Getting
re-elected is much easier when voters are content, such as when the economy is
doing well and everyone has work. No wonder we see a president tell media that
the U.S. economy is fantastic but also tell the Fed that the economy is in
trouble and needs a strong boost from a prime rate cut. This is crude, but if
everyone complies it will work. However, in nations with a stronger blend of
state and private sectors, more sophisticated approaches are also available.
Scholars
have long thought that state-owned enterprises (SOEs) have political uses, and
in a recent paper in Administrative Science Quarterly by Carlos Inoue we learn
more about how politicians can use them. The trick in this case is
over-employment, which has to be done very selectively because voters in most
nations are wary of the state, or the enterprises it owns, running up excessive
bills that have to be paid through taxes. That’s why the use of SOEs has to be
sophisticated, not crude.
What to do?
Inoue looked at the water-supply sector in Brazil, which has exactly the blend
of municipal authorities, SOEs, and privately owned firms needed to check
whether SOEs are special. And indeed, they are special. SOEs hired additional
staff exactly during election years (for governors, who are the ones
controlling them). To maximize the electoral impact, they were careful to hire
more staff in communities with greater poverty. Some SOEs also had private
investors, who resisted effectively enough that the over-hiring in election
years was less. So we see a sophisticated effort to buy elections through
influencing SOEs: hire more when needed, where the creation of jobs is most
effective, and whenever possible.
What was
the cost of all this? In general, SOEs were not costlier than other firms,
because they diverted resources from other areas to create jobs. But they did
have lower profitability as a result of the greater employment during election
years. They spent money – sacrificed profits – exactly when it was useful for
politicians seeking re-election, but not otherwise.
Organizations
are used in so many ways, some of which are far away from their original
purpose. The water-supply industry is important in any nation, because abundant
and clean water helps the society and economy, but at least some of these firms
have a second purpose. This is something that both scholars and practical
readers dislike, but at the same time we have to admire how skillfully it was
done in this case.
