Page 44 - Introduction to Business

18 PART 1 The Nature of Contemporary Business

and utilities, are still provided by the government. A number of services (defense,
social services, Amtrak, the Tennessee Valley Authority, etc.) in the United States are
also provided by the government. Most economies are mixed economic systems.
mixed economic system The economic A mixed economic system is one that exhibits elements of both the capi-
system that exhibits elements of both talist system and the command system. Not all services (e.g., defense and social
the capitalist and the command welfare) can be provided by the private sector; hence the government plays a
economic systems
crucial role in providing these services while at the same time procuring goods
(fighter aircrafts, naval fleet, ammunition, etc.) from private companies. Not all
mixed economies are alike. In some countries public sector (government-owned
or state-owned) enterprises play a much larger role than in others. In the industri-
alized countries of Europe, for example, France, the government owns (now par-
tially) several companies like Air France and SNCF (the French railroad system). In
many developing countries, for example, China and India, several companies in
the manufacturing and service sectors are owned by their governments. The
Indian government owns several steel, fertilizer, petrochemical, oil and gas,
machinery, and electronics firms as well as services like airlines, railways, and
shipping.
The larger the role state enterprises play in an economy, the greater the
prospect for economic inefficiency. State enterprises are inherently overstaffed
with underperforming employees who have little motivation to work hard or effi-
ciently, since their salaries are generally not tied to productivity. All employees
get paid more or less the same and salaries are normally based on seniority—num-
ber of years of service with the state agency. If you have traveled to France or
India, you will readily see for yourself how the United States compares with them
in terms of efficiency in the production of goods and services. Countries that are
dominated by private sector enterprises generally exhibit dynamic business and
economic growth. The trend these days in mixed economies like France and India
is to move away from state enterprises to private businesses. This is being achieved
through the sale of state enterprises to private entrepreneurs—a process called
privatization The process of selling privatization.
state enterprises to private As countries privatize state enterprises, their economies are bound to grow
entrepreneurs
faster and productive employees will become richer. Governments can then focus
their attention on providing services like social welfare and defense that generally
cannot be provided by private firms. While the mixed economy is bound to stay
with us for a very long time, the role of government in running businesses is des-
tined to diminish.

The Transition Economies
In 1989, after years of state control of all productive assets in the Soviet bloc, the
Berlin Wall fell and the Soviet Union broke up. This led to the start of market-
oriented reforms in Russia and the former communist economies of Central and
Eastern Europe and Central Asia. This move, from central planning to capitalism
(in the direction of competitive, market-oriented, open trade economics), is called
economic transition The move from a economic transition and is aimed at ending the inefficiencies of central planning.
command economic system to a Privatizing state-owned enterprises is also designed to free resources and talent that
capitalist economic system (in the
direction of competitive, market- could be used productively by the private sector, thereby raising the living standards
oriented economics) that is aimed at of these people. While economists generally refer to the former Soviet Union coun-
ending the inefficiencies of central tries as transition economies, China in 1978 was the first major economy to embark
planning
on the reform from state control to capitalism. China is implementing market-
oriented reforms that are introducing profit incentives to rural enterprises and
private businesses, liberalizing foreign trade and investment regulations, relaxing
state control over some prices, and investing in industrial infrastructure and the

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