Trends by Martin Khor
23 January 2012
Clash of capitalisms in this Dragon Year
Year of the Dragon may symbolise the struggle for prosperity for some,
but others may use this year to challenge what they call state-capitalism
being practised by developing countries, especially in Asia.
the first day of the Year of the Dragon. Like others around the
world, Malaysians hope it will be an auspicious year. Certainly it
will be an interesting one. Perhaps that’s the only certainty about
this coming year of uncertainty.
The new Dragon year will usher in even more intense debate about the
role and the rise of China and of other “emerging economies”.
As the Western countries face gloomy economic prospects, some of their
political elite and intellectuals seem to be seized by fears that
some developing countries, especially China, will be steaming ahead.
Used to centuries of global economic dominance, these advanced countries
are fearful that their leadership will be challenged and even overturned.
This may be the reason for the obsession about China. These days,
there are new books almost every month about the rise of China. Some
deal with its high growth and prospects or with its complex political
Quite a number, like the book “Death by China: Confronting the Dragon”,
are of the view that China is destroying not only the American economy
but the whole world and its environment.
But the fears go beyond China, and incorporate other emerging countries
as well, as seen in the latest issue of The Economist, with its cover
stories on “The rise of state capitalism: the emerging world’s new
The magazine describes the 88-storey Petronas Towers soaring above
Kuala Lumpur, as well as the China Central TV building in Beijing
and the VTB bank office in Moscow, as monuments to the new hybrid
corporation – backed by the state but behaving like private-sector
The Economist’s editorial admits that for emerging countries wanting
to make their mark on the world, state capitalism has an obvious appeal,
giving them the clout that private-sector companies would take years
But its dangers outweigh its advantages, says the magazine. For their
own sake and in the interests of world trade, the huge holdings should
be unwound and handed over to private investors.
Economist however also admits that this hybrid form of “state-directed
capitalism” company is not new, and cites the East India Company.
This was the huge conglomeration that took over many Asian countries’
economies, while the English government made use of its gunboats and
colonial rule to back up the EIC but other British companies.
The magazine also cites the United States after its war of independence,
Germany in the 1870s, and Japan and South Korea in the 1950s as examples
of rising powers using the state to kick-start growth.
There is thus recognition that the rise of today’s advanced countries
was based on the state’s strong support in their companies’ emergence.
These companies have dominated the global economy for decades and
in some cases centuries, backed up not only by subsidies, cheap credit
and other policy measures but also by their governments’ political
and military force.
The history of colonialism shows how the companies of the West combined
with the political and military might of their governments to take
over the resources and markets of the colonised parts of the world.
In the past three decades, most developing countries have been told,
through IMF-World Bank structural adjustment programmes, to give up
the role of the state to direct their economies and instead rely entirely
on the private sector.
These policies did not succeed as the domestic private sector is weak
or even non-existent in many countries. In poor countries, foreign
companies were not interested in coming in except in the mining or
However, several other developing countries, mostly in Asia, took
on a different model. Their governments believed in playing an important
or even dominant role in the development process.
At first these governments owned companies that they ran like government
departments, and this was nor efficient. This model was changed
in some countries to one where the state can own or partly own companies
that are then run on a commercial basis. The state can also assist
private companies to grow.
The government-linked or totally privately-owned companies are supported
by the framework of an industrial development plan, an agricultural
plan and a plan for selected service sectors, and a range of policy
measures including subsidies, credit, tax breaks, technological support
such as research and development grants and management programmes.
Government investment holding institutions like Khazanah and PNB in
Malaysia or Temasek in Singapore have been set up as crucial components
of this framework.
of these hybrid government-linked companies may be spun off to be
totally privately-owned companies in future. Some companies may remain
totally government-owned. And some may remain as hybrids.
It is true that if governments do not manage the hybrid between state
and commerce well, there will be failures. However, the absence of
an activist state that involves itself in giving a direction and coordination
to the development process is also damaging.
Success therefore depends on a development-oriented state, that manages
its development functions well. And this includes the management
of some hybrid economic institutions.
The increasing criticism by Western intellectuals and politicians
of “state capitalism” is not confined to academic observations. The
US administration and Congress are contemplating legislation and action
to place extra tariffs on Chinese products not only on anti-dumping
grounds but also that they have been subsidised and that China is
not a market economy.
The Congress is also discussing whether to slap tariffs on Chinese
products on the ground that China’s currency is manipulated and under-valued.
A time may come soon when a Chinese product may be simultaneously
slapped with four types of tariffs – the normal one, and one each
on grounds of dumping, subsidy and currency manipulation.
While the focus now may be on China, other developing countries may
be faced with the same actions based on the same reasoning, that these
countries are unfairly helping their companies through policy measures
that represent state-capitalism and industrial policy.
Moreover, the US and Europe and now negotiating free trade agreements
with developing countries that contain clauses or even chapters that
seek to prohibit or restrict the practices of government-linked companies,
or the provision of subsidies and preferences by government to local
The Korean economist Ha Joon Chang wrote a famous book “Kicking Away
the Ladder” to describe how developed countries made use of policies
that made them rich, and now want to prevent developing countries
from doing the same and thus are seeking to prohibit these same policies.
The clash of capitalisms and the clash between developed and developing
countries over what policies are legitimate and which should be banned
will intensify in this year of the dragon.