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In China a majority of the economy is in private hands, but the government retains a decisive role, setting the long-term direction, and intervening in critical sectors and at critical moments. This is Chinese model of ‘state managed capitalism’ or what the proponents of the World Economic Forum call stakeholders’ capitalism. And it has been found to be highly successful as one could see the meteoric rise of China into a global economic giant within a matter of four decades. The fully awakened dragon of the East is today challenging the US, the global hegemon which has been lording over the world economy now for over a century.

Indeed, a number of variants of this kind of ‘capitalism’ have been the foundational basis of the economic policies that had underpinned the spectacular economic progress achieved by most of the East Asian Tigers led by Japan since around 1980 without, of course most of them losing their respective democratic credentials. In the case of Japan, it is the permanent government comprising a highly competent and socio-economically well versed civilian bureaucracy that governs the country while the political governments mobilise public opinion in support of the policies being developed and implemented by this steel-framework of civilian bureaucracy.

In the case of Pakistan, that is exactly what we have also been doing but the permanent government in our case has remained in the hands of those who by training were not suited for the task. Therefore, the consistent failures, even after this steel framework having been on the job since around 1979 - sometimes upfront and at other times working from behind the scene and of course, in the process, consistently losing our democratic credentials, specially whenever this group tried to rule upfront like General Zia did for 11 years or General Musharraf for 8 years. And all these years our politicians have had the unenviable task of mobilizing public opinion for a security state selling it, however, as a social welfare one through misleading spins.

Unfortunately, the World Bank/IMF-trained economists that we were saddled with very early in the day instead of closely studying and learning from the East Asian countries like South Korea (which is said to have copied our first five-year plan) which have retained their democratic credentials while practicing classical models of ‘state managed capitalism’ of various hues, let our economic policies be dictated by the magic of the (free) market which led us straight into an ever ballooning debt trap making us perpetually dependent on foreign dole.

We had also refused to learn from those social market economies of capitalist Western Europe like Denmark, the Netherlands or Germany where governments, companies and unions to this day work together in an institutionalized form of stakeholders’ (state-managed) capitalism without losing their democratic credentials. And countries such as New Zealand and Singapore are said to be experimenting with their own stakeholders’ models.

And over the past decade, Vietnam has emerged as Southeast Asia’s most intriguing economic story because economic restructuring has brought to this country impressive gains in wealth, trade, and investment — all while leaving the country’s fundamental power structure (state managed capitalism) largely intact.

Other emerging markets in recent years have started to follow in the slipstream of China. Either the Asian giant became their largest export market, as China’s relative lack of natural resources meant that it developed a massive appetite for imports. Or, as is the case for countries such as Vietnam, China offered a development model that they in turn could adopt.

Pakistan’s private sector has consistently failed the nation. Not that, the public sector has in any way demonstrated a better record. In fact, both have been in a race to outdo the other. And whatever little wealth the two created, they siphoned off most of it and took a good part of it out of the country and parked it in off-shore safe havens and what was left was injected into the ever expanding domestic informal economy.

Our private sector not only evades taxes but it also pilfers utilities like gas, electricity and water. And over the last four decades the institution of our civil service has largely been rendered incompetent, inefficient and corrupt to the core. But with the right kind of political leadership at the helm capable of inspiring the nation as a whole this very institution can be reformed without much loss of time into a largely competent, dedicated, honest and conscientious public service entity. It is time, therefore, for our socio-economic policy makers to draw plans to gradually turn our economy from the wasteful free market to a market managed by the state while adhering strictly to democratic principles.

In this regard, digitalization of the governance aspect is said to hold the potential to turn the civil bureaucratic network into a well-oiled and competent machine operating the permanent government using the system of state-managed capitalism, with most of the corruption holes digitally closed. Several countries in Emerging Asia have lately taken decisive steps to digitalize governance. Technical and vocational education and training (TVET) can play an important role in the up skilling and reskilling of civil servants. By expanding digital governance gradually on the basis of felt need and technical capacity, Pakistan can, in due course of time, do away with the incompetent and dishonest lot that now man our bureaucratic network replacing it with a competent network of civil servants guaranteeing that the system of state-managed capitalism would benefit all sections of society equitably.

Peter Vanham, Head of Communications, Chairman’s Office, World Economic Forum and Johnny Harris, Journalist, filmmaker and co-founder, Bright Trip Inc. (After the rise of the West and Asia, we need a better form of capitalism-published on Jan. 28, 2021) have put the matter in its proper context by tracing the ups and downs of the world economy over the last 75 years:

It was only after the World War II ended in 1945, that a ‘golden era of capitalism’ took off in the West, and the fruits of economic progress were widely shared. The fact that there was a great sense of solidarity helped, as did the labour-augmenting nature of technology. As a result, blue-collar workers thrived, the labour share of GDP peaked, and companies and government did well, too.

Meanwhile, a different kind of capitalism started to gain the upper hand. University of Chicago economist Milton Friedman postulated in 1970 that “the social responsibility of business is to increase its profits” – and nothing else. It contrasted with the view where companies were a social entity as well as an economic one, deeply embedded in society, consulting with its stakeholders.

Friedman’s view, namely that of “shareholder capitalism”, ultimately won out, and as a result, more and more companies pursued short-term profits and dividends over longer term value creation. In many Western economies, the power of unions declined and the intervention of government in the economy receded, just as companies in general, and the financial sector, in particular, grew larger.

Finally, both trade and technology continued their advances, leading to an ever more globalized and connected world. Those trends had been largely beneficial in the early postwar decades, boosting economic growth and wages. But as the nature of capitalism changed, a more unfettered form of free trade, alongside increasing market concentration, led to greater economic inequalities.

According to the two authors some of the same shortcomings that surfaced in the Western economies starting the 1970s and 1980s, emerged in China and other emerging markets in recent years. For instance, initial inequalities in terms of housing, education, work or capital exploded alongside China’s economic and technological development. A similar evolution took place in other major emerging markets, such as India.

The rising economic inequality, the authors believe, should make the world reflect about whether it needs another sort of capitalism. They call this system as stakeholders’ capitalism. The stakeholder model, a variant of state capitalism, is one where companies optimize not for short-term profits, but long-term value creation, taking into account all of their stakeholders.

“It is also a system where companies, government, civil society and international organizations are recognized as equal partners as in social market economies, and where they all pursue a common goal: the well-being of people and the planet. It would prevent economic inequality to get out of hand in the way that it did. And it would make care for the planet a much greater priority than it is today.”

Making the turn from ‘shareholder’ capitalism of Milton Friedman, to ‘stakeholders’ (state) capitalism, would certainly be a challenging feat. It would require companies to change their long-term objectives, include other stakeholders, specially the state, in their decision-making, and adopt new measures of success. And it would also require responsive and responsible governments, whose members consult both with other stakeholders and their global peers.

Copyright Business Recorder, 2021

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