials or labour; comparative performance must be the sole test — if the public companies cannot compete on equal terms,- they do not deserve to be set up. This also means i that new capital should not be supplied on tap from the j | Treasury at gilt-edged rates, as it has been to some of ; the nationalized industries. Private firms must borrowj from the. market; the State concerns should borrow from a public finance body . . . which charges full market | rates, and applies normal commercial conditions.93 There are numerous illustrations of competition between public and private enterprise.®*^ In India, the railways compete with private road transport, public producers of steel and fertilizer compete with private producers, public finance corporations compete with private lending institu tions, and public and private oil refineries compete with 95 one another. In Sweden, two of the trading agencies and numerous state companies compete with private companies. According to Verney, Sweden prefers competitive public enterprise to stimulate private enterprise. This is evi- Crosland, op. cit., pp. 499-500. 94The topic of competition between public and pri vate enterprise and among public enterprises is studied by Henry G. Aubrey in Coexistance: Economic Challenge and Response (Washington: TcTatio'nar Planning" "Ass rn. J 196T5Y pp. 95 Ramanadham, The Structure of Public Enterprise in India (New York: Asia~~Pub 1 ishing House, 1961)^ pi 111. : 58i ! j jdent from the creation of the Swedish Credit Bank to com- 96 pete with large private commercial banks. There are many's other illustrations of this policy in Sweden. In Canada, : public corporations have a monopoly in the production of I ■ ! ■synthetic rubber, atomic energy, and certain lines of munitions, but compete with private enterprise in provid- 97 ing railroad, telegraph, and express services. Italy’s j qo ENI competes with oil producers in the rest of the world. In the United States, the Tennessee Valley Authority and other public enterprises compete with private companies.®^ The State of New York Temporary State Commission on Coordi nation of State Activities, however did not regard compe tition as a significant device for controlling state author ities. The Rome Treaty establishing the Common Market promises to substantially increase competition among public enterprises and between public and private enterprises with in Common Market countries. As summarized by Rogissart and 96 Verney, op. cit., pp. 14-15. ^Musolf, op. _cft. t pp. 12-13. 98 Robert Keatley, loc. cit. 99 Tillo E. Kuhn argues that public enterprise in the United States "typically represents a powerful public monopoly. Other models, such as the firm in the competitive market or the General Motors prototype are usually inappro priate." See Public Enterprise Economics and Transport Problems (Berkeley: University of California Press, 1962), p. 18. iDumonlin, the terms of the Rome Treaty prohibit: 1. Quantitative restrictions designed to isolate a particular public sector of the economy from the market; 2. The establishment or continuence of State monopolies wherever these involve restrictions on international trade falling within the definition of quantitative restrictions. By the end of the transi tional period all prejudices affecting the procurement of supplies or marketing arising out of the existence of a State monopoly must have been abolished; 3. All subsidies or other assistance designed arti ficially to facilitate the marketing of goods and services produced by public undertakings within the Common Market; 4. All fiscal and social legislation which gives unfair advantages to a publicly-owned undertaking or group of undertakings; 5. All preferential arrangements affecting access to the money market.1®® Prohibiting national market restrictions, subsidies, supply monopolies, and other preferences for public enterprises will increase competition and make profits imperative. However, the rules of the Common Market cannot be inter preted to mean that public undertakings must always cover costs because there will be occasions when competition or errors of judgment result in losses. Rogissart and Dumoulin argue that profits are necessary, under present borrowing practices in which deposits are used for collateral, in order for public enterprises to compete on equal terms with Georges Rogissart and Andre Dumoulin, "Public Undertakings in the Common Market," Annals of Collective Economy. July-September, 1962, pp. 244-245. private firms for loanable funds. j The increase of competition will result in economies ; of scale and increased efficiency. Eventually, every pub lic enterprise will be required: ; [ j 1. To review its internal technical organization j with a view to modifying manufacturing methods and reducing production costs; I 2. To introduce new marketing methods as a result ; of the widening of the market, the abolition of customs protection and the aggressive sales techniques which will develop as a result; 3. To modify its legal structure to bring it into line with the 'European model'; 4. To make the necessary efforts to cooperate with other undertakings in order to avoid duplication of activities (this can be done, in particular, by the conclusion of agreements of limited scope or on specific subjects which take account of the new facilities available as a result of the development of the 'European model'); 101 5. To increase their size as economic units. Based on the experience of the European Coal and Steel Community, in which "the number of specialization agreements in force has increased rapidly, as has the num ber of acquisitions of share holdings in other companies 102 and the number of amalgamations," similar arrangements reminiscent of private monopolies can be anticipated within the Common Market. Rogissart and Dumoulin contend that these arrangements are devices for "cooperation." Regard- 101Ibld.. p. 247. 102Ibid. less of the appropriate term for it, product specialization is expected to deliberately encourage the division of labor ^nd increase the scale of manufacturing enterprises. Com- iercial agreements, in which markets are allocated for i specific types of goods or services, are anticipated and Several stages of horizontal and vertical integration can be expected. Technical cooperation would start with spec ialization in different types of research with patent rights being exchanged among enterprises which have success fully completed research programs. In conclusion, the introduction of free trade and the reduction of national barriers and preferences within the Common Market, will plunge many public monopolies into competition if this has not occurred already. Consequently, the nationalized government corporations of France, Italy, and perhaps Britain, will compete directly by 1970, except as competition is limited by various ''cooperation” agree ments . Audit The legislative post-audit, in which the auditor evaluates the legality of public expenditures, is a primary device for determining whether the intent of the legislature was actually followed by executive agencies. In the United States, the Comptroller General audits and settles the accounts of departments. However, a major exception to 585 > i this procedure was made for most government corporations by : i 1 j jthe Government Corporation Control Act of 1945 which j ; ^exempted government corporations from the disallowance jpower of the General Accounting Office, while requiring a i i icommercial-type audit as long as the government has a i 1Q3 ! jfinancial interest in the enterprise. Since the Treas- I : ury's capital in the Federal Land Banks was retired in 1952, i j jthey are not audited. In New York State, the State Constitution authorizes, but does not require, state or city comptrollers to super vise the accounts of public authorities. Authorities involv ing another state or nation are excluded from this provision unless the other jurisdiction consents to a post-audit.10^ Under Turkey's public enterprises control law 3460, the High Control Board, which is independent of the admin istrative hierarchy, conducts both financial and efficiency auditing. The High Control Board has the authority to audit any public enterprise in which the government owns over fifty per cent of the capital. The efficiency audit has been criticized often and a recent study proposed that it be 103 Fritz Morstein Marx (ed.), Elements of Public Administration (Englewood Cliffs: Prentice-Hall, 1959), pp. 558, 235-233. See supra, chapter VII, "Legislative Controls." ■^itew York State, op. cit. , p. 571. idiscontinued.105 | In India, the Auditor-General audits some public 'corporations while the auditor of others is appointed by the government. In the cases of two mixed-ownership corpo rations, an audit is conducted by both a government- i I appointed auditor and an auditor elected by the share- | ^holders.1®® This procedure differs from the practice in jBritain where the government corporations select the auditors. Robson supports Hanson's belief that Parliament should investigate the efficiency of government corporations Toward that end he has proposed an audit commission to hold efficiency audits at regular i n t e r v a l s . 1<-*7 The Comptroller and the Auditor-General in Britain do not examine the accounts of nationalized industries which are self- supporting . The French Commission de Verification des Comptes has acquired an excellent reputation. The president is appointed by decree and the Commission members consist of members of the Cours de Comptes and representatives of the Ministers of Finance and Economic Affairs. The Commission investigates the accuracy of the accounts and also makes Government of Turkey, A Study on the Operation of State Economic Enterprises in Turkey (Ankara! Govern- roent of Turkey, 1961), pp. 65-76. 106 Ramanadham, op. cit.. pp. 157-163. The author is skeptical of the benefits of efficiency audits. "^^Robson, op. cit.. pp. 203, 194, 587 'observations and suggestions regarding management in a imanner similar to the audit recommendations of the Comp- 108 troller General in the United States and the Parliament- authorized auditor in Canada. i jBudget ! ' In the United States, only wholly—owned government corporations are required to submit annual budgets under the Government Corporation Control Act of 1945. Mixed- ownership government corporations are exempt from all budget control. Congress, however, merely approves the proposed expenditures out of the revenues of government corporations and normally does not appropriate funds from general tax revenues.^^ In Canada, the Financial Administration Act of 1951 requires agency corporations, which are'usually financed by revolving funds, to submit an operating budget to the appropriate Minister. Proprietary corporations, as defined in the Act, are not required to submit a budget. The appropriate Minister must annually submit a capital budget to Parliament for each agency corporation after approval by ■^■^^Bye, Nationalization in France and Italy, op. cit., p. 114, 109 See section 87 of the Financial Administration Act of 1951, Appendix J. ^^See supra, Chapter VII, "Executive Controls." ; 588 ; I Til jthe Governor in Council. However, when the Act con flicts with provisions of the incorporating statute, the Act does not apply. The Life Insurance Corporation and the State Bank i : jin India are not required to submit budgets whereas varying ! idegrees of budget control are applied to the remaining i : i ; government corporations. Ramanadham criticizes the variety I j o f budget controls and suggests that any budget control may i be detrimental to the efficient operation of public business 112 enterprises. British government corporations have com plete freedom from budget controls which is somewhat surprising in that nationalization is popularly identified with increased government control. The British nationali zation acts, however, provide for settlement of capital expenditures while the Indian acts do not. The Swedish trading agencies are allowed to control their own operating budgets but their capital expenditures I 113 are part of the state investment budget. There is no budget control over Swedish state companies after the gov- ^--'see Section 80 of the Canadian Financial Admin istration Act of 1951, Appendix J. Also see Hodgetts in Friedmann, op. cit. . pp. 56, 65, and his paper presented at the Rome Congress of the International Political Science Association, "The Control of Public Enterprise in Canada," op. cit., p. 9. ■^^amanadham, The Structure of Public Enterprise in India, op. cit., pp. 163-164. 113Ve rney, op. cit. , pp. 36, 40, 46. ! 589 ! - 1 jernment initially obtains its shares, the expenditure for which is included in the state investment budget for the relevant year. i : I jControl by Consumers Of all the countries under consideration, the con- Itrol devices to represent the interests of consumers have i | 114 jbeen most varied in Britain. These consist of consumers1; I ! I Scouncils, consultative committees in the transportation industry, and consultative councils for the electricity and 115 gas industries. The Coal Consumers1 Councils are appointed by the Minister and consist of representatives of domestic users, industrial users, and the National Coal Board. The Councils meet five or six times annually and report to the Minister regarding topics ranging from complaints of individuals about prices and quality to import policies. The Minister also appoints the Transport Consulta tive Committees which represent agriculture, commerce, industry, shipping, labor, and local authorities. They meet about five times annually and report to the Minister who lays it before Parliament. The Consultative Committees for Robson, op. cit.. pp. 243-277; and Ramanadham, Problems of Public Enterprise. op. cit., pp. 120-155. 115 H. G. Griffith, "The Voice of the Consumer," Political Quarterly, April, 1950, pp. 171-183. ! 590 t |Transport consider an even wider range of topics than the Coal Consumers1 Councils. The Minister of Power appoints a representative i 1 consultative council for each of the gas and electricity t I !regions. The council size may vary from twenty to thirty ! jroembers. They are not called consumer councils because ’they not only present the board's attitudes and policies to j |the public but also convey consumer complaints and views | to the board.11® The chairman is an ex-officio member of -the Electricity Board or Gas Board. The achievements of the groups representing con sumers and other interest groups in Britain appear to be modest. This may be, in part, the result of their new ness. The system of consumer councils has been criti cized on the grounds that it is too complex because there are too many councils. The critics have suggested a single system of consumers' councils for all nationalized industries.117* The function of administrative tribunals has been to decide claims by employees regarding injury from R. Keif-Cohen complains, "The whole concept that a state-owned industry is there to render a service to the Nation who own the industry and consume its products is completely absent from the Annual Reports of the indus tries." Nationalization in Britain (2nd edition; London: Macmillan and Company, Ltd., 1961), p. 303. 117 Griffith, op. cit., p. 178. 