By Charitha Ratwatte
Benito Mussolini, the fascist ruler of Italy, during World War II,
said that his brand of fascism ‘should be more appropriately called
Corporatism, because it is a merger of state and corporate power’Compare
this with the dictionary definition of capitalism: ‘A system in which a
country’s business and industry are controlled and run for profit by
private owners rather than by government’ in a liberal democratic
governance environment.
Capital is privately owned and traded, the owners could decide on the
best way to utilise it, using the foresight of entrepreneurs and
innovative thinkers. Statism on the other hand is a system in which the
government involvement in business and industry is overwhelming, but the
system of government is democratic or at least not fascist.
Dirigisme
It was Jean-Baptise Colbert, the Finance Minister of France ’s Louis
the XIV, who first invented the statist idea of economic interventionism
by the state, calling it dirigisme. Over time it has come
to be an
economic term designating an economy where the state power exerts strong
directive influence, and even more, ownership or joint ownership of
enterprises. It applies to mainly capitalist economies with strong
economic participation by the government.
The shift of power to make decisions on the utilisation of capital
from owners and innovators to state officials is the very antithesis of
capitalism. Corporatism chokes off the dynamism that makes for engaging
work, faster economic growth and greater opportunity and inclusiveness.
In a capitalist economy, the government’s obligation is to set the
policy framework within which business and industry can operate subject
to law, and by taxation, both direct and indirect, utilise funds raised
by such taxation, in an open transparent and accountable manner to
supply what economists describe as ‘public goods’ to the population at
large.
Such ‘public goods’ are goods and services which are neither
excludable – people cannot be prevented from using the goods or
accessing the service – and are non rival in consumption – one person’s
use does not reduce another’s ability to use it. Examples of such public
goods and services would be a tsunami warning siren, a fireworks
display open to the public, national security, etc
State ownership
Whether corporatist or statist, state ownership of enterprises which
could be run as private firms places a heavy toll on a country’s
bureaucracy. The responsibility of managing such State-Owned Enterprises
(SOE) is in most cases the responsibility of the country’s professional
bureaucracy.
But in some cases, politicians appoint handpicked managers of their
political thinking, to manage such enterprises and this leads to what is
described as crony capitalism.
An SOE can be defined as a government owned or government controlled
economic entity that generates the bulk of its revenues by selling goods
and services to consumers. These are commercial enterprises of which
the government controls management by virtue of its ownership stake.
The government may even hold a controlling share of the enterprise
through departmental holdings or holdings of other SOEs or government
controlled captive funds, like the EPF and the ETF.
Such SOEs are not a new idea; Britain ’s East India Company is one of
the originals. Today the crisis of capitalism presently causing blight
in the world’s economies has resulted in the emergence of the state as a
major player in business.
The world’s 10 biggest oil and gas firms, measured by reserves, are
all state owned. State capitalisms supporters argue that the system
provides stability and growth.
State capitalism
Lee Kuan Yew’s Singapore is the poster boy for state capitalism with a
human face. The People’s Republic of China, post Deng Xiaoping, is the
much touted model for corporatism, just falling short of fascism by a
whisker.
State capitalism can work well only when it is directed by a
competent state – e.g. Singapore . Kleptocratic states rip off the
system for the benefit of politicians and their cronies.
In Russia , a group described as ‘Bureau-garchs’ – a combination of
bureaucrats and oligarchs, mostly ex-KGB types – have the Russian
economy in a vicelike grip. A strong, effective and efficient
bureaucracy is essential if the state is today to play an effective
role. How many countries today have this?
SOEs or corporates in which the state has a controlling share have a
very high profile in many of the world economies. Reflections of this
are their corporate headquarters buildings which tower over the world
capital cities.
In Beijing the China Central Television building towers over the
city. In Kuala Lumpur it is the 88-storey Petronas twin towers. In
Moscow the head office of the banker VTB dominates the skyline in the
financial district. By its side stands the Sberbank tower. In Dubai is
the Burj Khalifa tower. In Colombo we will soon have the Lotus Tower
which will house the telecommunication regulator.
Creative destruction
The greatest strength of the democratic capitalist model is the space
provided in the system for what Schumpeter called ‘creative
destruction’. This is a self-regenerating mechanism which allows
uncompetitive industries to die and labour and capital to move on to
more competitive areas.
Resources and ideas are free to recombine in new forms which will
provide goods and services developing market demand requires. There is
no artificial keeping alive of irrelevant enterprises by pumping scarce
resources, mainly taxpayers’ money, which is the greatest weakness in
corporatism and state capitalism.
Creative destruction and regeneration is as organic as human
evolution, it sustains an ever expanding, evolving economic process.
It is when the evolution of creative destruction is interfered and
tampered with that enterprises are artificially kept alive after they
have lost their relevance and there is no demand for their products that
the worst aspects of corporatism comes into play.
Public money is invested, political cronies are appointed to manage
them and an unending downward spiral begins. State capitalists fear
creative destruction. They cannot control it.
