Different Kinds of Capitalism Offer Different Paths of Development
People often refer to capitalism casually as though it were one kind of economic system. Economists, however, have identified numerous different models of capitalism, each of which can have profoundly different impacts on a country’s development. I am including here a posting that I received from another listserv which includes relevant links to different models of capitalism. The current model prevailing in the Arab world has been called “oligarchical capitalism” because the economic system is designed to benefit a narrow class of elites without regard to the public good. As such, it is the worst kind of capitalism because it systematically adopts welfare-reducing policies (i.e., policies that reduce social wealth). Why would such a system adopt perverse economic policies? Because the elites stand to enrich themselves from those policies while the losses are borne by the marginalized and politically powerless masses. That is why the first step toward development in Egypt and the Arab world is to democratize, so that governments have incentives to adopt policies that improve the welfare of the great mass of their citizens rather than enriching themselves. Egypt and Tunisia have taken tentative steps to do this. Now, the citizens of each state who came together to overthrow their respective rulers need to focus on consolidating democratic gains so that they can begin to focus on adopting policies that will benefit all the citizens.
FURTHER READING ON THE VARIETIES OF CAPITALISM:
IHT op-ed by a Chinese prof. titled “The allure of the Chinese model”:
Many of the African leaders coming here for the Chinese-African summit meeting are attracted not only by opportunities for aid and trade, but also by the Chinese model of development.
They know that only three decades ago, China was as poor as Malawi. But while the latter remains among the world’s poorest, China’s economy has expanded nine-fold. Indeed, the Chinese model has in many ways challenged the conventional wisdom in the West on how to fight poverty and ensure good governance. Its key features are:
People matter. Since 1978, China has pursued a down-to-earth strategy for modernization, and has focused on meeting the most pressing needs of the people. The architect of China’s reform, Deng Xiaoping, argued that China could only “seek truth from facts,” not from dogmas, and all reforms must take account of local conditions and deliver tangible benefits.
Constant experimentation. All changes in China first go through a process of trial and error on a small scale, and only when they are shown to work are they are applied elsewhere.
Gradual reform, not big bang. China rejected “shock therapy” and worked through the existing, imperfect institutions while gradually reforming them and reorienting them to serve modernization.
A developmental state. China’s change has been led by a strong and pro-development state that is capable of shaping national consensus on modernization and ensuring overall political and macroeconomic stability in which to pursue wide-ranging domestic reforms.
Selective learning. China has retained its long tradition of “selective cultural borrowing” – including from the neoliberal American model, and especially its emphasis on the role of the market, entrepreneurship, globalization and international trade. It is inaccurate to describe the Chinese model as the “Beijing consensus” versus the “Washington consensus.” What makes the Chinese experience unique is that Beijing has safeguarded its own policy space as to when, where and how to adopt foreign ideas.
Correct sequencing and priorities. China’s post- 1978 change has had a clear pattern: easy reforms first, difficult ones second; rural reforms first, urban ones second; changes in coastal areas first, inland second; economic reforms first, political ones second. The advantage is that the experiences gained in the first stage create conditions for the next stage.
IHT op-ed by a Berkeley economics prof. titled “Capitalism: One size does not fit all”:
For developing countries, the East Asian model has not lost its influence. The model is characterized by relative equality at first, followed by land reform and mass expansion of education, which helps smooth the wrenching conflicts and readjustments of early industrialization.
In addition, state coordination of private enterprise strengthens rather than stifles the market processes. The phenomenal growth of capitalism in China under pervasive government control has only added to the attraction of the basic East Asian model.
India, another high-growth country, has also not quite followed the economic orthodoxy in a systematic manner, particularly in matters of privatization, deregulation and fiscal deficit management.
In the 2006 “index of economic freedom” compiled by the Heritage Foundation, China and India rank far below most Latin American and many African countries. Yet the economic performance of the latter countries, which did follow the liberalizing and privatizing reforms of the Anglo-American model more faithfully during the last two decades, has been, with a few exceptions, disappointing.
Martin Wolf FT column (Wolf is the associate editor and chief economics commentator of FT) on good and bad forms of European capitalism (“Europeans can look to each other”):
The “Nordic model” (Denmark, Finland, Sweden, plus the Netherlands) has the highest public spending on social protection and universal welfare provision. Labour markets are relatively unregulated but there are “active” labour market policies, while strong unions deliver a high degree of wage equality.
