CITY COLLEGE OF EL SALVADOR

PUBLIC ADMINISTRATION DEPARTMENT

PUBLIC ENTERPRISE 103

Course Description
In this course, students introduce the differentiate concept of public enterprise.
This is to enable the students to know the definition, meaning and origin of public
enterprises. Students also examine some definitions by various scholars on Public
Enterprise, as well as the concept of Public Enterprises. The comprehension of any
concept of depends on an analysis of its features and this is the reason you are being
introduced to them firstly.

Course Objectives
The objective of this course is to enrich students to understand the challenges
and forces that public administration sectors have been facing. There will be a
concerted effort to link theoretical discussion to practical concerns on topics of the
growing trend toward entrepreneurial government management.
By the end of the course, students will gain knowledge that will assist them to
demonstrate an understanding of the dynamics of the management of public enterprises
and business relations:
• Think critically, analyze and synthesize elements related to entrepreneurial
governments and ways of conducting public services.
 Have the knowledge be able to apply the knowledge to assess the role of
relevant theory to practical issues in public sectors.
 Be able to explain the dynamics of e-Commerce and application to e-
Government.
 Have the knowledge to explain the concepts of entrepreneurial government and
reinvention and describe how to apply them to challenges in the public sector.
 Understand the importance of effective governing in public services
 Prepare for challenges and changes of public sectors
Table of Contents
PRELIM TOPIC

I. Definition of key Terms

A. Public Enterprise 1-2

B. GOCC 2-5

C. Local Economic enterprise and Economic Order ………………………...…6-8

D. Economic System …………………………………………………………………8

II. Nature of Scope, Role and Concepts

A. Public Enterprise 9-11

a. Characteristics ………………………………………………………..11-12
b. Objectives ……………………………………………………………..12-13
c. Contribution …………………………………………………………..,14-23
d. Forms/Other Names ………………………………………………....23-25
e. Criticisms ……………………………………………………………...23-25
B. Types of Public Enterprise
a. History of GOCC in the Philippines…………………………………25-26
b. Reason for creation (laws, statutes, decrees and all legal bases)
…………………………………………………………………………..26-34
c. Characteristics ………………………………………………………..34-35
d. Evolution of its Oversight Body ……………………………………..35-40
C. Local Economic Enterprise (LEES) …………………………………………….40
a. Legal Basis …………………………………………………………....40-42
b. Financing System …………………………………………………….42-44

MIDTERM TOPIC

III. Economic Contribution and Social Responsibility of Public Enterprises ……44-45

A. Economic Contributions …………………………………………………..45-46
 B. Sale and Disposals of Public Enterprises ………………………………46-49
C. The company and its responsibility to society. Relating corporate strategy
to ethical values …………………………………………………………...50-52
IV. Economic Order
A. Typology with respect to Population classification (Economic spending) 52
a. Traditional Economic Order ……………………………………...52-55
b. Evolvers …………………………………………………………….55-57
c. New Economic Order ……………………………………………..57-59
d. Comparison of the different classification ………………………59-62
e. OPEC ……………………………………………………………….62-65
f. Zero-Sum …………………………………………………………..65-66
B. International Economic Order (After World War II) …………………....66-67
a. Bretton Woods System …………………………………………...67-71
b. New International Economic Order ……………………………...71-84

C. Types of Economic System ………………………………………………...,,84

a. Combine Private Ownership with Market Allocation(market

capitalism, command capitalism, socialist planned economies,
market socialism, capitalist economic system and socialism)
……………………………………………………………………….84-92
b. By Resource Allocation ………………………………………………92
a) Mixed Economy …………………………………...………92-93
b) Participatory Economics ……………….…………………93-94
c. By ownership of the means of production (capitalism, mixed
economy and socialist economy) ……………………………….94-99
d. By Political Ideologies …………………………………………..99-101
V. References ……………………………………………………………………...102-105
I. Definition of Key Terms

A. Public Enterprise
A business organization is wholly or partly owned by the state and controlled
through a public authority. Some public enterprises are placed under public ownership.
Because for social reasons, it is through the service or product should be provided by a
state monopoly. Utilities (gas, electricity, etc.), broadcasting, telecommunications, and
certain forms of transport are examples of this kind of public enterprise.
Although the provision of these services by public enterprises is a common practice in
Europe and elsewhere, in the United States private companies are generally allowed to
provide such services subject to strict legal regulations. In some countries industries
such as Railways, Coal mining, Steel, Banking, and insurance have been nationalized
for ideological reasons, while other groups such as armaments and aircraft
manufacturers re have been brought into the public sector for strategic reasons. In
communist countries most forms of production, commerce, and finance belong to the
state; in many newly independent and less-developed countries, there is a very large
Public- Enterprise sector.
Public enterprises are usually intended to pay their way in the longer term, and
yet they may be subject to political constraints in their pricing policy that could be in
conflict with that objective. Conversely, for social reasons they may receive hidden
subsidies or enjoy additional protection not available to competitors; such factors tend to
distort the normal commercial operations of the corporation or the company and often
lead to managerial disorientation. Partly because of these non-commercial
considerations, Public Enterprises may appear to be highly inefficient and in times of
difficult trading conditions, maybe a drain on public resources.
However, the measurement of the efficiency of a Public Enterprise is no easy
matter. When it produces a marketable product, such as coal or steel, that competes
wot other products, the normal commercial criterion of profit may be adopted to assess
its performance. In the case of a utility enjoying monopoly power, economists have
developed concepts like cost-benefit analysis as a performance measurement tool. In

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 recent years many state enterprises in the developed world have been given financial
targets that take into account both social and commercial responsibilities.

B. GOCC – GOVERNMENT OWNED AND CONTROL CORPORATION

GOCC - is a stock or non-stock corporation, whether performing a governmental
or proprietary function which is directly chartered by special law or general corporation
law. It is owned or controlled the government directly or indirectly through a parent
corporation or subsidiary corporation, to the outstanding capital stock or its outstanding
voting capital stock.
GOCC should be examined in relation to their contributions towards: Sustainable
development growth, equitable distributions of wealth and total human development
especially of the common two.

This role can be examined from 3 different levels:

1. Theoretical level - which discusses the ideal type of public corporation and the basic
ideas governing public corporate activity under different economic and social conditions.
2. Normative level - analyzes the set of norms with respect to the role and position of
public enterprise.
3. Focuses on what is the actually achieved role, position and impact of public corporation.

The changing roles of GOCCs in the Philippines:

- Determination of the role of GOCCs- most important of which are the legal and policy
framework, the development impetus, the political economy of the country, and political
change.
- The legal and policy framework for creation of GOCC is set forth in no less than the
1973 constitution.
- The dramatic proliferation of GOCCs coincided with the aggressive push towards
development.
- GOCCs were utilized as a major tool for the attainment of development goals, as
indicated by the huge magnitude of government investment in the sector.

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 The growth of GOCCs:
- The GOCCs before political independence- available documents indicate that the pre-
war governments scrupulously limited the role of GOCC to a few sectors.
- Financing
- Public utilities
- Agricultural development
GOCC created during the American colonial period were engaged in public
transportation and financing.
e.g. Manila railroad company and Philippine national bank
The commonwealth period saw the expansion of the ole of GOCCs to agricultural
development.

GOCCs created were specifically:

● Agricultural trading
● National rice economic corporation 1936
● National abaca & other fibers corporation (1938)
● National coconut corporation (1949)
● National trading corporation (1040)
The post-war period – the reconstruction period “(relief & rehabilitation” by word of that
era.

GOCC- 30 created from 1945-1950

- Manila railroad company
- Metropolitan water district
- National power corporation
- National Tobacco corporation
- National food products corporations
- PNB
- RFC – rehabilitation finance corporation
- Agricultural credit and cooperative administration
- National land settlement corporation

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- Rural progress administration
- Martial law period and the 1980s:
Massive flows of loans and other forms of financing from private banks and the
international financing institutions further encouraged the expansion of GOCCs.
From 65 (45 parent corporations & 18 subsidiaries)
1970-303 corporation (93 parent & 150 subsidiaries and 57 acquired assets)
Philippine public enterprise (PES) or government and /or controlled corporation- has
been created to be potent tools of development.
● Industries related to financing
● Public utilities
● Agricultural development and trading
● Agricultural development
● Social
● Civic
● Educational and scientific endeavors
● Gaming and gambling
GOCC-stock or non-stock corporation
- performing governmental or proprietary functions
- owned or controlled by government directly or indirectly through a parent or subsidiary
corporation.
- to the extent of at least a majority of its outstanding capital stock or its outstanding
voting capital stock.

Prior to 1972 (martial law)

- response to long-established strategic needs
- those requiring large scale indivisible investments
- basic industry that provides high forward linkages
- public sentiment to keep the industry free form foreign control because of the impact in
the economy
- private sector is unwilling or unable to put up the capital to establish the industry.

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GOCC - major arenas for the consolidation of economic and political power. They were
also abused and used as laundry services and talk to transfer public resources to the
hands of cronies and the private few.
- they have multiple and oftentimes conflict/objectives |proprietary and
development, profit and service|
- subject to excessive political interference

Characteristics / Features:
1. Government Owned - Solely owned by the government or if established with the
undertakings, then majority of shares are held by the government.
2. Government Owned and Managed - Authority to appoint key management
position: CEO, managers, Director - Most of the control of the public enterprise
rest under government authority.
3. Separate Legal Entity - Provision special act or company Act can sell property
in its own name.
4. Perpetual Succession – an artificial entity which exists in contemplation law
5. Autonomy - Separate legal entity status; it is independent from the government
and the people managing it.
6. Service Motive - to provide needed services to the general public at an
affordable price.
7. Public Accountability - to provide needed services at an affordable price.
8. Business Motive.
9. Notion of Monopoly.
10. Stable

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C. Local Economic enterprise and Economic Order
Local economic enterprises (LEEs) may include public markets, slaughter
houses, hospitals, public cemeteries, parking areas, sports, recreational and cultural
facilities, public utilities such as water and power supply and distribution and
telecommunications, garbage collection and disposal, and public transport and terminal
services, among others ( Manasan, R.G. and Castel C.G (2010). Improving the
Financial Management of Local Economic Enterprises p1)
Earlier studies (e.g., Pardo and Zipagan 2008, Manasan 2003) have pointed out
that although LEEs are meant to be self-sustaining, if not revenue-generating units,
many of them actually incur losses on a continuing basis. Current practice in many
LGUs does not engender a clear appreciation of the true cost of the local economic
enterprise. COA has documented many cases where the operation of LGU economic
enterprises was not treated as special accounts in the General Fund contrary to the
provisions of the Local Government Code (LGC) of 1991. The less than transparent
reporting of the actual financial condition and profitability of these enterprises may have
some adverse effect on decisions taken by LGU officials.
On the one hand, economic enterprises are oftentimes used as the vehicle for
charging casual employees who are utilized elsewhere in the LGU system so as to
circumvent the 45%-55% limitations on personal services (PS) expenditures of LGUs.
On the other hand, part of the cost of LEE operation and management is sometimes
charged under other offices in the LGU. Overall, the less than business-like approach
to local enterprise management has resulted in large arrearages and low collection
efficiency.
An unambiguous definition of term “economic enterprise” is key the formulation of
a clear policy framework for the creation and continued operation of local economic
enterprises. In this regard, we that the oversight agencies (DBM, DOF/ BLGF, DILG,
NEDA) adopt a common definition of the term “local economic enterprise” emphasizing
enterprise dimension: LEEs are local government owned economic entities that
generate the bulk of their revenues from selling goods and services ( Manasan, R.G.
and Castel C.G (2010). Improving the Financial Management of Local Economic
Enterprises p29)

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 The guidance on LEEs found in the LGC, the NGAS and the UBOM is generally
consistent with conceptual framework found in the international literature. Perhaps by
being silent on what the alternative options are, the existing policy framework appears
to lean more heavily towards the public ownership model. Also, the existing policy
framework does not provide cautionary statement on potential government failures that
may arise with the establishment and continued operation of LEEs ( Manasan, R.G. and
Castel C.G (2010). Improving the Financial Management of Local Economic Enterprises
p29-30)

ECONOMIC ORDER
In the domain of economics, institutional arrangements assign the benefits and
opportunity costs of an economic decision to individuals or other subunits of society, for
instance to individual households which consume goods and supply labor and savings,
to firms which produce and invest, to the private sector or to governments and its
different layers (Siebert 1996). In assigning benefits and opportunity costs, institutional
arrangements define the incentives for the economic agents, and these incentives in
turn determine the performance of the economy, for instance its growth and
employment. Rules take the place of ad hoc solutions and discretion (Kydland and
Prescott 1977).
Economic order reveals precisely how much of a product a company should
order to meet customer demand while minimizing holding and ordering costs.Economic
order aims to prevent businesses from tying up too much cash in inventory assets. After
all, inventory alone is expensive enough. Add to that costs to order, receive and
maintain inventory, and your business can really spend a pretty penny stocking items it
just doesn’t need. When used properly, it helps your business stock the perfect amount
of inventory—enough to meet the demands of your customers. The rest of your cash
can be saved for a rainy day, or injected into other areas of business, like sales,
marketing or human resources.
By using Economic order for your business, you can improve your overall
inventory management process. By ordering the right amount of inventory instead of

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guessing what to order, you can reduce costs, prevent stock outs, and keep your supply
chain operating smoothly.

D. Economic System
An economic system is a means by which societies or governments organize
and distribute available resources, services, and goods across a geographic region or
country. Economic systems regulate the factors of production, including land,
capital, labor, and physical resources. An economic system encompasses many
institutions, agencies, entities, decision-making processes, and patterns of consumption
that comprise the economic structure of a given community. An economic system is the
combination of the various agencies and entities that provide the economic structure
that defines the social community. These agencies are joined by lines of trade and
exchange goods. Many different objectives may be seen as desirable for an economy,
like efficiency, growth, liberty, and equality. An economic system may involve
production, allocation of economic inputs, distribution of economic outputs, landlords
and land availability, households (earnings and expenditure consumption of goods and
services in an economy), financial institutions, firms, and the government.
Alternatively, an economic system is the set of principles by which problems of
economics are addressed, such as the economic problem of scarcity through allocation
of finite productive resources. Economic systems are grouped into traditional,
command, market, and mixed systems. Traditional systems focus on the basics of
goods, services, and work, and they are influenced by traditions and beliefs. A
centralized authority influences command systems, while a market system is under the
control of forces of demand and supply. Lastly, mixed economies are a combination of
command and market systems.

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 II. Nature of Scope, Role and Concepts
A. Public Enterprise
The nature of scope of public sector flows from the strategies and policies
governing economic development and the structure of the economic system of a
country. In developing countries, it has been targeted at acceleration of economic
development with social justice. In industrialized countries like France, Italy and the UK,
it was intended primarily to ensure supply of essential goods and services at reasonable
prices and to augment country’s competitive capabilities in selected areas.
● Economic planning served as a tool for launching relatively massive programmes and
projects for economic and social development. These led to large investments by the
state in different sectors of the economy – primary, secondary and tertiary. The public
sector investments were not limited to enterprises which assumed autonomous forms of
organizations – in the manufacturing and service sectors of the economy - but also
extended to departmental undertakings such as the railways, financing and other
service-providing or promotional organizations. Besides, fairly large investments were
channeled into state level undertakings.
● The scope of public sector gets wider when the state level public sector is included.
Besides service and promotional activities, the states widened the area of manufacture
and services. Nevertheless there is a qualitative and dimensional difference between
the enterprises run by the Central Government and those by the State Governments.
While the former were established mainly to achieve industrialization and economic
development of the country as a whole, the latter, other than the State Electricity Boards
and Transport Corporation, were smaller in scale (though larger in number about 1000)
and were supplementary in character. These were intended more to utilize natural
resource available in the respective states or to develop skills and provide employment.
Several of these were established with social orientation; others for political reasons.
Concept of Public Enterprise
Public enterprise is a business organization wholly or partly owned by the state and
controlled through a public authority. Some public enterprises are placed

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 under public ownership because, for social reasons, it is thought the service or product
should be provided by a state monopoly.

The Role of Public Enterprise

● The creation and growth of state (public) sector of business is designed as an
instrument of social control. For a developing country public enterprises have become a
key factor for the planned and balanced growth. A.H. Hanson rightly observes that,
“Public enterprise without a plan can achieve something but a plan without public
enterprise is likely to remain on paper.”
● Public enterprises (PEs) are institution operating service of an economic or social
character or behalf of government. The main attributes of public sector enterprises are:
state ownership, state control and management, public accountability, non profit motive,
state privileges and regulations.
● In India, public sector enterprises are of three types: departmental undertaking, public
corporation and Government Company. In most of the countries, the roles of PEs are
justified from social point of view. In many cases PEs are not economically viable but
socially desirable.
● At present, the wave of privatization has challenged the PEs’ managers to run the
business on economic lines and earning the profit. Definitely in India, now after 50 years
of independence there is need of economic viability for PEs. Managers of public sector
should serve the society but after running the business on profit.
● Public enterprises play different roles depending on the motivation and the directive
forces which move the state into action in various economic activities. In a fully socialist
and communist country, the state resorts to total nationalization. It represents the
complete extreme of both government ownership and control.
● But now private ownership is permitted in limited sense. The state owns not only the
agents of production but also the commodities produced. The distribution of consumer
goods is made on the basis of one’s needs without regard to producing ability.
Communism does not depend upon individual economic motivation, but upon non-
economic, social stimulus for the productive efforts.

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● There is another case of expanding public enterprises in the form of building-up
powerful state capitalism (Fascist or Nazi state). Both Communism and Fascism glorify
the state above the individual. The state is supreme, the individual is nothing. Fascism
is generally pro-big business, and to make the nation more self-sufficient, essential
democratic freedoms are suppressed, first on political fronts, then increasingly, in
economic affairs.
● Authority of one strong man is the ideal of the Fascist state. Fascism is essentially a
political system and is synonymous with dictatorship-Hitler in Germany, Mussolini in
Italy, Franco in Spain, etc. In a mixed economy, like ours, public and private enterprises
work side by side in coordination with each other. Public enterprises have been
providing employment to large number of persons directly as well as indirectly. The
number of persons employed has been increasing considerably over the years.

A. Characteristics
The notable characteristics of public enterprises are as follows:
1. Business enterprises of government- Public enterprises are business enterprises
established by government. They are engaged in manufacturing, marketing ,
public utilities and services. Government makes budget allocations to public
enterprises. They are financed by state.
2. Government ownership, management and control -Public enterprises are owned
by government. Their share capital is financed by government ranging from 51%
to 100%. They get foreign assistance through government. The top level
management of public enterprises is appointed by government. This consists of
board of directors and chief executive officer.
3. Service motive -Generally public enterprises have service motive. They provide
essential goods and services to public at reasonable price. They are guided by
social welfare motive. They also generate profit and pay tax to the government.
4. Autonomy -Public enterprises enjoy autonomy or semi-autonomy in operations.
They function as companies and corporations. The government does not
interfere in their day to day functioning. So, autonomy is a notable characteristic
of public enterprises.

