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Minister Ebrahim Patel was right about some things, if not all

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Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

While his ideas were sound, it can be argued that his way of applying economic principles — through dogged negotiations and a tendency towards micromanagement — could have been more deftly handled. Perhaps, too, he was simply ahead of his time.

What is the role of the state in the economy? Should it direct industrial policy in a heavy-handed, dirigiste way, being deeply involved in state development and acting as a conduit for scarce resources of capital and labour?

Or should it step back, providing only the very lightest-of-touch interventions — possibly as little as essential market regulation and antitrust — while allowing the market free rein to allocate resources according to Adam Smith’s famous concept of “the invisible hand”?

The question of where on this continuum a state positions itself — from North Korean-style communism to libertarian free market fundamentalism — lies at the very heart of the study of the political economy. Of course, it is not only a two-dimensional model — on every point on the axis of state intervention there are countless variations of exactly what type and what stratagem of state intervention might precisely be applied in practice.

To debate the latest incarnations of industrial policy, some of the world’s best-known economists gathered last week at the New Economy Forum outside Berlin, in a conference entitled “Winning back the people — testing times for a new economic paradigm”. Participants such as Dani Rodrik, Branko Milanovic, Mariana Mazzucato, Thomas Piketty, Olivier Blanchard, Jean Pisani-Ferry and Barry Eichengreen could be considered the Taylor Swifts and Beyoncés of their field.

Dani Rodrik, of the Kennedy School of Governance at Harvard, was emphatic. “Six years ago, a conference like this would have been impossible. The agreement we now have on industrial policy, the lack of fundamental criticism … when I think about it, when I hear myself saying this out loud, I’m amazed.”

Clearly, since the days of the neoliberal Washington Consensus, there has been a massive shift in what is considered mainstream economics orthodoxy. Now, ideas that would have been considered “heterodox” are increasingly seen as essential for economic growth, preventing ever-spiralling inequality and maintaining social cohesion.

Why is this? There would seem to be three main explanations. 

First was Covid, which was an exogenous global economic shock. It required previously unprecedented levels of state intervention, both with regard to setting social parameters for lockdowns and distancing, as well as direct economic shock therapy, to ensure the effects of the measures taken to slow the infection rate did not have permanently scarring effects on the economy. 

Once such Rubicons of state intervention had been crossed and — in Europe and the US at least (inflationary side effects notwithstanding) — had been largely successful, then questions were asked as to why such state involvement could not become de rigueur.

Trickle-down economics

Second, it has become clear that trickle-down economics simply does not work. When starting from a point of an unequal distribution of resources, markets are perhaps more flawed than previously imagined as redistribution mechanisms. 

Rather, left to their own devices, unregulated markets tend to result in capital “pooling” and accruing to an elite, who use the means and influences at their disposal to amass an ever greater share of societal wealth.

There can be little doubt that the unprecedently easy decade of monetary policy following the financial crisis inflated asset prices, meaning that those owners of capital — be it listed equities, property or arcane instruments such as crypto — became ever wealthier, while the lowest rung of the asset wealth ladder moved ever further away from those in debt or renters. Such inequality has not only had negative effects on productivity, but has had disastrous social effects, leading to the surge in right-wing populism seen across the West and more recently in South Africa.

Finally, many of the problems facing the world — chief among them climate change — are essentially failures of the market to adequately price environmentally damaging externalities — for example, carbon emissions. The only solutions are therefore joint ones, whereby governments coordinate policy to resolve these failings and make hitherto unimagined investments into green energy and sustainability. 

With these points in mind, it has been interesting to review some of the lacerating criticism that SA’s Minister of Trade and Industry Ebrahim Patel has come in for since announcing his retirement two weeks ago. He has been branded a “slow-as-a-snail control freak”, a minister who “held private sector companies in contempt”, and one who was “corrupted … by his myopic ideological belief in communist central planning”. 

While it is true that the sales of South Africa’s manufactured goods peaked in 2007 and have fallen by almost 15% since then, and almost every other major economic metric — from unemployment to GDP per capita and inequality — has worsened under his tenure, it surely cannot be said that his impact on the economy was wholly negative. 

Many of the ideas he espoused from 2010 — a strong and involved competition authority, state-directed masterplans to drive key economic sectors and, perhaps most controversially, a very hands-on approach to managing mergers and acquisitions — have become economic orthodoxy in the EU and even the US under Bidenomics.

While his ideas were sound, it can be argued that his way of applying such economic principles — through dogged negotiations and a tendency towards micromanagement — could have been more deftly handled. Perhaps, too, he was simply ahead of his time.

Either way, let us hope that whatever the next government of South Africa looks like, it will continue to apply his sound principles of ensuring that the market functions for all, and not for some. Perhaps it can be said of Patel’s legacy that “the path to hell is paved with good intentions”. DM

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  • B M says:

    Success as a visionary comes through successful implementation of the vision. All the good ideas mean diddly squat if there is nothing to show for it. On that basis, I venture that his tenure was an abject failure.

