Illiberal Capitalism – Freedom foregone?

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Capitalism and Freedom is a long-running theme (indeed it’s the title of the late Milton Friedman’s book: you can guess what his view was). In today’s FT Gideon Rachman sums up the view of many a decade ago (and epitomised in Francis Fukuyama’s book The End of History). “The chain of thinking works something like this. Communism failed as an economic system. Russia and China have had to embrace free markets. Economic freedom will, in time, produce political freedom”, writes Rachman. Countries that democratize should benefit from higher inward investment (and more growth). They can draw on more of the world’s stock of (commercial and technical) knowledge without worrying about people’s access to knowledge about their country’s politics (see a paper by Tony Addison and Almas Heshmati here).

But the capitalism and freedom thesis doesn’t seem as self-evident as it used to be. Many Russians equate the opening up to democracy with their own hardship as the economy simultaneously went through an often-chaotic liberalization and privatization process (creating today’s wealthy oligarchs, while throwing many workers into the street). Russia experienced the sharpest fall in male life expectancy of any peacetime economy in the early 1990s (Russia’s social crisis during the transitions is documented in the UNU-WIDER book by Andrea Cornia and Renato Paniccià).

The oil price boom of the last few years has provided President Vladimir Putin with abundant revenues; one of his first steps was to raise the state pension (pensioners were impoverished by the transition). Many Russians do not want to return to the penury of the late 1990s. So, prosperity combined with political authoritarianism has gone down well with many of the voters. Spatial inequality remains high with many remoter areas in deep poverty (go to this paper by Stanislav Kolenikov and Anthony Shorrocks at UNU-WIDER) but enough people are benefiting from the last few years of growth to give President Putin a strong power base (aside from his crackdown on political competitors).

In China, the economic transition was much better managed; “walking across the stream while feeling the stones under foot” as the proverb goes. Reforms in the agricultural system in the first phase from the 1970s onwards delivered rising food output, declining real food prices, and rising incomes (while the land reforms of the 1950s, often brutally conducted, provided something of a safety net for the eventual economic transition). The major drive into the global manufacturing economy then created new sources of income. China has thereby created a unique form of state capitalism. Vietnam took the lesson to heart, and is following a similar trajectory: economic liberalization (mostly) and tight political control. Vietnam’s chronic poverty has, for the most part, fallen sharply (for CPRC poverty research on Vietnam go to here).

Rising prosperity delivers support for the one-party state, leading to few challengers (and China has locked up plenty of journalists and monitors Internet access: will this blog make it past the ‘Great Digital Wall’?). China’s reluctance to let the currency appreciate – a source of tension with Washington – reflects a desire to keep growth rolling at an annual 10 per cent (although the currency policy is now relaxing somewhat to contain the inflationary pressures of growth)

Regional grievances have so far been contained, and the Party has moved over the last two years to address the discontent in rural areas of people who feel they have missed out from the boom. High growth is delivering ample tax revenues for the Party to now patch-up the alarming gap in health-care provision that opened up over the last decade.

A pressing challenge is still to reduce poverty in China’s western provinces (UNU-WIDER analysis of China’s spatial poverty is found here). Increasingly warm relations with neighbouring Russia provide part of the solution: expect to see some big Chinese-Russian initiatives in infrastructure to link up new economic zones in China’s poorer provinces with markets in Europe and Japan through better land transport routes (the ‘silk road’ is back).

Rachman’s points out the irony of it all: “In China, hopes that a flourishing private sector might provide an alternative source of power to the Communist party have so far not been realised. On the contrary, the party’s stake in large, cash-generative state monopolies has led some to joke that it is now ‘the world’s biggest holding company'”.

So, for the moment ‘illiberal’ capitalism is gaining traction. The neat link between capitalism and (political) freedom appears to be broken. We wonder what Milton Friedman would have thought of it all.

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