591 ^nationalization. In only one case has an administrative tribunal heard complaints by consumers. The advisory coun cils, such as the Air Transport Advisory Council, do not \ * represent consumer interests but must investigate complaints iabout the service of nationalized air lines. i | In France, Sweden, and Canada there is no general i ' ■system of consumers1 councils as there is in Britain. In ! jSweden, however, the twenty-five-member Railway Commission gives advice on matters concerning customers. In India, there is nothing in the corporation acts regarding con sumer control. According to Remanadham, the consumer "is 118 the most forgotten interest in Indian corporation acts." Personnel In Britain, the personnel of government corpora tions are not part of the civil service. Nevertheless, some government intervention in the form of ministerial 119 directives occurs. In the United States, however, the employees of government corporations are considered employees of the government although they are often exempt, either entirely or partially, from the regulations applying 1 1 8 Ramanadham, The Structure of Public Enterprise in Indja, op. cit., p. 167. 119 Robson, Nationalized Industry and Public Owner- s_hip, op. cit. , pp. 67-77. 592 : to Federal employees.120 The employees of trading agencies in Sweden are civil servants although the employees of state companies ! !are not. With the exception of complete security of tenure,; i i jthe personnel of state companies have conditions of employ- ' j jment which are similar to the conditions of employment in I 1 91 'trading agencies. £' - L In France, the introduction of government corpora tions through nationalization has given industrial workers the advantages of civil servants without reducing the 122 advantages of industrial workers in private enterprise. The best solution, however, may be to improve the status of civil servants. The rapid improvement in the status of employees in nationalized industries occurred during the early years after nationalization during which the boards were dominated by the workers under the tripartite, syn dicalist procedure for selecting board members. The pro cedure has now been revised and workers no longer dominate 123 the boards. As in Britain, the employees of French 120 Harold Seidman, "The Government Corporation in the United States," Public Administration. Summer, 1959, pp. 108-109. 121 Verney, op. cit., pp. 37-40, 50-52. 122 Bye, Nationalization in France and Italy, op. cit., p. 153. 123 Einaudi, Nationalization in France and Italy, op. cit. , p. 30. nationalized industries are not civil servants. j : Legislative Committees There are two specialized bodies of the British {Parliament which have authority to inquire into the {nationalized industries— the Public Accounts Committee and jthe Select Committee on Nationalized Industries (Reports and ! 124 ' Accounts). The reports of the Public Accounts Committee : i •: I Are limited to study of the accounts of nationalized industries which are not self-supporting and, therefore, are examined and certified by the Comptroller and the Auditor-General.The Select Committee examines the accounts of the remaining nationalized industries. The Select Committee, however, has not had sufficient staff to study the accounts of all nationalized industries and has issued reports on only four industries since 1955. In addition, some critics have asserted that a committee of Parliament cannot evaluate the efficiency of nationalized industries expertly and that the Select Committee has over burdened itself by investigating both policies and details. If the purpose of the Select Committee is to investigate policy formulation, the Minister is already responsible to 124 Hanson, Parliament and Public Ownership, op._ _cit. , pp. 125—174. Also see Kelf-Cohen, op. _c_it. , pp. 159-194. 594 {parliament for providing this information, according to the critics.-1 -2® Ramanadham holds that an inherent feature of the public corporation is its freedom from direct Parlia- j jmentary accountability except through the Ministers. In Canada, Parliamentary committees have been used {sporadically. The Committee on Public Accounts receives ! jail the financial records of public corporations but 1 ^appears to regard select committees as the proper vehicle for conducting thorough investigations. Consequently, there is no systematic study of corporate activities by Parliament.12^ As in Britain, public corporations which are not self-sufficient receive more careful attention by Parliament and the Auditor General. Both Hodgetts and Musolf agree that the most promising device for improving Parliamentary accountability is the more effective use of standing and select committees. Currently, there are fourteen standing committees, many of which are inactive. - 1 -2® Parliamentary committees are less important in Sweden today than in the past because of the increase of party power. Nevertheless, the Budget or Supply Committee controls investment programs and the committee of Parlia- 126 Ramanadham, Problems of Public Enterprise. op. cit., p. 130. 127 Musolf, op. cit., pp. 117-130. 128 Hodgetts, "The Control of Public Enterprise in Canada," op. cit. , p. 14. 595 jmentary Auditors inspects the accounts of the State’s [administration including the trading agencies. Critics [argue that the Parliamentary Auditors tend to accept the |reports of the General Accounting Office.Parliament 1 jhas no general right to directly examine the accounts of j [State Companies. i In the United States, three standing committees of I Congress review the activities of government corporations-- the Committee on Appropriations; the Committees on Govern ment Operations; and legislative committees concerned with the activities of the enterprise. ^0 appropriations committees review and approve or disapprove the annual budget of government corporations and conduct hearings which may review all aspects of operation and management. The Committee on Government Operations reviews and examines the reports of the Comptroller General. Legislative Debates and Questions In countries with parliamentary systems of govern ment, the extent to which Ministers are responsible to Parliament for the actions of government corporations is a crucial problem. In Britain, the practice of partial ministerial responsibility has emerged in which the ■ 1 OQ Verney, op. cit. , pp. 59-62, 71-72, 79-82. Supra, Chapter VII, "Legislative Controls." 596 Ministers answer questions relating to policy, but refuse •to answer questions relating to day-to-day administration. This procedure was set forth by Herbert Morrison in 1947. More detailed questions would increase centralization and ; ireduce efficiency within public enterprises. Robson feels : 131' jthat the present practice is widely accepted and correct.■ A similar procedure is used in Canada, but the few ness of the questions and the tendency for the questions to involve only a few of the largest government corporations leads Musolf to conclude that ,rthe full potentialities of the question period as a control mechanism are not being realized."^32 jje argUes that the present procedure for answering questions was established when secrecy was needed because government corporations competed with other firms, but that most government corporations are now monopolies and do not need to maintain secrecy. This position disre gards the point, mentioned above, that excessively detailed questioning increases centralization and decreases efficiency. Questions by members of the Swedish Parliament are limited by the Constitution which indicates the weakness of Parliament in Sweden compared to the British Parliament. 131 Robson, op. cit. , p. 176. Also see Hanson, Parliament and Public _0wne_rship, op. cit. , pp. 51-124. i qo Musolf, op. cit., p. 105. 597 ! I j Nevertheless, a wide range of topics is raised through questions. ; There are numerous occasions in Britain during j I i iwhich debate on government corporations can occur. At the 1 I ! {opening of Parliament, at the time of adjournment, and on j jsupply Days the nationalized industries may be discussed. Three days each year are usually designated for considering j jthe annual reports of the public corporations. In Canada, government corporations may be discussed when the House rules do not limit the subject matter for debate and when corporate affairs is the order of business. There are many specific occasions within these two general 333 categories, on which public corporations may be discussed. VIII. CONCLUSION Since each section of the chapter has been sum marized, another summary would be unnecessarily repetitious, but a few concluding observations may be helpful. First, the fact that the chapter deals with controls may give readers the impression that the solution to the problems of public accountability is more control instead of better control which has been suggested throughout the chapter. A {tentative proposal toward this end is that reporting eon- l33Ibid., pp. 109-117. itrols are more effective than decision-making controls for ! ; ■achieving efficiency and avoiding violations of the public ] | linterest.134 However, it is not the intent of this chap- j ter to emphasize the importance of controls at the expense of emphasis on the need for corporate autonomy. I ! ! Second, the wide acceptance of the idea that owner- i ; ship is a valid criterion for control appears to be a sig nificant weakness in the administration of government corpo rations because it has resulted in direct participation in management by government officials including Ministers, and has diverted attention from more effective control devices. In addition, the practice of making the size of the govern ment’s financial contribution the criterion for the applica tion of control and the criterion for the legal designation of the form of the enterprise, does not necessarily intro duce the most important criterion for determining whether an enterprise is a government corporation. A conclusion of this study is that ownership is not a necessary device for con trol. Third, various criteria for budgets and audits are Although this chapter has not dealt with the prob lem, the need for additional control institutions in some countries should not be ignored. Ramanadham has strongly Urged that India should have semi-judiciary bodies to regu late the prices and output of monopolistic public enter prises. No public corporations are currently subject to this control in India. He attributes this to the native assumption that public monopolies are inherently good. The ^Structure of Public Enterprise . . . , op. cit. , pp. 257- U S S 'T jS'.-'— " | 599 ! used throughout the world. In Turkey, public enterprises gre audited by the government if it owns over fifty per j cent of the capital. In Britain, government corporations are audited by the government only if they are not self- supporting. Similarly, British public corporations do not j submit budgets but wholly owned government corporations in i jthe United States submit business-type budgets annually i ^nd all government corporations are audited in the United i j States as long as the government has a financial interest. This suggests that the criteria for the application of con trols have not been adequately identified. Finally, the data on control over government corpo rations is uneven in quality and is unavailable for many countries. An equally difficult problem is the fact that the available information is usually supporting data in discussions primarily devoted to other topics and, there fore, is not a systematic, topical description and analysis of the structure and effects of control procedures. i CHAPTER XI | SUMMARY AND CONCLUSIONS ! I. SUMMARY i : I ! i (introduction | This study is an investigation of the economic func-: i : I : jtions of government and the role of government corporations in the economic development of both industrialized and emerging economies. As such, it is a study in institutional economics. The analysis is a continuation of the great and ancient debate over the virtues of public and private enterprise, over the extent to which political bodies are suited to the conduct of business. Numerous scholars including Robson, Hanson, Rossi, and even Keynes have attested to the importance of semi- autonomous government corporations, not only because of their peculiar necessity for responding to the public interest but because the institution is widely used in both industrially advanced and underdeveloped economies. A glance at current newspapers indicates the contemporary significance of government corporations. In 1962, Burma s i nationalized the British oil companies and is nationalizing retail firms and the banking system. Italy converted its 600 601 ; t ; jelectric power industry into a government corporation. In |1960, the Egyptian government purchased about three [quarters of the industries in the economy. Since inde- j : jpendence Indonesia has nationalized about three quarters i iof its enterprises also. Recently the facilities of the International Telephone and Telegraph Company were expro priated by the Brazilian state of Rio Grande do Sul. In the United States, a new Communication Satellite Corpora- j : tion was created in February, 1963. Government policies such as these, regardless of how wise they may be, create immediate problems of administration and operation of government corporations. The findings of this study indicate that the sig nificance of the government corporation is woefully under estimated in the western world. In the future it undoubt edly will continue to be a major institution in emerging economies because it is a middle-of-the-road compromise between the institutions of capitalism and communism. The analysis of this investigation proceeds from the general to the specific, from, for example, the func tions of government to the functions of government corpora tions. The government corporation is regarded as a generic, international institution which is identifiable in most economies. This study differs from others in that other jtypes of public enterprise are not emphasized. In addition, the government corporations initiated by a.11 levels of ! 602 j igovernment are included whereas most previous studies have considered only the public corporations at one level of government. The Reasons for Government Performance of Economic j i j Activ ities ! For conceptual clarity, the reasons for creating Igovernment corporations should be clearly distinguished [from the reasons for government participation in the econ omy. Once the need for government participation in business is established, the government’s preference for the corporate form of public enterprise depends on the structural and operational advantages of the government corporation over other forms. The reasons for creating government corporations, therefore, are the advantages of the government corporation over the trading agency, the departmental enterprise, the state company, and the public contract. The reasons for government performance of economic activities, on the other hand, are numerous but seem to fall into three major categories of inadequacy within the private sector of the economy: (1) the lack of private goods and services; (2) their inefficient production; or (3) their j maldistribution, in the judgment of the government. The government attempts to correct these inadequacies through [three types of economic activities: (1) regulation of | 603 [private enterprise; (2) facilitating the operation of pri vate firms by prividing credit, research, and subsidies; jand (3) direct operation of public enterprises. ! 