COMPARATIVE PLANNING
From State to Democracy: Two Views of Capitalism
David A. Andelman Editor, World Policy Journal President, Overseas Press Club of America 1/19/2011 11:52:26 PM
In the late 1970s, shortly after The New York Times replaced typewriters with computers in its newsroom in New York, the editors decided to ship an early workstation to its news bureau in New Delhi. A month later, the newspaper’s bureau chief in the Indian capital received word from customs that the computer had arrived, but had been impounded. It would not be allowed into the country, the bureau chief was told, because there was an Indian version that could provide comparable services. My colleague (I was then based in Bangkok covering Southeast Asia for the newspaper) asked to see the Indian version that was being forced on him. He was told to drive to a location in central Delhi and was taken into a room. There, filling the entire room, virtually the size of the entire bureau, was a monster computer with flashing lights and lots of whirring sounds.
"This can provide all the services of your American machine," he was told. "But it’s larger than our entire office, and it uses vacuum tubes," the reporter replied, once he managed to recover his composure. The salesman shrugged. It was the finest India had to offer.
This was deep in the days of state capitalism in India. No longer. Today, India is a modern nation with among the most advanced, and freest economies in the world — having undergone a growth spurt that is among the fastest in the history of our planet. But it could never have been done under the constraints of the state model pursued in the
years until 1991 and the end of the
Licence Raj.
This was by no means my last brush with state capitalism. From France under Socialist President François Mitterrand to Eastern and Central Europe when COMECON held sway under the influence of Soviet Communism, I experienced first-hand the often grotesque inefficiencies that were paramount and often quite appalling.
In 1981, when I arrived in Paris as a correspondent for the American television network CBS News, François Mitterrand had just arrived in power with an overwhelming mandate as the first Socialist President of France in a generation. Welcoming Communist Party members to his cabinet, he also embarked on a broad campaign of nationalizations. The first, and most visible, was a vast swath of the French banking sector.
At 12 noon on November 12, 1981, the Baron Guy de Rothschild invited me to his inner sanctum in the Banque Rothschild at its headquarters at 21rue Laffitte in the 9th arrondissement, the heart of the French banking quarter, barely a five minute walk from the Bourse. He began by taking me on a tour of his establishment that he was about to turn over to the French government — an end to 10 generations of Rothschild banking dating to King Louis-Philippe for whom his forebears had acted as financiers. It was after the name of this street that the Rothschilds named their great Bordeaux estate and its wine label, Chateau Laffitte. "What a pity," he said, pausing in his bank’s wood-paneled boardroom, sweeping his hand across the dozens of portraits of his ancestors looking down from the walls at the large red-leather chairs, all now empty, that surrounded what seemed like an acre of polished mahogany. "They will be staring down on communists, now sitting around this table."
In all, thirty-six banks and two finance companies were taken over by the state, an army of talent turned out, as bureaucrats moved in and took over. But banking was only the first industry targeted by the Socialists. Within a matter of months, the government had seized control of seven of the twenty largest industrial conglomerates in France plus five other major industrial companies whose workers numbered some 800,000 individuals.
Every morning, it seemed, the French awoke to news of another private company or industry brought under state control. The railroads (SNCF), natural gas and coal, Paris subways, the two French airlines (Air France for international flights, and Air Inter for domestic travel), the auto company Renault, the state tobacco company SEITA were all under government control and ownership. Eventually France was forced to issue vast quantities of special bonds to compensate the owners and shareholders of the nationalized firms — interest payments alone running 50 billion French francs a year (between $5 billion and $10 billion depending on the rate of exchange which fluctuated wildly during the 1980s).
France’s experiment with overwhelming state capitalism didn’t last long, however. The nationalizations proved all but catastrophic to the French economy, society and the entire way of life. Moreover, support for the process all but collapsed. While overwhelmingly positive through March 1983, by October of that year public opinion had turned overwhelmingly negative. The Franc had been devalued for the third time in two years, public spending was squeezed, and the right wing, led by the man who would succeed Mitterrand as President, Jacques Chirac, was presenting some very attractive alternatives. Within a matter of months, the nationalizations had begun to be reversed. The four Communist Party members had been chucked out of the cabinet. France was reverting to democratic capitalism. In 1987, having spent four years in self-imposed exile in New York, Baron Guy returned to Paris as his son David launched the new Rothschild & Cie Banque in the rue Messine, barely a mile from the building seized from his father.
