Role of govt in new global landscape
By David Skilling
THERE has been much recent discussion on whether free market capitalism is being dominated by more authoritarian versions. A few weeks ago, The Economist led with an article on 'The Rise Of State Capitalism' and it was a key topic of conversation at Davos. This debate is motivated by the significant economic and social challenges being faced by many advanced economies.
My view is that although meaningful changes are required to the models of capitalism employed in many advanced economies, this involves an adaptation of market-based capitalism to respond to new global realities rather than a shift to a fundamentally different model like state capitalism. Specifically, the dynamics unleashed by globalisation over the past 20 years mean an increasingly important role of government is positioning economies to compete.
There are two related aspects to this.
First, countries are competing to provide an attractive environment for people, capital and companies that are increasingly mobile across borders.
The second element is acting to develop a competitive domestic environment that supports locally based firms to succeed in global markets. Firms are the engines of growth, but the quality of the business environment is a key success factor for them.
Although this model of competition is private sector-led, it suggests a deliberate role for governments in positioning their countries to compete in the global environment. Countries need to be distinctive in some way to compete successfully for mobile factors against other locations, and to provide an environment that enables firms to compete successfully.
Countries can choose to compete in different ways. Some develop competitive strength around sector 'verticals', such as the life sciences or financial services, while others focus on 'horizontal' capacities such as tax rates, infrastructure quality, or the nature of the innovation ecosystem. There is no single policy template for success - Singapore and Denmark, for example, operate very different models. There are successful countries that have high and low tax rates, high and low levels of research and development spending, heavy and light labour market regulation, and so on.
But the policy settings do need to be coherent and to respond to global realities. If countries want to maintain high levels of government spending, for example, the economy needs to be sufficiently productive to support it. And these choices will change through time; the countries that succeed are those that adapt when the competitive landscape or their domestic situation changes.
Increasingly, the choice of how to compete is shaped by broader objectives. For example, many countries are looking to compete in ways that generate inclusive growth. These considerations may influence choices about which sectors or capacities to invest behind (for example, those with particular employment or wage profiles) or the design of tax and transfer policy.
The importance of a deliberate competitive strategy is increasing as countries face a global context that is more intensely competitive and volatile. Advanced economies need to determine the basis on which they want to compete in the global economy. In this model, governments assume a more deliberate role focused on shaping the environment for private companies to compete successfully.
Although some advanced-economy governments have significant portfolios of financial and commercial assets - such as Norway and Singapore - this is not a model of state capitalism in which governments rely on the direct control of companies to pursue their national interests. State capitalism has worked well for some countries developing rapidly, but becomes less helpful as countries develop and the private sector becomes a more important driver of growth.
For advanced economies, the choice is not between state capitalism and a hands-off free market version of capitalism. Rather, governments will seek to engage deliberately with the dynamics of globalisation.
To do this, governments need a coherent economic strategy, to manage risks and build resilience, and to construct a portfolio of external relationships, to navigate a more competitive, volatile order.
It was common a decade ago to talk of the 'market state', in which countries had to compete in open, globalised markets using a slimmed-down role reminiscent of Mr Tom Friedman's 'golden straitjacket'. But this focus on efficiency seems inadequate to the complexities of the emerging global environment.
Perhaps a better way of thinking about the role of government is the 'corporate state'; a more vertically integrated approach in which governments deliberately position their countries in the emerging global environment - much as a corporation would think deliberately about its competitive strategy, its risk exposures and its external relationships.
This conception is more the Singapore Consensus, involving a successful blend of state and market, than the Beijing Consensus. But even so, in an increasingly challenging global landscape, and in the context of an increasingly sophisticated Singapore economy with changing needs and preferences, changes to Singapore's competitive positioning - and the nature of its growth model - are more likely than not. Countries, like corporations, need to adapt.
The writer is director at Landfall Strategy Group, a Singapore-based government advisory firm.
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.