The “Anglo-Saxon” model (Ireland and the UK) provides quite generous social assistance of last resort, with cash transfers going mainly to people of working age. Unions are weak and the labour market relatively unregulated.
The “Rhineland model” (Austria, Belgium, France, Germany and Luxembourg) relies on social insurance for those out of work, as well as for provision of pensions. Employment protection is stronger than in the Nordic countries. Unions are also powerful or enjoy legal support for extension of the results of collective bargaining.
Finally, the “Mediterranean” model (Greece, Italy, Portugal and Spain) concentrates public spending on old-age pensions. Heavy regulation protects (and lowers) employment, while generous support for early retirement seeks to reduce the number of job-seekers.
…How well then do these different approaches work in terms of two fundamental European objectives: high levels of employment and elimination of relative poverty?
On the former goal, both the Nordic and Anglo-Saxon models perform well and the Rhineland and Mediterranean models relatively poorly. On the latter objective, the Rhineland and Nordic models do well and the Mediterranean and Anglo-Saxon models poorly (see chart). Prof Sapir argues, intriguingly, that the main reason for the underperformance of the Anglo-Saxon model on poverty alleviation is not the lack of fiscal redistribution but poor educational standards at the bottom.
The Nordic model is good for both employment and poverty alleviation and the Mediterranean model bad. Meanwhile, the Anglo-Saxon model is good on employment and bad on poverty alleviation, while the Rhineland model is the reverse. As Prof Sapir puts it, the Anglo-Saxon and Nordic models are efficient (at least for the labour market), while the Rhineland and Nordic models are equitable. He adds that the inefficient models may also be unsustainable. One indication of this is that the Rhineland and Mediterranean countries have higher ratios of public debt to GDPgross domestic product, at 73 per cent and 81 per cent, respectively, against 36 per cent in the Anglo-Saxon group and 49 per cent among the Nordics.
FT column by Martin Wolf on how oligarchic forms of capitalism delegitimize markets (“Why plutocracy endangers emerging market economies”):
Mexico’s Carlos Slim is now the richest man in the world, or so Fortune magazine has told us. His ascension is fascinating. This is not only because he is extraordinarily rich. It is also because the manner in which he has accumulated his wealth tells us much about the capitalism that is spreading across the globe.
Estimated at $59bn, Mr Slim’s fortune is equal to 6.6 per cent of Mexico’s gross domestic product. Bill Gates, in contrast, at about $56bn, is worth a mere 0.4 per cent of US GDP. Even at its peak John D. Rockefeller’s wealth was less than 2 per cent of US GDP. The richest person in the US would need $900bn to possess the same wealth, relative to US GDP, as Mr Slim does relative to Mexico’s.
Does this extraordinary accumulation of wealth in a single man’s hands matter? One reason someone might think so is that it implies extraordinary inequality. If, for example, one assumed a real return of 6 per cent a year, the Slim family’s permanent income would be $3.6bn a year. On World Bank figures, the average income of Mexico’s poorest 10 per cent was $1,200 per head in 2005. So the Slim family’s permanent income equals the current incomes of 3m of Mexico’s poorest people. I am no egalitarian. But this surely needs some justification.
Furthermore, vast concentrations of wealth are sure to have political consequences, inciting corruption and populism. Thus, it seems sure to weaken both the legitimacy and effectiveness of fragile democracies. These dangers are evident.
Princeton economist and NYT columnist Paul Krugman believes the US economy is becoming oligarchic (“Graduates Versus Oligarchs”):
What we’re seeing isn’t the rise of a fairly broad class of knowledge workers. Instead, we’re seeing the rise of a narrow oligarchy: income and wealth are becoming increasingly concentrated in the hands of a small, privileged elite.
I think of Mr. Bernanke’s position, which one hears all the time, as the 80-20 fallacy. It’s the notion that the winners in our increasingly unequal society are a fairly large group — that the 20 percent or so of American workers who have the skills to take advantage of new technology and globalization are pulling away from the 80 percent who don’t have these skills.
The truth is quite different. Highly educated workers have done better than those with less education, but a college degree has hardly been a ticket to big income gains. The 2006 Economic Report of the President tells us that the real earnings of college graduates actually fell more than 5 percent between 2000 and 2004. Over the longer stretch from 1975 to 2004 the average earnings of college graduates rose, but by less than 1 percent per year.
So who are the winners from rising inequality? It’s not the top 20 percent, or even the top 10 percent. The big gains have gone to a much smaller, much richer group than that.