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 5. Public accountability -Public enterprises have public accountability. They are
accountable to the parliament for their performance. The auditor general reports
to the parliament about the performance of public enterprises. They are also
accountable to general public through government.
6. Separate legal status -Public enterprises have separate legal status. They are
established by a special act of Parliament, or Company Act or other acts. Public
enterprises can enter into contract in their own name. They can sue and can be
sued in courts of law.
7. Continued existence -Continuity is another characteristic of public enterprises
because they have continued existence and stability. They are created by law
and can be dissolved only by law. Changes in shareholders, management and
employees do not affect the existence of public enterprises.

B. Objectives
1. Economic development: Public enterprises were set up to accelerate the rate of
economic growth in a planned manner. These enterprises have created a sound
industrial base for rapid industrialization of the country.
2. Self-reliance: Another aim of public enterprises is to promote self-reliance in
strategic sectors of the national economy. For this purpose, public enterprises
have been set up in transportation, communication, energy, petro-chemicals,
and other key and basic industries.
3. Development of backward Areas: Several public enterprises were established in
backward areas to reduce regional imbalances in development. Balanced
development of different parts of the country is necessary for social as well as
strategic reasons.
4. Employment generation: Unemployment has become a serious problem in India.
Public enterprises seek to offer gainful employment to millions. In order to
protect jobs, several sick units in the private sector have been nationalized.
5. Economic surplus: Public enterprises seek to generate and mobilize surplus for
reinvestment. These enterprises earn money and mobilize public savings for
industrial development.

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 6. Egalitarian society: An important objective of public enterprises is to prevent
concentration of economic power and growth of private monopolies. Public
sector helps the Government to enforce social control on trade and industry for
ensuring equitable distribution of goods and services. Public enterprises protect
and promote small scale industries.
7. Consumer welfare: Public enterprises seek to protect consumers from
exploitation and profiteering by ensuring supply of essential commodities at
cheaper prices. They aim at stabilizing prices.
8. Public utilities: Private sector is guided by profit motive. Therefore, it is reluctant
to invest money in public utility services like water supply, gas, electricity, public
transport. Therefore, the Government has to assume responsibility for providing
such services.
9. Defense: Government has to set up public enterprises for production of defense
equipment. Supply of such equipment cannot be entrusted for private sector due
to the need for utmost secrecy.
10. Labor welfare: Public enterprises serve as model employers. They ensure
welfare and social security of employees. Many public enterprises have
developed townships, schools, college and hospitals for their workers.

C. Contribution
Public Enterprise were set up by the government to speed up the process of
economic development as well as to achieve certain social objectives. They have
played a major role in fostering industrial and economic development of the nation by
providing the necessary infrastructure and providing essential services. It is there to
prevent the concentration of economic power and growth of private monopolies.
Public enterprises were set up and have contributed significantly to national
interests. They operate in a wide range of industries including steel, minerals, metals,
coal, petroleum, heavy engineering, fertilizers, chemicals, pharmaceuticals, transport,
electricity etc. The main attributes of public sector enterprises are: state ownership,
state control and management, public accountability, nonprofit motive, state privileges
and regulations.

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 PE were promoted to:
A. Accelerate the rate of economic growth.
B. Speed up industrialization, especially the development of heavy industries.
C. Expand the public sector and build a large co-operative sector.
D. Improve infrastructural facilities.
E. Balanced regional development.
F. Increase employment opportunities.
G. Raise the standard of living.
H. Ensure equitable distribution of wealth in the society.

D. Forms/Other Names
3 Forms of Public Enterprises
An important question arises as to what should be the form of organisation for
running state enterprises, suitable form of organisation will increase the efficiency of the
concern. Excessive dependence on government or finances will increase government
interference in the day to day working. These enterprises should be run on business
lines and necessary autonomy should be allowed to them. Following forms of
organisation are generally used for state enterprises.

A. Departmental Management:
Departmental form of organisation of managing state enterprises is the oldest
form of organisation. In this form, the enterprise works as a part of government
department. The finances are provided by the government and management is in the
hands of civil servants. The Minister of the department is the ultimate in-charge of the
enterprise.The enterprise is subjected to legislative security. Departmental management
is suitable for public utility services and strategic industries. In India, railways, post and
telegraph, radio and television are working as government departments. In the same
way, strategic industries like defence and atomic power are under government.

Characteristics:

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(i).The undertakings are wholly dependent on government for finances. State treasury
provides finances and surplus money (profits) is deposited in treasury.
(ii).The management is in the hands of the government. The enterprise is managed and
controlled by the civil servants of the department.
(iii). The budget of the department is passed by the Parliament and/or by the state
legislature.
(iv). The accounting and audit control applicable to other government departments are
applicable to state enterprises also.
(v). The department enjoys legal immunity. Governmental sanction is necessary for
using the undertakings.

Advantages
(i). Useful for Specific Industries:
Departmental form of organisation is necessary for public utility services. The
motive of these industries is not to earn profits but to provide services at cheap rates.
Strategic industries like defence and atomic power cannot be better managed than
under government departments.
(ii). Help in Implementing Government Policies:
Government policies and programmes are better implemented by the enterprises
under direct government control.
(iii). Complete Government Control:
Departmental undertakings are completely under government control. These
undertakings are associated with one of the government departments. Government can
regulate their working in a proper way.
(iv). Legislative Control:
These undertakings are under the control of legislatures. Government is
answerable to the legislature for the working of departmental undertakings. Legislative
control acts as a check on these undertakings.
(v). Source of Income for Government:

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 These undertakings are run on commercial lines. They earn profits like private
enterprises. They provide finances to the government for initiating other social and
development activities.
(vi). Secrecy:
Department undertakings can maintain secrecy in their workings. Secrecy is
especially necessary for undertakings like defence.
(vii). Useful for Developing Enterprises:
Departmental form of organisation is necessary for those undertakings which are
in a developing stage. They are suitable for enterprises where gestation period is long.

Disadvantages:
(i) Excessive Government Interference:
There is excessive government interference in departmental organisation. These
undertakings are not given freedom to decide their own policies.
(ii) Shortage of Competent Staff:
Departmental undertakings are like administrative departments. Civil servants
are given control of these undertakings. There is a shortage of competent persons who
have commercial experience. Civil servants are not suitable for running commercial
organisations.
(iii) Centralisation of Powers:
All policies are decided at the ministerial level. The powers are centralised at the
higher level. It adversely affects the efficiency of the concerns.
(iv) Red Tapism:
There is delay in taking important decisions. Red tapism is prevalent as in other
government departments. Commercial organisations cannot afford delay in taking
decisions.
(v) Inefficiency:
Losses in departmental undertakings are not taken seriously. No efficiency
standards are set for these undertakings. They are run as government departments and
not as commercial undertakings.
(vi) Political Changes affect their Working:

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 The change in government involves shift in policies of departmental
undertakings. Every political party tries to manage departmental undertakings according
to its election manifesto. This adversely affects the working of these undertakings.

B. Public Corporations:
Public Corporations are created by a special stature of a state or central
government. A legislative act is passed by defining the sphere of work and mode of
management of the undertakings. A public corporation is a separate legal entity created
for a specific purpose.
In India, the Reserve Bank of India, Damodar Valley Corporation, State Trading
Corporation, Industrial Development Bank of India, Industrial Finance Corporation are
some of the corporations created by special acts of Parliament.
According to President Roosevelt, “A public corporation is clothed with the powers of
the government but possessed of the flexibility and initiative of private enterprise.”
“Public Corporation is a continuation of public ownership, public accountability and
business management for public ends.”
An exhaustive definition is given by Earnest Davis, “Public Corporation is a corporate
body, created by public authority with defined powers and functions and is financially
independent. It is administered by a board appointed by public authority to which it is
answerable. Its capital structure and financial operations are similar to those of public
company, but its stock holders retain no equity interests and are deprived of voting
rights and power of appointment of the board.”

Characteristics:
(i) Separate Legal Entity:
A public corporation is created by a separate legislative act. It is a separate legal
entity. It can sue or be sued without any government approval.
(ii) Government Investment:
These corporations are financed by the government. In some cases private
capital may also be associated, but at least 51% of the shares are held by the
government.

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(iii) Financial Autonomy:
KCorporations are not dependent on the state exchequer for its day-to-day
financial requirements. Legislatures do not pass their budgets. They can also raise
loans separately.
(iv) Government Appointed Management:
The management of the corporation is appointed by the Government. Generally
a board is nominated to manage these undertakings.
(v) Service Motive:
The motive of public corporations is to provide service to the public at a
reasonable price.
(vi) Independent Recruitment of Employees:
These corporations recruit their own employees. They can appoint capable
persons to manage the corporations on commercial lines.
(vii) No Government Interference:
Public corporations are free from government interference. They execute their
independent policies. They do not depend upon government departments for
determining their policies.

Advantages:
(i) Internal Autonomy:
Public corporations have internal freedom. They can devise their own policies
and programmes. They can set their own goals and can decide their own line of action.
(ii) Flexibility:
There is no rigidity in their working as in case of departmental undertakings. The
flexibility is necessary for the success of a business concern. The management is free
to take decisions in the interest of the organisation.
(iii) Free from Government Interference:
Public corporations are free from government interference. They are not
dependent on government departments. Various policies are decided independently.
Management is free to manage these undertakings.
(iv) Employment of Competent Persons:

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 These corporations utilise the services of competent persons. They are free to
employ persons according to their requirements. All important positions are given to
capable persons. They have their own cadres of employees.
(v) Run on Business Lines:
These undertakings are run on commercial lines. They also earn profits like
private concerns. It helps these undertakings to finance their schemes and undertake
expansion plans.
(vi) Accountability:
These undertakings are accountable to the legislature for their performance.
They try to increase their efficiency, otherwise they are criticised in the Parliament or
state legislature.
(vii) Service to Society:
Public corporations provide commodities and services to the people at
reasonable prices. Though they also earn profits, their primary aim is to help the society
in getting various services

Disadvantages:
(i) Limited Autonomy:
Though public corporations enjoy internal autonomy, still government’s
interference is there. Concerned government department exercises direct or indirect
control over these bodies. All important policies are decided with government approval.
Management is also appointed by the government. So, limited autonomy is exercised by
these corporations.
(ii) Difficulty in making Changes:
Any change in the sphere of activities of the corporation involves a change in the
statute of the corporation. The statute can be amended only by a legislature. It is a
difficult process and takes much more time.
(iii) Misuse of Financial Autonomy:
Financial autonomy of the corporation is sometimes misused by the
management. Public money may be wasted on unnecessary projects.
(iv) Lack of Personal Touch:

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 Corporations are managed by the salaried employees. Top managerial personnel
are also paid employees. There is lack of personal touch. Everything is managed in a
routine wa
(v) Government Control:
Though these corporations are autonomous bodies, still there are many controls
exercised by the government. Public Accounts Committee and Auditor and Comptroller
General of India exercise control on these corporations.

C. Government Company Organisation:

A company owned by central and/or state government is called a government
company. Either whole of the capital or majority of the shares are owned by the
government. In some cases, private investment is also encouraged but at least 51%
shares are held by the government. Management of these companies is under the
control of the government. Subsidiary companies of government companies are also
covered under government companies.
According to Indian Companies Act, 1956, “Government company means any
company in which not less than 51 per cent of the paid up share capital is held by the
central government or by any state government or governments or partly by the central
government and partly by one or more state governments and includes a company
which is a subsidiary of a government company.”
Government companies are registered both as public limited and private limited
companies but the management remains with the government in both the cases.
Government companies enjoy some privileges which are not available to non-
government companies. No special statute is required to form government companies.
Government companies enter those fields where private investment is not forthcoming.
Sometimes, government has to take over sick units in private sector. These companies
are also useful where joint ventures are to be taken up. Nationalised industries can also
be run up by government companies. Some of the examples of government companies
in India are Coal Mines Authority Ltd., Steel Authority of India Ltd.

Advantages:

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(i) Flexibility in management:
There is a freedom and flexibility in the management of government companies.
Companies can organise their working according to the necessity of the situation.
(ii) Run on commercial lines:
Government companies are run on sound business lines. They earn surpluses to
finance their own expansion plans.
(iii) Healthy competition:
Government companies provide healthy competition to the private sector. Private
businessmen will have to be careful in fixing their prices. The consumer is not at the
mercy of the private businessmen.
(iv) Financial autonomy:
These companies are dependent on the government only for their initial
investments. They can plan their own capital structure. The companies earn profits and
these profits can be used for further investments.
(v) Helpful in developing neglected sectors:
There are certain sectors which are important from the national point of view.
Private sector may not be coming forth to invest in such sectors. Government
companies can enter all the neglected areas and can help all-round growth.
(vi) Providing industrial environment:
An industrial infrastructure is provided by the government companies. They help
the growth of ancillary units.

Disadvantages:
(i) Slackness in management:
The management of government companies is slackened under the garb of
public service. These companies are not generally as efficient as units in the private
sector.
(ii) Political interference:
There is a lot of political interference in government companies. Every
government tries to nominate directors from its own political party and the companies
are run on political considerations.

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 (iii) Red tapism:
These companies are dependent on the government for taking important policy
decisions. Red-tapism in government departments affects the working of these
companies.
(iv) Limited autonomy:
Theoretically, these companies are free from government control but in reality
they are dependent on various government departments. They have to get permission
from government departments regarding loans, capital and managerial appointments.
(v) Official domination:
Civil servants are appointed on important managerial posts of these companies.
They are not capable of running these undertakings on sound business lines.

E. Criticisms
Public enterprises are intended to be operated in the public interest. This gives
rise to a number of organizational and commercial issues. One problem is how
to reconcile the need for close political control with the need for sufficient
management autonomy. The public corporation form, used extensively in Great Britain
and widely copied in other parts of the world, is created by a special act of Parliament
that defines its powers, management structure, and relationship with government
bodies. As a corporation it has legal entity. Its capital requirements are met by the
treasury, but it is supposed to meet its current expenses from its normal commercial
operations. Its employees are not civil servants, and the top management is often
appointed by the minister in charge. Another administrative form that is popular in parts
of the world is the state company, which is simply an ordinary joint-stock
company whose shares are owned wholly or partly by the state.
Public enterprises are usually intended to pay their way in the longer term, and
yet they may be subject to political constraints in their pricing policy that could be in
conflict with that objective. Conversely, for social reasons they may receive hidden
subsidies or enjoy additional protection not available to competitors; such factors tend to
distort the normal commercial operations of the corporation or the company and often
lead to managerial disorientation. Partly because of these noncommercial

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considerations, public enterprises may appear to be highly inefficient and, in times of
difficult trading conditions, may be a drain on public resources. However, the
measurement of the efficiency of a public enterprise is no easy matter. When it
produces a marketable product, such as coal or steel, which competes with other
products, the normal commercial criterion of profit may be adopted to assess its
performance. In the case of a utility enjoying monopoly power, economists have
developed concepts like cost-benefit analysis as a performance measurement tool. In
recent years many state enterprises in the developed world have been given financial
targets that take into account both social and commercial responsibilities.
As a Filipino I can say that it is not good for a country to have a public enterprises
because as it means that it is controlled by a government so how can people be able to
manage and be part of this kind of enterprise if only those who has power to the
government are allowed to manage it.
Especially to the people who haven’t finished their studies so they don’t have the
right to be part of the specific enterprise under the government because as all we
know that the only suitable to the public enterprises is the person who has finished their
college degree or the person who get their board examination passers even if your are
graduated to your degree but if you don’t have your eligibility or other board examination
passer result so you are not allowed to enter to the said enterprises under the
government.
1. Like those private sectors like banks aren’t we allowed to be part of their
business?
2. Don’t we have the right to manage and be part of their businesses?
3. Do we need to enter politics just to be part of it?
4. And all government have the knowledge that is related to this kind of enterprise?
B. Types of Public Enterprise

A. History of GOCC in the Philippines

In the Philippines, the use of the corporate vehicle has been recognized as an
efficient way to manage government assets. Thus, there was a surge in the growth of
State Owned Enterprises (SOEs), called Government Owned and Controlled

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Corporation (GOCC) in our country, during the post-war years as our government
actively rehabilitated the economy. However, divestment efforts quickly followed during
the mid-50s and early 60s due to the dismal financial performance of these GOCCs. In
1965, when President Ferdinand Marcos assumed power, there were only 37 GOCCs.
In his first ten (10) years in office, however, government corporations grew rapidly to
reach 120 in 1975. It continued to grow in the next decade, numbering 303 in 1984.
However, by 1984, the Philippine government could no longer ignore the reality
that the government corporate sector consumed a large amount of public resources and
burdened the public sector with substantial domestic and external borrowings.
Yet, there was no central agency tasked to monitor and supervise the activities of the
government corporate sector. This led President Marcos to issue Executive Order No.
936 which created the Government Corporate Monitoring Committee (GCMC).
When President Corazon Aquino assumed power in 1986, she rationalized the
government corporate sector through Presidential Proclamation No. 50, which
authorized the privatization of GOCCs. As a result, only 157 GOCCs, or SOEs operate
in our country today. However, the public corporate sector remained infused with decay
that ranges from staggering, almost crass, allowances, to culpable mismanagement of
GOCC affairs and assets by its executives and directors.

THE PHILIPPINE GOCC GOVERNANCE ACT OF 2011

The urgency to reform the government corporate sector to make it an effective

vehicle in achieving social and economic progress becomes more apparent once we
take into account the role that GOCCs play in the Philippine economy.
In 2019, total expenditures of GOCCs are equivalent to 28% of the total
expenditures of the national government. GOCCs assets, at 125 Billion US Dollars in
2019, also exceed national government assets at 65 Billion US Dollars. The 2009
Annual Financial Report of the Philippine Commission on Audit (COA) also indicates
that out of the Ten Billion Five

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Hundred Million US Dollars Inter-Agency Receivable of the National Government 91%
are due from GOCCs.
When he assumed office in July 2010, President Benigno S. Aquino pledge to
reform the public corporate sector. This paved the way for the Philippine GOCC
Governance Act of 2011.
Previous attempts to monitor and coordinate the activities and functions of the
GOCCs were done through executive issuance which tend to change along with
changes in government. This is the first time that we have legislated policies to institute
long-term reforms in the public corporate sector.

