Johan Fourie's blog

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State capitalism

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The Mail & Guardian on Friday proclaimed that South African economic policy will now follow a Chinese blueprint.  The article attempts to explain what this means: apparently, the “the private sector has failed to invest in infrastructure to stimulate economic growth and the state needs to play a more activist role in the economy. Lack of investment in infrastructure over the past years is believed to have stunted South Africa’s growth.” Now, the authors argue, the South African government will follow “the Chinese model of building infrastructure”. Indeed, some policy makers have even visited China to study how China uses “state capitalism”, the new buzzword promulgated by The Economist, to keep its economy growing at nearly double-digit rates.

This should be an interesting debate, but it is diluted by bad economics. Firstly, it has and never will be the private sector’s responsibility to provide infrastructure. This was already known by Adam Smith, when he wrote: “The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain” (V.1.69). All governments invest in infrastructure – it is their duty – and lack of such investment, and the consequent stunted growth, is not the fault of capitalism but the fault of the state. If I read The Economist correctly, state capitalism (or China’s economic blueprint) implies even greater government involvement in all “key” areas of the economy. If our own government acknowledges that there has been a failure to invest in infrastructure, and it is our government’s responsibility to invest in South African infrastructure, surely then we should not give more responsibility to that same actor whose record shows an incapacity to deliver?

But what is this Chinese blueprint? The plan is that government would purchase shares in South African companies like MTN or Anglo and would “support” these companies strategically to promote the interests of  “the country”. It is not clear who “the country” is, though. Is it the people? Is the purpose therefore to promote employment or force down prices, with profits of secondary consideration (and at the cost of tax revenue)? Or is “the country” politicians and their cronies who can now influence how and where these companies conduct their business, from whom they buy their inputs, and to whom they sell and at what cost? Government involvement in the private sector leaves too many questions unanswered. What will happen when MTN, for example, makes a bad investment abroad, and must be bailed out? And what of Vodacom, who won’t have government “support”? Remember, China is not a democracy. There are no political parties requiring funds to help in election campaigns. If government “owns” MTN, or a share of it, who is to say that the incumbent political party does not misuse MTN’s vast communication infrastructure to influence voters? Similar examples abound.

This is not to say that government should not play a role. The Economist’s examples of successful Chinese, Russian and Brazilian state-sponsored companies are certainly valid. Sasol is a good example of a state-sponsored South African company that is now successfully operating in various markets, delivering profits to its shareholders and taxes to government. South African Airways, on the other hand, is a good example of how a parastatal drains government’s (and thus citizens’) resources. Why was Sasol successful and SAA not? One lesson, perhaps, is that state-owned companies are often not bought, but rather created for a specific purpose. Sasol was created to provide oil to an increasingly isolated country. Perhaps a state-sponsored company that targets the delivery of 5GW of green electricity within five years will be a more successful investment than acquiring shares in an already profitable firm. But, of course, there is no guarantee that the same issues that affect current parastatals will not also affect the upstarts.

If the South African government decides to follow the Chinese blueprint, given the current record of state-sponsored entities, a can of worms will be opened that will be difficult to reverse. What is quite clear, though, is that government’s (and, dare I say, economic illiterate journalists’) enthusiasm for a “new” model of capitalism is diverting attention from the real issue of how to ensure reliable services in those areas – such as infrastructure – where it is the government’s duty to operate.

Written by Johan Fourie

February 6, 2012 at 22:12

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