…Why would someone as smart and well informed as Mr. Bernanke get the nature of growing inequality wrong? Because the fallacy he fell into tends to dominate polite discussion about income trends, not because it’s true, but because it’s comforting. The notion that it’s all about returns to education suggests that nobody is to blame for rising inequality, that it’s just a case of supply and demand at work. And it also suggests that the way to mitigate inequality is to improve our educational system — and better education is a value to which just about every politician in America pays at least lip service.
The idea that we have a rising oligarchy is much more disturbing. It suggests that the growth of inequality may have as much to do with power relations as it does with market forces. Unfortunately, that’s the real story.
Should we be worried about the increasingly oligarchic nature of American society? Yes, and not just because a rising economic tide has failed to lift most boats. Both history and modern experience tell us that highly unequal societies also tend to be highly corrupt. There’s an arrow of causation that runs from diverging income trends to Jack Abramoff and the K Street project.
Jeff Sachs column in Scientific American in praise of the Scandinavian model (“The Social Welfare State, beyond Ideology”):
One of the great challenges of sustainable development is to combine society’s desires for economic prosperity and social security. For decades economists and politicians have debated how to reconcile the undoubted power of markets with the reassuring protections of social insurance.
…Most of the debate in the U.S. is clouded by vested interests and by ideology. Yet there is by now a rich empirical rec-ord to judge these issues scientifically. The evidence may be found by comparing a group of relatively free-market economies that have low to moderate rates of taxation and social outlays with a group of social-welfare states that have high rates of taxation and social outlays.
Not coincidentally, the low-tax, high-income countries are mostly English-speaking ones that share a direct historical lineage with 19th-century Britain and its theories of economic laissez-faire. These countries include Australia, Canada, Ireland, New Zealand, the U.K. and the U.S. The high-tax, high-income states are the Nordic social democracies, notably Denmark, Finland, Norway and Sweden, which have been governed by left-of-center social democratic parties for much or all of the post–World War II era. They combine a healthy respect for market forces with a strong commitment to antipoverty programs. Budgetary outlays for social purposes average around 27 percent of gross domestic product (GDP) in the Nordic countries and just 17 percent of GDP in the English-speaking countries.
On average, the Nordic countries outperform the Anglo-Saxon ones on most measures of economic performance. Poverty rates are much lower there, and national income per working-age population is on average higher. Unemployment rates are roughly the same in both groups, just slightly higher in the Nordic countries. The budget situation is stronger in the Nordic group, with larger surpluses as a share of GDP.
The Nordic countries maintain their dynamism despite high taxation in several ways. Most important, they spend lavishly on research and development and higher education. All of them, but especially Sweden and Finland, have taken to the sweeping revolution in information and communications technology and leveraged it to gain global competitiveness. Sweden now spends nearly 4 percent of GDP on R&D, the highest ratio in the world today. On average, the Nordic nations spend 3 percent of GDP on R&D, compared with around 2 percent in the English-speaking nations.
The Nordic states have also worked to keep social expenditures compatible with an open, competitive, market-based economic system. Tax rates on capital are relatively low. Labor market policies pay low-skilled and otherwise difficult-to-employ individuals to work in the service sector, in key quality-of-life areas such as child care, health, and support for the elderly and disabled.
…Von Hayek was wrong. In strong and vibrant democracies, a generous social-welfare state is not a road to serfdom but rather to fairness, economic equality and international competitiveness.
List of the “World’s Most Competitive Economies”:
COUNTRY RANKINGS 2006-2007
11. Hong Kong
13. Taiwan, China
Source: Global Competitiveness Report, World Economic Forum
(“U.S. Loses Top Spot to Switzerland In Global Competitiveness Survey,” by Marcus Walker, WSJ, Sept. 26, 2006 – behind a pay wall, email me to send)
Stats from an essay in the NYRB by Tony Judt comparing Europe to America:
Average number of hours worked per year:
(Source: OECD (2004), OECD in Figures, OECD, Paris)
Ratio of CEO pay to average manufacturing employee:
(“Europe vs. America,” Tony Judt, Feb. 10, 2005, New York Review of Books)
Productivity per hour worked (United States=100)
(International Productivity Monitor: www.csls.ca/ipm/9/sharpe-tables.pdf)
The Economist had a very interesting article explaining how Western Europe countries, and especially the Scandinavian ones, in fact have greater social mobility than America:
The obvious explanation for greater mobility in the Nordic countries is their tax and welfare systems, which (especially when compared with America’s) deliberately try to help the children of the poor to do better than their parents. One might expect social mobility and economic flexibility to go together – in fact, to be two sides of the same coin. But to the extent that redistribution is an explanation, it implies the opposite: that social mobility is a product of high public spending, a bit like the low incidence of poverty or longer life expectancy (on both of which Europe also does better than America).