B. Reason for creation (laws, statutes, decrees and all legal bases)
The Philippines is one of the developing countries that utilizes Government-
Owned and -Controlled Corporations (GOCCs) to perform not only vital governmental
functions but also purely commercial activities for profit, since the investment
environment is not favorable to private sector participation. Through GOCCs, the
government is able to deliver basic goods and services to the public or engage in the
business of public utilities or financing services and other profit-oriented undertakings.
The numerous tasks given to the GOCCs by the government show the important role
being played by these enterprises in the growth and development of the country.
GOCCs in the Philippines
The rise of public enterprises in the Philippines in the forms of a corporate
vehicle called GOCCs began after World War II. The phrase, “in the interest of national
welfare,” however, could evoke the creation of enterprise for any or all purposes such
as banks, nuclear plant, racehorses and gamecocks. This was especially true during the
time of former President Ferdinand Marcos, when only 37 GOCCs existed when he
assumed office in 1965, and within ten years grew rapidly to 120.
Republic Act No. 10149
An act to promote financial viability and fiscal discipline in government-owned or
controlled corporations to strengthen the role of the state in its governance and
management to make them more responsive to the need of public interest and other
purposes.

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Chapter 1. General Provision
SECTION 1. Short Title.—This Act shall be known as the “GOCC Governance Act of
2011”.
SEC. 2. Declaration of Policy.—The State recognizes the potential of government-
owned or -controlled corporations (GOCCs) as significant tools for economic
development. It is thus the policy of the State to actively exercise its ownership. rights in
GOCCs and to promote growth by ensuring that operations are consistent with national
development policies and programs.
SEC. 3. Definition of Terms. (a) Affiliate refers to a corporation fifty percent (50%) or
less of the outstanding capital stock of which is owned or controlled, directly or
indirectly, by the GOCC.
(b) Appointive Director refers to:
(1) In the case of chartered GOCCs, all members of its Board of Directors/Trustees who
are not ex officio members thereof;
(2) In the case of nonchartered GOCCs, members of its Board of Directors/Trustees
whom the State is entitled to nominate, to the extent of its percentage shareholdings in
such GOCC; and
(3) In the case of subsidiaries and affiliates, members of its Board of Directors/Trustees
whom the GOCC is entitled to nominate to the extent of its perrcentage shareholdings in
such subsidiary or affiliate.
SEC. 4. Coverage.—This Act shall be applicable to all GOCCs, GICPs/GCEs, and
government financial institutions, including their subsidiaries, but excluding the Bangko
Sentral ng Pilipinas, state universities and colleges, cooperatives, local water districts,
economic zone authorities and research institutions: Provided, That in economic zone
authorities and research institutions, the President shall appoint one-third (1/3) of the
board members from the list submitted by the GCG.

CHAPTER II
The Governance Commission for Government-Owned or -Controlled
Corporations (GCG)

26 | P a g e
SEC. 5. Creation of the Governance Commission for Government-Owned or -Controlled
Corporations.—There is hereby created a central advisory, monitoring, and oversight
body with authority- to formulate, implement and coordinate policies to be known as the
Governance Commission for Government-Owned or -Controlled Corporations,
hereinafter referred to as the GCG, which shall be attached to the Office of the
President. 
SEC. 6. Composition of the GCG.—The GCG shall be composed of five (5) members.
The Chairman with the rank of Cabinet Secretary and two (2) members with the rank of
Undersecretary shall be appointed by the President. The Secretaries of the Department
of Budget and Management and the Department of Finance shall sit as ex
officio members.
SEC. 7. Powers and Functions of the Chairman.—The management of the GCG shall
be vested in the Chairman who have it own power and duties.
CHAPTER III
COMPENSATION AND POSITION CLASSIFICATION SYSTEM FOR GOCCS
SEC. 8. Coverage of the Compensation and Position Classification System.—The GCG,
after conducting a compensation study, shall develop a Compensation and Position
Classification System which shall apply to all officers and employees of the GOCCs
whether under the Salary Standardization Law or exempt therefrom and shall consist of
classes of positions grouped into such categories as the GCG may determine, subject
to approval of the President.
SEC. 9. Position Titles and Salary Grades.—All positions in the Positions Classification
System, as determine by the GCG and as approved by the President, shall be allocated
to their proper position titles and salary grades in accordance with n Index of
Occupational Services, Position Titles and Salary Grades of the Compensation and
Position Classification System, which shall be prepared by the GCG and approved by
the President.
SEC. 10. Additional Incentives.—The GCG may recommend to the President,
incentives for certain position titles in consideration of the good performance of the
GOCC: Provided, That no incentives shall be granted unless the GOCC has fully paid

27 | P a g e
all taxes for which it is liable, and the GOCC has declared and paid all the dividends
required to be paid under its charter or any other laws.
SEC. 11. Non-diminution of Salaries.—The Compensation and Position Classification
System to be developed and recommended by the GCG and as approved by the
President shall apply to all positions, on full or part-time basis, now existing or hereafter
created in the GOCC: Provided, That in no case shall there be any diminution in the
authorized salaries as of December 31, 2010 of incumbent employees of GOCCs,
including those exempt under Republic Act No. 6758, as amended, upon the
implementation of the Compensation and Position Classification System for GOCCs.
CHAPTER IV
BOARD OF DIRECTORS-TRUSTEES-OFFICERS OF GOVERNMENET-
OWNED OR –CONTROLLED CORPORATIONS
SEC. 12. Coverage.—The duties, obligations, responsibilities and standards of care
provided under this Chapter shall be applicable to all members of the Board of
Directors/Trustees and Officers of GOCCs and subsidiaries now existing or hereafter
created including government appointed directors in affiliate corporations. These duties,
obligations and responsibilities sjhall be addition to the powers and functions provided in
the individual charters or articles of incorporation and by laws of the respective GOCCs.
SEC. 13. Number of Directors/Trustees.—The present number of Directors/Trustees
provided in the charter of the GOCCs shall be maintained.
SEC. 14. Ex Officio Alternates.—The ex officio members of the GOCC may designate
their respective alternates who shall be the officials next-in-rank to them and whose acts
shall be considered the acts of their principals.
SEC. 15. Appointment of the Board of Directors/Trustees of GOCCs.—An Appointive
Director shall be appointed by the President of the Philippines from a shortlist prepared
by the GCG.
SEC. 16. Fit and Proper.—All members of the Board, the CEO and other officers of the
GOCCs including appointive directors in subsidiaries and affiliate corporations shall be
qualified by the Fit and Proper Rule to be determined by the GCG in consultation and
coordination with the relevant government agencies to which the GOCC is attached and
approved by the President.

28 | P a g e
SEC. 17. Term of Office.—Any provision in the charters of each GOCC to the contrary
notwithstanding, the term of office of each Appointive Director shall be for one (1) year,
unless sooner removed for cause: Provided, however, That the Appointive Director shall
continue to hold office until the successor is appointed. An Appointive Director may be
nominated bz the GCG for reappointment by the President only if one obtains a
performance score of above average or its equivalent or higher in the immediately
preceding year of tenure as Appointive Director based on the performance criteria for
Appointive Directors for the GOCC.
SEC. 18. The Chief Executive Officer of the GOCC.—The CEO or the highest-ranking
officer provided in the charters of the GOCCs, shall be elected annually bz the members
of the Board from among its ranks. The CEO shall be subject to the disciplinary powers
of the Board and may be removed by the Board for cause.
SEC. 19. Fiduciary Duties of the Board and Officers.—As fiduciaries of the State,
members of the Board of Directors/Trustees and the Officers of GOCCs have the legal
obligation and duty to always act in the best interest of the GOCC, with utmost good
faith in all its dealings with the property and monies of the GOCC.
SEC. 20. Trustee Relation to the Properties, Interests and Monies of the GOCC.—
Except for the per diem received for the actual attendance in board meetings and the
reimbursement for actual and reasonable expenses and incentives as authorized by the
GCG, any and all realized and unrealized profits and/or benefits including, but not
limited to, the share in the profits, incentives of members of the Board or Officers in
excess of the authorized by the GCG, stock options, dividends and other similar offers
or grants from corporations where the GOCC is a stockholder or investor, and any
benefit from the performance of members of the Board or Officers of the Corporation
acting for and in behalf of the GOCC in dealing with its properties, investments in other
corporations, management of subsidiaries and other interest, are to be held in trust by
such member of the Board or Officer for the exclusive benefit of the GOCC represented.
SEC. 21. Care, Diligence and Skill in the Conduct of the Business of the GOCC.—The
members of the Board and the Officers must exercise extraordinary diligence in the
conduct of the business and in dealing with the properties of the GOCC. Such a degree

29 | P a g e
of diligence requires using the utmost diligence of every cautious person with due
regard for all circumstances.
SEC. 22. Power of the Board of Directors/Trustees to Discipline, Remove Officers of the
GOCC.—Subject to existing civil service laws, rules and regulations, the Board shall
have the authority to discipline the CEO, or order the removal from office, upon a
majority vote of the members of the Board who actually took part in the investigation
and deliberation.
SEC. 23. Limits to Compensation, per Diems, Allowances and Incentives.—The
charters of each of the GOCCs to the contrary notwithstanding, the compensation, per
diems, allowances and incentives of the members of the Board of Directors/Trustees of
the GOCCs shall be determined by the GCG using as a reference, among others,
Executive Order No. 24 dated February 10, 2011: Provided, however, That
Directors/Trustees shall not be entitled to retirement benefits as such directors/trustees.
SEC. 24. Restitution.—Upon the determination and report of the Commission on Audit
(COA) that properties or monies belonging to the GOCC are in the possession of a
member of the Board or Officer without authority, or that profits are earned by the
member of the Board or Officer in violation of the fiduciary duty, or the aggregate per
diems, allowances and incentives received in a particular year are in excess of he limits
provided under the Act, the member of the Board or Officer, receiving such properties or
monies shall return the same to the GOCC.
CHAPTER V
DISCLOSURE REQUIREMENTS
SEC. 25. Full Disclosure.—All GOCCs shall maintain a website and post therein for
unrestricted public access.
SEC. 26. Special Audit.
CHAPTER VI
CREATION AND ACQUISITION OF A GOCC OR RELATED CORPORATION
SEC. 27. Requisites for the Creation of a New GOCC or Related Corporation under The
Corporation Code.—A government agency seeking to establish a GOCC or Related
Corporation under “The Corporation Code of the Philippines” shall submit its proposal to
the GCG for review and recommendation to the President for approval before

30 | P a g e
registering the same with the Securities and Exchange Commission (SEC). The SEC
shall not register the articles of incorporation and bylaws of a proposed GOCC or
Related Corporation, unless the application for registration is accompanied by an
endorsement from the GCG stating that the President has approved the same.
SEC. 28. Requisites for the Acquisition of Controlling Interest in Another Corporation.—
Any government agency seeking to purchase a corporation or acquire controlling
interest therein shall submit its proposal to the GCG for review and approval of the
President.
CHAPTER VII
MISCELLANEOUS PROVISIONS
SEC. 29. Appropriations.—The amount of Ten million pesos (P10,000,000.00) for the
initial operation of the GCG shall be source from the Contingent Fund of the President.
Subsequent funding requirements shall be included in the annual General
Appropriations Act.
SEC. 30. Suppletory Application of The Corporation Code and Charters of the GOCCs.
—The provisions of “The Corporation Code of the Philippines” and the provisions of the
charters of the relevant GOCC, insofar as they are not inconsistent with the provisions
of this Act, shall apply suppletorily to GOCCS.
SEC. 31. Transitory Provision.—The Privatization Council and Privatization and
Management Office created under Executive Order No. 323, Series of 2000, shall
continue to implement and finish the privatization of GOCCs that have been identified
by the said Privatization Council and approved for privatization by the President prior to
the effectivity of this Act: Provided, however, That the privatization of said GOCCs hat
remain unfinished at the end of every two (2) years after the effectivity of this Act shall
be automatically transferred to the GCG which shall continue the privatization of the
GOCCs.
SEC. 32. Repealing Clause.—The charters of the GOCCs under existing laws and all
other laws, executive orders including Executive Order No. 323, Series of 2000,
administrative orders, rules, regulations, decrees and other issuances or parts thereof
which are inconsistent with the provisions of this Act are hereby revoked, repealed or
modified accordingly.

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 SEC. 33. Separability Clause.—Should any provision of this Act be declared
unconstitutional, the same shall not affect the validity of the other provisions of this Act.
SEC. 43. Effectivity.—This Act shall take effect after fifteen (15) days following its
publication in the Official Gazette or in two newspapers of general circulation.

LEGAL BASES
The Commission on Audit (COA) is constitutionally mandated with the power,
authority, and duty to examine, audit, and settle all accounts pertaining to the revenues
and receipts of, and expenditures or uses of funds and property, owned or held in trust
by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including governmentowned or controlled corporations (GOCCs) with
original charters, and on a post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under the Constitution; (b) autonomous
state colleges and universities; (c) other GOCCs and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or indirectly, from or
through the Government, which are required by law or the granting institution to submit
to such audit as a condition of subsidy or equity. It shall also keep the general accounts
of the Government and, for such period as may be provided by law, preserve the
vouchers and other supporting papers pertaining thereto.  The Constitution further vests
on the Commission the exclusive authority to define the scope of its audit and
examination, establish the techniques and methods required therefor, and promulgate
accounting and auditing rules and regulations. 

A. Characteristics
GOCCS is defined as functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government of the Republic of the Philippines
directly or through its instrumentalities either wholly or, where applicable as in the case
of stock corporations, to the extent of at least a majority of its outstanding capital stock.
It is characterized as 1significant tools for economic development, 2it plays a
role in supporting infrastructure development, 3transparent and responsive to the needs
of the public, 4it is an important instruments of social and economic policy in the

32 | P a g e
 Philippines, 5GOCCs operations are rationalized and centrally monitored, 6GOCCs are
likewise enjoined to refrain from hiring private lawyers or law firms to handle their cases
and legal matters, 7GOCCs’ unregulated proliferation is one of the contributing
elements to the fiscal imbalance of the economy and lastly GOCCs are, in fact, ideal
project implementers due to their corporate structures, established governance
systems, strategic asset holdings, independent operating budgets, and developmental
mandates.
B. Evolution of its Oversight Body
The benefits of public-private partnerships (PPPs) are particularly attractive
during this time of pandemic, when a significant portion of government resources is
being channeled to fight the coronavirus disease-2019 (COVID-19). In the first part of
this series, we discussed the need to explore alternative financing mechanisms for key
infrastructure and why it is worthwhile to look at PPPs. Now we look at a sector of
government that can step up and help deliver these projects: government-owned and -
controlled corporations (GOCCs). 
From cash cows to development agents
Having grown significantly in recent years, GOCCs have become an important
tool for economic development and a key source of public funds. As of 2018, there are
120 GOCCs under the coverage of the Governance Commission for GOCCs (GCG)
with total assets amounting to P7.9 trillion. That year, state companies generated an
impressive total adjusted comprehensive income of over P225.4 billion and remitted
P35.4 billion to the government as dividends. This does not even capture the
contributions of the myriad of other GOCCs outside the purview of the GCG, tasked to
oversee state firms’ operations.
Apart from supplying funds to our national coffers, GOCCs can play a role in
supporting infrastructure development. GOCCs are, in fact, ideal project implementers
due to their corporate structures, established governance systems, strategic asset
holdings, independent operating budgets, and developmental mandates. These unique
features enable GOCCs to be more dynamic when working with the private sector,
allowing them to undertake projects for which their national department and local
government counterparts may not have the same financial and legal wherewithal. Their

33 | P a g e
developmental mandates particularly afford GOCCs more flexibility to take on projects
that would otherwise be financially unviable.
Additionally, some GOCCs, like the Tourism Infrastructure and Enterprise Zone
Authority (TIEZA), have their own PPP and joint venture (JV) guidelines which prescribe
streamlined approval processes. The solicited project procurement process from
advertisement to contract signing can take as little as 6.5 months under the newly-
issued TIEZA JV guidelines vis-à-vis the comparable timeline of 11 months under the
amended build-operate-transfer (BOT) law. Charter provisions of GOCCs like the Bases
Conversion Development Authority (BCDA) likewise allow them to bid out projects in a
more efficient and timely manner. 
In view of the country’s immediate infrastructure needs in sectors such as health,
transport, water, energy, agriculture, and logistics, GOCCs with specific expertise in
these industries such as Philippine Heart Center for health, National Irrigation
Administration for farm services, National Electrification Administration for power and
National Housing Authority for settlements, are well-positioned to participate in PPPs.
Case studies
The engagement of GOCCs in infrastructure development is nothing new.
Historically, GOCCs in other countries have played a critical role in accelerating
infrastructure investments. During the early stages of South Korea’s development, state
firms were instrumental in building core infrastructure that subsequently helped to spur
private sector investment and economic growth. More recently in 2015, Indonesia
embarked on an ambitious five-year $477 billion infrastructure development program
and relied heavily on GOCCs to invest in key sectors such as power, transport, and
water. In both these countries, GOCCs were seen as effective vehicles for project
implementation in light of their higher tolerance to regulatory and financial risks.
There are also success stories for GOCCs locally. In 2003, the National Kidney
Transplant Institute (NKTI) implemented its landmark hemodialysis project via a PPP
lease arrangement with Fresenius Medical Care AG. The project not only increased the
capacity of the hospital, but also turned it into a model for renal care in Asia. The PPP
arrangement reduced project risks to the government, enabled NKTI to acquire top-of-

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the-line dialysis equipment, and most importantly, expanded service delivery to patients
at little to no additional cost.
In 2015, the Mactan Cebu International Airport Authority, together with the
transport department, granted a P17.52 billion, 25-year concession for the development,
operation, and maintenance of the Mactan-Cebu International Airport to the GMR
Infrastructure–Megawide consortium under a build-operate-transfer structure.
Completed last year, the award-winning airport boasts of state-of-the-art airport facilities
and increased passenger capacity from 4.5 million in 2014 to 12.5 million in 2019.
In 2016, water regulators at the Metropolitan Waterworks and Sewerage System
broke ground on the Bulacan Bulk Water Supply project, designed to meet the growing
water needs of various water districts in Bulacan. The consortium of San Miguel Corp.
and Korean firm Korea Water Resources Corp. was responsible for the financing,
design, construction, and maintenance of the project. When completed, the project is
slated to expand service area and household coverage and reduce the average water
tariff of water districts from P19.83 to P8.50 per cubic meter, benefitting residents
across 24 localities. 
Currently, BCDA is likewise working with the private sector to develop New Clark
City, an up-and-coming regional transport and investment hub. It has built sporting and
accommodation facilities which were used during the recently concluded Southeast
Asian Games. Lately, BCDA has put these structures to good use by converting them
into quarantine facilities for COVID-19 patients and suspects.

Cautionary tales
Not every GOCC-led infrastructure project has been a success, however.
Irregularities marred the contract between Manila International Airport Authority (MIAA)
and the consortium of Piatco and German firm Fraport AG for the construction of the
Ninoy Aquino International Airport (NAIA) Terminal 3 in 2002. A legal battle ensued for
many years, costing the government money and precious time in building additional
airport capacity. The delays here contributed to NAIA notoriously being labelled one of
the world’s worst airports.