1 jrhe Economic Functions of Public Development Corporations i | The government corporation is utilized at all I llevels of government. Perhaps the roost significant fact is [that the public development corporation is a post-World War i l l phenomena. Nearly all the public development corpora tions which are discussed in this study were created after 1945, during the revolution of rising expectations. At the international level is the International Bank for Recon struction and Development (IBRD), the Internationsl Development Association (IDA), the International Finance Corporation (IFC), the Inter-American Development Bank (IADB), and the European Investment Bank (EIB). Each makes loans for investment in various development projects in underdeveloped countries. At the national level the functions of government corporations vary according to the country’s level of economic development and its ideals. In advanced economies, their functions are usually limited to providing for widely recognized group needs such as public utilities, river basin development, banking, and projects unusually involved with the public welfare. In underdeveloped countries, how ever, government corporations commonly engage in trans- 604 jportation, communication, harbor development, mining, raanu- jfacturing, processing, wholesaling, and retailing in addition to the public utilities, banking, and national defense. Regional development corporations serve customers [in more than one political jurisdiction for the purpose of i I [strengthening and diversifying the area's productive 5 i 'capacity through projects such as river basin development. At the state level of government in the United States, government corporations, usually under the name of public authorities, provide credit, build industrial estates, encourage firms to locate in the area, operate toll roads, build schools and other public buildings, operate port facilities, and provide water and power. There are several thousand local industrial development founda tions which have been created for the purpose of improving employment opportunities in local communities. There was no attempt in this study to investigate thoroughly the use of government corporations by state governments in countries other than the United States. However, Ramanadham's study shows their use by states in India (Chapter IV). Objections and Limitations to Government Economic Functions The controversy over the proper economic role of government extends back in history to Plato and Aristotle. Aristotle argued that individuals lose much of the incentive, jresponsibility, charity, personality, and affection when j jcommon ownership of property replaces private ownership. | : |The system creates discord and friction over the proper i I jdistribution of the product. i Much later, Adam Smith argued that government I ; jinterference, except for maintaining law and order, defend- I ling the nation, providing public utilities and public edu cation, and regulating banks, reduced the efficiency and ^production of a competitive economic system. Mill agreed with Smith's reasoning and added that government activities endanger the personal liberty of individuals. The neo classical economists were concerned with the inability of private enterprise to maximize human welfare and with the ways through which government intervention might increase economic welfare. Today, the most controversial form of government intervention, nationalization of entire industries, is severely criticized by its most ardent supporters of a few years ago. Although the Labour Party in England still officially supports nationalization, most of the intel lectual leaders of the Party have abandoned this means of achieving the aims of socialism. The trend in Europe sug gests that improvements in the business functions of govern ment may be achieved most effectively, in advanced economies at least, by improving the control of enterprises rather | fhan by direct ownership and operation of business enter— | 606 iprises. This pragmatic conclusion has required some raodi- jfication of traditional socialist ideals. i I i The Role of the Government During the Take-Off Stage in ;the United States and India | Because of the differing economic environments dur iing the take-off stages of the economies of India and the ! jUnited States, the role of the government appears to be i Inecessarily larger in the economy of India, at least in some sectors, if an identical rate of growth is to be accomplished. This is a very tenuous generalization for many reasons, including the fact that there is little assurance that the 1840—49 decade in the United States is actually comparable to the 1950-59 period of economic development in India. In spite of one’s hesitance to make generalizations, however, the data shows that in several ways the role of the government of India was considerably larger during the years compared than the role of the government of the United States. Government expenditure was four times larger in India, government employment six times larger, and the government owned and operated a significant number of manufacturing and other enterprises, although their output and employment was relatively small. ■Furthermore, there is a strong probability that these figures underestimate the actual role of the Indian govern ment and that the trend of increasing government functions jrelative to the private sector, will continue. In spite of | jthe larger role of government in India, GNP in the United i 1 iStates increased fifty-three per cent as opposed to thirty- ' three per cent for India. Per capita income in the United j i States increased twenty-six per cent while in India the increase was eight per cent. j Principles of the Government Corporation ! No definition of the government corporation is com pletely adequate. The definition must clearly distinguish the government corporation from private corporations as well as from other forms of public enterprise. Complete ownership is not a universal characteristic because some government corporations have both public and private owners while others are self—owned. In the United States, Justice Story, in the Dartmouth College Case, indicated that government corporations were wholly owned by the government. However, wholly owned state companies in India are not re garded as government corporations. Government corporations, also, are not always self sustaining since they may receive subsidies or levy taxes. Furthermore, the government corpo ration is autonomous, in various degrees, only when com pared to executive departments or other forms of public | enterprise which are subject to more regulation. The personnel may or may not be government employees. The pub lic corporation is likely to be created by special legis- ! 608 jlative act but some are incorporated under general public j jincorporation laws, by executive decree, or under general I jlaws for incorporating ordinary business enterprises. The jcontrols over government corporations also are not uniform. j ! In view of the lack of universal distinguishing I i jcharacter istics, a new definition, which relies in part bn previous definitions, is proposed with the hope that it Will include most of the organizational institutions in t various economies which are commonly regarded as government corporations. A government corporation is a legal entity which is initiated by representatives of the public, including a government corporation; is incorporated by either a national or state government for a public purpose through general or special legislative act or executive decree; is controlled by the government but is more autonomous than the executive department and less inde pendent than private business corporations; obtains a major part of its funds from sales, but usually is at least partly financed by the initiating government. The advantages of government corporations over other forms of public enterprise include financial, juris dictional, and administrative advantages. The financial advantages center around freedom from financial restrictions placed on departmental enterprises. Common financial restrictions include debt limitations, audit and budget requirements, expenditure limitations, and dependence on appropriations. Jurisdictional advantages include avoiding interjurisdictional coordination problems and protection from political demands. The administrative advantages 609 i [include increased efficiency in economic functions, freedom i Ifrom departmental personnal policies, and freedom in making i contracts. i I I lOther Forms of Public Enterprise j : Public enterprise includes, in addition to govern ment corporations: (1) the departmental enterprise; (2) i jthe trading agency; (3) the state company; (4) the manage- I - j Iment contract with private companies; and (5) the contract for research and development. Departmental enterprises are financed from annual appropriations, are subject to audit, budget, and accounting controls which uniformly apply to departments, are staffed by civil servants, possess the sovereign immunity of the state, and usually are directly subordinate to the head of the department. The trading agency is a Scandinavian institution which has some characteristics of both the department and the government corporation. The trading agency is not a legal entity but has freedom in financing day-to-day opera tions, some freedom from departmental budget and audit control, and freedom from direct control by the department head;. , The state company usually has mixed ownership with both public and private shareholders appointing directors. It is a legal entity which may be created either by special 610 ' legislative act or under general laws authorizing the 'establishment of private corporations. The state company [may issue stock or borrow, either from the government or [from capital markets and has more freedom from government j [control than government corporations. | The management contract with private companies for j [operating a public enterprise is a comparatively new j , [device. The contractor is free from statutes applying to i governmental agencies and his employees are not public employees. He is given full authority, within the terms of the contract, to employ and dismiss personnel, determine salaries, procure supplies, and determine operating poli cies . The contract for research and development differs from the management contract in that the company under con tract does not operate a public enterprise. The use of this device has increased greatly since World War IX and was the subject of considerable criticism in a recent report by the Bureau of the Budget. History of National Government Corporations in the United States Except for the Smithsonian Institution and the Panama Canal Company, the Federal Land Banks, which were created by the federal government in 1916, were the first government corporations to be created by the federal govern- 611 j iment in the United States. They were financed primarily j :by the Treasury but these and subsequent subscriptions were ■entirely retired in 1947, however, and the Federal Land j ; jBanks are now privately owned. Several emergency corpora tions were created in 1917 and 1918 to facilitate the con- ! ; iduct of World War I. They were financed by the government j ; land were controlled through appointment of the directors. jwith the exception of the Emergency Fleet Corporation, ' which was dissolved in 1936, all the emergency corporations commenced liquidation shortly after the end of the war. Since this rather abrupt introduction of the government corporation in the United States, the degree and kinds of government control have tended to increase, the culmination of which was the Government Corporation Control Act of 1945. During the 1920's, the only government corporations to be created were the Federal intermediate credit banks and the Inland Waterways Corporation. The 1930's, however, was a decade during which fifty-five per cent of the cur rently active government corporations were created. The most well known of these are the Tennessee Valley Authority and the Federal Deposit Insurance Corporation. A rather long list of government corporations which are now inactive were created during World War II. Since then, the Saint Lawrence Seaway Development Corporation was the only active government corporation to be established. The Communication Satellite Corporation is a privately owned corporation with i 612 ; many features of a government corporation. Prior to 1945, most of the national government corporations were chartered under the general incorporation ; I ' jlaws of a state. Those which are still in existence have I been rechartered by Congress under the provisions of the \ government Corporation Control Act. There were many i i federal—State conflicts during the 1930's because Congress * ! “ failed to specify the relationship of government corpora- 1 J tions to state taxes and regulations. The Morgan case, in which the removal of Arthur E. Morgan as the first director of TVA was upheld by the courts in 1940, established the general executive authority and responsibility of the Presi dent over government corporations. Government corporations are exempt from the disallcw- ance power of the General Accounting Office, but, since 1945, a commercial type audit has been required as long as the government has a financial interest in the enterprise. This includes wholly-owned and mixed-ownership government corporations as designated in the Government Corporation Control Act. Even though the government has no direct financial interest in some government corporations, audits have been continued in all except the Federal Land Banks. Legislative control is also exercised through restriction on administrative expenditures in the appropriations acts. Congress reviews the budgets of government corporations and at least three standing committees review and investigate 613 ] itheir activities. j There are seven types of executive control. First, , the President has overall responsibility for the functions i i ! jof government corporations. Second, wholly—owned govern— t : J . j ment corporations submit annual business-type budgets to jthe Bureau of the Budget which has limited authority to ichange the estimates. Third, four types of financial jstatements are submitted to the Treasury and published in the Treasury Bulletin. Fourth, the President of the head of the supervising department appoints the members of the boards of directors of wholly-owned government corporations. Fifth, policy statements must be cleared by the Bureau of the Budget in order to insure that they are in accord with the official program of the President. Sixth, a department designated by the incorporating statute supervises the government corporation. Annual reports are usually sub mitted to the supervising department head. Seventh, the personnel of government corporations are employees of the United States although the employees of specific enter prises may be exempt from some or all of the provisions of the competitive civil service and the classification system. The General Accounting Office has consistently opposed the use of government corporations except for the •*-As designated in the Government Corporation Con trol Act. Appendix H. jmost necessary purposes on the grounds that congressional |controls are weakened. The executive branch of the federal government opposes the creation of additional mixed- ownership government corporations because there is jinadequate budget control over them. i | Congress has given additional emphasis to making E jgovernment corporations self-supporting and has altered i jaccounting procedures in order to inform itself whether the enterprise is self-supporting. The TVA, for example, now pays interest on appropriated funds. Most of the government corporations (87 per cent) in the United States provide credit or credit-related services and are concentrated in the field of