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Will Sri Lanka Shift more Towards State Capitalism as Economic Crisis Worsens?

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by Hasantha Wijenayake-courtesy: LakbimaNews

By Charitha Ratwatte

A recent article by Charitha Ratwatte in the daily “Financial Times”published by Wijeya newspapers provides interesting reading about Corporatism and State Capitalism. It also focuses on various aspects of the current Chinese Corporatist model

The writer describes facets of Chinese model in progress known as the “Beijing Consensus” and ponders about the future of Sri Lanka as the economic crisis worsens.

He also points to straws in the wind indicating the Country moving more towards State capitalism and pinpoints the flaws

As many of you know, Charitha Ratwatte a lawyer by profession has over 30 years experience as a Chief Executive Officer in boh government and private sectors. Ratwatte a former Secretary of the Finance ministry is currently the managing director of the Sri Lanka Business Development Centre.

I am reproducing Charitha Ratwatte’s insightful article on myBlog with due acknowledgement to the writer and the Financial Times.

Here it is Friends-DBS Jeyaraj

Will Sri Lanka Shift more Towards State Capitalism as Economic Crisis Worsens?

By Charitha Ratwatte

Benito Mussolini, the fascist ruler of Italy, during World War II, said that his brand of fascism ‘should be more appropriately called Corporatism, because it is a merger of state and corporate power’Compare this with the dictionary definition of capitalism: ‘A system in which a country’s business and industry are controlled and run for profit by private owners rather than by government’ in a liberal democratic governance environment.

Capital is privately owned and traded, the owners could decide on the best way to utilise it, using the foresight of entrepreneurs and innovative thinkers. Statism on the other hand is a system in which the government involvement in business and industry is overwhelming, but the system of government is democratic or at least not fascist.

Dirigisme

It was Jean-Baptise Colbert, the Finance Minister of France ’s Louis the XIV, who first invented the statist idea of economic interventionism by the state, calling it dirigisme. Over time it has come to be an economic term designating an economy where the state power exerts strong directive influence, and even more, ownership or joint ownership of enterprises. It applies to mainly capitalist economies with strong economic participation by the government.

The shift of power to make decisions on the utilisation of capital from owners and innovators to state officials is the very antithesis of capitalism. Corporatism chokes off the dynamism that makes for engaging work, faster economic growth and greater opportunity and inclusiveness.

In a capitalist economy, the government’s obligation is to set the policy framework within which business and industry can operate subject to law, and by taxation, both direct and indirect, utilise funds raised by such taxation, in an open transparent and accountable manner to supply what economists describe as ‘public goods’ to the population at large.

Such ‘public goods’ are goods and services which are neither excludable – people cannot be prevented from using the goods or accessing the service – and are non rival in consumption – one person’s use does not reduce another’s ability to use it. Examples of such public goods and services would be a tsunami warning siren, a fireworks display open to the public, national security, etc

State ownership

Whether corporatist or statist, state ownership of enterprises which could be run as private firms places a heavy toll on a country’s bureaucracy. The responsibility of managing such State-Owned Enterprises (SOE) is in most cases the responsibility of the country’s professional bureaucracy.

But in some cases, politicians appoint handpicked managers of their political thinking, to manage such enterprises and this leads to what is described as crony capitalism.

An SOE can be defined as a government owned or government controlled economic entity that generates the bulk of its revenues by selling goods and services to consumers. These are commercial enterprises of which the government controls management by virtue of its ownership stake.

The government may even hold a controlling share of the enterprise through departmental holdings or holdings of other SOEs or government controlled captive funds, like the EPF and the ETF.

Such SOEs are not a new idea; Britain ’s East India Company is one of the originals. Today the crisis of capitalism presently causing blight in the world’s economies has resulted in the emergence of the state as a major player in business.

The world’s 10 biggest oil and gas firms, measured by reserves, are all state owned. State capitalisms supporters argue that the system provides stability and growth.

State capitalism

Lee Kuan Yew’s Singapore is the poster boy for state capitalism with a human face. The People’s Republic of China, post Deng Xiaoping, is the much touted model for corporatism, just falling short of fascism by a whisker.

State capitalism can work well only when it is directed by a competent state – e.g. Singapore . Kleptocratic states rip off the system for the benefit of politicians and their cronies.

In Russia , a group described as ‘Bureau-garchs’ – a combination of bureaucrats and oligarchs, mostly ex-KGB types – have the Russian economy in a vicelike grip. A strong, effective and efficient bureaucracy is essential if the state is today to play an effective role. How many countries today have this?

SOEs or corporates in which the state has a controlling share have a very high profile in many of the world economies. Reflections of this are their corporate headquarters buildings which tower over the world capital cities.