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 If the success stories serve as a guide, these less-than-stellar examples can help
us avoid previous missteps. Governance must be strengthened further and here we find
that GOCCs are making good progress, following the passage of Republic Act 10149 or
the GOCC Governance Act of 2011. transparency should be observed so that the public
can be confident that these PPPs ultimately serve to benefit them.
Years of underspending in much-needed infrastructure is taking a toll on
Filipinos. The present health crisis has only exacerbated the challenges we face. Now is
the time for government and the private sector to work together toward the common
goal of uplifting the lives of Filipinos. On the side of government, GOCCs can take the
lead. Not only are they well-equipped to pursue PPPs, as we have endeavored to show,
but PPPs can help them better carry out their mandates too.

PPPs key to infrastructure building amid pandemic

The coronavirus disease-2019 (COVID-19) pandemic has laid bare critical gaps
in our country’s infrastructure. While many unknowns around the disease remain, we
can be certain that directing infrastructure investments toward key sectors will go a long
way in mitigating the pandemic’s impact, aiding the country’s recovery, and making sure
that we are better prepared for the next public health threat that comes along.
With public funds being increasingly diverted toward pandemic response and
relief efforts (and rightly so), it is an opportune time for the government to leverage
creative approaches to infrastructure development. Procurement alternatives such as
public-private partnerships (PPPs) can help relieve the massive fiscal burden that it
faces while offering a number of other valuable benefits. 
The case for PPPs
The need for more infrastructure is clear. But how can the government possibly
pay for huge capital outlay requirements in the face of competing budgetary priorities?
To date, a whopping P380 billion has been earmarked under the Bayanihan to Heal as
One Act for the pandemic response. The government’s debt is projected to account for
49.8% of economic output by year-end from a record-low of 39.6% last year. As the
pandemic drags on, further budget realignments are all but certain. With infrastructure
originally accounting for the largest share— 24% of the outlay—of the proposed 2020

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budget, it is not difficult to imagine that spending in this area will have to give way in
order to free up scarce funds.
PPP, defined formally as long-term contractual arrangements between the
government and a private proponent for the delivery of a public asset or service,
represent one solution. By transferring the responsibility of shelling out investment
capital to the private sector, the government can be relieved of the burden of supplying
at least the initial financing for projects and thereby keep huge project costs off its
balance sheet. This is true at both the national and local levels.
PPPs can be pursued by almost any government entity, including national
departments, state companies, local government units, and even state universities and
colleges. Unsolicited proposals, which refer to projects initiated by the private sector,
may be especially attractive during this time, given that such projects can come at zero
cost to the government. In some PPPs, the government may even receive a portion of
project proceeds, as in the case of the ongoing Civil Registry System-Information
Technology project, wherein the Philippine Statistics Authority is entitled to 46% of total
revenues. 
The benefit of tapping the private sector, as well as the latter’s willingness to help
out, have been repeatedly affirmed over the past few months. Conglomerates and
micro-enterprises alike have been instrumental in expanding quarantine sites, equipping
hospitals, procuring test kits, and providing food and personal protective equipment to
front-liners. Private stakeholders are crucial in testing, tracing and treating coronavirus
patients.
These experiences give us good reason to believe that private players will
similarly be keen and able to support the government should it seek assistance in
financing and enforcing much-needed infrastructure projects especially in the health
sector. Balanced and well-structured PPPs represent win-win partnerships that are
particularly advantageous amid the present crisis: while the government will be able to
enhance its already expansive infrastructure agenda, preserve its budget for greater
spending priorities, benefit from knowledge and technology transfer, mitigate project
risks, and stimulate private investment, private sponsors will be given the opportunity to

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use their technology and expertise to deliver social good in exchange for a reasonable
return. 
As we move toward a post-COVID-19 world, cross-sector collaboration is needed
more than ever. The government and private sector would do well to work together in
addressing the many areas of infrastructure, health and otherwise, that the Philippines
sorely needs. The virus may have dramatically upended forecasts and plans, but this
does not mean that the government must give up its ambitious infrastructure goals. The
challenges that confront us are daunting, but the path to recovery and a more resilient
future is well within our reach.

C. Local Economic Enterprise (LEES)

A. Legal basis
The Local Economic Enterprises (LEES) are meant to be self-sustaining, if not
revenue-generating units, many of them actually incur losses on a continuing basis.
Current practice in many LGUs does not engender a clear appreciation of the true cost
of the local economic enterprise. COA has documented many cases where the
operation of LGU economic enterprises was not treated as special accounts in the
General Fund contrary to the provisions of the Local Government Code (LGC) of 1991.
The less than transparent reporting of the actual financial condition and profitability of
these enterprises may have some adverse effect on decisions taken by LGU officials.
On the one hand, economic enterprises are oftentimes used as the vehicle for charging
casual employees who are utilized elsewhere in the LGU system so as to circumvent
the 45 percent-55 percent limitations on personal services (PS) expenditures of LGUs.
On the other hand, part of the cost of LEE operation and management is sometimes
charged under other offices in the LGU. Overall, the less than business-like approach to
local enterprise management has resulted in large arrearages and low collection
efficiency. Whereas consistent with local autonomy and decentralization as mandated
under RA No. 7160 also known as the Local Government Code of 1991, Local
Government Units shall endeavor to be self reliant and shall exercise such powers and
discharge such other functions and responsibilities for the provision of basic services
and facilities. Section 76 of the Local Government Code provides that “Every Local

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Government Unit shall design and implement its own organizational structure and
staffing pattern taking into consideration its service requirements and financial
capability, subject to the minimum standards and guidelines prescribed by the Civil
Service Commission. Section 443 of the Local Government Code likewise provides that
“The Sangguniang Bayan may:
(1) maintain existing offices not mentioned in subsection (a) and (b) hereof
(mandatory and optional position); (2) create such other offices as may be necessary to
carry out the purposes of the municipal government, or (3) consolidate the functions of
any office with those of another in the interest of efficiency and economy”; under
Section 447 of the Local Government Code, it is the responsibility of the Sangguniang
Bayan to determine the powers and duties of officials and employees of the Municipality
subject to the relevant positions of the code. Section 447 empowers the Sangguniang
Bayan to determine the positions and salaries, wages, allowances and other
emoluments and benefits of the officials and employees paid wholly or mainly from
municipal funds and provide for expenditures necessary for the proper conduct of
program, projects, services, and activities of the municipal government. A separate
account for every unit of the Municipal Economic Enterprise Office is hereby authorized
by the Sangguniang Bayan pursuant to Section 313 of the Local Government Code;
Profit or income derived from the operation of public utilities and other economic
enterprises, after deduction of the cost of improvement, repair and other related
expenses of the public utility or economic enterprise concerned, shall first be applied for
return of advances or loans made therefore. Any excess shall form part of the general
fund of the local government unit. The funding requirements of the economic
enterprises shall be sourced from their respective operating income or user’s fees. In
the event that the income of the economic enterprise is insufficient to fund its financial
requirements, the deficiency shall be sourced from the General Fund as subsidy.
The Capital Outlay of the economic enterprise units shall be treated as
investments and part of the development project of the local government unit and may
be charged to the 20% Development Fund. Charges, Rates and User Fees shall be
based upon the duly enacted Revenue Code of the local government unit and other
ordinances pertinent thereto that may thereafter be promulgated. All budgetary

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allocations of every position transferred in or detailed from various offices are deemed
transferred to the Municipal Economic Enterprise Office from the effectivity of this
Ordinance. All ordinances, resolution, orders and decrees or parts thereof which are
inconsistent with any provision of this Ordinance are hereby repealed or modified
accordingly.

B. Financing System
A financing system is a bunch of organizations such as banks, insurance
agencies, stock traders and any institutions which are concerned and granted the
trading of assets and financial transactions. Most financial systems contain elements2q
of mutual markets and top-down central planning. A commercial company is a centrally
planned financial system for its internal financial decision-making; however, it usually
operates in a wider market, interacting with external lenders and investors to execute its
long-term plans. A well-working financing system has total business sectors with
successful monetary middle people and monetary instruments permitting: Financial
backers to move cash from the present to the future at a reasonable pace of return;
Borrowers to effectively acquire capital; Hedgers to balance chances that will come
along the business way and to make it perform its mission effectively and make the
vision clearer.
There are three fundamental elements of a money administrator. These three
significant elements of money director are the venture, monetary, and the profit choices.
These three has relevant contribution in the development of the business as it helps it to
fully achieve the objectives and fully make the wide vision possible and attainable.
These are all essential especially in the whole run of the business as it would be the
lifeblood of every business and a saver from drowning or losses as well.
There are also ten different types of services such as Banking, professional
advisory, wealth management, mutual funds, insurance, stock market, treasury or debts
instruments, audit consulting, capital restructuring, and portfolio management. The
banking is the backbone of financial industry is something which offers a wide portfolio
of services. Wealth management is concerned with managing and investing wealth and
business assets. Mutual funds is the funds associated with two or more business and

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people. Insurance and stock market includes investments that secures the situation of
the business. The instrument and consulting which is correlated with each other. The
capital restructuring and portfolio management which has a contribution with the run of
the business. The said ten types of services has its own function and purpose within the
business. They are concerned with different types of fields, and concerned with the run
and record of financing that are associated within one industry.
There are also three pieces of a monetary framework which are savers,
monetary organizations, and financial backers. A financing system capacities as a
mediator and works with the progression of assets from the spaces of surplus to the
spaces of deficiency. It is a synthesis of different establishments, markets, guidelines
and laws, rehearses, cash chiefs, experts, exchanges, and cases and liabilities.
To achieve monetary turn of events, monetary frameworks are significant since
they incite individuals to save by offering alluring loan costs. These investment funds
are then channelized by loaning to different business concerns which are engaged with
creation and dispersion. Financing system is one of the most important inventories f
every modern business industry. These area with surplus fund while other are facing
deficits. It helps to determine the cost and volumes which can affect the production and
the growth of the economy and most importantly, it has an impact within the society and
the people who are living in a certain country.

III. Economic Contribution and Social Responsibility of Public Enterprises

The phrase “Economic contribution” will be used to describe how economic
activity circulates through the region’s current economy in a larger and more
comprehensive sense. The gross changes in a region’s current economy that may be
linked to a certain industry, event, or policy are referred to as economic contributions. If
the study is to be conducted using a standard input-output model (IOM), total final
demands is the appropriate measure of economic activity. Contribution analysis is a
descriptive analysis that simply follows the gross economic activity of a certain event,
policy or industry as dollars flow through the economy of the region. The extent to which
policies or events boost the gross economic activity of a certain industry given region
can be assessed. The economy affects how a government acts. Economic growth

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stimulates business and spending. Increased exports and imports lead to greater
income from business taxes. In short, governments have an improved cash flow. This
can lead to government spending. Essentially, everyone benefits as governments can
push money into processes such as health services.

Economic Strategy
Economic strategy is a relatively new and fast growing area of economic
consulting that entails applying economic concepts and procedures to provide
customers with unique insights aimed at addressing specific issues/problems and/or
improving long term performances.

Social Responsibility of Public Enterprises

When we say Social responsibility of Public enterprises is that we can claim that
businesses are socially responsible if they treat their employees properly and pay
acceptable wages, if they hire a certain amount of disadvantaged people, or if they offer
pensions to retired employees. However, socially responsible if it is just an expression
of management’s “enlightened self-interest’ that is, if it is part of an efficient long-term
profit maximization strategy? Profit maximization is not socially responsible, according
to definition 1 (cf. above), regardless of whether the best means to that objective include
doing goods to others. Much of the debate over business social responsibility revolves
around the relationship between economic performance and various forms of socially
responsible behavior. People who support some form of social responsibility may be
keen to show that social responsibility (In the sense of treating customers, employees,
nature, animals, marginalized groups, or whatever) pays off for businesses at least in
the long run. Social responsibility in business is also known as corporate social
responsibility (CSR), corporate responsibility, corporate citizenship, responsible
business, sustainable responsible business, or corporate social performance. This term
refers to a form of self-regulation that s integrated into different disciplines, such as
business, politics, economy, media, and communications studies.

Early Efforts in Social Responsibility

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 The concept of Social Responsibility is that an entry should operate in way that
balances personal gain with societal benefits. Individuals and corporations are both
considered entities. Profits are necessary for businesses, but not at the price of society
or the environment. Businesses should employ ethical decision-making methods to
make responsible decisions and avoid the need for government intervention, such as
the Environmental protection agency’s (EPA) monitoring of corporate decisions and
practices to prevent pollution.
A. Economic Contributions
The term economic contribution will be used to address the broader and more
general case of the how the economic activity cycles through the regions existing
economy. An economic contribution is defined as the gross changes in a regions
existing economy that can be attributed to a given industry, event, or policy. If the
analysis is to be performed with a standard Input-Output Model (IOM) then the
appropriate measure of economic activity is total final demands (Miller and Blair 1985).
If the analysis is to look at the effects of changes in output of an industry rather than
final demands, then a Mixed Exogenous/Endogenous Variables Input-Output Model or
an appropriately specified Computable General Equilibrium model (CGE) is necessary
(Steinback 2004)1.
Contribution analysis is a descriptive analysis that simply tracks the gross
economic activity of the given event, policy, or industry as the dollars cycle through the
region‟s economy. Policies or events can be analyzed for the extent to which they
increase or decrease the gross economic activity of a given industry in a given region.
An economic contribution analysis says nothing about how spending on one industry
may crowd out spending in another industry.

B. Sale and disposals of public enterprises

AUTHORITY/RESPONSIBILITY FOR PROPERTY DISPOSAL/DIVESTMENT
Pursuant to existing laws on the matter, the full and sole authority and
responsibility for the divestment or disposal of property and other assets owned by
national government agencies or instrumentalities, local government units, and
government-owned and/or controlled corporations and their subsidiaries shall be

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 lodged in the heads of the departments, bureaus, and offices of the national
government, the local government units, and the governing bodies or managing heads
of government-owned or controlled corporations and their subsidiaries conformably to
their respective corporate charters or articles of incorporation, who shall constitute
the appropriate committee or body to undertake the same.

MODE OF DISPOSAL/DIVESTMENT:
This Commission recognizes the following modes of disposal/divestment of
assets and property of national government agencies, local government units and
government-owned or controlled corporations and their subsidiaries, aside from other
such modes as may be provided for by law.
1. Public Auction
- Conformably to existing state policy, the divestment or disposal of government
property as contemplated herein shall be undertaken primarily thru public auction.
Such mode of divestment or disposal shall observe and adhere to established
mechanics and procedures in public bidding, viz:
A. adequate publicity and notification so as to attract the greatest number of interested
parties; (vide, Sec. 79, P.D. 1445).
B. sufficient time frame between publication and date of auction;
C. opportunity afforded to interested parties to inspect the property or assets to be
disposed of;
D. confidentiality of sealed proposals;
E. bond and other prequalification requirements to guarantee performance; and
F. evaluation of tenders and proper notification of award.
G. It is understood that the Government reserves the right to reject any or all of the
tenders.

2. Thru Negotiation
For justifiable reasons and as demanded by the exigencies of the service,
disposal thru negotiated sale may be resorted to and undertaken by the proper

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 committee or body in the agency or entity concerned taking into consideration the
following factors:
A. was a failure of public auction. As envisioned in this Circular, there is failure of
public auction in any of the following instances:
1. If there is only one offeror.
this case, the offer or bid, if sealed, shall not be opened.
2. If all offers/tenders are non-complying or unacceptable.
3. A tender is non-complying or unacceptable when it does not comply with the
prescribed legal, technical and financial requirements for pre-qualification.

B. negotiation may be conducted singly, i.e., on a one-on-one basis, or in group,

provided that due communication between the offerors and the government is
established with a view to ensuring that the government gets the best price.

C. To avert possible confabulation among unscrupulous parties, a record of the

proceedings of the negotiation must be maintained.

D. is understood that the price agreed upon at the negotiation shall not be lower
than the floor price as fixed by the government or the highest offer submitted
at the failed public auction whichever imaintained.

Conformably to existing law and regulation, in the case of local government

units, the Office of the Treasurer shall undertake the negotiated sale subject to
approval by the proper Committee on Award. Where the acquisition or transfer cost of
the property exceeds P5,000.00 in the case of provinces and cities, the approval of
this Commission is required. In the case of municipalities, where the acquisition or
transfer cost of the property is more than P 3,000.00, the approval of the Provincial
Auditor is required.
Is the direct exchange of commodities without the use of money and without
reference to price or the exchange of goods of one character for goods of another,
may be made with other government agencies or government owned and/or

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controlled corporations. This shall be resorted to where there is an offer that would
redound to the interest of and is advantageous to the government.

4. to Other Government Agencies Where the property or assets involved are no

longer serviceable or needed by the department, agency, corporation or local
government unit concerned, they may be transferred to other government
entities/agencies without cost or at an appraised value upon authority of the
head or governing body of the said agency or corporation, and upon due
accomplishment of an Invoice and Receipt of Property (Cf., Sec. 76, P.D.
1445).

5. Destruction or Condemnation
This mode shall be resorted to only when the unserviceable property has no
commercial value, or is beyond economic repair, or there is no willing receiver,
and/or the appraised value is less than the administrative cost of sale, subject to
prior inspection by the Auditor concerned. Valueless property shall be condemned
either by burning, pounding, throwing beyond recovery, and the like. The head of the
department, agency and corporation and the local chief executive shall approve the
disposition.
COA ROLE DURING DISPOSAL
In all modes or instances of disposal of government property or assets as
hereinabove contemplated, the proceedings shall be undertaken by the appropriate
authority in the presence of the Auditor or other COA representative who shall act as
an intelligent, responsive and articulate witness thereto. The said act of witnessing
shall not be confined merely to seeing what is being done during the proceedings but
shall be related to the more meaningful discharge by the Auditor of his/her
constitutional duty to examine, audit and settle all accounts pertaining to the
expenditures or uses of government funds and property. Thus, the Auditor acting as
such witness may verbally advise the agency head or his duly authorized
representative of any objectionable feature/s of the proceedings. Otherwise, he may
sign documents and other papers pertinent only to those proceedings which he

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 witnessed with his comments which he deems necessary under the circumstances.
Related advices and/or comments done in writing should invariably be sent officially
to and duly.

A. The company and its responsibility to society. Relating corporate strategy to

ethical values.
The role of a business is to produce and distribute goods and services to satisfy
a public need or demand. Society does not exist without some form of an economy, and
businesses are what make up the economic system of the world.
All businesses must do more than seek strong profit margins for success; being socially
responsible is part of business survival in today's economy. Companies should take a
stance on important social issues to build a brand that consumers trust and respect. As
a business leader, consider these four types of corporate social responsibility and how
you can implement programs that are good for the community and good for your
company.