(“Snakes and Ladders,” Economist, May 26, 2006 – email me to send)
Interesting Project Syndicate column by 3 profs titled “Good Capitalism, Bad Capitalism”:
We find it useful to divide the capitalist economies into four broad categories. While many economies straddle several of these, most economies fall primarily into one of them. The following typology helps explain why some economies grow more rapidly than others.
Oligarchic capitalism exists where power and money are highly concentrated among a few. It is the worst form of capitalism, not only because of the extreme inequality in income and wealth that such economies tolerate, but also because the elites do not promote growth as the central goal of economic policy. Instead, oligarchs fix the rules to maximize their own income and wealth. Such arrangements prevail in large parts of Latin America, the Arab Middle East, and Africa.
State-guided capitalism describes economies where growth is a central economic objective (as it is in the other two forms of capitalism), but attempts to achieve it by favoring specific firms or industries. Governments allocate credit (through direct bank ownership or by guiding credit decisions by privately owned banks), provide direct subsidies and/or tax incentives, grant trade protection, or use other regulatory devices in an attempt to “pick winners.”
Southeast Asian economies have demonstrated great success with state guidance, and, until the late 1990’s, there were calls in the United States to emulate their practices. But the Achilles heel of state guidance is that once such economies near the “production-possibility frontier,” policy makers run out of industries and technologies to copy. When government officials rather than markets then try to choose the next winners, they run a great risk of choosing the wrong industries, or channeling too much investment – and thus excess capacity – into existing sectors. Such a tendency contributed significantly to the Asian financial crisis of 1997-98.
Big Firm or managerial capitalism characterizes economies where large firms – often so-called “national champions” – dominate production and employment. Smaller enterprises exist, but are typically retail or service establishments with one or only a few employees. Firms get to be large by exploiting economies of scale, refining and mass-producing the radical innovations developed by entrepreneurs (discussed next). Western European economies and Japan are leading exemplars of managerial capitalism, which, like state guidance, also has delivered strong economic performance.
But managerial capitalism, too, has its Achilles heel. Bureaucratic enterprises are typically allergic to taking big risks – that is, developing and commercializing the radical innovations that push out the production-possibility frontier and generate large sustained jumps in productivity and thus in economic growth.
…This leads to the fourth type: entrepreneurial capitalism. Economies in which dynamism comes from new firms historically have commercialized the radical innovations that keep pushing out the production-possibility frontier. Examples from the last two centuries include such transformative products and innovations as railroads, automobiles, and airplanes; telegraph, telephones, radio, and television; air conditioning; and, as just noted, the various technologies responsible for the IT revolution, including both mainframe and personal computers, routers and other hardware devices, and much of the software that operates them.
NYT had a good short profile of Rodrik (“Economist Wants Business and Social Aims to Be in Sync”):
His father made ballpoint pens, protected by high tariffs from less expensive imports. The company was successful enough that his father could afford to send Dani to Harvard in 1975, the first in the family to study abroad. The younger Mr. Rodrik, a tall, thin, soft-spoken man, still credits Turkey’s effort to support less-efficient domestic manufacturers for his good start in life.
“I am the creation of import substitution,” he says, playfully aware of the incongruity of having benefited from an approach that flourished in the developing world a generation ago and is now widely disdained.
The experience helped Mr. Rodrik, who is 49, develop a flexible approach to trade. He has built a reputation among mainstream economists and policy makers for favoring eclectic solutions that mix government and the private sector in pragmatic ways.
“You scratch the surface of most industries that are successfully developing export capacity anywhere in the world,” he said in an interview, “and you will invariably find a combination of market forces and government forces at play.”
His specialty is the developing world and he tries, in his travels as an adviser, to help countries improve the mix. Now he is arguing for an improvement in the United States, his adopted home.
Finally, if you have time for blogs in your daily readings, I would highly recommend Rodrik’s (“Unconventional thoughts on economic development and globalization”):
Dani Rodrik, Professor of Political Economy at Harvard University’s John F. Kennedy School of Government, is the first recipient of the Social Science Research Council’s Albert O. Hirschman Prize. His latest book is One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.