agriculture. National river basin development programs since the crea tion of TVA in 1933 have been performed by executive departments rather than by government corporations. Price and Profit Policies of Public Enterprise There are many arguments for profits in public enterprises. Profits may be justified to: (1) increase public revenue; (2) offset the loss of tax revenue from private firms which have been nationalized; (3) avoid an inequitable distribution of the burden of development; (4) prevent misallocation of resources toward the public sector (5) increase the incentive of managers; (6) increase eco nomic growth; (7) attract private lenders; (8) subsidize 615 1 I Ipublic enterprises which have deficits; and (9) offset the j |loss of tax revenues from private firms which have been jnationalized by the states. ! i Most governments favor a break-even price policy 'over a period of years. Britain has adopted this policy. j jln this connection, Lewis has argued that any other policy i jwould contribute to either inflation or deflation and would I idistort investment. There are also arguments for deficits in public enterprises. The enterprise, it is argued, should not be required to pay all of the interest cost of nationalization if the government paid more than the assets are worth. The introduction of competing products which make public products obsolete may cause justifiable losses. A loss also may be permitted in order to reduce a balance of pay ments deficit. Whenever the marginal cost pricing rule is applied in decreasing—cost industries public enterprises incur deficits. Temporary losses also may be permitted while labor in low productivity regions moves to other regions. Finally, the government may wish to subsidize certain consumers or maintain self-sufficiency during war. In 1962, the Theory Committee on Price Setting in Public Undertakings of the International Committee for Research and Information on Collective Economy published its final report. In spite of all its criticisms of a break-even price policy, the Committee held that the | 616 ; iaverage unit cost should be the starting point of all ■ (considerations relating to price setting and conceded that Ipublic undertakings in underdeveloped countries usually I i jmust obtain reinvestment funds from profits because govern- ; ments do not have tax revenues for reinvestment. Contra- idictorily, the report also argued that most public enter prises would operate with losses in order to have [reserves of productive capacity. Elsewhere, the report recommended that public undertakings should cover costs, including interest payments, but avoid profits. The Com mittee also held that price and profit decisions should be made by management and that government should not issue price directives which would affect the "character of prices." Administrative problems connected with pricing and profits include the problem of incentive when profits are transferred to the government instead of being reinvested by the enterprise. In some cases, the government and the public do not receive adequate information about price and profit policies. The government also must be able to penalize managers and board members who do not perform their responsibilities satisfactorily by removing them from office. One of the most controversial administrative prob- ; lems is the question of whether profits should be directly reinvested or pooled for allocation by the central govern ment. 617 ! In New York State, public authorities have been i self-supporting and have rejected proposed projects which i jdid not appear to be self-supporting. They generally have been free from interference with rate-setting. Development banks, particularly private development banks, are usually jexpected to be profitable in order to attract capital from ! [private lenders. i j i : Investment Criteria and Priorities The investment criteria of development projects are the essential characteristics which must be present in a project in order for the desired economic goals to be accomplished. The priority of investment projects is the rank or order of precedence assigned to potential projects for the purpose of selecting the most important new under takings. Since economic goals are not the same in every economy, the investment criteria which are used also vary among economies. Individual enterprises, whether they are public or private firms, usually adopt micro-criteria. National and international organizations are more likely to consider macro-criteria. An individual enterprise may find that a particular criterion conflicts with other criteria which it wishes to satisfy. In addition, the criteria held by national and international organizations may conflict with those pursued by particular firms. 618 | In the rather voluminous literature on the criteria ' of investment projects a number of topics have received jextensive attention. They include: (1) the selection of i j jprojects which have or will have comparative advantage; (2) 1 'the issue of whether economic growth should be balanced or ! lunbalanced; (3) the question of whether capital-intensive j ; or labor-intensive methods should be used; (4) the impor tance of foreign exchange earnings and savings; (5) the need i ! for considering the social marginal product; (6) the desirability of adopting projects in an efficient sequence; (7) the usefulness of the capital-output ratio; (8) the significance of agricultural investment; and (9) the rele vance of benefit-cost analysis. The International Bank for Reconstruction and Development (IBRD) often has been criticized for ignoring macro-criteria by financing only "bankable” projects. In spite of this criticism, however, the IBRD has emphasized investment in projects with high social marginal product. The projects financed by IBRD have been basic public utilities which are widely recognized to have low commer cial profitability. The limited funds of the World Bank have not been used, however, for social investment projects such as education, housing, and water systems because higher priority has been given to basic public utilities. The United Nations Special Fund has given high priority to water development, research (primarily in agriculture), and 619 (training (primarily in industry), with less emphasis than i :is given by the IBRD to transportation and the generation i land distribution of electricity. j I Although Boskey holds that an identifying charac- i jteristic of development banks is their adoption of development (macro) criteria, they appear to be more con cerned with micro-criteria than the other institutions under consideration. The charters do not specify the macro-criteria which they allegedly apply. Finally, scholars seem to be reflecting the exper ience of many developing nations, such as Pakistan, which are recognizing that education and agriculture, among other investment alternatives, generally have been given insuf ficient priority to adequately satisfy long-run development goals. The Public Accountability of Government Corporations Public accountability is the control process which is intended to insure that government corporations, in the long-run, make an optimum contribution to public welfare. The short-run purpose of public controls is to: (1) inform the public and the government about the contributions of public enterprises toward the achievement of certain public i objectives; and (2) prevent possible violations of the public interest through the use of penalties and restric tions on the decision-making powers of the management. 620 ; j ; [Thus, public controls can be usefully divided into two i i categories: (1) reporting controls, and (2) decision making controls. i i I Public and private enterprises are often said to ibe accountable if they are responsive to the public jinterest. Government corporations are said to be more j j laccountable when new controls are introduced, meaning that i i jthey are more responsive to the public interest. In the j short-run, however, it is quite possible that an account able government corporation is not acting in the public interest. Therefore, the phrase "public accountability" should be used to refer to the control process rather than to the responsiveness of the enterprise to the public interest. Corporate autonomy and public accountability are often considered contradictory objectives. Fortunately, these goals are not necessarily incompatible. Complete autonomy is not essential for economic efficiency. Con trols may, but do not necessarily, reduce efficiency. Therefore, a key issue in the successful operation of pub lic enterprises is the selection of the best control devices. Toward that end, a tentative proposal is that reporting controls are more effective than decision-making controls for achieving efficiency and avoiding violations of the public interest. The Temporary State Commission on the Coordination of State Activities in New York State gave 6 21 considerable attention to the importance of reporting con trols. If the purpose of control over government corp orations is to Insure that their action is in the public Interest, then controls should be used to: (1) prevent actions which are detrimental, in the long run, to the pub lic interest; and (2) stimulate and require positive con tributions to the public welfare. Therefore, the criteria for the use of control are: (1) the high probability and the Importance of potential violations of the public int erest, and (2) the amount of external stimulus or compul sion needed to guarantee positive contributions to the public welfare. The findings of this study indicate that insuffic ient study has been devoted to the criteria for control. Consequently, the unwise use of controls reduce the capacity of the government corporation to achieve the pub lic interest. Ramanadham agrees that the optimum achieve ment of efficiency and public responsibility is likely to be impossible, in such cases, because of the improper, excessive, or insufficient use of controls. Unfortunately, no attempt has been made in this study to systematically categorize the types of potential violations of the public interest which are anticipated throughout the world or to evaluate the effectiveness of various control devices for preventing the violations from occurring. In this regard, 622 the organizational structure may provide effective Internal controls which minimize the need for external controls. The wide acceptance of the idea that ownership is a valid criterion for the application of control appears to he a significant weakness in the administration of govern ment corporations because it has resulted in direct part icipation in management by government officials including Ministers, and has diverted attention from more effective control devices. More important, the practice of making the size of the government's financial contribution the cri terion for the application of control and the criterion for the legal designation of the form of the enterprise, does not necessarily introduce the most important item for determining whether an enterprise is a government corpora tion. The findings of this study indicate that ownership is not a necessary or desirable device for control and is not a good indication of the need for control. However, even complete ownership need not reduce efficiency if the appropriate controls are used. A wholly-owned government corporation may be efficient, competitive (in certain industries), and profitable. A wide range of criteria for audits and budgets are used throughout the world. In Turkey, public enterprises are audited by the government If it owns over fifty per cent of the capital. In Britain, government corporations are audited only if they are not self-supporting. The j 623 British public corporations do not submit budgets but i wholly-owned government corporations in the United States submit business-type budgets annually and all government jcorporations are audited as long as the government has a t ^financial interest. These wide differences suggest that i ■ 'the criteria for the application of controls have not been (adequately identified. ! | : ! II. CONCLUDING OBSERVATIONS The Effectiveness of the Government Corporations Numerous conclusions which were made regarding the topics of each chapter have been summarized in the proceed ing section. A remaining task is to evaluate the effec tiveness of the government corporation as an institution for promoting economic development. This task can be divided into two evaluation problems: first, to measure the degree of effectiveness of the government corporation in achieving its goals; and second, to determine whether another form of enterprise could achieve these goals more successfully. Such an evaluation requires: (1) a knowledge of the goals which the government corporation is trying to achieve; (2) a measure of the effectiveness with which these goals are achieved; and (3) the application of the measur- device to all forms of public enterprise in order to com pare them. Since most government corporations have several goals, including some macro-goals, the evaluation must 624 I . ; jmeasure the degree of achievement of both macro- and micro- ; goals. The scope of this study does not permit undertaking ; | such evaluation. Although some problems and suggestions have been considered, the study also is not a treatment of | ; i limitations to the effectiveness of government corporations , jor a review of possible means of improving it. Neverthe less, a few comments may be helpful. I The goals of government corporations vary from one enterprise to another. In this study, moreover, there has been no separate discussion of the goals of government corporations although the most important goals have been considered in various places. Some common goals of govern ment corporations are to: (1) make profits; (2) avoid both profits and losses; (3) produce efficiently; (4) be more responsive to the public interest than private enterprise; (5) invest in industries which have a comparative advan tage; (6) create foreign exchange earnings or savings; (7) invest in production where the ratio of the social marginal product to the social marginal cost is highest; and (8) encourage private enterprise. The first, second, fifth, and perhaps the third goals are relatively easy to evaluate because monetary units of measurement can be used. Progress; toward achievement of the remaining goals is more difficult to measure. Although there are a host of other influences, the 625 findings of this study indicate that the progress of a government corporation toward the goal of efficiency is Influenced by (1) the organizational characteristics of i jthe enterprise, and (2) the quantity and quality of the controls under which it operates. In the proceeding jchapter, the use of reporting controls, as opposed to decision-making controls, was suggested for encouraging efficiency of production. A certain set of possible organizational character istics will be more effective than any other for performing given economic functions. Thus, a set of criteria for us ing a government corporation with certain features could be usefully developed. Such criteria would indicate the functions which a government corporation with a given set of characteristics could perform more effectively than with other characteristics. Practitioners with certain functions to accomplish then would have guidelines for structuring an enterprise to perform them. The government corporation is not an inflexible institution which has identical structure in every instance. The structure can be varied in order to satisfy the particu lar needs within an economy. In the case of development banks, for example, the enterprise may need to provide tech nical assistance and entrepreneurial activities as well as credit. The variety of functions which may be necessary can be performed most effectively if the needs are anticipated 626 by pre-incorporation studies and the structure of the enter prise is tailored to promote these goals. Periodic evalua tions of operational effectiveness can be conducted by executive or legislative investigatory bodies as new iobjectives are adopted and old ones are abandoned. 