So what is it about democratic capitalism that makes it more successful — hence more appealing — than state capitalism? To a large extent, it’s actually the very fundamentals of the two systems that suggest the answer. In state capitalism, the state dominates the markets for one particular reason — political, rather than economic, gain. To accomplish this, it must necessarily ignore the central reason for the success of a company: profit. When politics becomes the ultimate corporate driver, the state must take several measures that so often is likely to run counter to the success of a private enterprise. The principal motive for a state-controlled company must be preservation of jobs, since an employed worker and his or her family is far more likely to vote for the incumbent government in the next election. Corporate losses mean little when the public treasury is behind the corporation and can continue to pump in funds — which can, and often does, lead to a vicious spiral of state deficits, more bond issues, higher interest rates, inflation and a currency plunging in value. But political success trumps all of this — at least in the short run. Eventually, as happened in India in 1991 when the IMF and World Bank effectively turned off the financial spigot, forcing India to abandon the inefficient and wasteful state capitalism, the government exhausts the means of maintaining the inefficient, often corrupt and exploitive, and rarely innovative model of corporate governance.
Innovation, indeed, is the hallmark of democratic capitalism and anathema to state capitalism. Innovation involves risk, and risks imply the potential for failure, which in turn can have dire political consequences. However, since the ultimate motivation of a state-controlled enterprise is survival and jobs, rather than profit — what possible excuse could there be for remarkable innovation? When the state can simply block a smaller, faster, more user-friendly computer from entering the country, what possible motive can there be for inventing such a product when there is a totally captive domestic market?
There is, of course, one final model of capitalist system that is being practiced, admittedly with some considerable success — what I would call hybrid capitalism. This is the system in China, with variants as far afield as Cuba and Russia in the post-Soviet era, Saudi Arabia and the UAE, Malaysia and Brazil. In such a model, the state owns or controls vast portions of the infrastructure or natural resources economy, but allows a fully functioning, innovative private sector to co-exist beside it. Indeed, the state may even welcome well-heeled private investors to feed at the state-owned hog trough, while maintaining full, and unchallenged, control over what enters and leaves the trough and how it’s employed in between.
The central question is whether such systems can exist for the long term, or whether each is from the onset effectively meta-stable, meaning that it must at some point either revert to a full state-controlled system or move onwards to a system of full democratic capitalism? Some have suggested that the movement of China to full democratic capitalism is a move that must be taken in tandem with a move toward full democratic pluralism in a political sense — hence, hardly likely within the foreseeable future. China has none of the motivations that pushed India in that direction back in 1991. Its economic foundations are strong and stable. It has vast foreign currency reserves that it can use to subsidize state-controlled companies wherever and whenever necessary, and vast resources to buy new foreign markets or sources for raw materials — as both Australia and the United States have discovered, much to their respective chagrin.
China has managed to achieve at least a meta-stable form of a hybrid state- and democratic-capitalism by its extraordinary benevolence that is both a legacy of Maoist communism and self-preservation by the nation’s current most opportunistic leadership. So the nation has opened up to foreign interests, expertise and especially investment capital while at the same time keeping most closely held its principal sources of wealth—natural resources, banking, any form of manufacturing with military implications. At the same time, it has been squirreling away vast quantities of foreign reserves that serve as a significant cushion for hard times. Finally, it is most methodically opening it vast interior — still mired deep in the 19th century, often outside even a monetized economy — bringing gradually into the 21st century peasants and other villagers who would ultimately seek the wealth and power they are dimly beginning to perceive on the horizon. Such social consciousness combined with economic and fiscal savvy may indeed guarantee the communist leadership in Beijing the ability to keep full democratic capitalism, and the political democracy that inevitably accompanies it, at bay for at least another generation or two.
Brazil is another classic cautionary tale. Here is a nation that is the investment poster-child of the Western hemisphere. Its economy is surging, its stock market up some 150 percent in the past five years, having shrugged off the recessionary meltdown of its more northerly neighbors with barely a look backwards. Now, however, its state oil company Petrobras (Petroleo Brasileiro S.A.) is considering a major recapitalization, dithering to the point where major investors, like the American private equity investor George Soros, simply bailed out of its stock altogether.
