The period 1945–80 saw a growth in the public enterprise sector in most industrialised and non-industrialised countries of the world. As usual, ‘ size’ can be measured by reference to the share of the sector in output, investment or employment. You should refer back to Module 2 for a reminder of the problems associated with such measures in the context of the public sector as a whole. Table 8.1 shows the share of public enterprises in gross fixed capital formation for a sample of industrialised countries at the end of the 1970s. It can be seen that the sector was quantitatively of considerable importance. In Australia and the UK the share of public enterprises in gross fixed capital formation reached or exceeded 17 per cent, while the weighted average of industrial countries was about 15 per cent. Measured by share in GDP the public enterprise sector accounted for an average of about 9.5 per cent of the output of the industrialised countries at that time.
Public enterprises figured prominently in the natural monopoly industries in the period up to 1980. A study of public enterprise in the early 1980s could still observe that ‘In most countries, the major part, and often almost the whole, of the public utilities – electricity, gas, and water – and the communications and non-road transport industries are publicly owned’ (Short 1983 p. 26). However, natural monopoly constituted only part of the reason for public enterprise at the time. Although such industries were often the first to be taken into public ownership, they were joined during the 1960s and 1970s by others in many different sectors of the economy which had no natural monopoly characteristics. Short (1983 p. 26) notes that it was in the manufacturing sector that public enterprise was showing the greatest growth in the 1970s.
Public Enterprise in the UK in the 1970s
The wide variety of business concerns taken into public ownership in the 1970s is illustrated by the following examples.
The desire to establish government control over industries of strategic importance was reflected in the establishment of the British National Oil Corporation (1976) following the discovery and exploitation of large deposits of petroleum in the North Sea.
In contrast to the growing oil sector, governments by the mid–1970s were becoming heavily committed to industries subject to long-term decline. Nationalisation of shipbuilding (1977) and the rescue of British Leyland (1974) could be considered as a response to the social problems involved in failure rather than the desire to control large and economically important activities.
The crash and subsequent reconstruction of Rolls Royce (1971), and the activities of the National Enterprise Board (NEB), set up in 1975, gave the government an increasing stake in many individual firms during this period. The NEB involved the provision of loans and equity finance, and thus illustrates well the definitional problems considered earlier. The NEB was classified as a public corporation but the main impact of its operations was the creation of a growing class of mixed enterprises with a substantial state interest. For statistical purposes most of the subsidiaries of the NEB were treated as part of the private sector. Many of these were enterprises which had come upon hard times and exhausted the tolerance of all private providers of finance, enterprises such as Alfred Herbert the machine tool manufacturer. Others, however, were in a rather different category of firms with technically advanced products which likewise had problems in raising private finance.
An increasing concern to encourage high-technology firms and industries was revealed in the portfolio of assets held by the NEB and later the British Technology Group (formed by a merger in 1981 between the NEB and the National Research Development Corporation (NRDC)). Apart from the assets which were vested in the NEB when it was initially set up, much of the new assistance approved by the NEB went into the fields of microelectronics and biotechnology. More conventionally, the interest of the Labour Government in maintaining a large government commitment to high technology was seen in the nationalisation of much of the aerospace industry and the formation of British Aerospace in 1977.
Sources: Figures for the 1970s from Short (1983) Table 1.
UK figures for 1988 from Central Statistical Office, United Kingdom National Accounts(1989) HMSO Tables 6.3 and 1.2. Figures for 1987 taken from OECD (1989) National Accounts1975–87, Paris.
Notes:
It is evident from this brief outline of the historical experience of the UK up to 1980 that the relative simplicity of the nationalised industry sector, as set up in the late 1940s in the form of public corporations dominating certain ‘strategic’ and natural monopoly sectors, was being undermined in the 1970s. These later years saw the development of mixed enterprises in which the state held a substantial interest and which covered declining as well as growing industries and technologically advanced and technologically static small firms as well as large.
The changing climate of the 1980s is clearly indicated in Table 8.1. Most industrialised countries reduced the relative size of the public enterprise sector, some very dramatically. It was in the UK that the policy of transferring public corporation to the private sector was pursued most systematically. By 1988 the share of public corporations' investment in gross domestic fixed capital formation had fallen to 5.5 per cent, and in 2000 the share in total business investment was 2.2 per cent. In 1979 the state sector of industry (mainly the nationalised industries) accounted for 11 per cent of GDP. By 1993 the nationalised industries accounted for 2.3 per cent of GDP. Over 950 000 jobs were transferred to the private sector during this period (HM Treasury 1995 p. 63). This policy affected many enterprises: manufacturing firms such as British Steel; oil companies such as Britoil, subsidiaries of the British Technology Group; high-technology firms such as British Aerospace and Rolls Royce; transport undertakings such as British Airways and subsidiaries of the National Bus Company; as well as the traditional natural monopoly undertakings such as British Telecom, British Gas, and the Water Companies.
This swing away from public enterprise as been accompanied by an increasing use of alternative regulatory mechanisms to cope with natural monopoly as were discussed in Module 3. Further discussion of privatisation will be deferred until Module 9. In the following sections of this module we investigate possible reasons for the change in policy towards public enterprise, and consider in more detail the problems associated with the relationship between public enterprise and the government.