Tip
The four types of Corporate Social Responsibility are philanthropy, environment
conservation, diversity and labor practices, and volunteerism.
Philanthropic Efforts
The largest companies in the world are aligned with philanthropic efforts.
Microsoft works closely with the Bill and Melinda Gates Foundation to bring technology
to communities around the world. The company understands that its success requires
not just continued innovation, but building a next generation capable of understanding,
using and improving technology.
Even small companies benefit from aligning with philanthropic causes. A local car
wash might offer schools a platform to host fundraisers for sports teams. Restaurants
have fundraising nights when proceeds benefit a local school or charity. Supporting
these causes happens to also be good marketing, because the community is invited into
the business, has a good experience and sees the company in a positive light.

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Environmental Conservation
Environmental concerns regularly make the headlines, whether a long-term
problem lik global climate change or a more local issue such as a toxic chemical spill.
Companies that align themselves in these efforts help minimize environmental problems
by taking steps such as reducing their overall carbon footprint. Although major
corporations get most of the attention for their environmental commitments — General
Mills has committed to a 28 percent reduction in greenhouse gas emissions, for
example — there are plenty of opportunities for small and mid-sized business as well.
Does your business have an active recycling program on site? Have you
considered using alternative energy sources like solar and wind to help power your
operations? There are plenty of "green cleaning" alternatives that can help reduce your
use of harsh toxic cleaning chemicals. All these steps can make a small but significant
contribution to improving the environment. You can also ask your suppliers to do the
same, letting them know that their environmental measures will be a factor in your
purchasing decisions. By doing so, your environmental commitments are multiplied
along the supply chain.

Company Diversity and Labor Practices

Business leaders realize that diversity in the workplace is beneficial when
everyone is getting along and working as a team. However, labor policies must apply to
all employees, even those at the highest levels of the company. The scandals with
Harvey Weinstein and Steve Wynn show that no company is impervious to the
ramifications of sexual harassment. This movement has also given rise to other diversity
issues in the workplace that need attention and consistent action. As a business leader,
review your own diversity policies and protocol to address any complaints and
violations. This is not only good for your company image, it also helps build a positive
company culture with good morale and high productivity.

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Supporting Volunteer Efforts

Local communities and charities always need help. Smart business leaders know
that being involved in the community in a productive way is good for the company too.
Give employees the opportunity to help a local school plant trees or work with the city
council on addressing homelessness in the area. Business leaders have the opportunity
to choose where to spend volunteer efforts to best help the local area along with the
company. The important thing for businesses is to choose a cause and contribute time.

IV. Economic Order

A. Typology with respect to Population classification (Economic spending)
a. Traditional Economic Order
A traditional economy is a system in which the development and distribution of
goods and services are determined by customs, traditions, and time-honored beliefs.
In traditional economies, fundamental economic decisions, such as the
production and distribution of goods and services, are determined by tradition and
societal needs rather than by their potential for monetary profit. People in societies with
traditional economies typically trade or barter instead of using money, and depend on
agriculture, hunting, fishing, or a combination of the three for their livelihoods.
In most modern free market-based economies, such as that of the United States,
the production of goods is based on demand and how much money people are willing to
pay. The society’s economic health is usually measured in terms of gross domestic
product (GDP)—the market value of all consumer goods and services produced in a
given period. This contrasts with traditional economies, in which the behaviour of people
in the market is determined by family and personal relationships rather than by their
monetary wealth and impulses to buy the things that they want.
In a traditional economy, for example, children who are raised on farms are likely
to be farmers as adults. Rather than using money, they will exchange the goods they
produce, like milk or leather, for goods they need, like eggs and vegetables for food.

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Based on traditional family and community ties, they tend to barter with the same
people their parents and grandparents had traded with.
Traditional economies are typically found in rural areas of developing second and
third-world nations, often in Africa, Latin America, Asia, and the Middle East.
Traditional economies center on a family or tribe. As in the routines of daily life,
economic decisions are based on traditions gained through the experiences of the
elders.
Many traditional economies exist as nomadic, hunter-gatherer societies that
migrate seasonally across vast areas following the herd animals they depend on for
survival. Often having to compete with similar groups for scant natural resources, they
trade with them rarely since they all need and produce the same things.
When traditional economies do engage in trade, they rely on barter rather than
currency. Trade only takes place between groups that do not compete. For example, a
hunting tribe might trade some of its meat for vegetables grown by a farming tribe.
The term “completeness” is used by economists to describe a traditional economy as
one in which all goods and services are consumed. Producing only what they need to
survive, traditional economies rarely produce a surplus of goods, thus further eliminating
the need to trade or create money.

There are five characteristics of a Traditional Economy, and these are the
following:
1. First, traditional economies center on a family or tribe. They use traditions gained
from the elders' experiences to guide day-to-day life and economic decisions.
2. Second, a traditional economy exists in a hunter-gatherer and nomadic society.
These societies cover vast areas to find enough food to support them. They
follow the herds of animals that sustain them, migrating with the seasons. These
nomadic hunter-gatherers compete with other groups for scarce natural
resources. There is little need for trade since they all consume and produce the
same things.
3. Third, most traditional economies produce only what they need. There is rarely
surplus or leftovers. That makes it unnecessary to trade or create money.

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 4. Fourth, when traditional economies do trade, they rely on barter. It can only occur
between groups that don't compete. For example, a tribe that relies on hunting
exchanges food with a group that relies on fishing. Because they just trade meat
for fish, there is no need for cumbersome currency.
5. Fifth, traditional economies start to evolve once they start farming and settle
down. They are more likely to have a surplus, such as a bumper crop, that they
use for trade. When that happens, the groups create some form of money. That
facilitates trading over long distances.

When traditional economies interact with market or command economies, things

change. Cash takes on a more important role. It enables those in the traditional
economy to buy better equipment. That makes their farming, hunting, or fishing more
profitable. When that happens, they become a traditional mixed economy. 
Traditional economies can have elements of capitalism, socialism,
and communism. It depends on how they are set up. Agricultural societies that allow
private ownership of farmland incorporate capitalism. Nomadic communities practice
socialism if they distribute production to whoever best earned it. In socialism, that's
called "to each according to his contribution."
That would be the case if the best hunter, or the chief, received the choicest cut of meat
or the best grains. If they feed children and the elderly first, they're adopting
communism. That's called "each according to his need."5

There are several pros and cons of a traditional economy, as discussed below.
Advantages
 Little or no friction between members.
 Everyone understands their role and contribution.
 More sustainable than a technology-based economy.
Disadvantages
 Exposed to changes in nature and weather patterns.
 Vulnerable to market or command economies that use up their natural resource

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 b. Evolvers
The world economic order has been evolving over time, and it will continue to
evolve into the future, more often than not, in unexpected ways.The notion that some
final shape will emerge is an illusion. A backward glance at the rise and decline in the
economic and political power of nations confirms this.Economic and political orders
haves always changed, and it seems highly likely that this pattern will continue into the
future. For example, the world economic order in 1850 was largely dominated by the
UK. Although its population of 27 million was a small fraction of that of China and India
(7 and 12% respectively), it managed to dominate both of these large countries,
particularly India, for quite some time.
One hundred years later in 1950 most of the global power of the UK had
evaporated. The global economic order had come to be dominated by the USA and, to
a lesser extent, by its then nemesis, the USSR.
Fast forward 40 years to around 1990. Between 1950 and 1990, Japan had been
catching up with the USA.
Some experts predicted that Japan would overtake the USA to become “number
one”The relative rise of Japan is shown in the figure below which measures the total
level of production (gross domestic product abbreviated to GDP) in Japan as a per cent
of GDP in the USA. Between 1950 and 1990 Japan’s GDP rose from being around 10%
of the USA’s, to 40%.After that achievement, Japan went into an unanticipated 20-plus
year decline.Share prices are still around one third of the value they were more than
twenty years ago, and the Japanese land price index has similarly not risen for two
decades.No one predicted this. Likewise none of the experts predicted the collapse of
the afore-mentioned USSR around the same time that the Japanese economy went into
decline.

Fast forward to the present. The above figure indicates that the Chinese economy has
been rising inexorably to apparent global supremacy.
According to these estimates, the Chinese economy was already 93% of the size
of the US economy in 2009. Extrapolating these data into and beyond the present
suggest that the Chinese economy will match the US, in terms of the sheer volume of its

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economic output, within a few years; indeed, perhaps it has already achieved this. If the
overall relative performance of the two economies over the last two decades is
extrapolated into the future, by 2031 the Chinese economy will be three times the size
of the US, and India will have the same approximate size relative to the United States
that China had in 2009.
If these extrapolations are actually realised, China will indeed be an economic
and thus political power to be reckoned with.But that doesn’t necessarily mean that
China will dominate the world economic order, the way the US has during much of the
previous century.Back in the 1850s, when the UK dominated the global economic order,
its economy was a quarter the size of China’s.
What the UK had that China did not, was a relatively open political system and
outward-looking economic system. It was open to new ideas and innovation. Its average
living standard (per capita GDP) was four times that of China.
China’s economic system has been much more open over the last few decades
than it has been in the past.But its political system, though less chaotic than during the
period Mao Zedong was in power, is still quite rigid. Whether the rigidity of the political
system will stifle China’s global economic assent is hard to judge. Perhaps not in the
short run, but in the long run my guess is that it will.All in all, it seems highly likely that
economic and political power will be more diffused 20 years down the track, than is
currently the case.China will be much more influential, as will India and other countries
that manage to maintain relatively high growth rates.But there are many unknowns:
global warming, new technologies, political vicissitudes. How these things might pan
out, no one really knows. The lesson that might be drawn from this: expect the
unexpected.

c. New Economic Order

The United States and China are the world’s two largest economies. Over the
coming decades, no two countries will have a greater impact on the global economic
order the system of institutions, rules, and norms that govern international economic
affairs. A global economy that delivers strong, sustainable, balanced, and inclusive
growth will depend on such a well managed order. More than ever before, Washington

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and Beijing must work together to identify potential areas of cooperation, as well as
manage our differences.It is this collaborative mission that has inspired the deep and
productive relationship between our two institutions, the Center for Strategic and
International Studies (CSIS) and the Shanghai Institutes for International Studies (SIIS),
for many years. Since 2015, we have cohosted the U.S.-China Dialogue on the Global
Economic Order, a track 1.5 dialogue that has sought to build mutual trust, enhance
communication, identify issues, and propose solutions. The series of semiannual
workshops, alternating between Beijing and Washington, has covered a wide range of
topics across the global economic order, including trade, investment, finance, and
climate change. The dialogue has drawn scholars, former policymakers, and current
officials from the United States and China across a wide range of institutions and
disciplines. some of the rich bounty of our two year dialogue. Scholars from the United
States and China have contributed parallel essays presenting their respective positions
on a wide variety of topics in the global economic order. We hope that this collection will
generate new ideas that scholars, policymakers, and citizens in both countries can use
to solve the most urgent problems in the global economy. At the Sixth Special Session
of the United Nations General Assembly in 1975, a declaration was made for the
establishment of a New International Economic Order (NIEO). It is regarded as “a
turning-point in the evolution of the international community.” New Economic Order is to
be based on “equity, sovereign equality, common interest and co-operation among all
States, irrespective of their social and economic systems, which shall correct
inequalities and redress existing injustices, make it possible to eliminate the widening
gap between the developed and the developing countries and ensure steadily
accelerating economic and social development and peace and justice for present and
future generations.”Though the declaration on the New Economic by the General
Assembly (GA) is of recent origin, the idea is not altogether a new one. In fact, a similar
resolution was adopted by the GA itself long back in 1952. Again, similar demands were
raised from time to time by the UNCTAD since its inception in 1964. A.K. Das Gupta,
however, says that what is spectacular about the NIEO Declaration is its timing. The
NIEO aims at a development of the global economy as a whole, with the set up of
interrelated policies and performance targets of the international community at large in

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essence, the New Economic Order aims at social justice among the trading countries of
the world. It seeks restructuring of existing institutions and forming new organizations to
regulate the flow of trade, technology, capital funds in the common interest of the
world’s global economy and due benefits in favor of the LDCs. It has the spirit of a
‘world without borders. It suggests more equitable allocation of world’s resources
through increased flow of aid from the rich nations to the poor countries.
It seeks to overcome world mass misery and alarming disparities between the
living conditions of the rich and poor in the world as large. Its aim is to provide poor
nations increased participation and have their say in the decision-making processes in
international affairs. Among to other objectives, the NEO envisages the establishment of
a new international currency the implementation of SDR aid linkage, the increased
stabilization of international floating exchange system and the use of IMF funds as
interest subsidy on loans to the poorest developing countries. The crucial aim of the
New Economic Order is to promote economic development among the poor countries
through self- help and South-South co-operation. The New Economic Order intends to
deal with the major problems of the South, such as balance of payments disequilibrium,
debt crisis, exchange scarcity etc. The New International Economic Order (NIEO) is a
set of proposals advocated by developing countries to end economic colonialism and
dependency through a new interdependent economy. The main NIEO document
recognized that the current international economic order "was established at a time
when most of the developing countries did not even exist as independent states and
which perpetuates inequality." In the spirit of "trade not aid," the NIEO called for
changes in trade, industrialization, agricultural production, finance, and transfer of
technology. In the last three years, we have been told again and again that the
industrialized world is undergoing a crisis its worst one since 1945. Traditional receipts
for boosting economic activity have failed to work, and every new forecast of economic
growth in the Organization for Economic Cooperation and Development’s Economic
Outlook has brought a downward revision of the preceding one. (The only exception is
the forecast in the latest semiannual issue, published in July, which was readjusted
upward.) Even now, as the long-awaited recovery finally begins to gather strength and
momentum, it is failing to make itself felt in the most critical domain: employment. In

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 fact, the OECD’s Economic Outlook has confirmed what everybody knew already: that
unemployment in Europe can be expected to continue increasing, presumably until the
end of 1995.

d. Comparison of the different classification

1. Traditional Economic System
The traditional economic system is the most traditional and ancient types of
economies in the world. Vast portions of the world still function under a traditional
economic system. These areas tend to be rural, second- or third-world, and closely tied
to the land, usually through farming.
In general, in a traditional economic system, a surplus would be rare. Each
member of a traditional economy has a more specific and pronounced role, and these
societies tend to be very close-knit and socially satisfied. However, they do lack access
to technology and advanced medicine.

2. Command Economic System

In a command economic system, a large part of the economic system is
controlled by a centralized power. For example, in the USSR most decisions were made
by the central government. This type of economy was the core of the communist
philosophy.
Since the government is such a central feature of the economy, it is often
involved in everything from planning to redistributing resources. A command economy is
capable of creating a healthy supply of its resources, and it rewards its people with
affordable prices. This capability also means that the government usually owns all the
critical industries like utilities, aviation, and railroad.
In a command economy, it is theoretically possible for the government to create
enough jobs and provide goods and services at an affordable rate. However, in reality,
most command economies tend to focus on the most valuable resources like oil. China
or D.P.R.K. (North Korea) are examples of command economies.
● Advantages of Command Economic Systems

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 If executed correctly, the government can mobilize resources on a massive scale.
This mobility can provide jobs for almost all of the citizens.
The government can focus on the good of society rather than an individual. This
focus could lead to more efficient use of resources.
● Disadvantages of Command Economic Systems
It is hard for central planners to provide for everyone’s needs. This challenge
forces the government to ration because it cannot calculate demand since it sets prices.
There is a lack of innovation since there is no need to take any risk. Workers are
also forced to pursue jobs the government deems fit.

3. Market Economic System

In a free-market economy, firms and households act in self-interest to determine how
resources get allocated, what goods get produced and who buys the goods. This is
opposite to how a command economy works, where the central government gets to
keep the profits.
There is no government intervention in a pure market economy (“laissez-faire “).
However, no truly free market economy exists in the world. For example, while America
is a capitalist nation, our government still regulates (or attempts to control) fair trade,
government programs, honest business, monopolies, etc.
In this type of economy, there is a separation between the government and the market.
This separation prevents the government from becoming too powerful and keeps their
interests aligned with that of the markets. Historically, Hong Kong is considered an
example of a free market society.

● Advantages of a Free Market Economy

Consumers pay the highest price they want to, and businesses only produce
profitable goods and services. There is a lot of incentive for entrepreneurship.
This competition for resources leads to the most efficient use of the factors of
production since businesses are very competitive.

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 Businesses invest heavily in research and development. There is an incentive
for constant innovation as companies compete to provide better products for
consumers.
● Disadvantages of a Free Market Economy
Due to the fiercely competitive nature of a free market, businesses will not care
for the disadvantaged like the elderly or disabled. This lack of focus on societal benefit
leads to higher income inequality.
Since the market is driven solely by self-interest, economic needs have a priority
over social and human needs like providing healthcare for the poor. Consumers can
also be exploited by monopolies.

4. Mixed Economic System

A mixed economy is a combination of different types of economic systems. This
economic system is a cross between a market economy and command economy. In the
most common types of mixed economies, the market is more or less free of government
ownership except for a few key areas like transportation or sensitive industries like
defense and railroad.
However, the government is also usually involved in the regulation of private
businesses. The idea behind a mixed economy was to use the best of both worlds –
incorporate policies that are socialist and capitalist.
To a certain extent, most countries have a mixed economic system. For
example, India and France are mixed economies.

● Advantages of Mixed Economies

There is less government intervention than a command economy. This results in
private businesses that can run more efficiently and cut costs down than a government
entity might.
The government can intervene to correct market failures. For example, most
governments will come in and break up large companies if they abuse monopoly power.
Another example could be the taxation of harmful products like cigarettes to reduce a
negative externality of consumption.

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 Governments can create safety net programs like healthcare or social security.
In a mixed economy, governments can use taxation policies to redistribute income and
reduce inequality.
● Disadvantages of Mixed Economies
There are criticisms from both sides arguing that sometimes there is too much
government intervention, and sometimes there isn’t enough.
A common problem is that the state run industries are often subsidized by the
government and run into large debts because they are uncompetitive.

e. OPEC “Organization of the Petroleum Exporting Countries (OPEC)”

The term Organization of the Petroleum Exporting Countries (OPEC) refers to a
group of 13 of the world’s major oil-exporting nations. OPEC was founded in 1960 to
coordinate the petroleum policies of its members and to provide member states with
technical and economic aid. OPEC is a cartel that aims to manage the supply of oil
in an effort to set the price of oil on the world market, in order to avoid fluctuations that
might affect the economies of both producing and purchasing countries. Countries that
belong to OPEC include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela (the five
founders), plus the United Arab Emirates, Libya, Algeria, Nigeria, and four other
countries.
Understanding the Organization of the Petroleum Exporting Countries (OPEC) -
OPEC, which describes itself as a permanent intergovernmental organization, was
created in Baghdad in September 1960 by founding members Iran, Iraq, Kuwait, Saudi
Arabia, and Venezuela. The headquarters of the organization are in Vienna, Austria,
where the OPEC Secretariat, the executive organ, carries out OPEC’s day-to-day
business.
The chief executive officer of OPEC is its secretary-general. His Excellency
Mohammad Sanusi Barkindo of Nigeria was appointed to the position for a three-year
term of office on Aug. 1, 2016, and was re-elected to another three-year term on July 2,
2019.

