State Capitalism makes government budgets less transparent

Feb 06, 2012

Last week’s Economist tries to take down ‘state capitalism’, which it describes as an economic growth model where enterprises are ‘backed by the state but behaving like a private-sector multinational.’ This ‘backing’ takes many forms, from state-owned enterprises to significant government share-holding in private firms, to aggressive industrial policy measures such as tax breaks and loan guarantees.

The Economist claims a number of weaknesses in the state capitalism model, such as slower growth and inefficient use of capital and human resources. In addition to these economic orthodoxies, this model poses another set of problems: it makes government finances less transparent.

The Open Budget Index (OBI) scores the overall transparency of government budgets. The table below presents the overall OBI scores for five champions of state capitalism. It also presents the answers to a number of questions that deal with the interactions between the state and private and state owned companies. The table then provides an average score for these state capitalism related issues in each of these five countries.

The table shows that Brazil, China, South Africa, Malaysia and Russia are less transparent in their ‘state capitalism’ transactions than they are with their public finances in general. These countries tell us very little about:

  • financial transfers to public corporations;
  • tax expenditures that benefit the private sector through exceptions or preferences for specified entities, individuals, or activities in the tax code;
  • quasi fiscal activities such as when governments require that a public financial institution provides an indirect subsidy through loans at below-market rates for particular activities, or that an enterprise provide goods or services at prices below commercial rates to certain individuals or groups;
  • contingent liabilities such as loan guarantees;
  • government’s financial assets; and
  • extra budgetary funds; that is government transactions with separate banking and institutional arrangements that are not included in the annual budget law.

Emerging evidence suggests that budget transparency can reduce corruption, improve efficiency and align public spending with policy priorities. The examples of Greece and Portugal also show that markets could eventually punish governments for such a lack of transparency.

Of course there is nothing about the state capitalism model that is inherently less transparent than its competitors. Most of these five governments have all the relevant information available. All that they need to do is to share it with the rest of us.

Questions

Brazil

China

Malaysia

Russia

South Africa

Does the executive’s budget or any supporting budget documentation present information for at least the budget year on extra-budgetary funds?

0

0

0

33

100

Does the executive’s budget or any supporting budget documentation present information for at least the budget year on transfers to public corporations?

67

0

33

100

100

Does the executive’s budget or any supporting budget documentation present information for at least the budget year on quasi-fiscal activities?

33

0

33

0

33

Does the executive’s budget or any supporting budget documentation present information on financial assets held by the government?

0

0

0

0

67

Does the executive’s budget or any supporting budget documentation present information on contingent liabilities (such as government loan guarantees)?

67

0

0

67

100

Does the executive’s budget or any supporting budget documentation present information for at least the budget year on tax expenditures?

67

0

33

67

67

Average for State Capitalism related Questions

39

0

17

45

78

Open Budget Index

71

13

39

60

92

 * Scores of  100 means that the country publicly releases comprehensive, timely and regular information. Lower scores indicate that no such information is released or that there is some lack of comprehensiveness, timeliness or regularity in its release.

*More information on the Open Budget Index is available at www.openbudgetindex.org