REFORMS to state owned enterprises (SOEs) can unleash productivity and efficiencies in an economy. However, such reforms can bring pain and controversy—so-called “adjustment costs”. These costs were evident in the former Soviet Union in the 1990s, when sweeping SOE reforms led to the closure of thousands of SOEs, unemployment, and social unrest.
Even the more gradual reforms in the People’s Republic of China saw many SOEs dissolved. Many economies in the Pacific are dominated by the public sector. Successive Finding Balance studies by the Asian Development Bank have revealed that Pacific SOEs are plagued by low productivity, inadequate management, and weak financial results. Because Pacific economies are small, a common perception is that there are limited opportunities for the private sector to grow and for people to find other employment. This perception has contributed to SOEs’ continued dominance in economic activities.
The reform of the Public Works Department (PWD) in Samoa provides an illuminating example of how to navigate the necessary adjustment costs and lessen the resistance to reforms. The capabilities and efficiency of the PWD had steadily fallen throughout the 1980s and 1990s. Its reform was a result of both chance and design. Two major cyclones struck Samoa in 1990 and 1991. The massive reconstruction required to repair the damage stretched the capacity of the PWD beyond its breaking point. The Government of Samoa opened up the reconstruction efforts to the private sector on a far wider scale than previously.
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