Opinion: A mixed economy for development? Yes, but… Reply

Following up on my post about the road ahead for the South African economy this one opines on those fundamental drivers of growth and development and some recent comments from the ANC’s national executive committee. The Mail & Guardian reports that:

Zuma said the ANC national conference opted for a mixed economy, where public, private, cooperative and other forms of social ownership complement each other in an integrated way.

“Within this mixed economy, we re-affirm the active and interventionist role of the state in ensuring economic development.

“It must be a state that has the capacity to intervene in the economy to lead development,” Zuma said.

In the way that economists often conflate their growth rate views with the more fundamental issues of growth potential and economic development, politicians often conflate government’s role in providing public goods with “intervening in the economy to lead development”. The article goes on to report Zuma’s explanation of some the key programmes of the benign public goods-type. These include:

  • Infrastructure development plans: dams, roads, bridges, power stations,
  • Fast-tracking the supply of water and sanitation to households, and
  • The refurbishment of schools and health facilities.

Most economists would agree that the market would probably under-provide these merit goods and there is an established case for public provision.

Then there is mention of some active-and-interventionist type policies for which there is less of a textbook argument. Is the private sector failing to extract minerals, are there external benefits that society at large should be capturing? The article presents two views:

“We have also resolved that the state must capture an equitable share of mineral resources rents through the tax system and deploy them in the interests of long-term economic growth, development and transformation. Government must implement this resolution,” said Zuma.

A more equitable distribution of wealth is a textbook case for government intervention in the economy. Its result is, for example, a progressive income tax system and social spending by government. It becomes a different story when the argument goes:

“Mining has historically been the backbone of our economy and should still contribute meaningfully to our development. We call on the ANC government to place the state mining company at the forefront of state intervention in the mining sector.”

This can hardly be about benevolent intervention to ensure the optimal allocation of resources. And it is not clear how it will serve the purposes of equity. Or is there an argument for state capitalism?

In a recent post on the Project Syndicate blog Daron Acemoglu makes a strong case against the idea that state capitalism (think China) is gaining the upper hand. It is worth reading the whole thing, but here are a few choice quotes. Acemoglu argues that:

The answer lies in recognizing that state capitalism is not about efficient allocation of economic resources, but about maximizing political control over society and the economy. If state managers can grab all productive resources and control access to them, this maximizes control – even if it sacrifices economic efficiency.

At a deeper level, the real dichotomy is not between state capitalism and unfettered markets; it is between extractive and inclusive economic institutions. Extractive institutions create a non-level playing field, rents, and narrowly concentrated benefits for those with political power and connections. Inclusive institutions create a level playing field and give incentives and opportunities to the great mass of people.

He goes on to argue that sustained growth is the result of innovation and this can only come from inclusive institutions. Society should have control over the state, not the other way around. Yes, modern growth creates inequalities, but through regulation and the tax system, governments can address this. State capitalism is however almost always associated with authoritarian regimes and extractive political institutions.

To my mind, this is the yardstick against which to measure what we will be hearing in the State of the Nation Address and the Budget Speech and all the other policy discussions to come this year. Is it clear that they will contribute to inclusivity, innovation and efficiency? Education, health care, infrastructure – probably. State mining company – I doubt it.

And a final quote from Acemoglu:

… economics does not say that unfettered markets are better than state intervention or even state capitalism. The problems with state capitalism are primarily political, not economic. Any real-world economy is riddled with market failures, so a benevolent and omnipotent government could sensibly intervene quite often. But who has ever met a benevolent or omnipotent government?

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