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 According to its statutes, OPEC membership is open to any country that is a
substantial exporter of oil and shares the ideals of the organization. After the five
founding members, OPEC added 11 additional member countries as of 2019.
They are, in order of joining, as follows:
 Qatar (1961)
 Indonesia (1962)
 Libya (1962)
 United Arab Emirates (1967)
 Algeria (1969)
 Nigeria (1971)
 Ecuador (1973)
 Gabon (1975)
 Angola (2007)
 Equatorial Guinea (2017)
 Congo (2018)
Ecuador withdrew from the organization on Jan. 1, 2020. Qatar terminated its
membership on Jan. 1, 2019, and Indonesia suspended its membership on Nov. 30,
2016, so as of 2020 the organization consists of 13 states.
It  is notable that some of the world’s largest oil producers, including Russia,
China, and the United States, are not members of OPEC, which leaves them free to
pursue their own objectives.
OPEC's Mission
According to the OPEC website, the group's mission is “to coordinate and unify
the petroleum policies of its Member Countries and ensure the stabilization of oil
markets in order to secure an efficient, economic, and regular supply of petroleum to
consumers, a steady income to producers, and a fair return on capital for those
investing in the petroleum industry.”
The organization is committed to finding ways to ensure that oil prices are
stabilized in the international market without any major fluctuations. Doing this helps
keep the interests of member nations while ensuring they receive a regular stream of
income from an uninterrupted supply of crude oil to other countries.

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 OPEC recognizes the founding nations as full members. Any country that wishes
to join and whose application is accepted by the organization is also considered a full
member. These countries must have significant crude petroleum exports. Membership
to OPEC is only granted after receiving a vote from at least three-quarters of its full
members. Associate memberships are also granted to countries under special
conditions.

Advantages and Disadvantages of OPEC

There are several advantages of having a cartel like OPEC operating in the
crude oil industry. First, it promotes cooperation among member nations, helping them
achieve some degree of political hostilities. And because the organization's main goal is
to stabilize oil production and prices, it is able to exert some influence over production
from other nations.
OPEC FAQs
OPEC coordinates and consolidates the policies about petroleum production and
output involving its member nations. It promises a stable oil market that offers petroleum
supplies that are both efficient and economic.
Main goals of OPEC
OPEC's main goal is to maintain oil prices at a profitable level for its members
while keeping the market as free as possible from restrictions. The organization ensures
its members receive a steady stream of income from an uninterrupted supply of oil.

f. Zero-Sum Game
These notes describe a simple class of games called two-player zero-sum
games. You can probably figure out what a two-player game is. Zero-sum games refer
to games of pure conflict. The payoff one player is the negative of the payoff the other
player. This formulation is probably appropriate for most parlor games, where the
outcomes are either win, lose, or draw (and there is at most one winner or loser). Maybe
it describes war. It is a restrictive assumption and is not appropriate to most economic
applications, where there is a strong component of common interests mixed with the
conflict. For example, in a bargaining situation, the conflict is clear: the buyer wants to

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pay a low price and the seller wants to receive a high price. The cooperative element
arises because it is frequently the case that making a transaction at an intermediate
price is better for both sides than a failure to reach an agreement. Concretely, if
something is worth $10 to the seller and $15 to the (potential) buyer, then making a sale
at the price $12 (or any price between $10 and $15) is better for both buyer and seller
than making no sale at all. Problems that describe aspects of rm competition (models of
Cournot duopoly that you may have seen in a micro class) have non-zero sum aspects.
Why limit attention to zero-sum games? They are simpler. There is a beautiful theory
that is more compelling than the general theory of games. Predicting outcomes in these
games uses linear programming in ways that do 1 not generalize to other kinds of
game. The general structure of a game involves a list of players; a set of strategies for
each of the players; a payo for each vector of strategies. I will assume that the game
has only two players.

C. International Economic Order (After World War II)

The term international economic order refers to the set of proscribed rules,
norms, and procedures that regulate the cross-border exchange of goods, services, and
capital. While economists have persistently preached the virtues of an open economy
since David Ricardo (1772-1823), leaders have been warier because of a combination
of ideological concerns, domestic politics, and realpolitik.
At present, the idea of an international economic order seems inextricably linked
to multilateralism. However, in the century prior to 1945, almost all of the global
economic rules were established at the bilateral or unilateral level. the opening of the
global economy to trade in the mid-1800s was due to the Cobden-Chevalier Treaty
(1860) between France and Great Britain, and the decision to extend most -favored
nation trading status to new trading partners (Stein 1984; Lazer 1999). As for capital
markets, the golds standards was a creation of British hegemony; its large domestic
market compelled other countries to operate by the Bank of England’s rules
(Eichengreen 1996).
These arrangements were temporarily suspended during World War I (1914-
1918), and then disintegrated after 1930. The British tried to sustain the pre-war order,

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but their economic power had waned, and the United States refused to act as a
supporter of the system (Lake 1983). The interwar economic system was characterized
by high tariffs and beggarthy-neighbor policies, in which countries engaged in
competitive devaluations of their currency as a means to improve their balance of trade
(Kinder Berger 1973).
During and after World War II (1939-1945), the United States was bound and
determined to foster an international economic order that would prevent the high tariff
barriers and beggarthy-neighbor policies of the 1930s. This included a global trading
system to ensure that all participating members received nondiscriminatory treatment in
traded goods. To aid in trade expansion, the United States also pressed for currencies
to be fixed in value relative to the dollar, which in turn could be exchange for gold.
The World economic order born after World War II, to a large extent fashioned by the
United States, was based on two fundamental principles-in monetary terms, the
principle of fixed parties and the dollar standard(although the dollar was convertible into
gold at the request of the central banks.
As the Cold War unfolded in the decade and a half after World War II, the United
States experienced phenomenal economic growth. The war brought the return of
prosperity, and in the postwar period the United States consolidated its position as the
world’s richest country.
American involvement in World War II had a significant impact on the economy
and workforce of the United States. American factories were retooled to produce goods
to support the war effort and almost overnight the unemployment rate drop around 10%
The New International Economic Order (NIEO) is a set of proposals advocated by
developing countries to end economic colonialism and dependency through a new
interdependent economy. The main NIEO document recognized that the current
international economic order ‘’was established at a time when most of the developing
countries did not even exist as independent states and which perpetuates inequality.
a. Bretton Woods System
The Bretton Woods Agreement was reached in a 1944 summit held in New
Hampshire, USA on a site by the same name. The agreement was reached by 730
delegates, who were the representatives of the 44 allied nations that attended the

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summit. The delegates, within the agreement, used the gold standard to create a fixed
currency exchange rate. The agreement also facilitated the creation of immensely
important structures in the financial world: the International Monetary Fund (IMF) and
the International Bank for Reconstruction and Development (IBRD), which is known
today as the World Bank.

Bretton Woods and the Bretton Woods System

A key factor in the Depression was thought to be a lack of cooperation among
nation - states. That lack of cooperation was associated with high tariffs and other
import restrictions and protectionist practices, as well as the propensity of governments
to devalue their currencies in order to gain an edge in global trade over other countries.
The latter also made exchange rate wars among the nations involved more likely. Those
concerns were the backdrop for the creation of the Bretton Woods system and its five
key elements. First, each participating state would establish a ‘par value’ for its currency
expressed in terms of gold or (equivalently) in terms of the gold value of the US dollar
as of July 1944”. For example, the US pegged its currency at $35 per ounce of gold,
while, to take one example, the figure for Nicaragua was 175 cordobas per ounce. This
meant that the exchange rate between the two currencies was five cordobas for one
dollar. “Second, the official monetary authority in each country (a central bank or its
equivalent) would agree to exchange its own currency for those of other countries at the
established exchange rates, plus or minus a one - percent margin”. This made
international trade possible at or near the exchange rate for the currencies of the
countries involved without the need for any outside intervention. Third, the International
Monetary Fund (IMF) was created (as was the forerunner of the World Bank) to
establish, stabilize, and oversee exchange rates. Forty states became IMF members in
1946 and were required to deposit some of their gold reserves with the IMF. The IMF
was empowered to approve the par values of currencies and member states could not
change that value by more than 10 percent. If a currency was destabilized, the IMF was
prepared to lend member states the money needed to stabilize their currency.
Fourth, the member states agreed to eliminate, at least eventually, “all
restrictions on the use of its currency for international trade”. Finally, the entire system

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was based on the US dollar (at the end of WW II the US had about three - fourths of the
world’s gold supply and accounted for over one - fifth of world exports). The US agreed
to make the dollar convertible into other currencies or gold at the fixed par value. The
dollar became, in effect, a global currency. Of course, as the Bretton Woods system
came into existence and had a chance to develop, it changed dramatically over time.

Bretton Woods had its most powerful effects on global trade, the global monetary
order, and global investment. In terms of global trade, a key was the idea of the
“unconditional most - favored - nation” which “required governments to offer the same
trade concessions [reductions in trade barriers, non - discrimination against a nation’s
products] to all”. Restrictions on international trade were reduced over the years through
various meetings (“rounds” ) under the auspices of GATT (General Agreement on
Tariffs and Trade) and later the WTO. In terms of the monetary order, it was the IMF
that took center stage. The goal was to provide security, as well as flexibility, to the
monetary order. What emerged between 1958 and 1971 was a system in which the US
could not change the value of its dollar, while all other countries could, but as
infrequently as possible. This made exchange rates stable enough to encourage
international trade and investment which otherwise would have been discouraged by
dramatic fluctuations in rates. In terms of global investment , a key role was envisioned
for the World Bank, but massive US aid through the Marshall Plan, and rapid European
post - war recovery, made its work in that period of much less significance than had
been anticipated.

A key development in terms of investment involved MNCs, especially American -

based firms in fields like automobiles and computers, constructing their own plants
and/or investing in indigenous companies in other countries. This kind of investment
took center stage because the industries involved required very large, often global,
organizations in order to function effectively. In addition, this kind of investment made it
possible to get around trade barriers by opening plants within the countries with such
barriers.

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 The global openness encouraged by Bretton Woods also contributed to the
emergence or expansion of social welfare programs, indeed the welfare state, in many
countries. Welfare states sought to deal with various problems – recession, layoffs,
reductions in wages, and bankruptcies of uncompetitive fi rms. The creation of a social
safety net within a given country served to protect it and its citizens from these
problems, at least to some degree. In the process, it gave a nation and its
entrepreneurs the cover they needed to be actively involved in the global marketplace.
The combination of all of these aspects and dimensions of Bretton Woods
satisfied many different nations and constituencies (e.g. capital and labor) and in the
process “oversaw the most rapid rates of economic growth and most enduring
economic stability in modern history”.
History and Functionality of the Bretton Woods Agreement
As mentioned above, 44 allied nations met in Bretton Woods, NH in 1944 for the United
Nations Monetary and Financial Conference. At that time, the world economy was very
shaky, and the allied nations sought to meet to discuss and find a solution for the
prevailing issues that plagued currency exchange. The summit was also looking for
policies and regulations that would maximize the potential benefits and profits that could
be derived from the global trading system. What resulted from the conference were the
Bretton Woods Agreement and the Bretton Woods System.

The Bretton Woods System is a set of unified rules and policies that provided the
framework necessary to create fixed international currency exchange rates. Essentially,
the agreement called for the newly created IMF to determine the fixed rate of exchange
for currencies around the world. Every represented country assumed the responsibility
of upholding the exchange rate, with incredibly narrow margins above and below.
Countries struggling to stay within the window of the fixed exchange rate could petition
the IMF for a rate adjustment, which all allied countries would then be responsible for
following. The system was depended on and was used heavily until the beginning of the
1970s.
Significance of the Bretton Woods Agreement

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 Despite falling apart, the Bretton Woods summit and agreement are responsible
for a number of notably important aspects in the financial world. First and foremost is
the creation of the IMF and the World Bank. Both institutions remain vital to the global
economy to this day. On a larger scale, however, the agreement unified 44 nations from
around the world, bringing them together to solve a growing global financial crisis. It
helped to strengthen the overall world economy and maximize international trade profit.
The Collapse of the Bretton Woods System
Backing currency by the gold standard started to become a serious problem
throughout the late 1960s. By 1971, the issue was so bad that US President Richard
Nixon gave notification that the ability to convert the dollar to gold was being suspended
“temporarily.” The move was inevitably the final straw for the system and the agreement
that outlined it. Still, there were several attempts by representatives, financial leaders,
and governmental bodies to revive the system and keep the currency exchange rate
fixed. However, by 1973, nearly all major currencies had begun to float relatively toward
one another, and the entire system eventually collapsed.

KEY TAKEAWAYS
 The Bretton Woods Agreement and System created a collective international
currency exchange regime that lasted from the mid-1940s to the early 1970s.
 The Bretton Woods System required a currency peg to the U.S. dollar which was
in turn pegged to the price of gold.
 The Bretton Woods System collapsed in the 1970s but created a lasting
influence on international currency exchange and trade through its development
of the IMF and World Bank.

b. New International Economic Order

It is now over a decade since the idea of a New International Economic Order
(NIEO) has been proposed and gained considerable recognition in the international
community. It was an idea which in all its dimensions, embody prescriptions for the
various ailments of the world economy as well as providing genuine basis for its future
consolidation and development. However, despite the general recognition of the need

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for the restructuring of the world economy in view of its continuous deterioration and the
aggravation of poverty in the developing countries little progress has been made in the
implementation of the proposals of the NIEO. Consequently, the hopes about its role
and positive contribution to the world economy are rapidly fading.
The NIEO which basically seek the .restructuring of the pattern of international
trade and the flow of capital and technology so that their benefits could be more
equitably 'distributed to the developing countries has naturally raised 1m entire array of
basic questions. Among them: (1) The question of cost and benefit. Who will have to
bear the burden of instituting NIEO and will the results be worth the sacrifices? Will
benefits really accrue to the poor people to help them fulfill their basic needs and will
developing countries be made truly more self-reliant? Will the developed countries also
benefit from NIEO (a positive-sum game) or will it mainly mean the redistribution of the
current stock of wealth from them to the developing countries (a zero-sum game)? (2)
The question of morality. Do the developed countries have a moral obligation to help the
developing countries and does this responsibility extend to those countries who had no
historical part in the underdevelopment of the developing countries? (3) The question of
legitimacy. Is there free market, the basic mechanism of world trade and the best
vehicle of economic development or is it merely a convenient fiction to cover up the
current unjust manipulations of the developed countries?
The NIEO without much emphasis covers a wide range of international economic
issues. However, this paper in the light of the several questions mentioned above, will
attempt at drawing attention to the central problems on the basic issues of the NIEO
programme and to show how these could be resolved. For this purpose therefore, this
paper will be divided into four Parts. Part I is the introduction. Part II a discussion of the
origin and development of the NIEO. Part III deals with the progress and problems of
the NIEO especially in the areas of money and finance, integrated programme and
terms of trade, technology and Transnational Enterprises (TNEs), sovereignty and equal
rights and cooperation among developing countries. Ann Part IV the conclusion on the
basic issues.
II. Origin and Development

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 The uninterrupted series of economic imbalances accompanied by severe
economic and political crisis in the countries that make up the contemporary market
economies had led to a challenge to today's international economic order and the
proposed restructuring of the current system.
The entire array of historical events that set the stage for the NIEO began at the
end of World War II. While these events arose from their own historical antecedents
they themselves produced the setting for the breakdown of the post-war economic
system and the widening gap between developed and developing countries.
The mid-term review of the achievement of the Second Development Decade's
goals showed mixed results. The greatest disappointment came in the area of
agricultural production and official development aid. On the average, the United Nations
(UN) official development and targets have not been half achieved. At the same time,
service charges on past loans began to put enormous pressures on developing
countries' balance of payments and world poverty showed no signs of abating. There
was insufficient progress in commodity trade, inadequate access to the markets of
developed countries particularly for agricultural products, tariffs have escalated,
especially for semi-processed and processed· products and new tariff and non-tariff
restrictions were introduced by many developed countries on a number of items
including textiles and leather goods. The plight of the least developed, island and
landlocked developing countries, gave rise to additional concern. While some progress
was achieved preferences by the developed countries and the proposal of the Tokyo
Declaration concerning multilateral trade negotiations, the negative developments
weighed more heavily in the balance and created widespread dissatisfaction in the
developing countries.
Another set of factors came into play as well. This was the sudden and
unexpected rise of developing countries' economic and political power. The Middle East
oil embargo of 1972-1973 and subsequent fourfold increase in the price of oil created a
world energy crisis. It affected all oil importing countries. It also exhibited the
dependence of the developed countries on the developing countries for several major
natural resources and proved the ability of the developing countries to wield economic
and political power effectively. The consequences include rises in the price of food due

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to the increase in the cost of chemical fertilizers, and further tensions between
producers and consumers of raw materials. But the Organization of Petroleum
Exporting Countries (OPEC) exercise of developing countries economic and political
power proved unable to improve the condition of the developing countries as a whole.
Despite significantly higher gross resource flows from the oil-exporting to the oil-
importing developing countries, the economic plight of the latter worsened due to the
higher cost of energy. Developed countries found themselves beset by economic
problems of their own including not only higher 'Oil prices but inflation, unemployment
and unused industrial capacity.
Compounding the economic difficulties of the developed countries were signs of
breakdown in the international monetary system which affected all countries. Amidst
growing tensions between the United States of America (USA), Japan and European
Community over matters of trade, the Bretton Woods System of floating exchange
rates. The value of the US dollar began to erode, creating serious difficulties for those
countries which held their reserves in dollars. The creation of Special Drawing Rights
(SDRs) provided some access to foreign exchange independently of dollar holdings, but
such access favoured the countries already developed and the rest remained seriously
dissatisfied with the workings of the international monetary system. Hence, it became
evident that some of the basic tenets of the post-war world economy were being called
into question.
It was in this context that Algeria’s President Boumedienne in 1973 in his
capacity as chairman of the Non-Aligned Movement directed a request to the Secretary-
General of the UN that a Special Session of the General Assembly should be convened
to study raw materials and economic development problems. And as this initiative
immediately received widespread support it led to the convening in May 1974, of the
Sixth Special Session of the UN General Assembly which adopted the "Programme of
Action on the Establishment of a New International Economic Order" which was indeed
the full text of "Action Programme for Economic Co-operation" adopted in the Non-
Aligned Countries summit in· Algiers in September 1973. The NIEO programme
distinguishes itself from earlier international economic programmes by virtue of its
objectives which are not merely to improve the functioning of existing international

