'Economically, the ideals should be the austere German chancellor Konrad Adenauer, the 1958 Bundesbank and the stern Austrian school of economics, not the sloppy economic self-indulgence of Messrs. Bush, Obama, Bernanke and Keynes.'<blockquote>'Singapore is a model of where the Chinese economy may end up if it gets REALLY lucky. Unlike China it has integrity that is ranked at the very top of global league tables. It also has a degree of government control that would not work in the United States, but with a wise and honest government appears to work quite well. Singapore has achieved the miraculous result of having a government that is nearly as efficient as the private sector, and directly absorbs only 15% of Singapore's GDP–welfare, pensions and health are handled by the separate Singapore Provident Fund. The combination of a small entity overall and the minimum possible direct footprint on the economy appears to be necessary for Singapore's capitalism to work at a high income level–it may not be a reasonable model for the United States or China.
Finally Chile has found a model of a resource-based economy that works, something that has eluded resource-based economies for a century or more. Here the state is small as in Singapore, with health and welfare privatized as in Singapore. However it acts as a buffer for the volatility of resource prices, accumulating a “stabilization fund” large enough to absorb the shock and cushion the downturn when resource prices turn down. Again, the integrity of the system is very high by Latin American standards–indeed Chile ranks above the United States on Transparency International's Corruption Perceptions Index. Resources can potentially be controlled by the state (in Chile the largest copper company, Codelco, is so controlled although mining in general is private) but they must be managed without featherbedding and the royalties from those resources must not be allowed to tempt the local government into excessive expansion.
The successful examples of capitalism outlined here account for well under half world GDP, even including China, whose success is partly due to low wage costs. There are far more examples of capitalism with serious weaknesses that make it deeply inefficient. In Japan, for example, the state has expanded considerably over the last 20 years, weakening the economy's competitiveness, building up an immense overhang of government debt and stalling the growth of the previous four decades. However it retains Germany's strengths of excellent education and long-term orientation, and an effective government austerity program might well solve its problem quite quickly.
...freedom from arbitrary changes of regulation and re-writings of the rules is an essential component of a successful capitalist society.
...
...Sweden today looks much more capitalist and much more German than it has in many decades...
The overall lesson is thus clear. If, like Chile and Singapore, the state is held to no more than 15-20% of the economy, then it may be able to act to stabilize the economy and set up pension fund operations without compromising economic growth or imposing its inferior standards of probity on the rest of the economy. The U.S. government under the presidents up to Calvin Coolidge was similarly modest, and similarly effective in promoting economic growth.
If however as in the United States, Canada, Japan and Europe, the state has been allowed to grow to 40% of the economy then it must be much more circumspect. Because its own activity represents such a large portion of output, it must at all costs avoid the kinds of cronyism that characterized the George W. Bush administration's later years, with ex-Goldman Sachs CEO Hank Paulson at the Treasury. Still more important, it must maintain the highest standards of integrity, an area in which the U.S. has also slipped recently. It must also avoid subsidizing unproductive activities such as housing, agriculture, ethanol and charities, which can grow to inordinate size and undermine both the remainder of the economy and the ethical foundation of the society. Through its mastery of the tax system the government must ensure as far as possible that economic actors remain oriented towards the long term, with "financial engineering" severely discouraged and rent-seeking through the financial system prevented. Germany does not need a "Tobin tax" on financial transactions; the United States does. Economically, the ideals should be the austere German chancellor Konrad Adenauer, the 1958 Bundesbank and the stern Austrian school of economics, not the sloppy economic self-indulgence of Messrs. Bush, Obama, Bernanke and Keynes.'</blockquote>
Global Models of CapitalismBy Martin Hutchinson
November 30, 2010
SourceGermany's success in 2010 has surprised most U.S. analysts, who tend to start every sentence about Europe with "sclerotic." However it is by no means the only country that is recovering from the Great Recession in a remarkably healthy fashion. China, Chile and Singapore are also stand-outs in this respect, while the United States, Ireland and southern Europe have done poorly. This year's economic events can teach us again about which models of capitalism can be successful.
Germany's success should not have been surprising. The country had a remarkably successful economy in Wilhelmine times before 1914 and again from 1949 to 1990. The absorption of East Germany was an immense problem for the German economy, largely because it was done in the most expensive way possible, with a 1 to 1 conversion between the Ostmark and the Deutschemark, horribly overvaluing East German labor. However it was very obviously a problem of finite duration, given the language and cultural commonality between the two former countries. By about 2005, symbolized by the accession of the East German Angela Merkel to the Chancellorship, East Germany was ready to play a full part in the united whole. At that point, with the massive subsidies to the former East Germany declining, the traditional German model of capitalism was able to reassert itself and propel the economy forward.
The German economic model works very well for a country with perpetually high labor costs. Education and training are of great importance, as are engineering skill–engineers have a much higher social position in German societies than in Anglo-American ones–while housing finance is given a low priority, since it is correctly regarded as unproductive. Finance plays little role in the system–it was notable during the 2008 debacle to what extent the German banks were helpless victims of Anglo-American shenanigans, with little creative role of their own. The typical successful German company is both smaller and longer established than its U.S. counterpart, with powerful shareholders that prevent management from engaging in self-dealing and mindless empire building.
In very fast-moving innovative markets, the German model works less well than the Anglo-American Silicon Valley model of innovation. Thus the German enterprise software company SAP appears to have stolen technology from Oracle, not the other way around—to the tune of $1.3 billion in damages (a figure that may be reduced on appeal.) However the vast majority of economic activity is not particularly fast moving, and once a technology has become established the Germans have shown time and again that they are more than capable of playing a major role in the market with their skills of engineering and very high-quality manufacturing. They are much more of a threat in the Internet-related technology market than they were 15 years ago, for example.
