Sunday, August 23, 2009

Public vs Private: Does this distinction "defy logic"?

I was honored to have one of my recent posts, "How do Australia's Foreign Investment Rules Apply to China?", cross-posted by the East Asia Forum where it received the following question/observation from Lincoln Fung:
What does the ownership in terms of public versus private make to owning some shares of a firm in an another country? All firms in a country are subject to the regulations of that country, whether they are owned domestically or by foreign investors. A country can always regulate the behaviour of the firms operate in its land. So what are the concerns or fears of a firm is owned by a public firm of another country? It defies logic to understand the reasons behind.
Mr. Fung's questions are very important. Indeed, this distinguishing between "public" and "private" drives much of my own research. And, in fact, I used Mr. Fung's very line of reasoning in an interview about the Rio Tinto case with a journalist from the Sydney Morning Herald earlier this year. As for defying logic, I understand that such a distinction may defy some people's logic; however, from other people's perspectives, such a distinction may seem perfectly logical.

For example, there is the populist logic that a "communist", authoritarian state lacking in transparency and rule of law is not to be trusted. While one may disagree with that premise, it is not difficult to understand why someone holding that premise would logically be wary of China's intentions.

There is also the logic of neoclassical economic theory which tells us that a government, conflicted as it is with various political objectives, cannot run a business as efficiently or effectively as the private sector. Again, someone from China who is accustomed to the government having a major role in just about everything may not understand this "logic".

Many people in the West have been influenced by the two "logics" I have mentioned above. These have become so ingrained in Western culture that few people even bother to question them. However, the recent economic upheavals have led many in the West outside of academia (economists and political scientists have been pondering such questions for quite awhile) to ask whether government can indeed have a positive role.

This is not to say that governments will most certainly have an increased economic role going forward. They may, but then again, there are plenty of reasons to question the sustainability of China's state-centric economy.