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Political’ versus ‘liberal’ capitalism

Pakistan’s economy has always remained in a state of confusion. Except for the first decade or so when we went for import substitution our attempts to set our economy on an even keel that would take us to what we could rightly claim to be a social-welfare state, we have continued to just wander aimlessly from one economic philosophy to the other guided by foreign experts.

The only time our economy was being attempted to be backed by a firm philosophy was when it was being reshaped during 1972 to 1977 on the lines of socialist formulations. During this period, we were being seen creating a socioeconomic environment that would guarantee affordable universal education, affordable universal healthcare, affordable universal housing and affordable universal transportation and communication. Both our exports and our import-substitution efforts had reached a take-off stage during this period perched on the launching pad of ‘Roti-Kapra-Makan’ slogan.

But, this was too short a period for such a philosophy to take roots. The philosophy that replaced the one that was making it possible for Pakistan to stand on its two-feet without the crutches of foreign dole was while being founded on the ideology of ‘free market economy’ was at the same time becoming too dependent on ‘free lunches’, a clear-cut arrangement in contradiction which led our economy to be perpetually trapped in a state of confusion that is continuing to keep us right at the bottom rung of world’s economic ranking and our people permanently poor.

We need to break this trap of confusion at the earliest if we are to remain an independent country with our sovereignty intact.

According to Branko Milanovic (The Clash of Capitalisms: The Real Fight for the Global Economy’s Future — published in Foreign Affairs issue of January/February), Capitalism rules the world. Capitalism is now said to be the sole remaining mode of production. And the real battle is within capitalism, between two models that jostle against each other.

So, we need to choose between these two models and do it urgently so as to extricate our economy out of the current state of confusion.

In the opinion of Milanovic in the states of western Europe and North America and a number of other countries, such as India, Indonesia, and Japan, a liberal meritocratic form of capitalism dominates: a system that concentrates the vast majority of production in the private sector, ostensibly allows talent to rise, and tries to guarantee opportunity for all through measures such as free schooling and inheritance taxes.

Alongside that system stands, he claims, the state-led, political model of capitalism, which is exemplified by China but also surfaces in other parts of Asia (Myanmar, Singapore, Vietnam), in Europe (Azerbaijan, Russia), and in Africa (Algeria, Ethiopia, Rwanda). This system privileges high economic growth.

These two types of capitalism — with the United States and China, respectively, as their leading examples—, says Milanovic, invariably compete with each other because they are so intertwined. And it is this competition—not a contest between capitalism and some alternative economic system—that will shape the future of the global economy.

Almost 100 percent of China’s economic output came from the public sector until 1978. That is almost 30 years of purely public sector. Can we in Pakistan do this with single mindedly? Could we reverse back to the period when PIDC used to set up factories for import-substitution items and yarn production for export and then divest them to private sector? And also to the period when in the 1970s we were setting up basic infrastructure units in the public sector for achieving industrial self-sufficiency, like the steel mills, machine tool factory, heavy mechanical complex, heavy electrical complex, a set for producing special steel and even capacities for fabricating textile machinery?

Milanovic calls the Chinese type of capitalism as ‘Political capitalism’ which in his opinion, gives greater autonomy to political elites while promising high growth rates to ordinary people.

China’s government and those of other political capitalist states need to constantly generate economic growth to legitimize their rule. Political capitalist states must also try to limit corruption, which is inherent to the system.

According to Milanovic, in 1970, the West produced 56 percent of world economic output and Asia (including Japan) produced only 19 percent. Today, only three generations later, those proportions have shifted to 37 percent and 43 percent — thanks in large part to the staggering economic growth of countries such as China and India.

Milanovic points out that liberal meritocratic capitalism came into being in the last 40 years. It can be best understood in comparison to two other variants: classical capitalism, which was predominant in the nineteenth and early twentieth centuries, and social democratic capitalism, which defined the welfare states in western Europe and North America from World War II to the early 1980s.

Milanovic says liberal meritocratic capitalism model was structured around industrial labor and featured the strong presence of unions, which played a huge role in shrinking inequality.

“Social democratic capitalism presided over an era that saw measures such as the GI Bill and the 1950 Treaty of Detroit (a sweeping, union-negotiated contract for autoworkers) in the United States and economic booms in France and Germany, where incomes rose. Growth was distributed fairly evenly; populations benefited from better access to health care, housing, and inexpensive education; and more families could climb up the economic ladder.

“The last 40 years have seen the growth of a semi-permanent upper class that is increasingly isolated from the rest of society. In the United States, the top ten percent of wealth holders own more than 90 percent of the financial assets. The ruling class is highly educated, many of its members work, and their income from that labor tends to be high. They tend to believe that they deserve their high standing.

“In China, the transformation from quasi feudalism to capitalism took place swiftly, under the control of an extremely powerful state. Given this history, then, it is no surprise that capitalism in China, Vietnam, and elsewhere in the region has so often had an authoritarian edge.

“The system of political capitalism has three defining features. First, the state is run by a technocratic bureaucracy, which owes its legitimacy to economic growth. Second, although the state has laws, these are applied arbitrarily, much to the benefit of elites, who can decline to apply the law when it is inconvenient or apply it with full force to punish opponents. The arbitrariness of the rule of law in these societies feeds into political capitalism’s third defining feature: the necessary autonomy of the state. In order for the state to act decisively, it needs to be free from legal constraints. The tension between the first and second principles—between technocratic bureaucracy and the loose application of the law—produces corruption, which is an integral part of the way the political capitalist system is set up, not an anomaly.

“As China expands its role on the international stage, its form of capitalism is invariably coming into conflict with the liberal meritocratic capitalism of the West. Political capitalism might supplant the Western model in many countries around the world.

“Political capitalism, for its part, promises much more efficient management of the economy and higher growth rates. The fact that China has been by far the most economically successful country in the past half century places it in a position to legitimately try to export its economic and political institutions. It is doing that most prominently through the Belt and Road Initiative, an ambitious project to link several continents through improved, Chinese-financed infrastructure. The initiative represents an ideological challenge to the way the West has been handling economic development around the world. Whereas the West focuses on building institutions, China is pouring money into building physical things. The BRI will link partnered countries into a Chinese sphere of influence. Beijing even has plans to handle future investment disputes under the jurisdiction of a Chinese-created court.

“What does the future hold for Western capitalist societies? The answer hinges on whether liberal meritocratic capitalism will be able to move toward a more advanced stage, what might be called ‘people’s capitalism,’ in which income from both factors of production, capital and labor, would be more equally distributed. This would require broadening meaningful capital ownership way beyond the current top ten percent of the population and making access to the top schools and the best-paying jobs independent of one’s family background.”

This appears more like a dream than an achievable objective for the liberal capitalism which if one were to look at its merits and demerits appears to have already lost the world to the political capitalism.

M Ziauddin, "Political’ versus ‘liberal’ capitalism," Business Recorder. 2020-01-08.
Keywords: Economics , Social democratic capitalism , Economic conditions , Pakistan’s economy , Economic philosophy , Socioeconomic environment , Liberal capitalism , Capitalism rules , Economic growth , Economic ladder , Political capitalism , Bureaucracy , Corruption , Jurisdiction , France , Germany , China , PIDC , 2020

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