Trump Has Put Government Ownership Back On The Policy Agenda

Why Economists Became Pessimistic

The skeptical case rested heavily on public choice economics. A government-run firm may pursue goals other than financial returns. For example, it might seek to preserve jobs, hold down prices for consumers, support favored regions, or carry out national strategy. Those goals often conflict with the objective of maximizing profits. When state owned companies fail to earn a commercial return, elected officials have incentives to shift the costs onto taxpayers or defer them into the future.

Economists Andrei Shleifer and Robert Vishny formalized this argument in a powerful framework in the 1990s. Politicians may value jobs and local favors more than profit. Managers may welcome subsidies and protection. Taxpayers absorb the losses. This arrangement creates what economists call a soft budget constraint. A firm that expects rescue has less reason to cut costs, reject weak projects, or shed unproductive assets.

Shleifer later argued that private ownership is generally preferable in industries where firms must constantly innovate and keep costs low to remain competitive. By his logic, governments should pursue social goals through regulation, contracting, and targeted subsidies rather than direct state ownership. His work gained influence during the transition from communism, when many countries were struggling to reform large portfolios of state owned enterprises.

The empirical literature seemed to point in the same direction. William Megginson and Jeffry Netter reviewed a large body of evidence in 2001 and concluded that privatized firms generally became more profitable and financially healthier. Employment effects were mixed, but the operating results favored divestiture in many settings. Their review also stressed an important qualification. Competition and regulation often matter alongside ownership. A private monopoly with weak oversight can preserve many of the same problems as state owned companies.

What The Early Evidence Could Not Settle

The early findings were important, but the evidence was not ideal. Governments often sold the largest and healthiest firms through public offerings. That created selection bias because the firms chosen for sale were not necessarily representative of the state sector. Simple comparisons before and after privatization also lacked a clean counterfactual.

The transition economies created even larger measurement problems. Accounting records were poor and misreporting was common. Privatization arrived at the same time as price liberalization, trade opening, new bankruptcy rules, financial reform and changes in macroeconomic stabilization policy. Researchers could observe improvements in privatized firms, yet separating the effect of government ownership from the effect of the surrounding transformation was difficult.

Many firms in the early samples also had weak governance structures. Individual government ministries sometimes issued companies’ operating instructions, while boards lacked authority to change the direction of firms. Outside monitoring was limited. Professionally managed sovereign funds and state holding companies existed, but they were less common. Much of the early literature framed the debate as a choice between state and private ownership, giving less attention to the broad range of ownership and governance arrangements that lie between those two extremes.

A Different Form Of State Capitalism

By the 2010s, state capitalism had changed. Aldo Musacchio and Sergio Lazzarini, in their book Reinventing State Capitalism, showed that governments were no longer relying on a single model of ownership. Some retained majority stakes while giving firms greater commercial autonomy. Others became minority investors, channeled capital through development banks, or managed assets through professional holding companies. In many cases, public and private capital operated side by side within the same firm.

Their work did not portray state ownership as an unqualified success. Political influence, subsidized financing, and favoritism remained serious risks. Instead, they argued that ownership structures differ in important ways. A publicly listed company with outside shareholders, audited financial statements, and an independent board operates under stronger market pressures than an enterprise controlled directly by a government ministry. Minority ownership can also allow governments to share in financial returns while limiting their involvement in day to day management.

Mariana Mazzucato influenced the debate from another direction. She argued that governments sometimes create new markets that otherwise wouldn’t have existed, by financing basic research and investing in high risk technologies before private investors are willing to commit. She also called for public institutions to coordinate investment around popular national goals.

Mazzucato’s arguments concern innovation policy more than the routine operation of commercial firms. Even so, they challenge the assumption that governments are inherently ineffective investors. Mazzucato also argued that when taxpayers take early risks, public institutions should share in the financial upside. Her critics question whether government’s past history of successes in the technology sector offer a repeatable model and whether political officials can distinguish productive bets from favored companies. Nevertheless, the state as investor became a serious subject again.

An Emerging Consensus

Recent World Bank research offers a more detailed view of state ownership. A 2023 report examined 76,000 companies in 91 countries with at least 10 percent government ownership. Where data were available, their revenues equaled 17 percent of gross domestic product on average. Almost 70 percent operated in competitive markets. The report distinguishes among majority ownership, minority stakes, direct control and ownership through holding entities. It finds meaningful differences across these arrangements and across market structures. Its recommendations emphasize professional ownership, competitive neutrality, and periodic reviews to determine whether continued public ownership remains warranted.

The IMF reaches similar conclusions. State firms underperform private firms on average and can create fiscal risks. Governance, however, changes the size of the gap. An IMF analysis found that state firms in countries with high perceived corruption averaged about one third the productivity of private firms. In countries with strong governance, the productivity gap narrowed to 7 percent. The same analysis found that minority state participation was associated with better performance than majority government ownership. In other words, ownership alone does not determine performance. State capacity and institutional design leave substantial room for well designed public investment.

The OECD’s 2024 guidelines for state owned Enterprises reflect this newer consensus. A government should explain why it owns a company and what it expects the company to accomplish. The ownership function should be separated from regulation. Otherwise, a government may face a conflict of interest if the agency regulating an industry also owns one of the firms competing in it. Boards should be appointed on the basis of merit and given real authority to oversee management. Financial reporting and disclosure should meet standards comparable to those of publicly listed companies. Commercial activities should take place on market terms, without subsidized financing, tax preferences, or hidden government guarantees unavailable to private competitors.

Under this model, the government acts as a shareholder on behalf of the public rather than directing the company’s daily operations. Firms remain accountable to market forces, succeeding or failing based on their financial performance rather than relying on continuing government support.

How To Judge Trump’s Experiment

Trump’s ownership initiatives should be evaluated against this backdrop. The Intel agreement gave the government a passive equity stake without board representation, a structure that may reduce opportunities for direct political interference. His proposal for a sovereign wealth fund raises many of the same governance questions on a much larger scale.

The details are critical A fund financed by natural resource revenues is different from one built on government borrowing in a country running large deficits. Its mandate matters as well. A broadly diversified investment portfolio serves a different purpose than a fund designed to promote industrial policy. Likewise, a passive, diversified investment strategy differs fundamentally from one intended to direct capital toward strategic firms or industries. Whether any of these models succeeds depends largely on the institutions that govern it.

Economists in the 1990s were right to warn about patronage, soft budget constraints, and political control. More recent research has shown that state ownership takes many forms and that institutional design substantially influences outcomes. Public ownership can succeed under the right conditions. The debate has therefore moved on from asking whether governments should own companies to asking which institutions allow them to do so successfully. Trump’s proposals should be judged by that newer standard.