Finally, of course, there’s Russia — a nation, like India, of vastly disparate societies of haves and have-nots. With the end of communism came the official end, at least, of state capitalism. Suddenly, all bars were removed and those with contacts, friends in high places or simply enormous energy, drive or ruthlessness (often all four combined) became enormously, unfathomably wealthy. But while the old class of wealth and power — the apparatchiki—disappeared in a flash, they were replaced in a heartbeat by the new class of oligarchs. Russia never has been in any shape a classless society—even under the religion called Marxism-Leninism, which in theory eschews all classes. It is, perhaps, a tribute to the human condition, and particularly the Russian soul, that some will succeed wonderfully and many will fail miserably.
Throughout Russia’s transitionary period of true oligarchy and into the present proto-capitalist era, however, the state maintained its grip on at least some portions of the central sources of wealth. Oil, of course, remains paramount in this respect and when private oil companies — or their oligarchs — overstepped their political bounds, or failed to pay proper obeisance to the ruling elite, they found themselves quickly knocked back down to size, or shipped off to Siberia as the case may be (witness Yukos head Mikhail Khodorkovsky).
Today, in full hybrid flower, however, the nation and its key financial engines are flourishing. Stock and bond markets are strong. Foreign companies still clamor to invest or, having invested do their utmost to maintain their small slices that are never a controlling stake, in major Russian conglomerates where the state still maintains its majority control. A thriving middle class has begun to develop — a phenomenon that never existed in the clearly two-class communist era. In short, this system is working, quite admirably, at least for the moment.
None of this is to suggest, however, that such a hybrid of state- and democratic-capitalism can’t exist all but indefinitely. Clearly for the Russian people it works. Since the time of Ivan the Terrible, and before, Russians have sought a strong leader. Western style political democracy has never taken root and may never. An oligarchy, whether aristocratic, political or economic, has always ruled. Yet elsewhere, the likelihood of a successful hybrid maintaining more than a meta-stability is far slimmer.
Certainly, there was every motive for Dubai to turn its back on the flagrant, bordering on vulgar, expansion and excesses of the early 2000s when the capital (and debt) base on which its system of democratic capitalism was being constructed simply imploded after the global recession. Yet, with the help of neighboring big brother Abu Dhabi, it managed to avoid full nationalization of its faltering enterprises. Admittedly, most were majority-owned anyway by the government. But a full seizure of some of these corporations risked leaving this vibrant nation with the international and credit rating of the most abject bankrupt when (not if, mind you) the global system has returned to full recovery, hopefully in the not-too-distant future. There were other motivations here as well, of course—largely the deep stakes that real Dubai "citizens" retain in virtually every enterprise of the emirate. But Dubai’s development is ultimately founded on the profit motive and that is the heart of democratic capitalism, even in a nation that is ruled by an aristocracy.
It is equally imperative that India resists the siren call of a return to state capitalism. The form this must take, of course, will be different from any other, as indeed any nation’s form of political and economic system and how they interact is different from any other. American capitalism and democracy, for instance, differs from the system in England, France, Germany, even Canada where parliaments rule. At the same time, there is a difference between a large and vigorous public sector and full-blown state capitalism. Indeed, in a democratic system there is certainly a role for a state sector that may take on such essential, potentially only marginally profitable, services as public transport, water supply, electricity, and the post (though in each of these cases there are certainly instances where the private sector has assumed such functions to a more or less profitable or efficient degree instead of or alongside the public sector).
In most nations, and particularly India, it has become impossible to retrace the steps of a system that once set on a new direction assumes a momentum of its own. France tried to do so, all but catastrophically, in the 1980s. Many communist states, from Cuba to Central Europe, did so in the early to mid-twentieth century. It is unlikely that any nation will try such sweeping repositioning in the future. And with the increasingly tight interlinkage of the global economy in these days of instant communications, that is a very good thing indeed.
(Author's last book was "A Shattered Peace: Versailles 1919 and the Price We Pay Today" and he encourages readers to follow him on Twitter @DavidAndelman. The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)
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