The public sector of the economy is Definition, features and functions

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:55

The public sector of the economy appeared along with the first states, when people began to unite, because it was easier to survive with a larger community. Tax collection, defense, public safety are the primary elements with which any country began. Then there were state-owned enterprises for the production of weapons, communications, and transport. The public sector of the economy is a set of subjects of all types of activities in which the state is engaged. The first full-fledged model of the public sector of the economy appeared in ancient China.

Concept

The public sector of the economy is organizations, institutions, enterprises owned by the state, through which it participates in production, distribution and exchange. These economic entities can be controlled by the state directly or through their representatives.

First option

As a specific type of property and activity, the state sector of the country's economy appeared in 140 BCin ancient China under the emperor of the Han dynasty Wu Di. The country's governance model included almost all the elements inherent in the modern state economy.

The Chinese state owned enterprises of various industries, including mines, quarries, s alt works, land and water transport, credit institutions. Emperor Di introduced a unified monetary system and excises, control over competition and prices.

The state adopted a plan for interregional cooperation and stimulation of agricultural development. Together with the public sector, the country also developed the first system for managing the public sector of the economy. A modified model is still used in modern China.

Elements

The state carries out its activities through its representative organizations in various areas of production, distribution and circulation. In the sphere of production, the elements of the public sector of the economy are state and municipal enterprises. In most countries of the world, such enterprises are created in industries where it is not very profitable for the private sector to operate.

In the sphere of distribution, the main elements are the state and local budgets, taxes, subsidies and preferences. The state is forced to participate in the redistribution of public goods, including in order to reduce income inequality, protect the least protected segments of the population, and reduce disproportions in the development of different regions.

In the sphere of circulation, the main element of the public sectoreconomy is the Central Bank, which is responsible for the monetary policy and operation of the country's financial system.

How is it formed?

In normal situations, the development of the public sector of the economy occurs through the construction of new enterprises at the expense of the state and local budgets. For example, in Russia enterprises of the military-industrial complex are being built at the expense of the state budget, and utility companies are being built at the expense of local budgets.

In some cases, the state nationalizes all or part of private sector enterprises. The state is forced to take over large unprofitable enterprises; this practice exists in many European countries, including France, Italy, Great Britain, and Austria. In these countries, enterprises of various industries were nationalized, including coal mines, automobile plants, and air carriers.

Functions

One of the functions of the public sector of the economy is the formation and maintenance of the national economy. In capitalist countries, state-owned enterprises are created where the private sector cannot cope, and disproportions arise in the economy. Often, after an enterprise is nationalized and put in order, it returns to the private sector.

For example, many enterprises of the South Korean conglomerate Daewoo were nationalized and, after a certain period of reorganization, were sold to the private sector. The most classic case of the "failure" of the mechanisms of a market economy ismonopolization, which the state fights with regulation and participation in production.

The economic role of the public sector in the economy is to create enterprises for the benefit of the country as a whole, and not to maximize profits. Enterprises can be created for the purpose of efficient distribution of productive forces, regional development, creation of new national sectors of the economy.

More about the economic function

The state is able to accumulate large amounts of resources and ensure financial stability and demand, so one of the important functions of the public sector of the economy is the creation of capital-intensive facilities, often with long payback periods and low profitability. The most developed regions of Asia - Singapore, Hong Kong, South Korea, for example, began the development of industry with public investment.

The state also takes risks in situations where private business cannot cope with the technological modernization of backward industries that are critical for the country. For the development of individual regions, the country can not only create conditions for attracting private business, but also build its own enterprises. In some cases, public sector enterprises are organized in industries where there are private enterprises that occupy a monopoly position in order to reduce their influence on the market. Countries are investing heavily in key industries to reduce the control of foreign global corporations.

Main destinations

Depending onfrom the economic traditions of the country, the state has property in a variety of industries. For example, in Russia it is the extraction of natural gas, in Malaysia, Venezuela - oil, in Taiwan - the production and sale of alcohol. But in all countries, the state is responsible for the infrastructure facilities necessary for the functioning of the economy.

Railways and roads are being built at the expense of the state budget, public utilities and energy facilities are being developed. Basically, these are enterprises of low-profit industries and high social significance. The state takes on entrepreneurial risks when it is necessary to develop new technologies or entire industries that are critical for the country.

In all countries, the development of high-tech industries takes place with the partnership of the public and private sectors of the economy. Sometimes the state has to act as a rescuer, then unprofitable enterprises are nationalized. This is usually done for significant large enterprises with a large number of employees.

Regulation methods

Like any other part of economic activity in the country, the economy of the state and municipal sector is regulated by the state. Direct and indirect methods of influencing this sector of the economy are used. Direct methods include:

• creation of a legislative framework that determines the ability to engage in a particular type of activity;
• direct participation in production activities, including shareholding;
• privatization of the stateproperty, usually with the aim of replenishing the budget and transferring the business to the management of a more efficient owner;
• investments, loan guarantees and other methods of financial support.

Indirect methods of regulating the public sector of the economy are tax regulation, demand stimulation and public-private partnership. By setting rates, investment is stimulated to flow to industries with lower taxes. An increase in household income, for example, stimulates demand for consumer goods, and the size of the central bank's key rate determines where it is more profitable to direct money into production or the financial sector.

Who works in the public sector?

The variety of functions of the state determines the existence of hundreds of activities carried out by state and municipal enterprises. All enterprises can be classified into three types:

• Non-independent public law enterprises. These include penitentiaries, schools, mints.
• Independent enterprises operating under public law. These include post offices, railroads, highways, government holdings and corporations.
• Enterprises in the form of a private legal entity. These include joint-stock enterprises, where state participation is formalized through shares.

Enterprises of the first and second groups are created and operate on the basis of special legislative acts. In some countries, these enterprises may also exist injoint-stock form, for example, private prisons operate in the United States and in some European countries, and in many countries there are private schools. State entrepreneurship is carried out, usually through participation in a joint-stock company.

Advantages and disadvantages

In general, the decline in the role of the public sector in the economy is considered a positive factor, because everyone notes the lack of methods of reliable control and effective management, compared to private enterprises. State-owned enterprises are a source of corruption and nepotism (synonymous with nepotism).

In China, despite the brutal struggle, facts of corruption in the public sector are constantly being revealed, and in South Korea, all casino employees were fired for nepotism last year. State-owned enterprises are often poorly connected to the market and cannot quickly respond to changes in demand due to the need for lengthy coordination with state representatives.

The advantages of the public sector of the economy are sustainability, thanks to public investment, stability of work, thanks to guaranteed demand, the ability to work within the framework of a plan or program.