Capitalism: One Size Does Not Suit All

BERKELEY: A little over a decade ago the American model of capitalism was triumphant: The Soviet Union had recently collapsed, recession took the shine off the vaunted Japanese model of the 1980’s, the social-democratic models of northern and western Europe languished in high unemployment and low growth, and the so-called East Asian miracle was soon to be engulfed in the Asian financial crisis. For the many developing and transition economies in search of a model, there was only one prescription: Liberalize and privatize, and copy the Anglo-American institutions of legal, financial and corporate governance.

Today there is less certainty on the matter. First the technology and then the housing booms in the US subsided; many years of high American living on borrowed Asian money are now widely considered unsustainable; extreme income concentration at the very top with stagnation at the bottom has made the hollowness of the productivity growth particularly palpable for most working people; unemployment in the US and the UK has been in general lower than in much of Europe, but their jails are full with a larger proportion of citizens incarcerated; and the crisis in health insurance and social security looms large. The earlier triumphal mood has now disappeared.

Meanwhile the social-democratic and Japanese models, after some necessary repairs and ongoing liberalizing reforms, have come alive, with their economies revived, while still keeping a large part of their distinctive institutional features. (These features will undergo some tinkering, but no substantial change, after the outcome of the recent Swedish elections.)

Two of these features relate to the continuing emphasis on social protection and on a more coordinated style of corporate governance – in relations both across firms and between managers and workers. There is an increased appreciation of the fact that countries have different political contexts and the bargaining powers of the different stakeholders in the economic system – owners, managers and workers – vary. “One – Anglo-American – size fits all” is no longer the prevailing perception.

In the American system the owners are dispersed and relatively weak, managers powerful and often overpaid, and employees not well-organized. This is not the case in much of Europe or Japan. This gives rise to a different sustainable pattern of corporate governance, even though there is more recognition now of the mounting costs of social protection, the need for more labor flexibility and protection of minority shareholders against insider abuse. Commentators have also pointed out that while the more open and competitive system in the US encourages radical innovations in technology, the more coordinated system in Europe and Japan is more conducive to incremental innovations, where workers on the shop floor often contribute more to day-to-day technological improvements. Besides, the wage compression resulting from the more solidaristic wage-bargaining process, as in Nordic countries, helps the more productive firms at the frontier of technology at the expense of the less productive firms.

For the developing countries, the East Asian model has not yet lost its influence. This model is characterized by initial relative equality, following upon land reforms and mass expansion of education, which helps in smoothing the wrenching conflicts and readjustments of early industrialization. In addition, state-guided coordination of private enterprise and use of export performance to discipline firms strengthen, rather than stifle, the market processes.

The phenomenal growth of capitalism in China, with market reforms under pervasive government control – while starting from a position of relative income equality after the egalitarian land redistribution of 1978, providing a minimum safety net for most rural households – has only added to the attraction of the basic East Asian model. One -party rule Vietnam, opening its door to capitalist enterprises and growing at 8 percent a year, offers a variation on the theme. India, another high-growth country in recent years, has also not quite followed the economic orthodoxy in a systematic manner, particularly in matters of privatization, deregulation or fiscal deficit management.

In the 2006 Economic Freedom ranking of the Heritage Foundation, China and India rank far below most Latin American and many African countries. In these latter countries, which did follow the liberalizing and privatizing reforms of the Anglo-American model more faithfully during the last two decades, results in terms of economic performance have been, with a few exceptions, disappointing. Even the Bretton Woods institutions are now less confident in pushing their orthodox and austere “conditionalities” of loans in the cause of midwifing capitalism in the tropics – much like the declining confidence in foreign-policy circles for pushing democracy at gunpoint in the Muslim world .

Capitalism in both rich and poor countries has been afflicted by problems of rising inequality and environmental degradation. Globalization has increased anxiety everywhere about job security. This underlines the value of social safety nets – and retraining facilities, portable health insurance and environmental safeguards – in coping with adjustments to market competition. The considerable opposition to globalization, dismissed by most economists as populism, may be more a symptom of widespread disenchantment with the libertarian capitalism propagated since the Thatcher-Reagan era.

That era has, of course, left some healthy remnants. More attention is now paid in all countries to disincentive effects of state mandates, to the issue of individual responsibility in life decisions and to cost-effective ways of organizing private provision of public services. There is also a greater appreciation of the wholesome effects of market discipline in cutting through much of the sloth, waste and malfeasance generated by years of reflexive interventionism. Of course, societies give different weights on economic efficiency as opposed to distributive equity and social harmony. The greater tolerance of inequality in American society reported in some surveys is not shared by other societies. In these other societies the myth of high inter-generational mobility is less well-entrenched.

We need to explore the many ways in which equity can be enhanced without giving up on efficiency. These include expansion of facilities of education, training and health care. In many poor countries the barriers faced by large numbers of people in credit markets, where they lack adequate assets that can be used as collateral, and land markets, where the landed oligarchy often hogs the endowments of land and water, sharply reduce the society’s potential for productive investment, innovation and human-resource development. In societies with an extreme lack of equity, it is also more difficult to build consensus and organize collective action toward long-term reform and cooperative problem-solving efforts. Those who are preoccupied with these issues of social justice sometimes turn to various forms of anti-capitalism, as is evident in the environmental and anti-globalization movements. But protest is not enough, it is necessary for these groups to explore viable, incentive-compatible and thus sustainable ways of constructing alternatives to capitalism. They have so far come up with few new constructive ideas, and history has not been kind to their old ideas.

On the other side, it is important to stress that single-minded pursuits of efficiency are bound to be counterproductive. In particular, a standardized policy prescription that ignores social and institutional diversities or the context-dependent complexities of a particular society is a recipe for failure. The accumulated resentment of the large numbers of losers worldwide in the process of globalization – despite its theoretical potential of benefiting everyone – is already in danger of triggering a substantial backlash in many countries. The advocates of capitalism should try to protect it from the enthusiasts for any one particular variety of capitalism.