The Mixed Economy is here to stay

THE REPORTS on South Africa’s economy by a variety of international agencies are all negative. Our leaders may continue to chant “we have a good story to tell” and indeed there is much to be proud of, but the economy is not one of them.

We are underperforming badly, with stagnation the trend, particularly if you work on per capita growth figures.

Perhaps it is because of dismay, in a country so rich in natural resources, that comments on our performance get increasingly dogmatic and strident.Private Public

In particular those who believe in market economics are getting agitated about state performance with some justification.

Poor management in several state-owned enterprises (SOEs) provides ample scope for the critics of all government interventions in the economy. At the same time, government ministers seem to have their backs against the wall in defending state interests.

In a rather heavy-handed column Peter Bruce, editor-in-chief of Business Day, was scornful of “state capitalism”.

Christo van der Rheede, head of the Afrikaanse Handelinstituut, said: “SOEs are first and foremost businesses and they must be run like businesses. If it serves a development agenda, then (it is) the wrong route. That is not their purpose.”

Yet the ANC and the government insist the state does have a role to play and the government wants to protect its holdings in state-owned companies such as Eskom to ensure they pursue a “developmental role” in the economy as a whole.

What is surprising about all this is that if we put ideological preferences aside, can we really deny that we have a mixed economy, which will be with us for a long time to come? There is ample scope for discussing the best balance between the private and public sectors, but that both are with us is surely beyond doubt.

And we are not alone. Nowhere, in the world is there an example of a pure free market economy. All economies, with the exception of North Korea, are mixed to some degree.

Big government does more than provide welfare. There are massive interventions through quantitative easing, support for financially fragile private companies, trade barriers (auto industries in the US, banks in the US, UK, Ireland and others in the last seven years).

In short the either/or approach to the roles of the private and public sectors is not very helpful. There are things that the market delivers best and other things that governments deliver best.

Where competition and proper allocation of risk exists, the market might be the best to deliver, but where there is no or limited competition, and where risk is not properly allocated to the owners of capital – if things go pear-shaped, the owners of capital do not carry the loss – there might be a role for government.

China is aware of the advantages of competition so they promote competition between state enterprises even in the same industry.

We need to be careful about surrendering state enterprises. For instance, if Eskom was privatised but failed to deliver electricity, the government would have to bail it out. This is the problem called moral hazard. The state still bears the final responsibility with public services. In some cases private companies become inefficient because they know they will be bailed out.

In the US, large financial institutions were deemed “too big to fail” and were therefore bailed out at public cost. Perhaps state ownership is a better option at some point.

On the question of balance, Thomas Piketty, in his outstanding work Capital, pays a great deal of attention to the balance between the scale of capital in the private and public sectors, which seems to greatly influence the degree of inequality in the system.

He writes: “The division of property rights between the government and private individuals is of considerable political, economic and social importance.”

The point is that in a mixed economy the relative strengths of the private sector vis-à-vis the public sector is fluid. We see how China has developed a robust economy by allowing great scope to private capital while retaining substantial powers in the state, especially where strategic interests are involved. In oil-producing countries, the big oil companies are all state-owned and managed efficiently.

Much depends on the character of an economy, what resources are available and the legacy.

In South Africa under apartheid, the state-sponsored physical infrastructure and state enterprises that may not have happened otherwise became the backbone of industrialisation. The argument is often made that SOEs must be profitable even if they provide services.

But there is a built-in contradiction. If they are to make a profit, they have to implement more than cost recovery and this can only be done by raising charges.

But when charges are raised unduly, they are no longer developmental. For instance, a railway often has the effect of opening up a region economically because it can transport goods to other regions or even for export.

But that would only happen if the goods charges were low. If profit was the objective, there would be no advantage to the country as a whole. Also, if this government-sponsored infrastructure was run without profit (or as I prefer “surplus”), many private enterprises would not exist without them.

Because of our highly skewed economic history, many areas were left unserviced because neither the state nor the private sector wanted to go there.

Since 1994, many public services have been extended to areas and previously disadvantaged people. I have written a book on this topic and am still unable to define it.

Some of us also use the term “developmental state” which is another of those broad, amorphous terms that cannot be defined rigorously. But, like old age, we know what it is.

The ANC aspires to creating a developmental state, and indeed the former president, Thabo Mbeki, claimed to be running one, which was certainly also a mixed economy.

Having witnessed the collapse of the economies of the former Soviet Union and Eastern Europe, there is undoubtedly a great deal of agnosticism about state control and interventions in the economy.

History seems to teach us there is a great deal of importance in market signals about pricing and supply, which markets give us.

But there is also a great deal of scepticism about “free markets”, which are not generally free, nor do they encourage equity in society, hence the concern about growing inequality globally as shown by the latest research by Oxfam.

The convenors of Davos argue that “we are losing trust in markets” and “rising inequality contests not only the political, but economic legitimacy of capitalism”.

Surprisingly, the International Monetary Fund now contends that lower net inequality drives faster and more durable growth. In other words, inequality stifles growth. “A severely skewed income distribution harms the pace and sustainability of growth over the longer term,” says the fund’s managing director, Christine Lagarde.

So there you have it. Capitalism favours the rich who get richer. But inequality, at least in the long run, is counter-productive to growth.

Surely this makes a good case for countervailing powers, namely the state, which if run for the benefit of society as a whole will mitigate the effect of pure market forces?

None of this is to deny the serious managerial problems encountered in our parastatals.

To the contrary, by escaping the sterile market-vs-state approach and by accepting that neither the market nor government is perfect, we can recognise that both need to play a role and we should rather focus on solving their problems.

The real question becomes one of how we can harness and strengthen the capacity of both the private and public sectors.

* Turok is the director of the Institute for African Alternatives and editor of New Agenda.

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