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economic system but rather to expand its purpose. The purpose to be added to the
existing ones is economic development. Given the special situation of the developing
countries, the acceptance of this additional purpose involves the acceptance of a
number of principles. They include the following:

a. orientation of the international monetary system toward the interests of the

developing countries;
b. production cartels along the lines of OPEC:
c. commodity agreements to regulate prices and quantities;
d. linkage of export prices in the developing countries to the prices in the
developing countries to the prices they have to pay for imports (under the
general heading of "indexation");
e. extension of preferential treatment in trade;
f. recognition of developing countries' permanent sovereignty over their
natural resources, covering also the issue of exploiting the ocean floor and
related question of territorial waters;
g. transfer of advanced technology to the developing countries on
preferential terms - to some extent without a quid pro quo but with
guarantees by governments.
Albeit, the problem is not so much the acceptance of these principles (most
countries have done this) but their translation into changes in the mechanisms
governing the developed and developing countries. Most developed countries have
indicated that they have major reservations about the demands. In their view, meeting
all of them would imply a dismantling of the market-based international economic
system and its replacement by a largely dirigistic structure. Furthermore, it has also
been argued that a change of this kind would particularly affect two groups of countries
adversely: the poorest of the developing countries, especially those without their own
raw materials and countries with extensive foreign economic involvement, such as the
Federal Republic of Germany (FRG). Other groups with large natural resources and
smaller external economic involvement would definitely benefit; for instance, the Soviet

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Union, which possesses considerable reserves of oil and other raw materials and are
less integrated into the world economy.
Indeed, the reservations of the USA one of the countries that matter most have
been very clear on this issue. The assumption of the USA's government is that the
principal cause of the developing countries poverty is not external but internal. The
drawback to adequate internal mobilization of resources for economic development, for
example, is said to be the political ideology of Fabian socialism. Governments of
developing countries having taken the domestic position that equitable distribution of
wealth and income is right and necessary are described as turning to the international
arena to fulfill their pledges.
Thus, although the NIEO may have emerged as a sound proposal to deal with a
seemingly intractable global economic problems, nevertheless, the reservations of the
developed countries about the circumstances leading to its formation and the assumed
"far-reaching" effects taken together with the firm assumption that the critical factors in
the underdevelopment of the developing countries are internal inevitably suggests
progress in the implementation of the NIEO proposals are bound to be difficult. Let us
now proceed to examine the progress made so far.
III. Progress and Problems
No significant progress has been made in the demands that have been listed as
contributing to the NIEO that go very much to the heart of the present system: money
and finance; integrated programme and terms of trade; technology and TNEs;
sovereignty and equal rights; and co-operation among developing countries as long as
the basic issues are not resolved and a consensus does not emerge concerning them.
(a) Money and Finance
So far, very little progress has been made in the implementation of the General
Assembly's recommendations in the area of international monetary reform and
development finance. The effort to establish a link the creation of SDRs and the
provision of additional development finance had so far been frustrated. No agreement
was reached as regards development finance, compensatory financing, alleviation of
the debt burden of developing countries or the reform of the international monetary
system.

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 Developing countries' prospect for debt or other financial relief have continued to
recede inasmuch as its foreign debts have doubled or tripled during these past years
with higher rates of interest shorter terms of maturity and more onerous conditions of
debt management. Canada and some small European countries have unilaterally
cancelled the debts of a few poor developing countries, but the USA's government has
not and has no intention of a blanket or a significant write-off of loans to some poor
countries even if such a step is given legislative approval. The developing countries with
the largest debts, Brazil and Mexico, have themselves opposed all consideration of debt
moratoria for fear of damaging their own credit rating, which they need to get new loans
to pay off old ones.
The dollar has been devalued three times reducing the real value of the dollar
debt but also the developing countries' dollar reserves; and weakened dollar has
caused an effective devaluation of those developing countries currencies that are
pegged to it. These real monetary changes have of course occurred without the
slightest consideration of the interests of the developing countries. Moreover, the
developing countries and their populations have clearly suffered the most as a result of
these changes if only because they are the most defenseless against the world-wide
inflation, particularly in prices of manufactures that is fed by the reckless printing of
devalued dollars by the USA. The supposed measure to demonetize gold and to
replace it by SDRs or some similar universal reverse currency have led, on the one
hand, to the strengthening and price increase of gold to the disadvantage of developing
countries which have little or no gold mines or stocks. On the other hand of the SDRs
and other funds created by the International Monetary Fund (IMF) and other financial
institutions, only the equivalent of US $2.5 billion has been destined for non-oil
producing developing countries. This amount is equivalent to about one percent of their
current foreign debt and a very small share of total additional funds almost all of which
thus went to the developed countries. The "link" that the developing countries
demanded between additional money and development finance has been effectively
denied.
Thus, it remains to be seen whether states will muster the political will and skill to
establish a new monetary order and to manage the system with new rules and

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procedures. The agenda of reform is long and complex. The political process of reform
is fraught with difficulties. Although monetary power is now more widely dispersed but is
not equally dispersed. The USA remains the most powerful monetary actor. Unless and
until the USA assumes an active role, reform will be impossible.
(b) Integrated Programme and Terms of Trade
In the area of integrated programme or producers' association, there "has been
to date some successful maintenance of OPEC unity and prices, providing the impulse
toward the remaining demands for NIEO. However, the effective price of oil was again
eroded to an equivalent of US $7 per barrel by world inflation and dollar devaluation
before the price was again raised sharply in 1979. For a time, the OPEC countries were
not sufficiently united (in view of Saudi Arabia's effective veto power) to raise the oil
price again given their common fears of rocking the world economic boat on its current
crisis journey. Although the oil-producing countries - inside and outside OPEC -
increased the price of oil again in late 1978 and in 1979 they did so more out of disunity
than unity, each charging the "spot price" that its market will bear. If market demand
declines due to recession, so will the price of oil. Be that as it may, most of the effective
cost of the oil price hikes has also been passed on to the non-oil producing countries of
the developing countries. Meanwhile, the industrial countries have increased exports to
the OPEC countries and have recycled the remaining OPEC surplus through their
banks. Several other raw material - producer associations have been formed or
strengthened; however these associations and their price stabilization efforts have been
unable to prosper much against the opposition of developed raw materialproducing
countries and low world market prices in years of recession and times of crisis. Other
raw material producers do not have the relative monopoly power of OPEC, and
prospects for their independent successful action through stabilization let alone
"solidarity" funds are dim.
Common action with raw-material importing industrial countries is limited by the
laters' own interests which may admit some stabilization of supply and price but more in
favour of consuming than of producing countries. In any event, although the terms of
trade for non-oil producing developing countries, raw material-exporting countries
improved briefly between 1972 and 1974, they on balance declined again with the 1973-

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1975 world recession and the post 1975 mild recovery. For non-oil-exporting countries
in the developing countries, the terms of trade have fallen by more than 10 percent
since 1970 and suffered an "unprecedented" deterioration in the balance of trade of US
532 billion between 1970 and 1975; of this, the sum of US $5 billion can be attributed to
changes in volume, and US 527 billion to changes in prices of the goods traded. In turn,
of this US $27 billion deficit caused by price changes, US $8 billion can be attributed to
international inflation and US 59 billion to unfavourable changes in the terms of trade.
The developing countries terms of trade declined by 4.7 percent in 1975, rose by 3.7
percent in 1976, remained unchanged in 1977 and declined by 11.2 percent in 1978.
There has not been any significant improvement in the developing countries terms of
trade since 1979.
Even then, the prospect for foreign trade expansion of the developing countries
had been dampened since the increase in manufactures for export had not been
complemented with reduced protectionism by developed countries. On the contrary, the
demand of some local capital and labour in the latter faced with competition and
unemployment in the current crisis had been for protection: the European Common
Market, its member countries and the USA have moved to increase tariffs and to
impose quotas on the import of manufactures from developing countries. Examples
include provision for increased protection in the MuItifibre Agreement negotiated at the
end of 1977 and USA's restrictions on the imp ort of shoes, textiles, television sets, etc.
Thus, so long as there is instability in the prices of raw materials as a result of the
failures of the producer associations most developing countries would continue to
experience fluctuating foreign exchange earnings. And to the extent that this is so would
be incapacitated in the execution of their development plans. In the same vein
substantial increase in foreign exchange earnings are not in the pipe line the more the
present world economic crisis remains unabated and most developed countries are
confronted with increasing unemployment to which in most cases national solutions are
considered most appropriate.
(c) Technology and Transnational Enterprises (TNEs)
The developed countries have agreed to talk about codes for transfer of
technology and for conduct of TNEs. However, the real-life conduct of both continues to

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be just as determined by the global interests of TNEs as before. The developed sector
contributes all too little toward the self reliance of developing countries through the
selection of more appropriate technology, and still less through its development in the
developing countries itself. In fact, the latter's technological dependence on the TNEs in
particular and on the developed countries generally increases day by day. Moreover,
while the developing countries talk about collective codes of conduct most of these
countries are individually reducing or even eliminating the few restrictive provisions on
TNEs and technological transfer that they had imposed nationally or regionally in the
late 1960s and early 19705. Thus, Argentina, Chile, Mexico and other countries are all
busily engaged in relaxing controls on foreign enterprises and are competing with each
other to grant greater concessions to international capital. It would be too long and
tedious to document this trend in each individual case (some of this documentation is
already provided in, the developing countries) but the Business Weekly may be quoted:
"There is good news coming out of Latin America for USA and other foreign companies
with a stake in this vast region. Major countries are opening their doors wide to private
enterprise. Multinational executives consider the region to be one of the world’s major
opportunities.
(d) Sovereignty and Equal Rights
The developing countries are achieving formal equality among unequals where it
counts least. For example in the UN General Assembly and The Security Council, but
the UN specialized agencies remain under the near exclusive control of the larger
developed states. International financial agencies, such as the World Bank and the IMF
remain under the control of the USA (with IMF partially controlled by West Europe); and
if these institutions admit any developing countries to their boards they do so more to
co-opt them to permit them to help steer world financial affairs in a different direction.
Collectively, the developing countries are admitted to the conference bargaining tables.
However, the developing countries have no power to negate in practice even the little
that they were moved to in principle. Individually, the developing countries use their
sovereignty more often than not to compete with each other in ever greater concessions
to international capital and growing repression of their own populations without outside
interferences.

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(e) Co-operation among Developing Countries
Technical co-operation among developing countries certainly does not mean the
development or use of "indigenous" technology to promote economic and political self-
reliance for the masses of their people. If such co-operation means anything it partially
protects capital in some developing countries from competition by metropolitan capital
and opens some markets in certain parts of the developing countries to capital from
certain others. For example, Brazil, Mexico and India with the participation of TNEs
have been selling advanced technology and sophisticated know-how to petrochemical
and machine-building industries and to several Arab countries. In the meantime,
although the Arab states have found it politically convenient to present a united political
front with the developing countries, Arab capital has flowed into the banks of New York,
London and Zurich. Seeking the economic and political guarantees of imperialism, Arab
capital thus found protection for its profitable investments in Europe and North America
and its loans to other developing countries through the Eurocredit market. There has
been hardly any Arab investment in, let alone solidarity with the developing countries.
In addition to these, it will not be an over emphasis to state that the inadequacies of the
negotiation framework hindered the implementation of the NIEO programme. United
Nations Conference on Trade and Development (UNCTAD) and many other fora have
been moulded by the Group system, which comprises three Groups of countries the 77,
Group Band D - as well as China. The Group 77 (which now has 117 members)
consists of developing countries and Group D of East European countries. This' division
has consolidated itself as a pattern of alignment and the Group of 77 represents the
solidarity of developing countries which is of historic importance enabling them to
present a common stand and bring to bear their combined strength in "North-South"
negotiations. The Group system has its merits in deliberations where the developing
countries has needed to articulate and publicize its problems and position.
However, such deliberations have often ended in resolutions which exhort
everyone, without binding or committing any of the parties; the differences are drafted
away to create an appearance of agreement they persist in reality. One result of this
process is that the language of international resolutions has become in bred,
specialized and coded.

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 Genuine progress in international relations depends on painstaking negotiations
to reach agreed principle or legal instruments, only these processes can produce a
common language to provide a basis for action. In this context, Group system has been
criticized as tending to crystallize extreme positions on either side which delays and
sometimes defeats practical progress in resolving conflicting interests. The process of
reconciling differences within each Group has often led to extreme position driving out
moderate ones: maximum demands eliciting minimum offers. It has become necessary
to carry each Group along as a whole at every stage without neglecting differences, so
that the negotiating process becomes unwieldy, cumbersome and time consuming. The
time has come to examine whether a negotiating format can be devised which is more
functional, while fully respecting the concerns of the developing countries for
maintaining their solidarity.

IV. Conclusion
The progress toward the creation of the NIEO as has been observed is generally slow
as a result of the reticence of the developed countries apprehensive of the disruption in
the long established world economic mechanism which has thus far given them
considerable benefits and enhanced their advantageous position. But the deterioration
in the economic situation of most developing countries is not likely to be arrested as
long as permanent solutions remain elusive to the problems in the expansion of their
foreign trade and payments and to the inflow of foreign financial and technological
assistance. For example, the reduction of protectionism, both tariff and non-tariff, on the
exports, both in agricultural and manufactured goods of the developing countries,
represents a critical factor for the latter's trade expansion and sustained economic
development.
The lack of progress toward the creation of the NIEO however does not necessarily
indicate that it should be completely abandoned, rather it calls for renewed efforts.
Demands for changes in the mechanisms governing the economic relationships
between the developed and the developing countries have been made as far back as
the mid 1960s in the area of international trade and aid. But, the little results thus far
secured for these demands had not meant a complete loss of hope. So long as the

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present world economic recession remains unabated, the NIEO demands will continue
to feature prominently in all agenda of discussions of world problems in all international
fora. The NIEO can be achieved once it is perceived that its benefits are universal and
can reach all segments of the world's population, that its costs do not outweigh its
benefits, that its regulatory mechanisms are legitimate, there is real 'sense of moral
responsibility among states and there is sufficient political support for its measures
nationally and internationally.

D. Types of Economic system

a. Combine Private Ownership with Market Allocation (market
capitalism, command capitalism, socialist planned economies,
market socialism, capitalist economic system and socialism)
An economic system, or economic order, is a system of production, resource
allocation and distribution of goods and services within a society or a given geographic
area. It includes the combination of the various institutions, agencies, entities, decision-
making processes and patterns of consumption that comprise the economic structure of
a given community.

Capitalism
Traditionally also known as the free market system has adapted itself to different
national and cultural environments, almost right from its inception as the world’s most
dynamic economic system. One only needs to look at the different market economies in
the world today to grasp this fact. The English-speaking world, particularly the United
States and Great Britain, has traditionally adapted a more “laissez-faire” approach to
capitalism where markets functioned with fewer government regulations and
interference. This “Anglo-Saxon” model of capitalism has often been compared with the
capitalist model of Continental Europe which has traditionally been characterized by a
more corporatist and regulatory approach. This “Anglo-Saxon” and “European” forms of
capitalism in turn differs from the capitalism practiced in postwar Japan which was
deeply influenced by Japanese national traditions (famously reflected in such features
as lifetime employment and a cultural emphasis on economic egalitarianism).

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Market Capitalism
In order to get a better understanding of “market capitalism”, it is important to
grasp the features that greatly distinguish it from earlier economic systems. The
historian David Christian in his books “Maps of Time” (2005), follows anthropologist Eric
Wolf, in describing market capitalism as a system which has three main elements: (a) a
dominant class of entrepreneurs or “capitalists” who own productive resources (i.e.,
capital) and use them to generate commercial profits that sustain their elite lifeways; (b)
a class of people who, unlike peasants, have no access to productive property and can
therefore support themselves only by selling their own labor power, thereby becoming
wage earners or “proletarians”; and (c) competitive markets that link these two groups
through commercial exchanges governed by market forces rather than by legal or
physical coercion. Modern capitalism was made possible by the transformation of labor
into wage-labor and property into capital, each being transformable into the other via
their ‘double existence’ as commodities (Giddens, 1981). Capital and wage-labor are
economically mutually dependent (as well as being in conflict over interests) within a
system of production that creates an unprecedented capability for the development of
material wealth (Giddens, 1981). Likewise, the class structure and methods used to
generate wealth in market capitalism differs greatly from earlier economic systems. In
pre-capitalist societies, the means used to secure the compliance of labor and the
extraction of surplus production were usually based on force (or the threat of force) or
other extra-economic methods (i.e., religion). However, in capitalism, the means used to
secure the compliance of labor and the extraction of surplus production are primarily
“economic” in nature, i.e. on the dependence of property-less workers on capital-owning
employers for survival and sustenance. This dependence on employers is not backed
by force or other forms of extra-economic compulsion but by sheer economic necessity
on the part of workers.
In a world of entrepreneurs, competitive markets, and wage earners, both
entrepreneurs and wage earners have to pursue innovation as a condition of survival.
Entrepreneurs have to do so because in competitive markets, the most successful long-
term strategy will always be to cut the costs of production, and therefore of sale, and

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implementing such a strategy requires introducing cost-cutting innovations in
production, transportation, and management (David Christian, 2005). Wage earners
also have to actively seek ways of improving productivity. As sellers of labor power,
wage earners have to offer labor that is more productive than that of potential rivals but
costs less. Here, too, the ratchet of competition ensures that the productivity of labor will
steadily increase. These rules explain the odd paradox that what Leon Trotsky called
the “economic lash” of capitalism – the threat of unemployment – is a far more effective
tool for increasing labor productivity than the use of force and other forms of extra-
economic compulsions which were prevalent in pre-capitalist societies (David Christian,
2005). Capitalist employers generally regard the threat of unemployment or poverty as a
healthy stimulus to harder work. So the onus is on the workers to ensure that their labor
is productive enough to find a buyer. In this, the “economic lash” of capitalism stimulates
genuine, creative, self-discipline in a competitive environment geared toward innovation
and the maximization of value for owners and shareholders (David Christian, 2005).
What is the role of the state in market capitalism? The term “market capitalism”
should not be confused with the ideals and assumptions of “free market” ideology as
state intervention has played a key role throughout the history in capitalism in
supporting the business environment as well as in mitigating some of the harsh effects
of capitalism. Governments perform important functions through their roles in
setting/enacting economic/monetary policies, tax codes, regulatory frameworks,
subsidies and tariffs as well as through social safety nets, military spending, economic
stimulus, bailouts, and other forms of public spending. The managerial tasks of the state
also include a spectrum of surveillance activities that are not purely economic (Giddens,
1981). Thus, the government’s role in a market economy usually goes well beyond just
protecting the country, ensuring the sanctity of contracts and providing basic
infrastructure. However, the state’s key role in shaping and managing the capitalist
economy should not obscure the fact that private businesses, not the government, are
the main actors and drivers in a capitalist economy. Thus, although the policies of the
state and the interests and demands of the capitalist class do not always converge, the
state, like everyone else in a capitalist society, is dependent upon the activities of

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capitalist employers for its revenue and hence the state operates in a context of various
capitalistic ‘imperatives’ (Giddens, 1981).
It is true that along with businesspeople, the state has increasingly helped
formulate what these ‘imperatives’ are but nevertheless these imperatives clearly
belong to the economic sphere rather than the political sphere. “Because public
functions in the market system rest in the hands of businessmen, it follows that jobs,
prices, production, growth, the standard of living and the economic security of everyone
all rest in their hands. Consequently government officials cannot be indifferent to how
well business performs its functions…A major function of government, therefore, is to
see to it that businessmen perform their tasks” (Lindblom, quoted in Giddens, 1981).
Unlike previous ruling classes whose control over property was derived largely from
access to political and ideological resources (“authoritative resources”, Giddens, 1981),
the capitalist class’s control over property is not derived through political or ideological
means but rather chiefly through economic means and through control of capital
(“allocative resources”, Giddens, 1981). Thus, capitalist society rests upon the clear,
institutional separation of polity and economy. In capitalism, the means for securing the
compliance of workers is achieved through economic means, by the intersection of
‘management’ with the securing of ‘labor discipline’ through market competition. The
state is not able to sanction directly the extraction of surplus-value through its control of
the means of violence. The state’s revenue is dependent upon the accumulation
process, upon the valorization process, but it does not control these directly. This
proposition holds true, though with somewhat different implications, even in industries
that are nationalized or administrated by the state (Giddens, 1981). Capitalist societies
introduce a white heat of economic change and technological innovation that both resist
and stimulate state ‘management’ of the economy as a whole. The accumulation
process in capitalist societies, even in ‘oligopoly’ or ‘monopoly capitalism’, rests upon
the mobilization of privately owned capital which is not under the direct control of the
state. At the same time, the state assumes responsibility for the provision of a range of
community services derived from state revenues which depend upon the ‘economic
success’ of the economic activities of employers and workers (Giddens, 1981).

