Tuesday, April 3, 2012


Feb 11, 2012
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.

March 13, 2012

Capitalism, Version 2012

David Rothkopf, the chief executive and editor-at-large of Foreign Policy magazine, has a smart new book out, entitled “Power, Inc.,” about the epic rivalry between big business and government that captures, in many ways, what the 2012 election should be about — and it’s not “contraception,” although the word does begin with a “C.” It’s the future of “capitalism” and whether it will be shaped in America or somewhere else. 

Rothkopf argues that while for much of the 20th century the great struggle on the world stage was between capitalism and communism, which capitalism won, the great struggle in the 21st century will be about which version of capitalism will win, which one will prove the most effective at generating growth and become the most emulated. 

“Will it be Beijing’s capitalism with Chinese characteristics?” asks Rothkopf. “Will it be the democratic development capitalism of India and Brazil? Will it be entrepreneurial small-state capitalism of Singapore and Israel? Will it be European safety-net capitalism? Or will it be American capitalism?” It is an intriguing question, which raises another: What is American capitalism today, and what will enable it to thrive in the 21st century? 

Rothkopf’s view, which I share, is that the thing others have most admired and tried to emulate about American capitalism is precisely what we’ve been ignoring: America’s success for over 200 years was largely due to its healthy, balanced public-private partnership — where government provided the institutions, rules, safety nets, education, research and infrastructure to empower the private sector to innovate, invest and take the risks that promote growth and jobs. 

When the private sector overwhelms the public, you get the 2008 subprime crisis. When the public overwhelms the private, you get choking regulations. You need a balance, which is why we have to get past this cartoonish “argument that the choice is either all government or all the market,” argues Rothkopf. The lesson of history, he adds, is that capitalism thrives best when you have this balance, and “when you lose the balance, you get in trouble.” 

For that reason, the ideal 2012 election would be one that offered the public competing conservative and liberal versions of the key grand bargains, the key balances, that America needs to forge to adapt its capitalism to this century. 

The first is a grand bargain to fix our long-term structural deficit by phasing in $1 in tax increases, via tax reform, for every $3 to $4 in cuts to entitlements and defense over the next decade. If the Republican Party continues to take the view that there must be no tax increases, we’re stuck. Capitalism can’t work without safety nets or fiscal prudence, and we need both in a sustainable balance. 

As part of this, we will need an intergenerational grand bargain so we don’t end up in an intergenerational civil war. We need a proper balance between government spending on nursing homes and nursery schools — on the last six months of life and the first six months of life. 

Another grand bargain we need is between the environmental community and the oil and gas industry over how to do two things at once: safely exploit America’s newfound riches in natural gas, while simultaneously building a bridge to a low-carbon energy economy, with greater emphasis on energy efficiency. 

Another grand bargain we need is on infrastructure. We have more than a $2 trillion deficit in bridges, roads, airports, ports and bandwidth, and the government doesn’t have the money to make it up. We need a bargain that enables the government to both enlist and partner with the private sector to unleash private investments in infrastructure that will serve the public and offer investors appropriate returns. 

Within both education and health care, we need grand bargains that better allocate resources between remediation and prevention. In both health and education, we spend more than anyone else in the world — without better outcomes. We waste too much money treating people for preventable diseases and reteaching students in college what they should have learned in high school. Modern capitalism requires skilled workers and workers with portable health care that allows them to move for any job. 

We also need a grand bargain between employers, employees and government — à la Germany — where government provides the incentives for employers to hire, train and retrain labor. 

We can’t have any of these bargains, though, without a more informed public debate. The “big thing that’s missing” in U.S. politics today, Bill Gates said to me in a recent interview, “is this technocratic understanding of the facts and where things are working and where they’re not working,” so the debate can be driven by data, not ideology. 

Capitalism and political systems — like companies — must constantly evolve to stay vital. People are watching how we evolve and whether our version of democratic capitalism can continue to thrive. A lot is at stake here. But if “we continue to treat politics as a reality show played for cheap theatrics,” argues Rothkopf, “we increase the likelihood that the next chapter in the ongoing story of capitalism is going to be written somewhere else.”

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