The Western world has faced a debilitating economic crisis since 2008 which has sapped confidence in the West’s way of doing business. Bill Clinton wrote a hopeful op ed in the Financial Times recently suggesting that as our world and economies evolve, economic leaders have to rethink the relationship between economic and social challenges so that benefits and opportunities are available to more people. Clinton ended his piece by stating that the “most effective global citizens will be those who succeed in merging their business and philanthropic missions to build a future of shared prosperity and shared responsibility.” Another well regarded economist Hernando de Soto suggests that the brilliance of western capitalism was because “It gave us the best knowledge to explore economic combinations. Capitalism does not need to be rethought or re-invented. It simply has to be rediscovered.”
While these soothing words are comforting, governments and the private sector have a huge task in getting the Western economies out of the doldrums. In the US there are some early signs – the upswing in the growth rate in the last quarter – that the recession may be ending. Let’s hope that the indices in the current quarter will reinforce the trend. The EU leaders (minus the UK and Czech Republic) who have signed on to a new fiscal austerity pact also seem to be determined to put their economic house in order. It is crucial for the Western economies because of the interdependence of their economic systems to see the EU regain its footing. At the very least Merkel and Sarkozy the two main EU players are making a determined effort to cut the Gordian knot of sovereign debt afflicting Greece, Portugal, Ireland, Spain and Italy. In the new Italian Prime Minister Mario Monti, they have found a fellow traveler who has indicated a willingness to take tough and unpopular austerity measures to shore up the tottering debt ridden Italian economy.
Finally, The Economist has cast a critical eye on state-directed capitalism in the emerging markets of Russia, China and some other countriesThe world’s ten biggest oil and gas firms are state owned, state backed companies account for 82% of the value of China’s stock market and 62% of Russia’s. The Chinese according to The Economistthink that they have redesigned capitalism to make it work better. Brazil and South Africa are also flirting with this model which according toThe Economist has weaknesses; when the government favors one lot of companies the others suffer. The Economist concludes that the practitioners of state capitalism need to start unwinding their huge holdings in favored companies and handing them over to private investors. “If these companies are as good as they boast they are, they no longer need the crutch of state support.”
I however am skeptical if The Economist’s advice is going to be heeded any time soon by Russia, China, Brazil and others. State capitalism is here to stay for the time being at least as a variant of the classic free enterprise model.