The author points to these two systems of capitalism – Western and State. In first government was minimal and in second it led capitalism (ironical but true):
State capitalism is capturing a great deal of attention. There is particular focus on East Asian economies, in which state plays a dominant role, and which are seen to be outperforming Western economies. Many commentators are extolling the virtues of Asian capitalism and predicting the demise of alternatives. Of course, the strong points of East Asian development have long been recognized, beginning with the high savings rates, hyperinvestment in education and infrastructure, and a strong planning role for the state. There are also examples of state capitalism in other parts of the world that are less laudable. Nevertheless, a surprising number of the world’s largest corporations are now state owned. Does this portend the demise of the West? Frankly, it may be premature to dismiss the future of Western capitalist economies, despite their current travails.
The agents of state led capitalism (SLC) are different. They either have sovereign wealth funds (SWFs) or state owned enterprises tyo advance commercial interests.
SLC was kind of criticised earlier but failure of western capitalism has led to rethink:
Correctly, many are highlighting the failures of western capitalism in light of the financial crisis, its origins in under-regulation, and its aftermath in public bailouts that rewarded excessive risk-taking. Indeed, one of the major differences between state-led and market-led capitalism is the way risktaking is managed. Importantly, whereas the statist model has government on both sides of the risk-return ledger, the market model has the asymmetric characteristic of the private sector reaping the gains of successful risk-taking and the government covering major risk-taking losses.
I pose three questions: (i) who bears business risks and who reaps the return; (ii) how do societies decide on the balance between consumption today and tomorrow; and (iii) how should governments and firms handle the tradeoffs between national interest, private gain, and global commitments? State capitalists seem rather clear in their views on these issues, whereas market-led societies seem confused and conflicted. It is my view that resolution of these questions is indispensable for the Western capitalist model to continue to be successful.
He says this asymmetric response to crisis has led to grave problems. How does one alter the western model to balance the three risks pointed above?
How can the Western market model be changed so that the asymmetric risk-return balance is redressed? The quintessential example of this market failure is the financial sector, where government foots the bills for poor decisions but profits are pocketed by the risk-takers. Remedies may need to include a re-introduction of a Glass-Steagall separation of commercial and investment banking functions in the United States.
How can the Western market model be altered so that investing for the future is given greater weight in comparison to short-term profits and current consumption? Is this an alien objective that can only be pursued by government or can it be linked to long-run corporate and household strategies? In the first case, I believe the problem can be dealt with but only if we see substantial reforms in the weak role played by corporate governance in most corporations.
How can the Western market model be amended to restore a sense of national purpose in a world without borders, while neither sacrificing principles of open trade, nor encouraging narrowly nationalistic policies? This is at the core of Dani Rodrik’s “impossible trilemma” argument, wherein he holds that governments cannot be fully democratic, further national goals, and also adhere to difficult international commitments (Rodrick 2011). Is it reasonable for a fiscally strapped nation like the United States to lose all tax revenue from major corporations that park profits offshore?
A strong argument can be put forward that if nations are able to successfully pursue some national economic goals, only then will they be able to exercise strong global leadership. Since the state-led capitalist model is quite clearly pursuing national aims, it behooves the market-driven capitalists to come to grips with these kinds of difficult political issues. Without resolution, they damage chances that the non-state-led model will prevail.
Hmmm…fascinating points to ponder.
THough State led capitalism has flaws as well:
State-led capitalism has one Achilles heel, of course, in that it most often coincides with a lack of political freedoms. In this circumstance, entrepreneurs are unlikely in the absence of controls to invest their creativity in new businesses. It is therefore in the area of innovation that the Western model has an edge, if it can align its incentives correctly.
State capitalists tend often not to play by the same set of rules, and short-sighted Western governments have mistakenly thought that better adherence to global norms would eventually emerge. This is a mistake, as Carl Dahlman (2011) has pointed out in his new book, The World Under Pressure, since the time to manage adherence to global rules is earlier rather later. I have argued elsewhere that the advanced economies, the traditional custodians of the international system, are struggling and cannot provide the necessary leadership, while the newly powerful economies are not yet willing to take up the gauntlet of global responsibility. Under these circumstances, multilateralism will be under increasing stress (Leipziger 2011).
Hmm..Not good at all for global economy…
Time could soon be over for West Cap countries:
The competition between state-led capitalism and market-dominated capitalism is reaching a decisive stage. The state capitalists are growing faster, investing more, and following a clear strategy that is leading to a larger share of world output and income. With that increase in economic power will come other political aims of statism. Furthermore, as Henry Kissinger (2012) has argued, military objectives are often seen as corollaries of economic power. The Western democracies are mired in short-term difficulties, distracting them from the urgent and necessary reforms to the system that would enable them to compete. It is not too late to fix the Western capitalism model, but soon it will be.
A lot of food for thought in this piece and is much more than 6 pages. High level global stuff thinking is required.
But come to think of it how things are rapidly changing post-crisis. Before the crisis, one could hardly see a global initiative like Growth dialogue talking about pursuing national interests ahead of global interests. You had people but they were clearly the exception. Now, such thinking is becoming more common.
Earlier, most articles would say follow global best practices and State led capitalism was a strict no. SLC was seen as interfering, industrial policy types full of errors. It was seen as an oxymoron.
But then the author praises the SLC model a bit too much. There are lots of issues in this model and we could easily have a case of more government intervention in economic activity. And we know where this goes. The problem with SLC is the problem with markets. We think of them as idealistic and virtuous. The reality is both have limits…