  • T T says:

    Unfortunately this article misses the point completely on what was wrong with former Minister Patel. Or maybe you just were looking for something to write about.

    The man’s heart was clearly in the right place. But for the entirety of his tenure, he operated with a department full of actors everyone. almost every we met and interacted with was an acting manager or director. It was all Hollywood. clearly the man never had any intensions to capacitate his department to systematically develop industrial policy. instead he made sure everything that happened in the department came through his desk. he never trusted anyone.

    So, we will never know whether any of his thinking ever was useful. None of it was ever implemented.

  • mr rol rol says:

    He saved our fledgling international Business Process Outsourcing sector during COVID by designating it as an Essential Service. By keeping our lights on, SA was able to win business from other BPO destination countries that decided to shutdown their operations. This saved thousands of jobs and generated many new ones.

  • Nick Steen says:

    Patel’s weaknesses lay in his dogmatic adherence to ideology, a deep distrust of business (and overly trusting his Union Comrades and associates). Because of his lack of understanding of how business operates, when he did listen to business, it was only to “big business” as a results his initiatives only benefitted them, wish SMME’s ( the real employment creators) being left out of the loop. The result was protection of Union and large entrenched businesses may of which were facing extinction simply because they now operated in a global environment without the benefits that apartheid isolation offered. In the end Patel will be judged by the results while he was at the helm and on almost all counts those were dismal

  • Terrence B says:

    One point the author fails to mention is that market intervention (state) also results in “capital pooling” as the state affectively chooses “winners” and “losers”. As the great economist Douglass North said, “Institutions set the rules of the game”. This idea that an unregulated market will enviably lead to monopolies is something out of early 20th century “Robber Baron” thinking.

    Trickle-down economics comes from the Reagan era of deregulation and tax cuts, that tax cuts on income and corporate profits would ultimately trickle down to the most vulnerable in the market. This could literally apply to any contemporary progressive rationale regarding “super-tax” – that if we tax the most wealthy, the state will suddenly become competent and distribute said wealth to the most vulnerable in the market.

    Secondly, we’re literally living state-led developmental economics. The state has a monopoly on key sectors of the economy. But somehow we’re talking about the ills of a deregulated market.

    • A Rosebank Ratepayer says:

      Beg to differ with the article – it is largely devoid of any mention or analysis of the informal sector or a contextual appreciation of the differences between the SA economy and the economies in which the economic luminaries at this recent conference are based. While it is correct that trickle down doesn’t work from the formal corporate sector down to those trying to earn livelihoods and get a foothold in the economy, the way to achieve this is not by foisting evermore socialist style rules and regulations on the corporate sector.
      The way to do this is to free up access to business opportunities for SMMEs and the informal sector. There is not even policy coherence in SA for these 3 components of the economy. The DTI and the competition board focus on the corporate sector. The ministry of Small business development kind of focuses rather ineffectually on SMMEs. And one gets the strong impression that government, formal businesses and the middle classes wish the informal sector would somehow disappear, even though, given SA’s abysmal public education, lack of formal sector job creation and low levels of entrepreneurial development – this is the only livelihood opportunity for most people, including graduates. Given the above reality it’s not surprising how the voting went in the recent elections and why so many graduates and university students support the EFF!

      • Terrence B says:

        Agreed – its largely because economists such as the author are “Pikettian” in training. Thomas Piketty was in ZA not too long ago advocating for the same Super Tax that resulted in the largest capital flight in French economic history. His solution? More regulation and punitive measures.

  • PETER BAKER says:

    Despite the faint praise offered by the writer I cannot see one single parameter by which anyone can see the former minister Patel as anything but an abject failure. He, along with the trade unions and the other communist members of the cabinet have seen to it that our manufacturing industry has been cremated on the alter of MADE IN CHINA. In the right hands South Africa should have become the South Korea….even the China, of the African continent. Patel saw to it that we have become just another African begging bowl. We must pray that intelligent and pro-South African people and not parasitic (or stupid) party politicos / comrades /deployees, start to take over the management and growth of our festering economy. For South Africa I think we can say ….good riddance.

  • Antonio Tonin says:

    I found this insightful and a worthwhile read. But it seems to have been poorly received – as if the author is pandering to the political left, rather than recognising inherent problems in the economy of this and many other countries. Ma che ne so io? Sono solo un biologo, non un economista.

    • Natale Labia says:

      Ciao Antonio, grazie ! I commenti so tutti negativi rispetto a quello che speravo fosse na visione equilibrata su n ministro controverso odiato dalla destra. Non volevo accontentà la sinistra, ma dì che dovemo mette i suoi pensieri in un contesto globale. spero che ti piaccia il maverick!

      • Antonio Tonin says:

        Grazie Natale, mi piace molto il Maverick e la tua rubrica! Ma devo dire che mi preoccupa il fatto che tanti sudafricani e lettori di questo grande giornale abbiano così paura dei pensieri indipendenti.

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