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"The Poverty of Nations," The Atlantic. October, 1962, pp. 47-53. Hayes, Samuel P. "Give Now— It Pays Later," Saturday Review, December 29, 1962, pp. 33-34. "Investment and Growth," International Financial News Survey. December 21, 1962, p. 405. Mantanelli, Indra. "Power Octopus," Atlas, September, 1962, pp. 194-209. Pearce, John E. "The Creeping Conservatism of TVA," The Reporter f January 4, 1962, pp. 31-35. Saulnier, Raymond J. "For Prosperity in U.S.— A New Prescription," U.S. News and florid Report. July 16, 1962, pp. 90-92. "What the Crisis in Steel Means," U.S., News .and World Report f April 23, 1962, pp. 37-41. "The Wise Way to Wealth," Life Magazine, October 6, 1961, p. 4. 653 D. ESSAYS, ARTICLES IN COLLECTIONS Ahumada, Jorge. "Investment Priorities," Economic Develop ment for Latin America. Edited by H. S. ^EfTis. New York! St". Martin ’ s ' Press, 1961. Pp. 366—398. Aubrey, Henry G. "Deliberate Industrialization,” Under developed Areas. Edited by Lyle W. Shannon. New York: Harper and Brothers, 1957. Pp. 262-272. i | Baran, Paul A. "National Economic Planning," A Survey of | Contemporary Economics. Vol. II. Edited by Bernard F. | Haley. Homewood: Richard D. Irwin, Inc., 1952. Pp. ! 355-407. Bello, Francis. "The Technology behind Productivity," Automation and Technological Change. Edited by John T. Dunlop. Englewood Cliffs: Prentice-Hall, Inc., 1962. Pp. 153-168. Bergson, Abram. "Socialist Economics," Survey of Con temporary Economics. Edited by Howard S. Ellis. Homewood: Richard D. Irwin, Inc., 1948. Pp. 412-448. Bohr, Kenneth A. "Investment Criteria for Manufacturing Industries in Underdeveloped Countries," Underdeveloped Areas. Edited by Lyle W. Shannon. New York: Harper and Brothers, 1957. Pp. 225-231. Bramanarida, P. R. "Agricultural Versus Industrial Develop ment," Eqonomic Development for Latin America. Edited by H. S. Ellis. New York: St. Martin’s Press, Inc., 1961. Pp. 399-429. Bronde, Henry T .Y. "The Role of the State in American Economic Development, 1820-1890," The State and Eco nomic Growth. Edited by Hugh G. J. Aitken. New York: Social Science Research Council, 1959. Pp. 4-25. Bruton, Henry J. "Growth Models and Undeveloped Economies," The Economics of Underdevelopment. Edited by A. N. Agarwala and S. P. Singh. London: Oxford University Press, 1958. Pp. 219-244. Buttrick, John A. "The Formation of Capital," Economic Development. Edited by Harold F. Williamson and John A. Buttrick. New York: Prentice—Hall, Inc., 1954. Pp. 135-195. 654 Campos, Roberto de Oliveira. "Inflation and Balanced Growth," Economic Development for Latin America. Edited by H. S. Ellis. New York: SY Mar t in"rs ’ Press, 1961. Pp. 82-109. Chayes, Abram. "The Modern Corporation and the Rule of | Law," The Corporation in Modern Society. Edited by Edward S. Mason. Cambr"icTg” e~:"Harvard University Press, 1959. Pp. 25-45. Chenery, H. B. "The Role of Industrialism in Development Programs," The Economics of Underdevelopment. Edited by A. N. A g ar w a la and S’. FI STng"hY ” "Lon’ cfon": 'Oxford University Press, 195S. Pp. 450-471. Dubridge, L. A. "Education and Social Consequences," Automation and Technological Change. Edited by John T. Dunlop. Englewood Cliffs: Prentice-Hall, Inc., 1962. Pp. 26-42. Finer, Herman. "The Role of the Government," Economic Development. Edited by H. F. Williamson and J. H. Buttrick. New York: Prentice-Hall, Inc., 1954. Pp. 365-428. Gershenkron, Alexander. "Economic Backwardness in Histor ical Perspective," The Progress of Underdeveloped Areas. Edited by Bert F. Hoselitz. Chicago: University of Chicago Press, 1952. Pp. 3-29. Goodrich, Carter. "Economic History and Economic Develop ment," Economic Growth. Edited by Eastin Nelson. Austin: University of Texas, 1960. Pp. 3-16. Higgins, Benjamin. "Elements in a Theory of Underdevelop ment," Economic Growth. Edited by Eastin Nelson. Austin: University of Texas Press, 1960. Pp. 32-70. Hodgetts, J. E. "The Public Corporation in Canada," The. Public Corporation. Edited by W. Friedman. Toronto: The Carswell Co., Ltd., 1954. Pp. 51-92. Hoselitz, Bert F. (ed.). "Theories of Stages of Economic Growth," Theories of. Economic Growth. Glencoe: The Free Press, 1960. Pp. 193-238. Kuznets, Simon. "Underdeveloped Countries and the Pre- Industrial Phase in the Advanced Countries," The Economics _of_ Underdevelopment. Edited by A. N. Agara- wala and S. P. Singh. London: Oxford University Press, 1958. Pp. 135-153. 655 Rosenstein—Rodan, P. N. "Notes on the Theory of the 'Big Push'," Economic Development for Latin America. Edited by H. S. Ellis. New York: St. Martin's Press, Inc., 1961. Pp. 57-81. Schultz, Theodore W. (ed.). "Investment in Human Beings,” The Journal of Political Economy. Supplement. October, 1962. "The Role of the Government in Promoting Economic ; Growth," The State of the Social Sciences. Edited by L. D. White. Chicago: University of Chicago Press, 1956. Pp. 372-383. j Singer, Hans W. "The Concept of Balanced Growth in Economic Development," Economic Growth. Edited by Eastin Nelson. Austin: University of Texas Press, 1960. Pp. 71-86. Viner, Jacob. "Stability and Progress: The Poorer Coun tries' Problem," Stability and Progress in the World Economy. Edited by Douglas C. Hague. New York: St. Martin's Press, 1958. Pp. 41-104. Wallich, Henry C. "Postwar United States Monetary Policy Appraised," United States Monetary Policy. New York: The American Assembly, 1958. "Some Notes Toward A Theory of Derived Develop- ~~"ment," The Economics of Underdevelopment. Edited by A. N. Agarwala and S. P. Singh. London: Oxford University Press, 1958. Pp. 189-204, E. UNPUBLISHED MATERIALS Ahmed, Mohamed Said. "Public Corporations in the United Arba Republic." Unpublished report prepared for the International Public Administration Center of the University of Southern California, February, 1962. 17 pp. Davico, Jasa. "Publicly Owned Enterprises in Yugoslavia and Control of Their Operation." Unpublished paper presented at the Rome Congress of the International Political Science Association, Sept., 1958. 10 pp. Hanson, A. H. "Some General Proposals for the Reorganiza tion of the State Enterprises," Unpublished and undated report for the Government of Turkey. (Mimeographed.) 656 Hodgetts, J. E. "The Control of Public Enterprises in Canada." Unpublished paper presented at the Rome Congress of the International Political Science Asso ciation, September, 1958. (Mimeographed.) Kewly, T. H. "The Control of Public Enterprise in Australia." A paper presented at the Rome Congress of the International Political Science Association September, 1958. (Mimeographed.) Melin, Ingvar S. "The Control of Public Enterprise in Finland." Unpublished paper presented at the Rome Congress of the International Political Science. Association, September, 1958. 24 pp. "Public Enterprise in Scandinavia." Unpublished "“’ paper delivered to a group of businessmen, December, 1959. Niaz, Aslam. "Public Corporations in India and Pakistan." Unpublished report prepared for the International Public Administration Center, The University of So. Calif., January, 1962. Seidman, Harold. "The Control of Public Enterprise." Unpub lished paper presented at the Rome Congress of the International Political Science Association, Sept., 1958. 6 pp. Sherwood, Frank. "Forms of State Enterprise." Unpublished report of a consulting assignment in Turkey, April 26, 1961. "public Enterprises and Institutions." Unpub- Ifshed paper on government corporations in Brazil, 1963. 22 pp. Treves, Giuseppino. "The Control of Public Enterprise in Italy." Unpublished paper presented to the Rome Congress of the International Political Science Asso ciation, September, 1958. (Mimeographed.) 12 pp. Vito, Francesco. "The Control of Public Enterprise." Unpublished paper presented at the Rome Congress of the International Political Science Association, Sept., 1958, 23 pp. F. NEWSPAPERS jLong Beach Press Telegram, February 7, 1962, pp. 1, 4. Los Angeles Times, October 22, 1961, p. 1. Keatley, Robert. "Italian Oil Agency Appears Tamer but ; Still Vexes International Firms," The Wall Street Journal, February 4, 1963, p. 22. Mooney, Richard E. "Black Says Merit Should Decide Aid," New York Times Western Edition, December 10, 1962, p. 1 ■Olson, Arthur J. "Russians Discuss Profit as Spur," New j York Times Western Edition, October 20, 1962, p. 27 i — i iShabad, Theodore. "Russia Defends Profit Incentive," New York Times Western Edition, October 20, 1962, p. 2. "Uneasy Italy," The Wall Street Journal, July 30, 1962, p. 1. APPENDIX A GOVERNMENT CORPORATIONS IN PAKISTAN2 1 Pakistan Industrial Development Corp. (PIDC), 1950 Pakistan Industrial Development Bank, 1949 Pakistan Industrial Credit & Investment Corp. (PICIC), 1957 Thai Development Authority State Bank of Pakistan, 1949 National Bank of Pakistan, 1949 Water & Power Development Authority (East Pakistan, 1959; West Pakistan, 1958, WAPDA) Pakistan Insurance Corp., 1952 Pakistan Refugee Rehabilitation Finance Corp., 1948 Housebuilding Finance Corp., 1952 Agricultural Development Finance Corp., 1952 Small Industries Corp., 1960 Small Scale Industries Corp., 1957 Karachi Development Authority Karachi Municipal Corp. Karachi Electric Supply Corp. Karachi Road Transport Corp. Pakistan International Airline, 1953 Pakistan Aviation, 1949 West Pakistan Road Transport Branch, 1957 East Pakistan Road Transport Branch Inland Water Transport Authority Dacca Improvement Trust Chittagong Development Authority Chittagong Port Trust Industrial Workers Housing Corp. Forest Industries Development Corp., 1959 International Hotel Corp., 1962 aSelected from various sources. The year of incorpora tion is not readily available for all the government corporations listed. APPENDIX B GOVERNMENT CORPORATIONS IN CANADAa Credit and Financial Agencies: T: Canadian Farm Loan Board (1935). Originally set up in 1927 as Federal Farm Loan Board. 2. Bank of Canada (1938). First created as a "privately-; owned public trust" in 1932. 3. Industrial Development Bank (1944), 4. Export Credits Insurance Corporation (1944). 5. Central Mortgage and Housing Corporation (1945). Commodity Trading and Procurement Agencies: TI Canadian Wheat Board (T955) . 2. Commodity Prices Stabilization Corporation Ltd. (1941). 3. Crown Assets Disposal Corporation (1950). (Set up originally in 1944 as War Assets Corporation.) 4. Agricultural Prices Support Board (1944). 5. Fisheries Prices Support Board (1944). 6. Canadian Commercial Corporation (1946). 7. Canadian Sugar Stabilization Corporation Ltd. (1947). 8. Defence Construction Ltd. (1951). This agency took over the charter of a previous Crown company, War time Housing Ltd. (1941). Producing and Business Agencies: n Canadian National Railways" (1919). 2. Canadian National (West Indies) Steamships Ltd. (1927). 3. National Harbours Board (1936). 4. Canadian Broadcasting Corporation (1936). First set up in 1932 as the Canadian Radio Broadcasting Com mission. 5. Trans Canada Airlines (1937). 6. Polymer Corporation Ltd. (1942). 7. Eldorado Mining and Refining (1944) Ltd. (1944). 8. Northern Transportation Co. Ltd. (1947). 9. Canadian Arsenals Ltd. (1945). 10. Northwest Territories Power Commission (1948). 11. Canadian Overseas Telecommunications Corporation (1950). 12. Atomic Energy of Canada, Ltd. (1952). Management and Research Agencies: T. National battlefields Commission (1908). 2. National Gallery of Canada (1913). 3. Halifax Relief Commission (1918). 4. National Research Council (1924). 660 5. Federal District Commission (1927). 6. Director of Soldier Settlement (1931). A corpora tion "sole." 7. Unemployment Insurance Commission (1940). 8. Park Steamships Ltd. (1942). 9. The Director, Veterans’ Land Act (1942). A corpora- ! tion "sole.” i 10. Atomic Energy Control Board (1946). ! 11. Canadian Maritime Commission (1947). | 12. Dominion Coal Board (1947). i 13. Eastern Rockies Forest Conservation Board (1947), ■ 14. Canadian Patents and Developments Ltd. (1948). i 15. St. Lawrence Seaway Authority (1952). 1 16. Canadian Disaster Relief Fund, Inc. (Pending in 1953). Q W, Friedmann (ed.), The Public Corporation (Toronto: The Carswell Companj), 1954, pp. 56-58. APPENDIX C STATE PUBLIC AUTHORITIES IN THE UNITED STATESa | Toll Road and Bridge Authorities: | Maine" Turnpike’Authority ; Mystic River Bridge Authority ; State Bridge Commission of Michigan New Jersey High Authority | New Jersey Turnpike Authority New York State Bridge Authority New York State Thruway Authority Bridge Commission of Ohio I Ohio Turnpike Commission Oklahoma Turnpike Authority Pennsylvania Turnpike Commission Elizabeth River Tunner Commission Washington Toll Bridge Authority West Virginia Turnpike Commission Port Authorities: Board of Commissioners of the Port of New Orleans Port of New York Authority Building Authorities: Alabama "Building (Torpor at ion Florida State Improvement Commission State School Building Authority University System Building Authority Kentucky Military Department Armory Corporation Maine School Building Authority State Building Authority (Declared unconstitutional on June 8, 1953 by the Supreme Court of New Jersey.) General State Authority State Public School Building Authority State Highway & Bridge Authority of Pennsylvania State Office Building Commission Power and Water Authorities: Central Nebraska Public Dower and Irrigation District Consumers Public Power District Omaha Public Power District Platte Valley Public Power and Irrigation District Power Authority of the State of New York Grand River Dam Authority South Carolina Public Service Authority Lower Colorado River Authority 662 ; Lower Neches Valley Authority | ; Miscellaneous Authorities: CentralUew York Regional Market Authority Lower Hudson Regional Market Authority | Saratoga Springs Authority 1 State Agricultural Marketing Commission ' Hampton Roads Sanitation District Commission aCouncil of State Governments, Public Authorities in the States (Chicago: Council of State Governments, 1953), Appendix B. APPENDIX D PUBLIC AUTHORITIES IN NEW YORK STATEa Year Created | Port of New York Authority 1321 I j Lake Champlain Bridge Commission 1927 j Power Authority of the State of New York 1931 i New York State Bridge Authority 1932 j American Museum of Natural History Planetarium | Authority 1933 | Bethpage Park Authority 1933 ! Buffalo and Fort Erie Public Bridge Authority 1933 Central New York Regional Market Authority 1933 Industrial Exhibit Authority 1933 Jones Beach State Parkway Authority 1933 Lower Hudson Regional Market Authority 1933 Saratoga Springs Authority 1933 Thousand Islands Bridge Authority 1933 Suffolk County Water Authority 1934 Buffalo Sewer Authority 1935 Dormitory Authority 1944 Whiteface Mountain Authority 1944 Nassau County Bridge Authority 1945 Triborough Bridge and Tunnel Authority 1946 White Plains Parking Authority 1947 Elmira Parking Authority 1948 Syracuse Parking Authority 1948 Erie County Water Authority 1949 , Peekskill Parking Authority 1949 ; Monroe County Water Authority 1950 1 New York State Thruway Authority 1950 Northwestern New York Water Authority 1950 | Ogdensburg Bridge Authority 