Global Trends by Martin Khor

Monday 23 January 2012

Clash of capitalisms in this Dragon Year

The Year of the Dragon may symbolise the struggle for prosperity for some, but others may use this year to challenge what they call state-capitalism being practised by developing countries, especially in Asia.


Its’ the first day of the Year of the Dragon.   Like others around the world, Malaysians hope it will be an auspicious year.  Certainly it will be an interesting one.  Perhaps that’s the only certainty about this coming year of uncertainty.

The new Dragon year will usher in even more intense debate about the role and the rise of China and of other “emerging economies”.

As the Western countries face gloomy economic prospects, some of their political elite and intellectuals seem to be seized by fears that some developing countries, especially China, will be steaming ahead.

Used to centuries of global economic dominance, these advanced countries are fearful that their leadership will be challenged and even overturned.

This may be the reason for the obsession about China.  These days, there are new books almost every month about the rise of China.  Some deal with its high growth and prospects or with its complex political developments.

Quite a number, like the book “Death by China: Confronting the Dragon”, are of the view that China is destroying not only the American economy but the whole world and its environment.

But the fears go beyond China, and incorporate other emerging countries as well, as seen in the latest issue of The Economist, with its cover stories on “The rise of state capitalism:  the emerging world’s new model.”

The magazine describes the 88-storey Petronas Towers soaring above Kuala Lumpur, as well as the China Central TV building in Beijing and the VTB bank office in Moscow, as monuments to the new hybrid corporation – backed by the state but behaving like private-sector multinationals.

The Economist’s editorial admits that for emerging countries wanting to make their mark on the world, state capitalism has an obvious appeal, giving them the clout that private-sector companies would take years to build.

But its dangers outweigh its advantages, says the magazine.  For their own sake and in the interests of world trade, the huge holdings should be unwound and handed over to private investors.

The Economist however also admits that this hybrid form of “state-directed capitalism” company is not new, and cites the East India Company.

This was the huge conglomeration that took over many Asian countries’ economies, while the English government made use of its gunboats and colonial rule to back up the EIC but other British companies.

The magazine also cites the United States after its war of independence, Germany in the 1870s, and Japan and South Korea in the 1950s as examples of rising powers using the state to kick-start growth.

There is thus recognition that the rise of today’s advanced countries was based on the state’s strong support in their companies’ emergence.

These companies have dominated the global economy for decades and in some cases centuries, backed up not only by subsidies, cheap credit and other policy measures but also by their governments’ political and military force.

The history of colonialism shows how the companies of the West combined with the political and military might of their governments to take over the resources and markets of the colonised parts of the world.

In the past three decades, most developing countries have been told, through IMF-World Bank structural adjustment programmes, to give up the role of the state to direct their economies and instead rely entirely on the private sector.

These policies did not succeed as the domestic private sector is weak or even non-existent in many countries.  In poor countries, foreign companies were not interested in coming in except in the mining or plantation sectors.

However, several other developing countries, mostly in Asia, took on a different model.  Their governments believed in playing an important or even dominant role in the development process.

At first these governments owned companies that they ran like government departments, and this was nor efficient.   This model was changed in some countries to one where the state can own or partly own companies that are then run on a commercial basis.  The state can also assist private companies to grow.

The government-linked or totally privately-owned companies are supported by the framework of an industrial development plan, an agricultural plan and a plan for selected service sectors, and a range of policy measures including subsidies, credit, tax breaks, technological support such as research and development grants and management programmes.

Government investment holding institutions like Khazanah and PNB in Malaysia or Temasek in Singapore have been set up as crucial components of this framework.

Some of these hybrid government-linked companies may be spun off to be totally privately-owned companies in future.  Some companies may remain totally government-owned.  And some may remain as hybrids.

It is true that if governments do not manage the hybrid between state and commerce well, there will be failures.  However, the absence of an activist state that involves itself in giving a direction and coordination to the development process is also damaging.

Success therefore depends on a development-oriented state, that manages its development functions well.  And this includes the management of some hybrid economic institutions.

The increasing criticism by Western intellectuals and politicians of “state capitalism” is not confined to academic observations.  The US administration and Congress are contemplating legislation and action to place extra tariffs on Chinese products not only on anti-dumping grounds but also that they have been subsidised and that China is not a market economy.

The Congress is also discussing whether to slap tariffs on Chinese products on the ground that China’s currency is manipulated and under-valued.

A time may come soon when a Chinese product may be simultaneously slapped with four types of tariffs – the normal one, and one each on grounds of dumping, subsidy and currency manipulation.

While the focus now may be on China, other developing countries may be faced with the same actions based on the same reasoning, that these countries are unfairly helping their companies through policy measures that represent state-capitalism and industrial policy.

Moreover, the US and Europe and now negotiating free trade agreements with developing countries that contain clauses or even chapters that seek to prohibit or restrict the practices of government-linked companies, or the provision of subsidies and preferences by government to local companies.

The Korean economist Ha Joon Chang wrote a famous book “Kicking Away the Ladder” to describe how developed countries made use of policies that made them rich, and now want to prevent developing countries from doing the same and thus are seeking to prohibit these same policies.

The clash of capitalisms and the clash between developed and developing countries over what policies are legitimate and which should be banned will intensify in this year of the dragon.