The Chinese model of capitalism has shown remarkable growth, but it has not yet been shown to work well in a world where its citizens don't enjoy an immense labor cost advantage over its competitors. It combines the U.S, approach to entrepreneurship with a high level of government control and a relatively low level of systemic integrity. In the very long run, it will need to reform itself, and may find moving to the U.S. approach difficult because of the lack of integrity in the system and the government's distortion of investment decisions. However the U.S. system hasn't recently been notable for its integrity or its efficient allocation of investment either, so maybe China will do (relatively) fine.
Singapore is a model of where the Chinese economy may end up if it gets REALLY lucky. Unlike China it has integrity that is ranked at the very top of global league tables. It also has a degree of government control that would not work in the United States, but with a wise and honest government appears to work quite well. Singapore has achieved the miraculous result of having a government that is nearly as efficient as the private sector, and directly absorbs only 15% of Singapore's GDP–welfare, pensions and health are handled by the separate Singapore Provident Fund. The combination of a small entity overall and the minimum possible direct footprint on the economy appears to be necessary for Singapore's capitalism to work at a high income level–it may not be a reasonable model for the United States or China.
Finally Chile has found a model of a resource-based economy that works, something that has eluded resource-based economies for a century or more. Here the state is small as in Singapore, with health and welfare privatized as in Singapore. However it acts as a buffer for the volatility of resource prices, accumulating a “stabilization fund” large enough to absorb the shock and cushion the downturn when resource prices turn down. Again, the integrity of the system is very high by Latin American standards–indeed Chile ranks above the United States on Transparency International's Corruption Perceptions Index. Resources can potentially be controlled by the state (in Chile the largest copper company, Codelco, is so controlled although mining in general is private) but they must be managed without featherbedding and the royalties from those resources must not be allowed to tempt the local government into excessive expansion.
The successful examples of capitalism outlined here account for well under half world GDP, even including China, whose success is partly due to low wage costs. There are far more examples of capitalism with serious weaknesses that make it deeply inefficient. In Japan, for example, the state has expanded considerably over the last 20 years, weakening the economy's competitiveness, building up an immense overhang of government debt and stalling the growth of the previous four decades. However it retains Germany's strengths of excellent education and long-term orientation, and an effective government austerity program might well solve its problem quite quickly.
In Canada the government is no larger than in the United States, but is prone to whimsical and unpredictable decisions, such as its refusal to allow the BHP takeover of Potash and its extraordinary decision to refuse permission to Taseko Mines' Prosperity gold mine project, blowing off over $5 billion in economic value. As the endlessly prolonged recession in the United States is demonstrating, freedom from arbitrary changes of regulation and re-writings of the rules is an essential component of a successful capitalist society.
In Latin America, corruption levels far higher than Chile and governments that regard booms as an excuse for mad state sector expansion have condemned the continent to a century of economic stagnation. It remains to be seen where Colombia and Peru, which are showing signs of following Chile in a free market direction, will continue doing so or whether the example of Brazil, which has relapsed into corrupt big-spending socialism, will be more potent.
In Europe, Germany's economics is enjoying something of a renaissance. Whereas in 2007 Germany's finance minister Peer Steinbruck was regarded as an outrageous socialist for his attack on hedge funds, his later assault on the “crass Keynesianism” of fiscal stimulus showed his heart was in the right place, and today he is regarded as prescient rather than eccentric. Germany's economic model has fared much better than the Anglo-American one in 2008-10. Indeed it is still not clear whether Britain and the United States will pull themselves out of recession without entering into a painful “double dip” outbreak of inflationary recession when their over-stimulative monetary policies are reversed. Sweden today looks much more capitalist and much more German than it has in many decades and many east European countries, notably the Baltic states, have realized the hard way that Anglo-American finance capitalism can lead their vulnerable economies into appallingly painful boom-bust cycles.
The overall lesson is thus clear. If, like Chile and Singapore, the state is held to no more than 15-20% of the economy, then it may be able to act to stabilize the economy and set up pension fund operations without compromising economic growth or imposing its inferior standards of probity on the rest of the economy. The U.S. government under the presidents up to Calvin Coolidge was similarly modest, and similarly effective in promoting economic growth.
If however as in the United States, Canada, Japan and Europe, the state has been allowed to grow to 40% of the economy then it must be much more circumspect. Because its own activity represents such a large portion of output, it must at all costs avoid the kinds of cronyism that characterized the George W. Bush administration's later years, with ex-Goldman Sachs CEO Hank Paulson at the Treasury. Still more important, it must maintain the highest standards of integrity, an area in which the U.S. has also slipped recently. It must also avoid subsidizing unproductive activities such as housing, agriculture, ethanol and charities, which can grow to inordinate size and undermine both the remainder of the economy and the ethical foundation of the society. Through its mastery of the tax system the government must ensure as far as possible that economic actors remain oriented towards the long term, with "financial engineering" severely discouraged and rent-seeking through the financial system prevented. Germany does not need a "Tobin tax" on financial transactions; the United States does. Economically, the ideals should be the austere German chancellor Konrad Adenauer, the 1958 Bundesbank and the stern Austrian school of economics, not the sloppy economic self-indulgence of Messrs. Bush, Obama, Bernanke and Keynes.
Finally, the United States should consider privatizing both social security and healthcare provision, either through a "Provident Fund" system like that of Singapore or directly as in Chile. By doing so, it could reduce its public sector drastically, while maintaining modern welfare provisions through independent funding. As Singapore and Chile have discovered, that would make maintaining a healthy capitalist system very much easier.