1950 i Genesee Valley Regional Market Authority 1951 Onondaga County Water Authority 1951 ; New York City Transit Authority 1953 : Niagara Frontier Port Authority 1955 Oswego Port Authority 1955 aState of New York, Staff Agent on Public Authorities under New York State (Albany: Temporary State Com mission on Coordination of State Activities, 1956). The list includes the public authorities active on January 1, 1956, APPENDIX E ORGANIZATION & OWNERSHIP OF CORPORATIONS OF THE U.S. GOVERNMENT AS OF JUNE 30, 196la--Wholly Owned Corporations1 Supervisory Basic Date of Life Voting Power Organization Federal Incorpora of of Corporations Authority tion 2/ Corporation Stock Commodity, Credit Corp. Dept, of Agriculture 62 Stat. 1070 as amended Jul. 1,1948 Indefinite No provisions Development Loan Fund 3/ Independent 72 Stat.262 Jul. 1,1948 Indefinite 3/ No provisions Export-Import Bank; of 61 Stat.130 Jun. 9,1947 Jun. 30,1963 Washington Independent No provisions Fed,Crop Insurance Dept, of 52 Stat. 72 Feb.16,1938 Indefinite No provisions Corporation Agriculture as amended Fed.Nat11 .Mortgage Housing & 68 Stat.612 Aug. 2,1954 Indefinite None Ass'n (Management & Home Finance liquidating functions 1Agency & special assistance functions) Fed.Prison Industries, Dept, of 48 Stat. Incorporated Justice 1211 Dec.11,1934 Indefinite None Fed.Savings & Loan In Fed. Home 48 Stat. surance Corp. Loan Bank Bd. 1256 Jun.27,1934 Indefinite No provisions Panama Canal Co. Sec.of the 62 Stat. Jun.29,1948 Indefinite No provisions Army 8j IO76 as amended Put)lie Housing Admin. Housing & Home Finance Agency 50 Stat.888 Sept.1,1937 Indefinite No provisions APPENDIX E (continued) Corporations Supervisory Organization Basic Federal Authority Date of Incorpora tion 2/ Life of Corporation Voting P rer of Stock St. Lawrence Seaway Development Corp. Indepen dent 9/ 68 Stat.92 May 13,195^ Indefinite None Tennessee Valley Authority Indepen dent kQ Stat.58 Jun.16,1933 Indefinite None Virgin Islands Corp. Dept, of Interior 10/ 63 Stat.350 Jun.30,19^9 as amended Jun.30,1969 None Corporations Appt. or Election of Authorized Governing Body Ownership of Stock Commodity Credit Corporation Development Loan Fund 3/ Export-Import Bank of Board of 6 directors appointed for indefinite terms by the President of the U.S. by and with the advice and consent of the Senate, in addi tion to the Sec. of Agric. who serves as chair man of the Board. Board of 5 directors consisting of the Sec. of State, who is chairman, the Director of the International Cooperation Admin., the Chairman of the Bd. of Directors of the Export-Import Bank, the Managing Director of the Fund (appointed by the President of the U.S. by and with the advice and consent of the Senate), and the U.S. Exec. Director of the Intemat'l Bank for Reconstruction and Development,kj Board of 5 directors consisting of the President and 1st Vice President of the Bank, and 3 addi tional persons appointed for indefinite terms by U.S., Sec. of Agric. as agent United States (Nonstock capital) U.S., Sec. of the Treasury as agent 665 APPENDIX E (continued) Corporations Appt. or Election of Authorized Governing Body Ownership of Stock Fed. Crop Insurance Corporation Fed. Nat'l Mortgage Ass'n (Management & liquidating functions & special assistance functions) Fed. Prison Indus tries Incorporated Fed. Savings & Loan Insurance Corp. Panama Canal Co. the President of the U.S. by and with the advice and consent of the Senate. Board of 5 directors consisting of the manager of the Corp.; two from Dept, of Agric., and two experienced in the insurance business who are not otherwise employed in Gov't, all appointed for indefinite terms by the Sec. of Agric., who shall not, himself, be a member of the Board. Board of 5 directors, one of whom shall be the Housing & Home Finance Administrator as chair man of the Bd., and four appointed by the Ad ministrator from among the officers or employees of the Association, if the immediate office of the Administrator, or (with the consent of the head of such dept, or agency) of any other department or agency of the Federal Gov't. Board of 6 directors appointed for indefinite terms by the President of the U.S.; one member each from industry, labor, agriculture, retail ers and consumers, a representative of the Attorney General and a representative of the Sec. of Defense. Federal Home Loan Bank. Board of 3 members appointed by the President of the U.S. by and with the advice and consent of the Senate. Term of each member is four years. Board of not less than 9 and- not more than 13 directors appointed for indefinite terms. All members of the board of directors, except the Governor, are appointed by the stockholder. The Governor of the Canal Zone is, ex officio, a director and President of the Company. U.S., by Sec, of the Treasury as agent U.S. (Nonstock Capital) U.S. (Nonstock Capital) U.S. (No capital stock outstanding.) U.S., evidenced by an ownership re ceipt held by the Sec. of the Treas. 999 APPENDIX E (continued) Corporations Appt. or Election of Authorized Governing Body Ownership of Stock Public Housing Admin. St. Lawrence Seaway Development Corp.9/ Tenn. Valley Authority Virgin Islands Corp. Public Housing Commissioner appointed for an indefinite term, by the President subject to Senate confirmation. Administrator and Deputy Administrator, appointed by the President of the U.S. by and with the advice and consent of the Senate. Board of 3 directors appointed for nine year term by the President of the U.S. by and with the advice and consent of the Senate. Board of 7 directors consisting of the Sec. of the Interior, the Sec. of Agric., the Adminis trator of the Small Business Admin., the Gov. of the Virgin Islands, and three experienced businessmen appointed for six year terms by the President of the U.S. U. S., by Sec. of the Treasury as agent. U.S. (Nonstock Capital) U.S. (Nonstock Capital) U.S. (Nonstock Capital) 1 For functions of corporations wholly owned by the U.S., see the Budget Document, 1963. 2 Pursuant to Public Law 248, approved Dec.6, 1945, all corporations chartered under state or district laws have been reincorporated under Federal charter or have ceased to exist. 3 In accordance with Public Law 87-195, approved Sept.4, 1961, and Exec. Order 10973 dated Nov.3, 1961, the corporate entity of this Corp. was terminated at the end of Nov.3, 19^1, and its activities were transferred to the Dept, of State, Agency for International De velopment. 4 Functions of the Sec. of State as a member and Chairman of the Board have beairedelegated to the Under Sec. for Economic Affairs. The Bd. carries out its functions subject to the foreign policy guidance of the Secretary of State. ' 5 The succession of this Corp. was terminated at the close of Sept.30, 1961, and it was dissolved in accordance with Public Law 87-190, approved Aug.30, 1961. Assets and lia bilities of the Corp. are being liquidated by the Administrator of General Services. 6 The Federal Facilities Corp. was created on June 30, 195^, under provisions of the Rub ber Act of 1948 (62 Stat. I05) .and Exec. Order 10539 June 22, 195^ • 667 APPENDIX E (continued) 7 In accordance -with. Public Law 87-353* approved Oct.4, 1961, this Corp. was abolished and its assets and the authority relating to collection of its notes receivable were trans ferred to the Secretary of the Treasury. 8 The Company is supervised by the Secretary of the Army acting as the representative of the President for such purpose. 9 In accordance with Sec. 1 of Exec. Order 10771 of June 20, 195^* direction and supervision by the Sec. of Defense shall be limited to functions concerning construction of the St. Lawrence river navigation project and shall terminate when construction is completed. Except as provided in Sec. 1 of the Order, the Sec. of Commerce shall exercise direction and supervision as provided in Sec. 1 of the act of May 13* 195*+♦ 10. As the representative of the President of the United States, the Secretary of the Interior exercises general direction of the Corporation. aFrom Combined Statement of Receipts, Expenditures, and Balances of the United States Government, 1961 (Washington: Treasury Dept., Government Printing Office, 1961), pp. 508-510- 668 APPENDIX F ORGANIZATION & OWNERSHIP OF CORPORATIONS OF THE U.S. GOVERNMENT AS OF JUNE 30, 1961— Other Corporations8 , Corporations Supervisory Organization Basic Federal Authority Date of Incorpora tion l/ Life of Corporation Voting Power of Stock Banks for Coopera tives Federal Deposit In surance Corp. Federal Home Loan Banks Federal Intermed- ate Credit Banks Federal Nat’1 Mortgage Ass'n (Secondary market operations) 6/ Farm Credit Admin. Indep. Fed. Home Loan Bank Board Farm Credit Admin. Housing & Home Finance 1+8 Stat.257 261 as amended 1+8 Stat.168 as amended 47 Stat.725 1+2 Stat. 1^5^ as amended 68 Stat.612 1933 Jun.16,1933 Oct., 1932 ea. dist. Aug.2,195^ 6/ Indefinite Indefinite Indefinite Mar., 1923 Indefinite Indefinite Class A-nonvot- ing, Class B- nonvoting,Clas s C-one vote 2/ None Voting rights are vested in privately owned stock No provisions Gov’t owned non-voting Privately owned, non voting APPENDIX F (continued) Corporations Appt. or Election of Authorized Body Ownership of Stock Banks for Cooperatives Federal Deposit Insur ance Coip. Federal Home Loan Banks Dist. hanks— Farm Credit Bd. in each dist. com posed of 7 members. Three are known as elected directors, and the 3 voting groups of each dist. (nat'l farm loan association^ production credit associations, and cooperatives which are stock holders or subscribers to the guaranty fund of the dist. bank for cooperatives) each elect 1 member. Subject to other provisions of law, i j - members are appointed, by the Gov. of the Farm Credit Admin, by and with the advice and consent of the Fed. Farm Credit Bd. 3/ Central Bank— Bd. of 13 directors. One director from each of 6 designated farm credit districts is elected by the bd. of directors of the regional bank for cooperatives in the dist. One director from each of the remaining 6 farm credit districts, and the director-at-large are appointed by the Gov. of the Farm Credit Admin, by and with the advice and consent of the Fed. Farm Credit Bd. bj Board of 3 members, 1 is the Comptroller of the Currency. The Pres, appoints 2 members by and with the advice and consent of the Senate for 6 year terms. Ten of the banks each have a Board of 12 direc tors. Four directors are appointed by the Fed. Home Loan Bank Bd. for k year terms, and the others are elected by member institutions for 2 year terms. The San Francisco bank is managed by 19 directors. Actions of the Bd. of Direc tors of each bank are subject to approval of the Federal Home Loan Bank Board. 5/ U.S. by Gov. of Farm Credit Administration ($118,286,900) Cooperative No capital stock outstanding U.S. (no stock out standing) private interests of member institutions ($1,091,560,250) 670 APPENDIX F (continued) Corporations Appt. or Election of Authorized Body Ownership of Stock Federal Intermediate Credit Banks Federal National Mortgage Ass'n (Secondary market operations) 6/ Farm Credit Board in each dist. composed of 7 members. Three are known as elected direc tors, and the 3 voting groups of each dist. (national faim loan associations, production credit associations, and cooperatives which are stockholders or subscribers to the guaranty fund of the dist. bank for cooperatives) each elect 1 member. Subject to other provisions of law, members are appointed by the Gov. of the Farm Credit Admin, by and with the advice and consent of the Federal Farm Credit Board. 3j Board of 5 directors, one of whom shall be the Housing and Home Finance Admin, as chairman of the Bd., and t appointed by the Admin, from among the officers or employees of the Ass'n, of the immediate office of the Admin., or (with the consent of the head of such dept, or agency) of any other dept, or agency of the Fed. Gov't. U.S. by Gov. of Farm Credit Admin istration Production credit associations ($32,1^5,555) U.S., by Sec. of ($158,820,305) Mortgage sellers ($76,125,59^) 1 Incorporated under Federal charter. 2 Each holder of one or more shares of Class C stock which is eligible to borrow from a bank for cooperatives shall be entitled to one vote only, provided that any such holder which within a period of 2 years next preceding a date, fixed by the Farm Credit Admin., prior to commencement of voting has not been a borrower from a bank of which it holds Class C stock shall not be entitled to vote. 3 The Farm Credit Act of 1953 further provided that under certain conditions each of the voting groups may elect 1 additional member in lieu of and upon the expiration of the terns of office of members appointed by the Gov. At June 30, 19&1, each dist. bd. consisted of 5 directors elected by the voting groups and 2 directors appointed by the Governor. APPENDIX P (continued) ^ Except as otherwise required under subsections (b) and (c) of Section 31 of Public Law 86-503 approved June 11, i960, a director appointed for a district shall be succeeded by a director elected in the same district and a director elected in a district shall be succeeded by a director appointed in the same district. 5 Under certain conditions, the Board may increase the number of appointed and elected directors of a bank up to a maximum of 19 pursuant to Public Law 86-3^9 approved September 22, 1959* 6 The Association began its secondary market operations on November 1, 195^* aFrom Combined Statement of Receipts, Expenditures, and Balances of the United States Government, 1961 (Washington: Treasury Department, Government Printing Office, 1961), pp. 50ti-510. ~ 67 2 APPENDIX G SELECTED DATA ON FEDERAL PUBLIC ENTERPRISE FUNDS IN THE UNITED STATES Summary of Debt and Investment Transactions of Public Enterprise Funds (in millions of dollars)a Description: i Public enterprise fund borrowing from the public Public enterprise fund pur chases of U.S. securities Public enterprise fund re payment of borrowing from the public Total reductions in cash, debt, and invest ment items Increase or decrease (-) in cash due to debt and investment transactions of public enterprise funds 1961 1962 1963 actual estimate estimate 375 234 149 239 343 666 315 2S9 343 -815 86 -109 ^rom the Budget of the U.S. Government 1963, (Washington: Government "Printing Office,’ T962) , pT 3B1. 674 Public Enterprise Fund Purchases of U.S. Securities Net (in millions of dollars)3 Description: 1961 actual 1962 estimate 1963 estimate Federal National Mortgage Association (Housing & Home Finance Agency) 8 5 10 Federal Housing Admin. (Hous ing & Home.Finance Agency) 97 12 79 Federal Savings & Loan Insur ance Corp. (Federal Home Loan Bank Board) 34 239 271 Tennessee Valley Authority -12 64 -28 Veterans Admin.: Veterans special-term insurance fund 22 -31 12 Total purchases of U.S. securities 149 289 343 aFrom the Budget of the U.S. Government 1963 (Washington: Governrnenf Printing"~(5f±Tice-, 1962) , pT 361. 