In Beijing the China Central Television building towers over the city. In Kuala Lumpur it is the 88-storey Petronas twin towers. In Moscow the head office of the banker VTB dominates the skyline in the financial district. By its side stands the Sberbank tower. In Dubai is the Burj Khalifa tower. In Colombo we will soon have the Lotus Tower which will house the telecommunication regulator.

Creative destruction

The greatest strength of the democratic capitalist model is the space provided in the system for what Schumpeter called ‘creative destruction’. This is a self-regenerating mechanism which allows uncompetitive industries to die and labour and capital to move on to more competitive areas.

Resources and ideas are free to recombine in new forms which will provide goods and services developing market demand requires. There is no artificial keeping alive of irrelevant enterprises by pumping scarce resources, mainly taxpayers’ money, which is the greatest weakness in corporatism and state capitalism.

Creative destruction and regeneration is as organic as human evolution, it sustains an ever expanding, evolving economic process.

It is when the evolution of creative destruction is interfered and tampered with that enterprises are artificially kept alive after they have lost their relevance and there is no demand for their products that the worst aspects of corporatism comes into play.

Public money is invested, political cronies are appointed to manage them and an unending downward spiral begins. State capitalists fear creative destruction. They cannot control it.

Government controlled entities develop cronies within the administration, decision making is skewered, decisions are taken not on economic logic or merit but just to sustain the cronies, the work force and dying businesses.

Taxpayers’ money is the oxygen, at tremendous cost to the taxpayers, who should be getting better services from their tax money, not have taxes being used to sustain rusting industries.

Corporatism at its worst

We saw this happening in the recent past, in the United States with its AIG scandal, the Detroit car companies requesting government assistance and the bail out of banks in the UK, with the Government virtually nationalising banks, in France with the Government rescuing Renault and the PSA Peugeot Citroen, in China with the China Investment Corporation, a sovereign wealth fund, buying shares of Chinese banks on the open market, in Sri Lanka with Pramuka Bank depositors being compensated for taking hazardous risks and the Government appointing managers to a host of financial institutions, all with taxpayers’ money, the trend is clear.

The ‘seen hand’ of the State in the takeover of underperforming enterprises and underutilised assets legislation is an example of corporatism at its worst. But, exceptionally, in the US the Detroit car manufacturers were later sold off at a profit, which was made much of by Clint Eastwood in a superb commercial for Chrysler at half time at the Super Bowl.

China case study

China is a useful case study. For two decades after Deng Xiaoping declared that getting rich was acceptable, China pushed through a series of costly reforms to extract production from the hands of the State, big Government corporations were broken up, reconfigured or closed.

Large industries were very cautiously privatised. Entrepreneurs known as Red Capitalists reigned supreme. They have even been made members of the Communist Party! Shares were sold on foreign stock markets, making them at least nominally subject to the rules of good governance.

Although China still remains a place where companies face heavy direct and indirect State control, there has been dramatic change as China has prospered and broader economic freedoms contributed to unprecedented economic growth and millions emerging out of poverty to the middle class.

While the reforms were being implemented, there was not much criticism from the Communist party and the bureaucracy. But once the economic crisis hit the Western economies, the critics came out into the open; there was an intense criticism of capitalism as industry after industry, which had been privatised, went back to the Government for help.

While banks collapse worldwide, China ’s banks’ share prices have held; analysts suspect that the country’s many sovereign funds have been buying bank shares in the open market to bolster them.

The Chinese Communist Party has realised that its citizens are the engines of sustainable economic growth. Premier Wen Jiabao has said that China ’s State capitalist economy is “unstable, unbalanced, uncoordinated and unsustainable”.

The current Chinese five-year plan makes it clear that the State must transfer wealth from China ’s largest State-owned companies to consumers to ensure that the country is no longer quite so vulnerable to economic shocks from the world economy.

Chinese leaders know that bureaucrats and cronies cannot innovate. The future lies in sectors such as information technology, alternative energy, bio engineering technology and nano technology – sectors which are, by definition, inherently driven by pioneering individual creative innovators, not bureaucratic cronies. Herein lies the lasting strength of democratic capitalism.

Human beings naturally want to improve life for themselves and their families. Free markets have proven time and again that they can empower virtually anyone with an innovative idea. Adam Smith’s ‘unseen hand,’ the self interest of every individual to improve himself, raises the prosperity of all. Except when the ‘seen hand’ of the state stifles and crowds out entrepreneurs and occupies the economic space.

‘Work in progress’

But this conflict in China is very much a ‘work in progress’. China ’s airlines are a case in point; a State monopoly carrier was broken up into three – Air China , China Eastern and China Southern to provide competitive services. There was limited success; coverage across China was dramatically expanded. But the worldwide downturn in aviation has led to all three airlines needing massive capital injections from the State.

The power sector in China presents a similar story; a single monopoly was unbundled in 2002, to foster competition. But when rising coal and oil prices caused pricing problems, the Government imposed a cap on prices; massive losses resulted in the government infusing huge cash injection into the companies, effectively increasing its domination of the companies.

