Cyril likes SOEs, so we’d better get used to making them work
State capitalism is a dangerous concept, but some countries have made them efficient and profitable
Bad politics can play havoc with an economy and in SA we are certainly experiencing the fallout of such a game.
The government is pursuing the model of a developmental state, continuing to add excessive regulation, especially regarding labour, business and credit. It is increasingly damaging the economy and free market through social engineering and state-owned enterprises.
It has resulted in even higher unemployment, a weak currency, declining industries, and choked economic growth. The recent Economic Freedom of the World Report 2018 confirms SA’s devastating slump.
Analysing this report at a Free Market Foundation presentation, Neil Emerick, of tourism software company NightsBridge, said economic freedom is when individuals are permitted to choose for themselves: “When economic freedom is present, the choices of individuals and markets will decide when, what and how goods and services are produced.”
The Economic Freedom Index shows which way a country leans in this regard, either tending towards state intervention or preferring a model based on individual choice. The index covers key categories evident in policy: extent of private property; rule of law; freedom to trade, including with foreigners; sound money; and the limited role of government. Its data are objectively drawn from measurements contained in other reports such as those from the World Bank, IMF, and World Economic Forum.
In the latest report, and out of 162 countries, SA ranks 110. It was 46 nearly two decades ago but has become increasingly developmental and trended towards more government intervention. We have been beaten by Russia and several emerging African peers including Rwanda, Uganda and The Gambia.
The economically most free countries are Hong Kong, Singapore and New Zealand, with Georgia at position seven and Mauritius in eighth place. At the bottom, being the least economically free, is Venezuela, keeping company with several African countries.
On the size of government, SA has declined from a ranking of 53 in 2000 to 107 as other countries embrace economic freedom.
Regarding how sound our money is – which includes stability of currency, oscillation of inflation, and capital controls – SA now ranks 102 (64 in 2000). It has one of the worst inflationary environments, with the value of money halving every 12 years.
Emerick said state economic intervention in SA looks set to stay, with President Cyril Ramaphosa, a huge supporter of state-owned enterprises, busy with a master’s thesis on Chinese state corporations. Working on the premise that large state capitalism will be a feature of our economy for some time, Emerick then looked at which nuance of such intervention is preferable.
He noted that in countries where this model has worked, SOEs are efficient organisations. Executive appointments are based on merit rather than politics; state corporations are responsive to public input, they compete in the market with private businesses, there are restrictions on elite enrichment, state capital is wisely spent on high-quality projects, and they generate good returns.
Emerick described state capitalism as a dangerous concept that is proven in many cases not to work. “Preferable is efficient markets driven by the private sector, with social security nets and supportive government structures.”
He also wants to see more spending from all sectors. SA has been spending on average 20% of GDP on gross fixed capital formation every year. Emerick wants this raised to 25% to achieve growth.
“We are ‘low’ investors and do not renew capital stock as often as high-growth countries,” he said.