675 Public Enterprise Fund Borrowing from the Public (in millions of dollars)3 ] 1961 1962 1963 jDescription: actual estimate estimate Federal Housing Admin. | (Housing & Home Finance i Agency) Federal National Mortgage i Ass'n (Housing & Home Finance Agency) Federal Farm Mortgage Corp. (Farm Credit Admin.) Home Owners Loan Corp. (Home Loan Bank Board) Tennessee Valley Authority 81 225 184 -797 -* --- _* —* --- _* 50 150 50 Total borrowing from the public -666 375 234 ^rom the Budget of the U.S. Government 1963 (Washington: Government Printing Office, 1962), p. 360. *Less than one-half million dollars. Gross Expenditures and Applicable Receipts of Public Enterprise Funds (in millions of dollars)3 Gross" "Expendifures Operations "Receipts Description 1961 1962_____1963_____1961_____1962 ^-963 Funds "appropriated "to'fhe "Fires’." : Foreign assistant— Economic 270 497 651 13 49 6 Other 104 100 41 116 65 41 Dept, of Agriculture: Commodity Credit Corp. 5,925 7,301 7,745 4,507 4,700 5,664 Other 59 421 485 70 389 409 Dept, of Commerce 7 30 88 9 12 15 Dept, of Defense: Military 111 108 76 74 78 52 Civil 106 106 114 100 103 106 Dept. Health, Ed., & Welfare 4 4 5 4 4 5 Dept, of the Interior 96 130 171 35 46 51 Dept, of Labor 304 233 23 S 256 289 244 Post Office Dept. 4,362 4,420 4,732 3,497 3,630 4,719 Treasury Dept. * * 1 4 2 5 General Services Admin. * 2 * 3 2 * Housing 8s Home Finance Agency: College housing loans 233 294 429 35 44 54 Urban renewal fund 254 374 497 109 145 149 Fed. Nat'l Mortgage Ass'n 1,298 1,547 1,366 1,223 1,535 1,182 Fed. Housing Admin. 318 456 488 325 242 377 Public Housing Admin. 288 364 390 133 190 197 Other 32 57 101 110 21 15 Veterans Admin. 330 650 526 199 372 544 Other independent offices: Export-Import Bank of Wn. 571 954 855 534 1,055 1,080 Small Business Admin. 223 400 433 127 158 267 Gross Expenditures and Applicable Receipts of Public Enterprise Funds (continued) Gross Expenditures Description 1961 1962 1963 Operations Receipts 1961 1962 1963 Tennessee Valley Authority 311 Other 52 367 31 376 30 272 86 289 313 270 301 TOTAL 15,257 18,847 19,837 11,842 13,692 15,795 ♦Less than one-half million dollars. aFrom the Budget of the U.S. Government 1963 (Washington: Government Printing Office, 1962), p. 359. 677 APPENDIX H GOVERNMENT CORPORATION CONTROL ACT AS AMENDED THROUGH THE 86TH CONGRESS (59 Stat. 597; 31 U.S.C. 841) Public Law 248— 79th Congress Chapter 557— 1st Session An Act To provide for financial control of Government 'corporations. Be it enacted by the Senate and House of Repre sentatives of the United States of America in Congress .assembled, That this Act may be cited as the "Government Corporation Control Act." Declaration of Policy Sec. 2. It is hereby declared to be the policy of the Congress to bring Government corporations and their transactions and operations under annual scrutiny by the Congress and provide current financial control thereof. i j TITLE I— Wholly Owned Government Corporations ! ! Sec. 101. As used in this Act the term "wholly [owned Government Corporation" means the Commodity Credit porporation; Regional Agricultural Credit Corporations; farmers Home Corporation; Federal Crop Insurance Corpora tion; Federal Fram Mortgage Corporation; Federal Surplus Commodities Corporation; Reconstruction Finance Corpora tion; Defense Plant Corporation; Defense Supplies Corpora tion; Metals Reserve Company; Rubber Reserve Company; War Damage Corporation; Federal National Mortgage Association; Disaster Loan Corporation; Inland Waterways Corporation; Warrior River Terminal Company; Virgin Islands Corpora tion; Federal Prison Industries, Incorporated; United States Spruce Production Corporation; Development Loan Fund; Institute of Inter-American Affairs; Institute of Inter-American Transportation; Inter-American Educational Foundation, Incorporated; Inter-American Navigation Corpo ration; Prencinradio, Incorporated; Cargoes, Incorporated; Fxport-Import Bank of Washington; Petroleum Reserves 679 Corporation; Rubber Development Corporation; U. S. Com mercial Company; Federal Public Housing Authority (or United States Housing Authority) and including public housing projects financed from appropriated funds and ope rations thereof; Defense Homes Corporation; Federal Sav ings and Loan Insurance Corporation; Home Owners1 Loan Corporation; United States Housing Corporation; Federal Housing Administration; Saint Lawrence Seaway Development Corporation; Panama Canal Company; Tennessee Valley Authority; and Tennessee Valley Associated Cooperatives, Incorporated. j Sec. 102. Each wholly owned Government corporation : shall cause to be prepared annually a business-type I budget which shall be submitted to the Bureau of the j Budget, under such rules and regulations as the President j may establish as to the date of submission, the form and i content, the classification of data, and the manner in which such budget program shall be prepared and presented. The budget program shall be a business-type budget, or plan of operations, with due allowance given to the need | for flexibility, including provision for emergencies and I contingencies, in order that the corporation may properly I carry out its activities as authorized by law. The budget \ program shall contain estimates of the financial condition i and the operations of the corporation for the current and ensuing fiscal years and the actual condition and results \ jof operation for the last completed fiscal year. Such \ budget program shall include a statement of financial j condition, a statement of income and expense, an analysis of surplus or deficit, a statement of sources and appli cation of funds, and such other supplementary statements j and information as are necessary or desirable to make j known the financial condition and operations of the j ^corporation. Such statement shall include estimates of j ioperations by major types of activities together with | ’ estimates of administrative expenses, estimates of borrow- j lings, and estimates of the amount of Government capital j jfunds which shall be returned to the Treasury during the fiscal year or the appropriations required to provide for the restoration of capital impairments. Sec. 103. The budget programs of the corporations as modified, amended, or revised by the President shall be transmitted to the Congress as a part of the annual Budget required by the Budget and Accounting Act, 1921, Amendments to the annual budget programs may be submitted from time to time. Budget programs shall be submitted for all wholly owned Government corporations covering operations for the fiscal year commencing July 1, 1946, and each fiscal year thereafter. Sec. 104. The budget programs transmitted by the 680 iPresident to the Congress shall be considered and legisla tion shall be enacted making available for expenditure for loperating and administrative expenses such corporate funds |or other financial resources or limiting the use thereof as the Congress may determine and providing for repayment |of capital funds and the payment of dividends. The pro visions of this section shall not be construed as prevent ing Government corporations from carrying out and financ ing their activities as authorized by existing law, nor jas affecting the provisions of section 26 of the Tennes- jsee Valley Authority Act, as amended. The provisions of jthis section shall not be construed as affecting the lexisting authority of any Government corporation to make contracts or other commitments without reference to fiscal year limitations (as amended by P.L. 268, 80th I !C on g. ) . Sec. 105. The financial transactions of wholly owned Government corporations shall be audited by the General Accounting Office in accordance with the principles and procedures applicable to commercial corporate trans actions and under such rules and regulations as may be prescribed by the Comptroller General of the United States: PROVIDED, That such rules and regulations may provide for the retention at the offices of such corpora tions, in whole or in part, of any accounts of accountable officers, covering corporate financial transactions, which are required by existing law to be settled and adjusted in the General Accounting Office, and for the settlement and adjustment of such accounts in whole or in part upon the basis of examinations in the course of the audit herein provided, but nothing in this proviso shall be construed as affecting the powers reserved to the Tennessee Valley Authority in the Act November 21, 1941 (55 Stat. 775). The audit shall be conducted at the place or places where the accounts of the respective corporations are normally kept. The representatives of the General Accounting Office shall lhave access to all books, accounts, financial records, reports, files, and all other papers, things, or property belonging to or in use by the respective corporations and necessary to facilitate the audit, and they shall be afforded full facilities for verifying transactions with the balances or securities held by depositaries, fiscal agents, and custodians. The audit shall begin with the first fiscal year commencing after the enactment of this Act. Sec. 106. A report of each such audit for each fiscal year ending on June 30 shall be made by the Comptrol ler General to the Congress not later than January 15 fol lowing the close of the fiscal year for which such audit is made. The report shall set forth the scope of the audit and shall include a statement (showing intercorporate 681 jrelations) of assets and liabilities, capital and surplus ior deficit; a statement of surplus or deficit analysis; a statement of income and expense; a statement of sources and application of funds; and such comments and informa- jtion as may be deemed necessary to keep Congress informed |of the operations and financial condition of the several jcorporations, together with such recommendations with Irespect thereto as the Comptroller General may deem jadvisable, including a report of any impairment of capital jnoted in the audit and recommendations for the return to jsuch Government capital or the payment of such dividends ias, in his judgment, should be accomplished. The report ishall also show specifically any program, expenditure, or 'other financial transaction or undertaking observed in the course of the audit which, in the opinion of the Comptroller General, has been carried on or made without authority of law. A copy of each report shall be furnished to the President, to the Secretary of the Treasury, and to the corporation concerned at the time submitted to the Congress. Sec. 107. Whenever it is. deemed by the Director of the Bureau of the Budget, with the approval of the President, to be practicable and in the public interest that any wholly owned Government corporation be treated with respect to its appropriations, expenditures, receipts, accounting, and other fiscal matters as if it were a Government agency other than a corporation, the Director shall include in connection with the budget program of such corporation in the Budget a recommendation to that effect. If the Congress approves such recommendation in connection with the budget program for any fiscal year, such corporation, with respect to subsequent fiscal years, shall be regarded as an establishment other than a corpo ration for the purposes of the Budget and Accounting Act, 1921, and other provisions of law relating to appropria tions, expenditures, receipts, accounts, and other fiscal matters, and shall not be subject to the provisions of this Act other than this section. The corporate entity shall not be affected by this section. TITLE II— Mixed-Ownership Government Corporations Sec. 201. As used in this Act the term "mixed- ownership Government corporations1 ' means (1) the Central Bank for Cooperatives and the Regional Banks for Coopera tives, (2) Federal Land Banks, (3) Federal Intermediate Credit Banks, (4) Federal Home Loan Banks, and (5) Federal Deposit Insurance Corporation. Sec. 202. The financial transactions of mixed- ownership Government Corporations for any period during which Government capital has been invested therein shall 682 jbe audited by the General Accounting Office in accordance ■with the principles and procedures applicable to commercial [corporate transactions and under such rules and regula tions as may be prescribed by the Comptroller General of ithe United States. The audit shall be conducted at the place or places where the accounts of the respective corporations are normally kept. The representatives of the General Accounting Office shall have access to all books, accounts, financial records, reports, files, and all other papers, things, or property belonging to or in juse by the respective corporations and necessary to jfacilitate the audit and they shall be afforded full ifacilities for verifying transactions with the balances ior securities held by depositaries, fiscal agents, and jcustodians. The audit shall begin with the first fiscal iyear commencing after the enactment of this Act. Sec. 203. A report of each such audit for each fiscal year ending on June 30 shall be made by the Comp troller General to the Congress not later than January 15, following the close of the fiscal year for which such audit is made. The report shall set forth the scope of the audit and shall include a statement (showing inter corporate relations)of assets and liabilities, capital and surplus or deficit; a statement of surplus of deficit analysis; a statement of income and expense; a statement of sources and application of funds; and such comments and |information as may be deemed necessary to keep Congress informed of the operations and financial condition of, and the use of Government capital by, each such corpora tion, together with such recommendations with respect thereto as the Comptroller General may deem advisable, including a report of any impairment of capital or lack of sufficient capital noted in the audit and recommenda tions for the return of such Government capital or the payment of such dividends as, in his judgment, should be accomplished. The report shall also show specifically any program, expenditure, or other financial transaction or undertaking observed in the course of the audit, which, in the opinion of the Comptroller General, has been carried on or made without authority of law. A copy of each report shall be furnished to the President, to the Secretary of the Treasury, and to the corporation con cerned at the time submitted to the Congress. Sec. 204. The President shall include in the annual Budget any recommendations he may wish to make as to the return of Government capital to the Treasury by any mixed- ownership corporation. TITLE III— General Provisions Sec. 301. (a) The expenses of auditing the jfinancial transactions of wholly owned and raixed-ownership iGovernment corporations as provided in sections 105 and 1202 of this Act shall be borne out of appropriations to |the General Accounting Office, and appropriations in such suras as may be necessary are hereby authorized: PROVIDED, That each such corporation shall reimburse the General Accounting Office for the full cost of any such audit as billed therefor by the Comptroller General, and the jGeneral Accounting Office shall deposit the sums so reim- Ibursed into the Treasury as miscellaneous receipts: |PROVIDED FURTHER, That in making the audits provided in jsaid sections the Comptroller General shall, to the fullest jextent deemed by him to be practicable, utilize reports of jexaminations of Government corporations made by a super vising administrative agency prusuant to law, (b) For the purpose of conducting such audit the Comptroller General is authorized in his discretion to employ not more than ten persons without regard to the Classification Act of 1923, as amended, only one of whom may be compensated at a rate of as much as but not more than $10,000 per annum, and to employ by contract, without .regard to section 370S of the Revised Statutes, profes sional services of firms and organizations for temporary periods or for special purposes. (c) The audit provided in sections 105 and 202 of this Act shall be in lieu of any audit of the financial transactions of any Government corporation required to be made by the General Accounting Office for the purpose of a report to the Congress or to the President under any existing