State intervention not always equal to inefficiency
• Interventions must, however, be targeted, co-ordinated and co-operative
The debate over state intervention in markets has persisted for centuries, often clouded by myths and oversimplifications. The myth that ideal market conditions are unattainable ignores successful models such as Germany’s codetermination system, where workers share company decision-making, fostering cooperation and productivity.
Similarly, Singapore’s targeted industrial policies demonstrate how government intervention can create fertile ground for specific industries.
“Intervention equals inefficiency” is an oversimplification that ignores the numerous instances where interventions have improved market efficiency. Antitrust laws combat monopolies, fostering fair competition. Environmental regulations, while imposing costs, incentivise innovation and protect resource sustainability, ensuring long-term market stability.
It is also a myth that competition cannot occur with state-owned enterprises, because this ignores the potential for complementary roles. For example, publicprivate partnerships leverage private sector expertise while ensuring public interest considerations. Regulatory agencies, without competing directly, create frameworks that promote fair competition within industries.
Arguments for strategic intervention include:
● Many sectors, especially technology and infrastructure, naturally tend towards oligopolies due to network effects and high capital requirements. Left unchecked, these oligopolies stifle innovation, raise prices and limit consumer choice. The state does not necessarily need to compete, but it must systematically reduce barriers to entry.
● While proponents of laissezfaire may advocate for limited state involvement, a welldesigned interventionist role can actually facilitate true free market principles. State investments in research & development lay the groundwork for innovation, benefiting the entire market (think Apple and Space X).
● The “platformisation” trend, where companies evolve into closed ecosystems, creates inefficiencies and stifles innovation. Algorithms can reinforce user patterns, limiting exposure to competitors, and companies act as “digital landlords”, extracting rents from users and stifling competition. Strategic state intervention through data portability regulations and open API standards can empower users and promote a more level playing field. This extends to other sectors, such as retail.
● SA’s concentrated market structures, coupled with global monopolies, exacerbate inequality. This limits investment and job creation, fuelling asset bubbles and social unrest.
● Financial innovation and complexity often prevent market prices from accurately reflecting supply and demand. Speculation can distort markets. For example, think of the limited effect of spot oil prices and exchange rates in a world driven by futures contracts.
Strategic state intervention through regulations and transparency measures can ensure markets function efficiently and reflect true economic realities. Nowhere is the need for strategic state intervention more evident than in SA, where a potent cocktail of domestic oligopolies and global dominance has created a skewed economic landscape. The concentration of wealth and income in the hands of a few has far-reaching consequences:
● Skewed consumer demand.
● Reduced investment and stagnant jobs. Oligopolies, by their very nature, are less incentivised to invest in innovation or expansion.
● Sociopolitical spillover. The frustration and desperation fuelled by economic inequality often manifests in the political and social sphere, igniting extreme positions that in turn inspire extreme policies, which creates a cycle of failure.
This grim picture underscores the urgency for well-designed state intervention. This should include market-orientated policy. The state should not compete directly with the private sector but rather guide market forces through strategic policy tools. This includes targeted fiscal and monetary policies, incentives and disincentives for desired outcomes, and diplomacy to foster technology transfer and market linkages.
Tackling complex challenges also requires multifaceted approaches that address multiple interconnected issues simultaneously. This means:
● Multi-problem solutions. Initiatives designed to solve one problem should consider potential synergies with other issues. For example, waste-toe-nergy projects can address urban waste, generate clean energy, create jobs and increase tax revenue.
● Holistic policy frameworks. Policymakers should avoid a silo approach and develop cross-sectoral strategies that consider the interplay of different issues. For example, addressing public housing could include employment of ablebodied beneficiaries in the construction thereof, transfer of skills and competitive bidding in the downside supply (cement, bricks and so on), allowing small and medium enterprises to challenge the big players.
● Scalable interventions. Isolated, small-scale solutions might have limited impact. Scaling up successful interventions ensures broader reach and greater societal impact.
The state can help catalyse private investment in priority sectors by providing risksharing instruments such as loan guarantees and credit enhancements. These mechanisms help mitigate risks for institutional investors, incentivising them to deploy their capital into projects that have high economic and social impacts but may be perceived as commercially risky. The state’s participation lowers actual risks and unlocks larger pools of private finance. Thoughtfully designed risksharing models are a powerful tool to mobilise capital at scale into inclusive growth sectors.
Examples include South Korea’s chaebols, statesupported conglomerates that were instrumental in the country’s rapid economic development, demonstrating the potential for strategic state-business partnerships; Germany’s vocational training system, which combines classroom learning with onthe-job training to provide skilled workers who have contributed greatly to German industry’s competitiveness; and Singapore’s industrial policy, which included targeted government investments in specific sectors such as semiconductors and fuelled rapid economic growth and diversification.
These examples highlight how well-designed and targeted state intervention can complement market forces, leading to more inclusive, innovative and sustainable economic growth. The need for state intervention in markets is not about replacing competition but about creating the conditions for it to thrive.