Johannesburg — TRADE and Industry Minister Rob Davies has come out strongly in defence of government intervention in the economy, saying one fundamental challenge for government is to bring about structural change in the economy to address unemployment and poverty.

Speaking on Friday at a public lecture given by Nobel laureate Joseph Stiglitz, hosted by the Department of Trade and Industry, Davies said governments played an active role in the economies of all countries that had advanced.

"It is a lesson we have got to learn. We are at a time that we have to make those structural changes," Davies said.

Spelling out his vision for intervention, Davies cited the industrial policy now on the table. "There is massive market failure in the industrial sector, and if we leave them to their own devices they are going to go south.

"Over the past number of years we grew moderately, by 5%, but we did not make a dent in unemployment and poverty, and if we return to business as usual we will not be able to halve unemployment and poverty," he said.

Hinting at structural problems created by government intervention in the past, and the risks in propping up rent seekers, Davies said the government would focus on particular sectors that had strengths, but "we are going to insist on reciprocity".

"We need discipline in industrial policy so that those who receive rents do so productively, and we need to choose industries where there is potential for growth.

"We need to unpack a process of learning by doing. We also need to pick up on the issue of policy coherence, and that is going to be the biggest challenge for us."

Davies's vision for an interventionist state got backing from Stiglitz, who argued that the government would be justified in actively seeking to grow employment.

"Should job creation be a separate variable? I think yes. And that goes to the question of the industrial structure of the economy. It is not necessarily true that companies would push high employment-

creation growth, so focusing on growth is not enough. You have to focus on pro-poor growth and job creation," Davies said.

However, Stiglitz was more cautious in his vision for state intervention to boost growth. While citing a long list of market failures, he also pointed to a series of government failures and a need to understand how "markets can check government, and government can check markets".

"There is no economy that has not succeeded with at least some form of industrial policy. The most difficult question is how to do that and how to do that well," he said.

But in advocating state involvement in the economy, Stiglitz steered clear of the sweeping type of interference SA envisages in its industrial policy.

Pointing out clear market failures in technology development, Stiglitz prioritised government intervention in knowledge transfer, citing the examples of South Korea and Malaysia.

"A large fraction of growth is related to learning, and learning is not well mediated by market forces.

"... Some interventions through industrial policy can help the economy to learn. There is a static cost but a dynamic benefit. Almost every successful economy has had government playing a large role in promoting innovation," Stiglitz said.