Government controlled entities develop cronies within the
administration, decision making is skewered, decisions are taken not on
economic logic or merit but just to sustain the cronies, the work force
and dying businesses.
Taxpayers’ money is the oxygen, at tremendous cost to the taxpayers,
who should be getting better services from their tax money, not have
taxes being used to sustain rusting industries.
Corporatism at its worst
We saw this happening in the recent past, in the United States with
its AIG scandal, the Detroit car companies requesting government
assistance and the bail out of banks in the UK, with the Government
virtually nationalising banks, in France with the Government rescuing
Renault and the PSA Peugeot Citroen, in China with the China Investment
Corporation, a sovereign wealth fund, buying shares of Chinese banks on
the open market, in Sri Lanka with Pramuka Bank depositors being
compensated for taking hazardous risks and the Government appointing
managers to a host of financial institutions, all with taxpayers’ money,
the trend is clear.
The ‘seen hand’ of the State in the takeover of underperforming
enterprises and underutilised assets legislation is an example of
corporatism at its worst. But, exceptionally, in the US the Detroit car
manufacturers were later sold off at a profit, which was made much of by
Clint Eastwood in a superb commercial for Chrysler at half time at the
Super Bowl.
China case study
China is a useful case study. For two decades after Deng Xiaoping
declared that getting rich was acceptable, China pushed through a series
of costly reforms to extract production from the hands of the State,
big Government corporations were broken up, reconfigured or closed.
Large industries were very cautiously privatised. Entrepreneurs known
as Red Capitalists reigned supreme. They have even been made members of
the Communist Party! Shares were sold on foreign stock markets, making
them at least nominally subject to the rules of good governance.
Although China still remains a place where companies face heavy
direct and indirect State control, there has been dramatic change as
China has prospered and broader economic freedoms contributed to
unprecedented economic growth and millions emerging out of poverty to
the middle class.
While the reforms were being implemented, there was not much
criticism from the Communist party and the bureaucracy. But once the
economic crisis hit the Western economies, the critics came out into the
open; there was an intense criticism of capitalism as industry after
industry, which had been privatised, went back to the Government for
help.
While banks collapse worldwide, China ’s banks’ share prices have
held; analysts suspect that the country’s many sovereign funds have been
buying bank shares in the open market to bolster them.
The Chinese Communist Party has realised that its citizens are the
engines of sustainable economic growth. Premier Wen Jiabao has said that
China ’s State capitalist economy is “unstable, unbalanced,
uncoordinated and unsustainable”.
The current Chinese five-year plan makes it clear that the State must
transfer wealth from China ’s largest State-owned companies to
consumers to ensure that the country is no longer quite so vulnerable to
economic shocks from the world economy.
Chinese leaders know that bureaucrats and cronies cannot innovate.
The future lies in sectors such as information technology, alternative
energy, bio engineering technology and nano technology – sectors which
are, by definition, inherently driven by pioneering individual creative
innovators, not bureaucratic cronies. Herein lies the lasting strength
of democratic capitalism.
Human beings naturally want to improve life for themselves and their
families. Free markets have proven time and again that they can empower
virtually anyone with an innovative idea. Adam Smith’s ‘unseen hand,’
the self interest of every individual to improve himself, raises the
prosperity of all. Except when the ‘seen hand’ of the state stifles and
crowds out entrepreneurs and occupies the economic space.
‘Work in progress’
But this conflict in China is very much a ‘work in progress’. China
’s airlines are a case in point; a State monopoly carrier was broken up
into three – Air China , China Eastern and China Southern to provide
competitive services. There was limited success; coverage across China
was dramatically expanded. But the worldwide downturn in aviation has
led to all three airlines needing massive capital injections from the
State.
The power sector in China presents a similar story; a single monopoly
was unbundled in 2002, to foster competition. But when rising coal and
oil prices caused pricing problems, the Government imposed a cap on
prices; massive losses resulted in the government infusing huge cash
injection into the companies, effectively increasing its domination of
the companies.
China ’s car industry is also in crisis, even with huge foreign
participation, carmakers are getting massive subsidies and grants are
being made to encourage buyers of cars.
China was a statist economy which was partially reformed, which is
returning to some aspects of Statism due to the economic crisis. However
there are exceptions; ZTE China’s leading maker of microchips is one.
Zhongxing Telecommunication Equipment Company (ZTE) is projected to be
on par with Nokia and Samsung within a few years. It sells in 140
countries; revenues jumped 36% this year.
In 1985 the founder, an icon Red Capitalist, worked as an engineer in
a factory owned by China ’s Aerospace Ministry, in the boom following
Deng Xiaoping’s opening up of China ’s economy, the party allowed him to
open a small State-owned factory. Now they operate like a private
company.
At the Boao Forum for Asia, held on China ’s Hainan Island in April
2010, China ’s alternative to the World Economic Forum, the blossoming
of China ’s State-owned enterprises was discussed.
The CEO of Tata Consultancy Services observed: “ China is faster in
execution, because it is State-driven; they just go after it
immediately.” But Professor Xiang Bing, Dean of the Cheung Kong Graduate
School of Business in Beijing , said: “SOEs have a disadvantage, the
curious mix of officialdom and business gives plenty of room for
inefficiency, you have the misallocation of resources, time and money.
