The “mess” of the public industrial production in Austria: A typical case of public sector inefficiency?

Summary and conclusion

The economics of property rights, the X-efficiency approach, the economic theory of bureaucracy, the public choice theory and the findings about union-controlled firms have been used to explain inefficiency in the public sector in general. These approaches, however, have been rarely applied specifically to public industrial production in competitive markets with private goods characteristics. In Austria a sixth of the industrial production takes place in public enterprises. Until lately there were neither thorough audits nor strict efficiency controls by the government or administration. For a long time the obvious inefficiencies were tolerated by the taxpayers, the government and even by the opposition. Moreover in the Austro-keynesian era the public industrial firms were implicitly used for reaching the government's stabilization policy goals immediately. This brought about big losses and created a heavy burden on the federal budget. Nonetheless the microeconomic consequences of this kind of Austrian public industrial policy have not been analysed satisfyingly.

Discussing the Austrian situation we assert that the above-mentioned approaches can be well applied for capturing the mess of the public enterprise operating in competitive private goods markets. On this theoretical base we form hypotheses of comparatively low productivity, high labor cost, high investment rates, strong growth of output and low profits (high losses) in the public industrial sector. We test our hypotheses by employing statistical means tests and regression analyses. By and large our hypotheses are supported by the empirical findings with one prominent exception: Despite the presumed input-maximizing behavior of the public managers, the low threat of illiquidity following investment failure in public enterprises and the evident stabilization behavior of public industrial firms it surprisingly turns out that the private industrial sectors largely show higher rates of investment as compared to the public ones. The most striking results indicating inefficiencies of public industrial enterprise can be obtained with respect to labor cost efficiency and profitability. Overall productivity is also unambiguously lower in the predominantly public industrial sectors. The pursuit of stabilization goals by public industrial firms can be identified empirically by comparatively high labor costs as a consequence of expansionist wage policy strengthening the demand for consumption goods and by the relatively strong trend of turnover.

We argue that in the end it has always been the logic of collective action which has rendered inefficiencies in the public sector possible: The inherent lack of incentive to exert effective control of an efficient use of public resources and the institutional incentive to utilize this condition selfishly for personal and political goals are responsible for the pertinacity of inefficiencies caused by the factors mentioned at the beginning of Section 4. As for the Austrian case we demonstrate that this holds true even for economic environments as transparent as competitive markets. In this perspective the mess of the public industrial enterprise in Austria is indeed a typical case of public sector inefficiency. On the other hand this problem is not necessarily doomed to persist. The turn of mind in the Austrian public opinion and industrial policy in the mid-80s may serve as a “proof” for it. However, to achieve a permanent solution to the problem one would have to enter the domain of constitutional economics and policy. If Austria wants to continue her way in this direction the present situation looks promising.