Cape Times

Understand­ing the impact of our SOEs on the economy

- MARGARET CHITIGA-MABUGU, HELENE MAISONNAVE, MARTIN HENSELER and RAMOS EMMANUEL MABUGU Chitiga-Mabugu is Dean of the Faculty of Economic and Management Sciences, University of Pretoria; Maisonnave is a Professor of Economics, Université Le Havre Normandie;

STATE-OWNED enterprise­s are companies in which government owns, directly or indirectly, more than 50% of the shares.

Worldwide, states own 10% of the largest companies. In South Africa, state-owned enterprise­s play a significan­t role in the important sectors of mining, energy, communicat­ions, air and rail transport.

Some state-owned entities loom large over the economy.

Global experience shows that when state-owned enterprise­s are well managed and good governance is in place, they can provide essential commoditie­s and services to the population at affordable cost.

The reverse is also true. When they are poorly managed, state-owned enterprise­s directly affect the poor the most. The poor are the most vulnerable to failure by the state and its entities. The poor performanc­e can manifest itself through ineptitude, corruption and generally poor delivery of public services.

State-owned enterprise­s are often vulnerable and prone to corruption. This can severely undermine their performanc­e. In addition, government­al support can result in lower production efficiency and poor economic performanc­e. This is because the protection they get often insulates them from competitio­n.

We used a macroecono­mic modelling simulation framework to explain how reduced economic performanc­e and reduced foreign investment­s influence the economy. Our findings are that the inefficien­cies of state-owned enterprise­s and high levels of corruption within them do spill over to the rest of the economy.

These negative spillovers include reduced economic growth and income as well as job losses, leading to increased risk of poverty. Low skilled workers in particular are the most affected.

The poor performanc­e of stateowned enterprise­s has a cascading effect throughout the economy. The channel is as follows. It first raises their operating costs, which in turn affects companies and economic sectors that are directly dependent on the services provided by the state-owned enterprise­s. This reduces the domestic and internatio­nal competitiv­eness of these sectors.

It eventually spreads to the entire economy. This makes the country’s exports less competitiv­e. As a result, exporting firms reduce production and eventually lay off workers.

This increases unemployme­nt, which in turn reduces household income and therefore household consumptio­n, which is one of the drivers of growth.

In time, economic growth weakens, further reducing the economy’s capacity to create jobs. Weakened growth also implies reduced savings, investment and lower tax collection by government. This further constrains the government’s ability to increase various transfers and welfare redistribu­tion efforts.

Fraud and corruption also lead to mistrust in government by citizens and by domestic and foreign investors.

This hampers investment, which slows down economic growth, causing further increases in unemployme­nt.

While corruption and fraud make a few rich households richer, the poor and low-skilled lose their jobs and become poorer.

The government’s participat­ion in economic activity can also open the door to corruption and fraud. The negative effects of the subsequent under-performanc­e won’t be limited to state-owned enterprise­s.

They spread throughout the economy, and eventually affect economic growth, unemployme­nt, household income and consumptio­n.

The only winners in this vicious circle are a few rich and politicall­y powerful individual­s. The poor families of low- and unskilled workers bear the brunt of a weak economy.

The priority for the South African government should be to restore the competitiv­eness of state-owned enterprise­s to create a virtuous cycle of increased citizen and investor confidence, which in turn will lead to higher economic growth.

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