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Command Capitalism
A system where the government, and the market forces decide both, which
should be produced and consumed. This is a mixture of Capitalism and Socialism.
Is a mixture of capitalism and socialism. It adapted the best features of both systems.
Therefore, it is called mixed or planned economy.

Command Capitalism
1. State + Owned Resources
2. Profit + a pieces of social welfare is involved in government supervison
3. Rules and Regulations are set by the government in collaboratiion with market
entities.
4. Employees are motivated to develop their society.

Socialist Planned Economies

Economic planning in socialism takes a different form than economic planning in
capitalist mixed economies. In socialism, planning refers to production of use-value
directly (planning of production), while in capitalist mixed economies,planning refers to
the design of capital accumulation in order to stabilize or increase the efficiency of its
process. While many socialists advocate for economic planning as an eventual
substitute for the market for factors of production, others define economic planning as
being based on worker-self management, with production being carried out to directly
satisfy human needs. Enrico Barone provided a comprehensive theoretical framework
for a planned socialist economy. In his model, assuming perfect computation
techniques, simultaneous equations relating inputs and outputs to ratios of equivalence
would provide appropriate valuations in order to balance supply and demand.
The command economy is distinguished from economic planning. Most notably,
a command economy is associated with bureaucratic collectivism, state capitalism, or
state socialism
.
Market socialism

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 Also called liberal socialism, economic system representing a compromise
between socialist planning and free enterprise, in which enterprises are publicly owned
but production and consumption are guided by market forces rather than by government
planning. A form of market socialism was adopted in Yugoslavia in the 1960s in
distinction to the centrally planned socialism of the Soviet Union. A similar development
occurred in Hungary during the late 1960s and early 1970s.

Capitalist Economic Sytem

A capitalist economic system is one characterised by free markets and the
absence of government intervention in the economy.
In practice a capitalist economy will need some government intervention, primarily to
protect private property. (This is important to distinguish capitalism from anarchism,
where there is absolutely no government present)

Features of a capitalist economic system

 Economic freedom. Individuals free to set up business and provide the goods
and services they want.
 Consumer sovereignty. Consumers free to decide which goods and services to
purchase.
 Limited government. Government intervention limited to the protection of private
property and provision of public goods.
 Finance sector. Capitalism requires a developed banking and financial system
which can provide loans to companies and banking services to households.
 Profit motive is seen as important for enabling an efficient distribution of
resources and encouraging innovation and responsive markets.
 Market forces. Goods and services are distributed according to ‘the invisible
hand of the market’ – in other words, the allocation of goods is determined by
market forces. For example, if demand rises, firms have an incentive to increase
supply.
 Flexible labour markets – easy to hire and fire workers.
 Free trade. Low tariff barriers to encourage international trade.

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  Friedman on Capitalism

“There is one and only one social responsibility of business – to use it resources
and engage in activities designed to increase its profits so long as it stays within the
rules of the game, which is to say, engages in open and free competition without
deception or fraud” ― Milton Friedman, Capitalism and Freedom (1962)

Examples of capitalist economies

According to this rank of countries by ‘economic freedom’. The US is ranked
12th. The UK ranked 13th. Source: Global Finance
1. Hong Kong
2. Singapore
3. New Zealand
4. Australia
5. Canada
In the real world, many economies which are viewed to have a capitalist
economic system may have government spending taking up to 35% of GDP. This is
because the government pays for welfare, health, education and national defence.
However, the economy is still viewed as capitalist because in the area of private
enterprise, firms are free to decide what to produce and for whom.

Economists who advocate capitalism

1. Friedrich Hayek – The Road to Serfdom (1944)
2. Milton Friedman – Capitalism and Freedom (1962)
3. Adam Smith – The Wealth of Nations (1776)
4. Alternatives to capitalism
A capitalist economic system is often contrasted to a socialist or communist
economic system where economic decisions are made centrally by government
agencies. In a communist economy, the means of production are owned collectively and
the government has more say in what to produce, how to produce and how to distribute
resources.

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Advantages of a capitalist economic system
1. More efficient
2. Less bureaucratic
3. More innovation
4. Discourages discrimination and forces people to trade with each other –
breaking down barriers.

Problems of a Capitalist Economic System

1. Inequalityapitalist economic systems invariably lead to inequalities of wealth and
income. However, it is argued that this inequality provides an incentive for wealth
generation and economic growth.
2. IMonopolyn a capitalist society, firms could gain monopoly power over
consumers and workers.
3. Environmental problems. A capitalist society driven by the profit motive may take
decisions to maximise economic income in the short term but at a cost of
environmental problems in the long-term.

Different types of Capitalism

 Turbo-capitalism – free-market capitalism with little government regulation
 Responsible capitalism – Free markets but also a social welfare net. More
reflective of European economies with private markets, but strong government
intervention.

Socialism
Social and economic doctrine that calls for public rather than private ownership
or control of property and natural resources. According to the socialist view, individuals
do not live or work in isolation but live in cooperation with one another. Furthermore,
everything that people produce is in some sense a social product, and everyone who
contributes to the production of a good is entitled to a share in it. Society as a whole,
therefore, should own or at least control property for the benefit of all its members.

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 Socialism has many variations, depending on the level of planning versus market
power, the organization of management, and the role of the state.

b. By Resource Allocation
Allocation of resoires, apportionment of productive assets among different uses.
Resource allocation arises as an issue because the resources of a society are in limited
supply, whereas human wants are usually unlimited, and because any given resource
can have many alternative uses.
In free-enterprise systems, the price system is the primary mechanism through which
resources are distributed among the uses most desired by consumers. In planned
economies and in the public sectors of mixed economies, the decisions regarding
resource distribution are political. Within the limits of existing technology, the aim of any
economizing agency is to allocate resources in a manner that obtains the maximum
possible output from a given combination of resources.
a) Mixed Economy
Mixed economy, in economics, a market system of resource allocation,
commerce, and trade in which free markets coexist with government intervention. A
mixed economy may emerge when a government intervenes to disrupt free markets by
introducing state-owned enterprises (such as public health or education systems),
regulations, subsidies, tariffs, and tax policies. Alternatively, a mixed economy can
emerge when a socialist government makes exceptions to the rule of state ownership to
capture economic benefits from private ownership and free market incentives. A
combination of free market principles of private contracting and socialist principles of
state ownership or planning is common to all mixed economic.

b) Participatory Economics
A Participatory Economy is a model for a new democratic, fair and green
economic system developed as a viable alternative to capitalism. It provides a concrete
description of how a modern economy of millions of people can be organised around
cooperation and solidarity instead of competition and greed. Participatory economics,
often abbreviated parecon, is an economic system proposed in the 1990s primarily by

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activist and political theorist Michael Albert and radical economist Robin Hahnel, among
others. It uses participatory decision making as an economic mechanism to guide the
production, consumption and allocation of resources in a given society. Proposed as an
alternative to contemporary capitalist market economies and also an alternative to
centrally planned state-socialism, it is described as "an anarchistic economic vision",
and is a form of socialism, since in a parecon the means of production are owned in
common. The underlying values that parecon seeks to implement are equity, solidarity,
diversity, workers' self-management and efficiency. It proposes to attain these ends
mainly through the following principles and institutions: ⁕workers' and consumers'
councils utilizing self-managerial methods for making decisions ⁕balanced job
complexes ⁕remuneration according to effort and sacrifice ⁕participatory planning
Albert and Hahnel stress that parecon is only meant to address an alternative economic
theory and must be accompanied by equally important alternative visions in the fields of
politics, culture and kinship. The authors have also discussed elements of anarchism in
the field of politics, polyculturalism in the field of culture, and feminism in the field of
family and gender relations as being possible foundations for future alternative visions
in these other spheres of society. Stephen R. Shalom has begun work on a participatory
political vision he calls "par polity". Both systems together make up the political
philosophy of Participism, which has significantly informed the interim International
Organization for a Participatory Society.

Core Goals of a Parecon System

Briefly, what are the principal, core goals your model or system seeks to realize?
The model called participatory economics, or parecon, is overwhelmingly
about economics. It has just a few guiding values, plus a few specific institutional
commitments intended to fulfill those values while also accomplishing
economic functions.
In a nutshell, the values are:
 self-management;
 solidarity;
 diversity;

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  equity;
 classlessness; and
 ecological sustainability
 The institutional commitments are:
 self-managing workers’ and consumers’ councils;
 remuneration for duration, intensity, and onerousness of socially
 valued labor;
 balanced job complexes; and
 participatory planning.

c. By ownership of the means of production (capitalism, mixed

economy and socialist economy)

CAPITALISM
 Capitalism is an economic system in which the means of production are privately
owned and operated for profit, usually in competitive markets.
 In other words; An economic system in which investment in and ownership of the
means of production, distribution, and exchange of wealth is made and
maintained chiefly by private individuals or corporations.
 Capitalism is the social system which now exists in most countries of the world.
Under this system, the means for producing and distributing goods (the land,
factories, technology, transport system etc) are owned by a small minority of
people. We refer to this group of people as the capitalist class. The majority of
people must sell their ability to work in return for a wage or salary (who we refer
to as the working class.)
 ADAM SMITH called “the obvious and simple system of natural liberty” (Book:
Wealth of Nations ).
Subject to certain restrictions, individuals (alone or with others) are free to decide
where to invest, what to produce or sell, and what prices to charge. There is no natural
limit to the range of their efforts in terms of assets, sales, and profits; or the number of

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customers, employees, and investors; or whether they operate in local, regional,
national, or international markets.
 Mercantile System
Production Factors in Government hands
Export emphasis
 Capitalist System (Adam Smith)
Centralized to Decentralized system.
Authoritarianism to representative democracy.
Free flow of resources.
People strive for self interest in free market.
Beneficial for society.
Based on Demand & Supply Forces.
Monopoly to Competitiveness.
Self sufficiency to International interdependence.
Producer interest to customer power.
Benefits of Capitalism:
In years 1000–1820 world economy grew six-fold, in years 1820–1998 world
economy grew 50-fold.
 Provides Choice to customers.
 Provides valuable goods and services.
 Capitalism actively rewards positive traits like hard work.
 Similarly, it punishes negative traits such as laziness and theft.
 Narrows the gap between common person and wealthy.
 Provides opportunity to realize dreams and desires.
 Capitalist societies usually do not have large black markets.
 Build on democracy.
 Social Good.
 Major limitations/ Criticism:
 Downfall of work ethics.
 Free Market + Self Interest.
 Accumulation of wealth.

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  Encourages inequality in a society.
 Business lobbying with government.
 Monopolistic tendency.
 Human resource exploitation.
 Results in great disparities between income of people owning the capital
resources and others.

MIXED ECONOMY
 Any economy in which private corporate enterprises and public sector
enterprises exist side-by-side, and decisions taken through market mechanism
are supplemented by some form of partial planning, is to be described as a
mixed economy.
 This system overcomes the disadvantages of both the market and planned
economic systems.
 Provides a clear demarcation of the boundaries of public sector and private
sector so that the core sector and strategic sectors are invariably in the public
sector.
 The government intervenes to prevent undue concentration of economic power,
and monopolistic and restrictive trade practices.
 The rights of the individual are respected and protected subject only to the
requirements of public law and order and morality.
 Features;
 Resources are owned both by the government as well as private individuals. i.e.
co-existence of both public sector and private sector.
 Market forces prevail but are closely monitored by the government.
 Monopolies may be existing but under close supervision of the government.

Advantages:
 Producers and consumer have sovereignty to choose what to produce and what
to consume but production and consumption of harmful goods and services may
be stopped by the government.

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  As compared to Market economy, a mixed economy may have less income
inequality due to the role played by the government.
 A mixed economy represents an achievable balance between individual initiative
and social goals.

SOCIALISM/SOCIALIST ECONOMY
 Collective ownership and democratic control of the material means of production
by the workers and the people.
 Socialism is a term applied to an economic system in which property is held in
common and not individually, and relationships are governed by a political
hierarchy. Common ownership doesn't mean decisions are made collectively,
however. Instead, individuals in positions of authority make decisions in the
name of the collective group.
 Socialists argue that socialism would allow for wealth to be distributed based on
how much one contributes to society, as opposed to how much capital one holds.
 A primary goal of socialism is social equity and a distribution of Wealth based
on one’s contribution to society and an economic arrangement that would serve
the interests of society as a whole.
 Socialism as we know it today, most commonly refers to " market socialism "
which involves individual market exchanges organized by collective planning.
 Difference between socialism and communism is that communists directly
oppose the concept of capitalism, an economic system in which production is
controlled by private interests. Socialists, on the other hand, believe socialism
can exist within a capitalist society.
 Features of Socialism;
 Social Ownership of means of production.
 Existance of public sector.
 Decisive role of Economic Planning.
 Production guided by Social Benefits.
 Abolition of exploitation of labour.
 Benefits of Socialism;

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 i. Better salaries.
ii. Stable Environment.
iii. Eliminates poverty.
iv. Better Products.
v. Fulfills survival need.
vi. Opportunity for citizens to explore non-economically-productive pursuits.
 Criticism of Socialism
 Distorted price signals.
 Suppression of economic democracy.
 Slow Technological advancements.
 Minimize self management.
 Reduced incentives.

d. By Political Ideologies
An economic system is a means by which societies or governments organize and
distribute available resources, services, and goods across a geographic region or
country, while political ideologies refers to certain set
of ethical ideals, principles, doctrines, myths or symbols of a social
movement, institution, class or large group that explains how society should work and
offers some political and cultural blueprint for a certain social order. If we combine these
two definition we can conclude that every political ideology has it’s own economic
system and down below are some of the economic system of well-known political
ideologies.
1. Economic liberalism is based on the principles of personal liberty, private
property, and limited government interference. The term ‘liberalism’ should be
understood in its historical context. Classical liberalism emphasized liberty from
government regulation. In the economic context this would include the elimination
of restriction on the choice of occupations or transfers of land. Liberalism asserts
that self-interest is a basic component of human nature. In the economic arena,
producers provide us with goods, not out of concern for our well-being, but due to
their desire to make a profit. Likewise, workers sell their labor and buy the

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 producer’s goods as a means of satisfying their own wants. This leads to the
belief in a natural harmony of interests. By each individual pursuing their own
interest the best interests of society are served. The forces of a free competitive
market economy would guide production, exchange, and distribution in a manner
that no government could improve upon. The government’s role, therefore, is
limited to the protection of property rights, the enforcement of contracts providing
public goods, and maintaining internal and external security.
2. Economic anarchism promotes economic freedom on the grounds that it
enables people to organize their own economic affairs autonomously. Under
these arrangements, there is no place for state ownership, regulation or
intervention. This endorsement of economic freedom rests on anarchism’s
rejection of the state and all types of hierarchical authority because they are
oppressive. Consequently, anarchists oppose existing forms of capitalism (such
as the ‘managed’ or neo-liberal capitalism operating in western Europe and the
USA) and state socialism (such as those adopted by the USSR, China and North
Korea). It is important to note too that different strands of anarchism reject
capitalism and state socialism for different reasons, however, there is no
common agreement among anarchists as to what should replace capitalist and
state socialist systems.
3. Economic capitalism is a laissez-faire system is an economic system in which
the government tries to avoid interfering in the economy. Firstly, it facilitates
those who wish to ‘get on’ in life. The Conservative Party has consistently sought
to present itself as offering help to hard-working individuals and families. In order
to back up this argument, one might consider polices such as providing mortgage
tax relief to the sale of council homes at a substantial discount. Secondly,
conservatives are sympathetic towards laissez-faire capitalism because they feel
it benefits everyone. This particular line of argument relates to an economic term
called the trickle-down effect. The economic activity generated by those on high
incomes is advantageous for all members of society due to economic growth,
greater levels of consumer choice and an increase in investment. Whilst the
result of the trickle-down effect is an uneven distribution of wealth and income,

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 conservatives take the view that such an outcome is both inevitable and
desirable. Lastly, conservatives claim that the freer the market the freer the
people. The ability to spend the wealth we earn is an important leitmotif / symbol
of a free society. State intervention within the economy inevitably limits our
economic freedom as it entails the government confiscating our wealth. For
instance, home ownership means that we are relatively free to do as we wish
with our property. Conservatives claim that this taps into a broader mindset
reflected in the aphorism that ‘an Englishman’s home is his castle.
4. Economic fascism incorporates elements of both capitalism and socialism.
Fascist economists advocate for self-sufficiency and individual profit, but promote
government subsidies of corporations. Fascist economics thus supports a blend
of both private and public ownership over the means of production—there is an
emphasis on private profit, but at the same time, the national interest is ultimately
more important. Under fascism, the state, through official cartels, controlled all
aspects of manufacturing, commerce, finance, and agriculture. Planning boards
set product lines, production levels, prices, wages, working conditions, and the
size of firms. Licensing was ubiquitous; no economic activity could be undertaken
without government permission. Levels of consumption were dictated by the
state, and “excess” incomes had to be surrendered as taxes or “loans.”

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