Private Enterprises vs. Government Enterprises
A private enterprise, funded by capital contributions from family economic units, primarily aims to maximize profits. To achieve this goal, they acquire fixed assets using the capital contributed and combine them with labor services provided by contracted workers. These workers are then paid a salary reflecting their productivity value.
The owner of a private enterprise seeks to maximize profits, which in turn maximizes the return on their capital and provides income for acquiring consumer goods satisfying family members’ needs. Moreover, when a private enterprise maximizes profits under competitive conditions, it contributes significantly to societal well-being by fulfilling its social responsibility. This is possible because private enterprises have clearly defined property rights, allowing shareholders to appropriate net gains and bear the full cost in case of losses.
Government Enterprises: Challenges and Impact
In contrast, government enterprises often face losses that are socialized, meaning the entire society bears the burden in two primary ways. Firstly, fewer resources are allocated to public services like education, healthcare, and infrastructure due to covering losses. Secondly, these enterprises are frequently created without thorough social evaluations, making them unprofitable and destructive to national wealth and economic growth potential.
Government enterprises suffer from two significant issues. First, property rights are not clearly defined; all Mexicans are nominal owners, yet no one is genuinely responsible for losses. Secondly, these enterprises are assigned a “social function,” which disallows profit generation unlike private enterprises whose social function is to maximize gains.
Problems with Government Enterprises
When a government enterprise is assigned a “social function,” it typically means selling goods or services below the marginal cost of production. Consequently, revenues fail to cover even variable costs (salaries, raw materials, etc.), leading to accounting losses and necessitating government transfers for coverage. Furthermore, as these enterprises don’t cover variable costs or fixed costs (especially the cost of capital), they incur economic losses, destroying parts of national wealth.
The unclear property rights mean no one genuinely owns these enterprises, allowing workers or administrative bureaucracy to appropriate them. This results in excessive staffing and higher-than-productivity-value salaries, including benefits like paid vacations, labor union leave, retirement at younger ages, and significantly larger pensions than private sector counterparts, further increasing variable costs and losses.
Consequences of Government Enterprise Losses
Government enterprises lose through two channels: lower revenues from selling below production costs and higher operational costs than if they were private. This necessitates government transfers to cover losses, forcing the government to cut spending in other areas or incur more debt.
Mexico’s Parastatal Sector: A Historical Perspective
This has been and continues to be the story of Mexico’s parastatal sector. Examining the federal budget reveals transfers to Pemex, CFE, Tren Maya, Interoceanic Railway, Mexicana de Aviation, AIFA (what do the armed forces have to do with operating railways, airlines, and airports?), Litiomex, and more. With a statist ideology, the government remains indifferent to its enterprises destroying parts of national wealth instead of contributing to economic development.