law. (d) Unless otherwise expressly provided by law, no funds of any Government corporation shall be used to ipay the cost of any private audit of the financial 'records of the offices of such corporation, except the •cost of such audits contracted for and undertaken prior to April 25, 1945. ; Sec. 302. The banking or checking accounts of all wholly owned and mixed-ownership Government corporations shall be kept with the Treasurer of the United States, or, with the approval of the Secretary of the Treasury, with a Federal Reserve bank, or with a bank designated as a depositary of fiscal agent of the United States: PROVIDED, That the Secretary of the Treasury may waive the require ments of this section under such conditions as he may determine: AND PROVIDED FURTHER, That this section will not apply to the establishment and maintenance in any bank for a temporary period of banking and checking accounts nor in excess of $50,000 in any one bank. The provisions of this section shall not be applicable to Federal Intermediate Credit Banks, the Central Bank for Cooperatives, the Reg- inal Banks for Cooperatives, or the Federal Land Banks, 684 [except that each such corporation shall be required to [report annually to the Secretary of the Treasury the names iof the depositaries in which such corporation keeps a [banking or checking account, and the Secretary of the [Treasury may make a report in writing to the corporation, [to the President, and to the Congress which he deems [advisable upon receipt of any such annual report. I Sec. 303. (a) All bonds, notes, debentures, and iother similar obligations which are herafter issued by any [wholly owned or mixed-ownership Government corporation and ■offered to the public shall be in such forms and denomina tions, shall have such maturities, shall bear such rates [of interest, shall be subject to such terms and condi tions, shall be issued in such manner and at such times iand sold at such prices as have been or as may be approved [by the Secretary of the Treasury. (b) Hereafter, no wholly owned or mixed-ownership Government corporation shall sell or purchase any direct obligation of the United States or obligation guaranteed as to principal or interest, or both, for its own account and in its own right and interest, at any one time aggre gating in excess of $100,000, without the approval of the Secretary of the Treasury: PROVIDED, That the Secretary of the Treasury may waive the requirement of his approval with respect to any transaction or classes of transactions subject to the provisions of this subsection for such period of time and under such conditions as he may deter mine . (c) The Secretary of the Treasury is hereby authorized to exercise any of the functions vested in him by this section through any officer, or employee of any Federal agency whom he may designate, with the concur rence of the head of the agency concerned, for such pur pose. (d) Any mixed-ownership Government corporation from which Government capital has been entirely withdrawn shall not be subject to the provisions of section 302 or of this section during the period such corporation remains without Government capital. The provisions of subsections (a) and (b) of this section shall not be applicable to Federal Intermediate Credit Banks, the Central Bank for Coopera tives, the Regional Banks for Cooperatives, or the Federal Land Banks, except that each such corporation shall be required to consult with the Secretary of the Treasury [prior to taking any action of the kind covered by the pro visions of subsections (a) and (b) of this section, and [in the event an agreement is not reached, the Secretary of [the Treasury may make a report in writing to the corpora tion, to the President, and to the Congress stating the grounds for his disagreement. 685 j Sec. 304. (a) No corporation shall be created, {organized, or acquired hereafter by any officer or agency {of the Federal Government or by any Government corporation ifor the purpose of acting as an agency or instrumentality ;of the United States, except by Act of Congress or {pursuant to an Act of Congress specifically authorizing {such action. I (b) No wholly-owned Government corporation created ;by or under the laws of any State, Territory, or possession {of the United States or any political subdivision thereof, or under the laws of the District of Columbia, shall con- {tinue after June 30, 194S, as an agency or instrumentality jof the United States, and no funds of, or obtained from, {the United States or any agency thereof, including corpora tions, shall be invested in or employed by any such corporation after that date, except for purposes of liquidation. The proper corporate authority of every such corporation shall take the necessary steps to institute dissolution or liquidation proceedings on or before that date: PROVIDED, That prior thereto any such corporation may be reincorporated by Act of Congress for such purposes and term of existence and with such powers, privileges, and duties as authorized by such Act, including the power to take over the assets and assume the liabilities of its respective predecessor corporation. Approved December 6, 1945. APPENDIX I A BILL TO AMEND THE GOVERNMENT CORPORATION i i CONTROL ACTa (H.R. 8332, 85th Congress, 1st Session) BE IT ENACTED BY THE SENATE AND HOUSE OF REPRESENTATIVES OF THE UNITED STATES OF AMERICA IN CONGRESS ASSEMBLED, That the Government Corporation Control Act (59 Stat. 597- 602), as amended (31 U.S.C. 841-869), is further amended as follows: v> j (1) The heading of title I of said Act (59 Stat. 597), is 1 amended to read: "TITLE I— GOVERNMENT CORPORATIONS." ; (2) Section 101 of Said Act, as amended (31 U.S.C. 846), j is amended by striking the words "wholly•owned" and I the word "and" where it last appears in the section, ! and by adding before the period at the end thereof ! the following: "; Central Bank for Cooperatives, Regional Banks for Cooperatives, Federal Intermediate j Credit Banks, and Federal Deposit Insurance Corpora- j tion." (3) Section 102 of said Act, as amended (31 U.S.C. 847), j is amended by designating the paragraph thereof as I paragraph "(a)"; by striking the words "wolly owned"; i by amending the last two sentences thereof to read j as follows: "Such budget program shall include a j I statement of financial condition, a statement of j i revenue, expense, and retained earnings, a statement ; of sources and application of funds, including net : expenditures, and such other statements and informa tion as are necessary or desirable to make known the program and financing of the corporation, and the j j status of related appropriations and borrowing j authority. Such statements shall include estimates j of operations by major types of activities, together with estimates of administrative expenses, estimates of borrowings, estimates of the amount of Government capital and dividends which shall be paid to the Treasury during the fiscal year, and the appropria tions required to provide additional capital or to restore impairments"; and by adding the following new paragraph: | "(b) This section and section 105 of this Act shall j not apply to any Government corporation which shall j have repaid all of the Government capital invested therein, but it shall apply to any such corporation j during any period when it possesses statutory author- ‘ ity to (1) issue or have outstanding obligations ; j guaranteed in whole or in part by the United States, i — . - or (2) obtain Government funds by appropriations, borrowings, subscriptions to capital stock, or other wise, or (3) utilize Government funds which have bean obtained in any manner covered by clause (2) of this sentence and which have not been repaid to the Government in full.” (4) The second paragraph of section 103 of said Act (31 j U.S.C. 848) is amended by striking the words "wholly owned." i (5) Section 105 of said Act (31 U.S.C. 850) is amended by ! striking the words "wholly owned" from the first I sentence thereof and by striking the word "financial" | from the next to the last sentence of the section; and j by adding at the end of said section the following: ; "The provisions of this section and of section 106 j shall apply to any Federal Home Loan Bank without i regard to the provisions of subsection (b) of section j 102. " (6) The second sentence of section 106 of said Act (31 j U.S.C. 851) is amended to read as follows: "The I report shall set forth the scope of the audit and I shall include financial statements and such comments } and informationas may be deemed necessary to keep I Congress informed of the operations and financial j condition of the several corporations, together with ! such recommendations with respect thereto as the j Comptroller General may deem advisable, including a j report of any impairment of capital noted in the audit * j and recommendations for the return of such Government ! | capital or the payment of such dividends as, in his j judgment, should be accomplished." j (7) Section 107 of said Act (31 U.S.C. 852) is amended by j striking the words "wholly owned." I Section. 2 (1) Title II of said Act, 59 Stat. 600-601, as i amended (31 U.S.C. 856-859), is repealed. I (2) Title III of said Act, 59 Stat. 601, is redesignated ; as "Title II." ! (3) Section 301 of said Act, as amended (31 U.S.C. 866), is renumbered as section 201; paragraph (a) of said section is amended to read as follows: i "(a) The expenses of auditing the financial trans actions of Government corporations as provided in section 105 of this Act shall be borne out of appro- j priations to the General Accounting Office, and I appropriations in such sums as may be necessary are hereby authorized: PROVIDED, That each such corpora tion shall reimburse the General Accounting Office for the full cost of any such audit as billed there- j for by the Comptroller General, and the General j Accounting Office shall deposit the sums so reimbursed into the Treasury as miscellaneous receipts, but such 688 i I cost shall not be regarded as an administrative j expense for the purpose of any limitation which may ! be placed upon administrative expenses of any such i corporation: PROVIDED FURTHER, That in making the audits provided in said section the Comptroller General shall, to the fullest extent deemed by him to be practicable, utilize reports of examinations of Government corporations made by a supervising admin- | istrative agency pursuant to law.”; and paragraph (c) j of said section is amended by striking the words j "sections 105 and 202," and substituting in lieu ; thereof the words "section 105." (4) Section 302 of said Act, as amended (31 U.S.C. 867), J is renumbered as section 202, and is amended by striking the words "wholly owned and mixed-ownership"; j by inserting the word "or" following the words "the ; Central Bank for Cooperatives,"; and by deleting the j words "or the Federal Land Banks,". (5) Section 303 of said Act, as amended (31 U.S.C. 868), is renumbered as section 203 and paragraph (a) there of is amended by striking the words "wholly owned or mixed-ownership"; paragraph (b) thereof is amended by striking the words "wholly owned or mixed-owner- j ship"; and paragraph (d) thereof is amended to read as follows: "(d) The provisions of section 202 of this section shall not apply to any Government corporation which shall have repaid all of the Government capital ! invested therein, but they shall apply to any such j corporation during any period when it possesses statutory authority to (1) issue or have outstanding obligations guaranteed in whole or in part by the United States, or (2) obtain Government funds by appropriations, borrowings, subscriptions to capital stock, or otherwise, or (3) utilize Government funds j which have been obtained in any manner covered by | clause (2) of this sentence and which have not been | repaid to the Government in full." ! (6) Said Act is amended by adding the following new I sections: "Sec. 204. Notwithstanding the provisions of any | other law, the rate of interest payable by any corpo- I ration subject to this Act on loans hereafter made to j the corporation by the Treasury shall be fixed by the i Secretary of the Treasury, taking into consideration the current average market yields of outstanding marketable obligations of the United States having j comparable maturities." j "Sec. 205. Any Government corporation as defined in j section 101 of this Act, or any corporation or agency j or activity thereof which is required by law to sub- 689 mit an annual budget pursuant to, or as provided by, section 102 of this Apt— (a) shall make payment in full, either by advance or reimbursement, to any agency of the United States,, including any other corporation, in such amount as may be agreed upon between the agencies concerned, ; for the use of space in Government-owned or leased j structures, guard services, communication services j or facilities, and for any other service or facility which may be rendered upon request or which may be designated by the Bureau of the Budget: PROVIDED, j That such services or facilities may be rendered with-, out charge only if the head of the rendering agency j determines that the cost involved in nominal or cannot ! be determined accurately without incurring costs j substantially equal to or in excess of the estimated cost of the services or facilities rendered; j (b) shall contribute, from the respective appropria- j tion or fund used for payment of salaries, pay, or compensation, to the civil service retirement and j disability fund, a sum as provided by section 4 (a) ! of the Civil Service Retirement Act, as amended (5 U.S.C. 2254 (a)), except that such sum shall be determined by applying to the total basic salaries (as defined in that Act) paid to the employees of the corporation, agency, or activity, covered by that j Act, the per centum rate determined annually by the Civil Service Commission to be the excess of the total normal cost per centum rate of the civil service retirement system over the employee deduction rate I specified in said section 4 (a). The corporation, agency, or activity shall also contribute at least quarterly from such appropriation or fund, to the employees’ compensation fund, the amount determined by the Secretary of Labor to be the full cost of j benefits and other payments made from such fund on I account of injur

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Creator Smith, Hadley Edwin (author)

Core Title An International Comparison Of The Role Of Government In The Economic Development Of Developed And Emerging Economies, With Particular Reference To Government Corporations

Degree Doctor of Philosophy

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor Elliott, John E. (committee chair), Anderson, William H. (committee member), Storm, William Bruce (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c18-314809

Unique identifier UC11358718

Identifier 6403109.pdf (filename),usctheses-c18-314809 (legacy record id)

Legacy Identifier 6403109.pdf

Dmrecord 314809

Document Type Dissertation

Rights Smith, Hadley Edwin

Type texts

Source University of Southern California (contributing entity), University of Southern California Dissertations and Theses (collection)

Access Conditions The author retains rights to his/her dissertation, thesis or other graduate work according to U.S. copyright law. Electronic access is being provided by the USC Libraries in agreement with the au...

Repository Name University of Southern California Digital Library

Repository Location USC Digital Library, University of Southern California, University Park Campus, Los Angeles, California 90089, USA