A market economy will uplift South Africa’s poor

5 May 2023

South Africa’s Energy Minister, Gwede Mantashe, has blamed the private sector for South Africa’s blackouts that have destroyed businesses and jobs. Surprised? I am not.

Politicians who believe in government controls, advocate for an interventionist role of government in the economy, always blame the private sector when their statist policies fail.

Mantashe will only fool the ignorant, not men like us who have spent years understanding and studying the intricacies of public policy.

A stronger market economy is key to South Africa’s prosperity

A market economy, driven by a strong private sector, remains crucial in advancing human development. Markets are very good at efficient allocation of resources. Every South African who has done first year economics should know that.

The efficient allocation of resources boosts economic productivity in the sectors of the economy. These are sectors that create jobs for South Africa’s workforce.

The other special characteristic of the market is that it incentivises hard work and optimal decision-making amongst participants in the economy.

In the market, if, as a consumer or buyer, you make a reckless decision, you pay the price, and when you make the right decisions, the market rewards you. So true with producers and sellers as well. If they make the right decisions, the market rewards them. Should they make the wrong decisions, they pay the price.

In a largely state-driven economy, the incentives for productive work are destroyed. This is because economic participants tend to believe that the government, financed by taxpayers’ money, will foot the bill for anything that goes wrong in government entities. This lack of incentives to do good suppresses productivity and therefore economic growth.

The fact that the decision maker must face the consequences of his or her actions, is a fundamental, special characteristic of a market economy. And this characteristic alone helps fuel and increase economic productivity in the market. And because of an increase in productivity, economic growth also increases.

The reason why South Africa has the highest unemployment rate in major emerging markets, is because of its very weak economic growth.

Competition is also a special characteristic of the market economy. Competition for the market share between producers encourages higher levels of economic productivity, which is good for society. Because of competition, no producer or seller wants to tarnish their reputation in the market, also none wants to sell the same standard product at a higher price as they will lose customers in the market.

In a market economy, customers decide the fate of producers and sellers because if customers do not like the product of a particular producer, that producer will lose customers and therefore make losses in the market. There is no incentive for poor performance amongst producers and sellers in a competitive market economy. No seller or buyer can influence market prices in a market economy, because the power is dispersed.

In his famous essay, titled "The Use of Knowledge In Society'', Nobel economist Friedrich Hayek wrote that the exchange of goods and services as well as prices provide for motivation and information in the market.

The market economy is critical because it gives people the opportunity to benefit from broadly distributed knowledge when nobody has more than the smallest portion of that knowledge, not even the planners of the government, Hayek beautifully wrote in his seminal 20th century essay.

The market economy and the poor

Many South Africans are misinformed about how markets work. They believe privatization or a market economy is anti-poor. This is untrue. A market economy is a must, if the goal is to uplift the poor. Allowing businesses to drive growth and grow is what creates jobs for the poor.

Think of businesses in small towns and in places like Soweto. Private small businesses in these places employ the poor, giving them an opportunity to earn income and finance their livelihood. And what that means, is that growth of the private sector is good for the economy and for the poor. The more private businesses we have, to produce goods and services, the better for South Africa's poor.

Right now, as we speak, Eskom continues to implement blackouts. They have been doing so for 15 years now. Energy supply was monopolized in South Africa, with Eskom the only supplier. Today we face supply problems, simply because we did not have private companies that could have supplied electricity along with Eskom.

The outcome of the monopolized energy market has been a disadvantage to the poor. They now have no light and have lost jobs as businesses they work for have been hard hit by blackouts. Were the energy supply a competitive market, with many suppliers, the poor would have never experienced the suffering they are experiencing today.

Some, including me, have argued for the privatization of Eskom. Now when we've argued that, we've been told the poor won't have access to electricity. Not true! That’s misinformation. The government can still subsidize the poor to have access to electricity in the market, by for example, vouchers to buy electricity in the market.

Equity concerns in a market economy

The critics of a market economy have, for a long time, argued that the free-market system results in exploitation of workers, and enriches the elite at the expense of the poor. Though markets are efficient when it comes to resource allocation, efficiency is not the only metric that should be used to evaluate resource allocation, the critics of the market economy have argued.

Many people, both in developed and developing countries, maintain that the outcomes of the market economy should also be assessed from an equity perspective; how fair the results of the market are. What is problematic though, is that people have different views on what fairness or equity is.

In a market economy, I believe equity must be seen from the perspective of choices consumers and buyers can make. Buyers and sellers in the market must have a choice and they must all face the consequences of their choices. Every participant in the market must be in a position where they can make their own decisions, without any coercion or force from third parties. That is fairness, or equity.

Some argue that market-controlled wage prices can be unfair to workers if workers are paid low wages. With a competitive market economy, such unfairness is eliminated because the sellers of labour have choices. If they are unhappy with the wages paid to them by buyers of labour, they can leave and find another buyer or employer. I have seen happen in real life, having worked in corporate for more than seven years.

Why a small government is good for the economy

Government is a cost to taxpayers. The bigger the size of the government and its programs, the more costly it is to taxpayers. The bigger the government and its control means that there will be distortion of choices in the market because of higher taxes. Higher taxes mean that citizens will react and adjust their consumption behaviour or spending in proportion to changes in taxes , David Hyman wrote in his famous book titled "Public Finance - A Contemporary Application of Theory to Policy".

The dire state of SOEs like Eskom, Denel, the South African Broadcasting Corporation (SABC), Post Office, is proof that the government is a huge cost to society, as these SOEs have consumed billions of rands in taxpayers’ money. Hence, a smaller, efficient government is good in ensuring that the economy grows faster for the benefit of our society.

In his famous essay “Why government is the problem”, late Nobel economist Milton Friedman, wrote that the problem with government is the influence of special interests. According to Friedman, the government actions often provide significant benefits to a few people while imposing costs on many, which is unfair.

The minimization of South Africa's government can only be a reality if policymakers are open to and embrace stronger markets, and see markets as a solution to South Africa's socio-economic problems. A stronger market economy will attract more investment, both local and foreign. These investments are critical for South Africa’s economic productivity and prosperity.

What blocks South Africa from becoming a market-driven economy with smaller government also has to do with politics. There is weak political will amongst leaders of the country to implement policies that bolster markets. A great deal of influence in the current government by interest groups, such as labour unions and the South African Communist Party (SACP), also exists. These interest groups always oppose any pro-market reforms.

The very big problem of interest groups influencing government policy also needs to be addressed. Addressing that problem will help us create a thriving, stronger market that helps the poor escape poverty.

Phumlani M. Majozi is a senior fellow at African Liberty. His website is phumlanimajozi.com. Follow him on Twitter: @PhumlaniMMajozi.