Fighting bad government policy the South African way

Published in Insights, The New Zealand Initiative’s newsletter, 10 October 2014

Two countries, two successful internet entrepreneurs, two clashes with government. Last week we witnessed an epic Twitter battle between Trade Me founder Sam Morgan and Economic Development Minister Steven Joyce over the usefulness of research grants. Meanwhile, founder of Thawte Consulting and the Ubuntu Linux OS, Mark Shuttleworth, won a long legal fight against the South African Reserve Bank.

Though unrelated cases, there are lessons we might draw from both of them.

Sam Morgan’s anger was directed at the New Zealand government’s policy of subsidising research and development through its Callaghan Innovation Centre. His objection is both practical and philosophical since he does not believe that government should, let alone could, pick winners.

As Morgan points out, R&D subsidies can only fail. Either the government funds companies that no reasonable private investor would, or it funds companies whose business model is so good that they do not need any hand-outs. In Morgan’s own words, “if anyone in government had any idea how to pick those winners, I would hire them. Fact is, nobody does, but government is particularly poor at it.”

Minister Joyce of course vehemently defended his innovation grants, pointing out that they were meant to encourage growth in the IT sector. However, even though the rationale may be laudable it does not mean that the policy actually makes sense.

“Tech investors love free subsidies, so nobody tells the government that the grant programmes are stupid,” said Morgan, adding that “when you can get free money you’d be mad not to fill in the form and take the grant makers out to lunch.”

South African internet pioneer Mark Shuttleworth’s problems were of a different nature. Rather than trying to give him money, the Reserve Bank attempted to tax it away when Shuttleworth moved his assets from South Africa to the UK.

Ironically, the reason for Shuttleworth’s relocation were the capital controls the Bank imposed on businesses. To escape them, he decided to leave – only to find his capital subjected to a 10 percent export levy. Furious about this, Shuttleworth fought the Bank in the courts until he won his money back (approximately $28 million).

But here comes the twist: Instead of keeping the funds, Shuttleworth is investing them in a trust dedicated to fighting legal battles where constitutional rights are violated by the state.Maybe that would be an option for Sam Morgan as well? Take the grant money and invest it in initiatives making the case for better public policy. We’d be happy to hear from him.