Maintaining a good relationship with the Government may be more
important for the executives than the success of the SOE.”
Sri Lankans know this well. But this Corporatist China model, also
called the ‘Beijing Consensus’ of one party rule, an eclectic approach
to free markets, a big role for State enterprises, observance of human
rights and the rule of law not being a priority, as opposed to the
Washington Consensus of an open liberal, good governance, enforceable
property rights, private sector-oriented policy, is attractive to more
and more emerging economies, not least because China supports them with
aid, that comes without Western strings like lectures on good governance
and human rights!
Bremmer’s views
Ian Bremmer, President of the Eurasia Group, in his book ‘The End of
the Free Market: Who Wins the War Between States and Corporations?’
says: “As China gains dominance on the world stage, more and more
multinational corporations will have to rethink their assumptions about
competing under its State capitalism model – one in which the Government
is the principle economic driver.”
He also cautions that “the China State Capitalism model is robust…
because … 1.3 billion people at a per capita income of $ 3,000 still
have extraordinary productivity gains that they can wring out of the
system.”
Bremmer also points out that “…you’re in a world system where the
most important growing economy is not a mature, developed state with a
commitment to the rule of law and strong institutions… It is an emerging
market where political insecurities are the ultimate driver. Hence,
state capitalism.”
Sri Lanka
Sri Lanka , a near command economy in which the private sector is
deemed to be the engine of growth, will see more of recourse to State
capitalist measures as the economic crisis hits. Given the recent
actions of State-controlled captive funds and the placing of political
nominees on leading ‘private sector’ boards, the indications are not
positive.
Dr. Saman Kelegama of the Institute of Policy Studies, speaking at
the launch of the ESCAP Survey for 2010, pointed out that the losses
incurred by the CEB, CPC, SLTB, Postal Dept., Railways Dept., SriLankan
Airlines and Mihin Air totalled Rs. 45 billion. This is almost 1% of
GDP. The country simply cannot afford to continue this litany of
inefficient, incompetent and loss-making State corporatism.
Capitalism, operating in an environment of an efficiently and
transparently regulated market economy, in a liberal democratic model of
governance, has one unique advantage over Corporatism, Statism or any
other system. It is that Charles Darwin’s theory of the ‘Survival of the
Fittest’ is allowed to operate without limitation.
Losers are allowed to lose out and disappear. Winners have the space
to win well, fairly and squarely. There is no propping up of losers with
taxpayers’ money, by corrupt politicians, because cronies are running
or own the firms. Nor are winners suppressed, oppressed or expropriated,
because political opponents own them or because of hallucinated
social/political costs. What Schumpeter called ‘creative destruction’
takes place.
Certainly the protection of investors and workers rights according to
ILO’s standards and international best practice, an effective safety
net for the poor and the marginalised, the protection of patents,
trademarks and copy right and the Rule of Law and not the rule of men is
essential.
Seeds of destruction
There are two factors within corporatism that are the seeds of its
own destruction. The first is the unavoidable tendency of the crony
corporate elite to seek rent, i.e. corruption. The state cannot be its
own umpire. It cannot self-regulate. Such states implode from within.
The second is that corporatism is taking root in countries which have
serious flaws in governance. China ’s crony connections (guanxi) and
corruption. Russia ’s nepotism and corruption and the overwhelming
influence of the ex KGB ‘bureau-garchs’.
Transparency International rates China 75th in the 2011 Transparency
Index, Russia at 143rd! The corrupt elitist victors are the takers. The
People’s Bank of China estimates that from the mid 1990s to 2008,
roughly 16,000 to 18,000 Chinese bureaucrats in State-owned corporates
hijacked around $ 123 billion of people’s money!
Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy,
at the National University of Singapore, recently wrote: “For all its
flaws and defects, Capitalism remains the best system to improve human
welfare.”
Mahbubani points out that what he terms as Western Capitalism, has
today been discredited for three reasons. First, lack of good governance
i.e. lack of strict regulation and supervision. Secondly, the benefits
of Western capitalism were drawn by only a few – the 1%, of bankers and
financial service providers that the Occupy Wall Street-ers were
protesting against.
Thirdly, the Western capitalists failed to educate their populace on
the fact ‘creative destruction’ was an essential ingredient of
capitalism and that out sourcing and off shoring of labour intensive
work to economies which provided cheap manpower was inevitable. The
workers of the Western Capitalist countries would have to upgrade their
skills to remain employable.
The bottom line is that you cannot introduce political criteria into
commercial decisions, nor commercial criteria into political decisions.
The twain cannot meet. As Rudyard Kipling famously said: “East is East,
West is West and never the twain shall meet.”
The conjunction has to be at policy and regulatory level. As Daily FT
Columnist W.A. Wijewardena quotes John Exter, the founder Governor of
Sri Lanka’s Central Bank, “Eventually, the markets will win.”
When will the politicians learn?
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