Saturday, February 11, 2012

The benefits of state capitalism

IN RECENT years, economists have come up with a theory known as 'post-autistic economics'.

Such a theory came about after lecturers and students at the Ecole Normale Superieure, France's premier institution of higher learning, sent out an online petition in 2000 claiming that the study of economics had become a somewhat 'autistic' subject, with students engaging in frivolous and abstract exercises (especially numerical ones), without any connection to events in the real world.
They proposed that the teaching of economics overcome its 'autistic' nature, to restore its range and depth as a social science and revive its links with the real world. The petition generated a lot of response in academic circles, with undergraduates at Britain's Cambridge University and America's Harvard University putting forward similar proposals.
Many were asking: What has gone wrong with the overall economic theory in the contemporary study of economics?
One hot topic in 'post-autistic economics' is the debate between 'liberal capitalism' and 'state capitalism'.
From the 1900s to the 1970s, people around the world believed the state (that is, the government) can play a crucial role in development and in resolving social conflicts. From the 1970s to the 2000s, led by Britain and the United States, the role of the state became tarnished, and the role of companies and the market was extolled.
As a result, the state's role in exercising control, supervision and management took a back seat. Liberal capitalism evolved into a sort of 'casino capitalism' with greed at its core, culminating in the US sub-prime mortgage crisis and the worldwide 'financial tsunami' of 2008.
Yet, over the past two decades or so, another form of capitalism - one with the government at the centre and known as state capitalism - has also been rising to the forefront. This form of capitalism did well in the countries where it is practised - including China, India, Russia, Brazil, South Africa, Saudi Arabia and the United Arab Emirates.
In China, state capitalism helped the country achieve an average growth rate of 9.5 per cent and an average increase of 18 per cent in foreign trade over the past 30 years.
Over the past decade, China's gross domestic product also grew three times to hit a total of US$11 trillion (S$13.7 trillion).
State capitalism as practised in China has provided a new model of capitalism for countries to choose from.
And China itself is the reason many newly emerging economies have also adopted state capitalism, and why the World Economic Forum made state capitalism a highlight of this year's forum.
Indeed, many Western business leaders have acknowledged that free-market capitalism in itself is not ideal and that state capitalism does have a value of its own.
Scholars know that all governments possess immense authority and have the capability to mobilise funds and manpower. This is especially so in emerging economies, where private capitalism is undeveloped, and the state plays an important role in mobilising funds and manpower.
For example, the decision of the government of former Russian president Boris Yeltsin to make privatisation its goal ultimately led to an outflow of national interests and rights, and resulted in rampant tax evasion and corruption.
As the country lacked the resources to look after its people, the average lifespan of the Russian citizen fell by as many as five years during that period.
After experiencing the negative effects of liberal capitalism, Russia then decided to embrace state capitalism, and the situation in the country improved greatly.
State capitalism offers governments much leeway. Countries can speedily mobilise funds and manpower, and set up and operate companies in a capitalistic fashion, building an autonomous foundation for the nation's rapid development.
Some companies operating under state capitalism can mobilise manpower and venture into sectors that private companies are unable to. They can venture into international resource markets and tender for projects worldwide through mergers and acquisitions, and bring in new technologies and management models. Once state-run enterprises go in this direction, they will become the driving force for the country's development.
In 2010, China's state-owned Huawei Technologies obtained the most number of patents worldwide. In recent years, the state-owned Temasek Holdings also played a core leading role in Singapore's rapid transformation.
Hence, many newly emerging economies around the world are embracing state capitalism, whereas liberal capitalism in the West is declining day by day.
Westerners such as Mr David Rubenstein, managing director of US private equity fund Carlyle Group, have warned that the West needs 'to improve the economic model that we have, and if we don't do that soon... the game will be over for the type of capitalism that many of us have lived through and thought was the best type of capitalism'.
Political risk consultancy Eurasia Group president Ian Bremmer's latest book, The End Of The Free Market: Who Wins The War Between States And Corporations, argues that state capitalism is doomed to fail as it lacks efficiency and is unable to carry out any innovation.
But his views do not hold water. The US government took action to rescue the aerospace company Lockheed Corp in the 1970s, and has never ceased to use state funds to revive poorly managed and inefficient companies, all in the name of bailing them out. What the US government has done and is still doing is actually a form of state capitalism that is even more extreme than the state capitalism practised elsewhere.
However, all newly emerging economies should remain ever vigilant. Only through appropriate and fair wages, efficiency and keeping technologies up to date can one prevent state capitalism from slipping into decline.
Did not Western capitalism end up in its current dire situation today because of greed and corruption?
This is an edited version of an editorial from the Feb 12 issue of the Chinese-language weekly Yazhou Zhoukan. Translated by Terence Tan of The Straits Times Foreign Desk.