China ’s car industry is also in crisis, even with huge foreign participation, carmakers are getting massive subsidies and grants are being made to encourage buyers of cars.

China was a statist economy which was partially reformed, which is returning to some aspects of Statism due to the economic crisis. However there are exceptions; ZTE China’s leading maker of microchips is one. Zhongxing Telecommunication Equipment Company (ZTE) is projected to be on par with Nokia and Samsung within a few years. It sells in 140 countries; revenues jumped 36% this year.

In 1985 the founder, an icon Red Capitalist, worked as an engineer in a factory owned by China ’s Aerospace Ministry, in the boom following Deng Xiaoping’s opening up of China ’s economy, the party allowed him to open a small State-owned factory. Now they operate like a private company.

At the Boao Forum for Asia, held on China ’s Hainan Island in April 2010, China ’s alternative to the World Economic Forum, the blossoming of China ’s State-owned enterprises was discussed.

The CEO of Tata Consultancy Services observed: “ China is faster in execution, because it is State-driven; they just go after it immediately.” But Professor Xiang Bing, Dean of the Cheung Kong Graduate School of Business in Beijing , said: “SOEs have a disadvantage, the curious mix of officialdom and business gives plenty of room for inefficiency, you have the misallocation of resources, time and money. Maintaining a good relationship with the Government may be more important for the executives than the success of the SOE.”

Sri Lankans know this well. But this Corporatist China model, also called the ‘Beijing Consensus’ of one party rule, an eclectic approach to free markets, a big role for State enterprises, observance of human rights and the rule of law not being a priority, as opposed to the Washington Consensus of an open liberal, good governance, enforceable property rights, private sector-oriented policy, is attractive to more and more emerging economies, not least because China supports them with aid, that comes without Western strings like lectures on good governance and human rights!

Bremmer’s views

Ian Bremmer, President of the Eurasia Group, in his book ‘The End of the Free Market: Who Wins the War Between States and Corporations?’ says: “As China gains dominance on the world stage, more and more multinational corporations will have to rethink their assumptions about competing under its State capitalism model – one in which the Government is the principle economic driver.”

He also cautions that “the China State Capitalism model is robust… because … 1.3 billion people at a per capita income of $ 3,000 still have extraordinary productivity gains that they can wring out of the system.”

Bremmer also points out that “…you’re in a world system where the most important growing economy is not a mature, developed state with a commitment to the rule of law and strong institutions… It is an emerging market where political insecurities are the ultimate driver. Hence, state capitalism.”

Sri Lanka

Sri Lanka , a near command economy in which the private sector is deemed to be the engine of growth, will see more of recourse to State capitalist measures as the economic crisis hits. Given the recent actions of State-controlled captive funds and the placing of political nominees on leading ‘private sector’ boards, the indications are not positive.

Dr. Saman Kelegama of the Institute of Policy Studies, speaking at the launch of the ESCAP Survey for 2010, pointed out that the losses incurred by the CEB, CPC, SLTB, Postal Dept., Railways Dept., SriLankan Airlines and Mihin Air totalled Rs. 45 billion. This is almost 1% of GDP. The country simply cannot afford to continue this litany of inefficient, incompetent and loss-making State corporatism.

Capitalism, operating in an environment of an efficiently and transparently regulated market economy, in a liberal democratic model of governance, has one unique advantage over Corporatism, Statism or any other system. It is that Charles Darwin’s theory of the ‘Survival of the Fittest’ is allowed to operate without limitation.

Losers are allowed to lose out and disappear. Winners have the space to win well, fairly and squarely. There is no propping up of losers with taxpayers’ money, by corrupt politicians, because cronies are running or own the firms. Nor are winners suppressed, oppressed or expropriated, because political opponents own them or because of hallucinated social/political costs. What Schumpeter called ‘creative destruction’ takes place.

Certainly the protection of investors and workers rights according to ILO’s standards and international best practice, an effective safety net for the poor and the marginalised, the protection of patents, trademarks and copy right and the Rule of Law and not the rule of men is essential.

Seeds of destruction

There are two factors within corporatism that are the seeds of its own destruction. The first is the unavoidable tendency of the crony corporate elite to seek rent, i.e. corruption. The state cannot be its own umpire. It cannot self-regulate. Such states implode from within.

The second is that corporatism is taking root in countries which have serious flaws in governance. China ’s crony connections (guanxi) and corruption. Russia ’s nepotism and corruption and the overwhelming influence of the ex KGB ‘bureau-garchs’.

Transparency International rates China 75th in the 2011 Transparency Index, Russia at 143rd! The corrupt elitist victors are the takers. The People’s Bank of China estimates that from the mid 1990s to 2008, roughly 16,000 to 18,000 Chinese bureaucrats in State-owned corporates hijacked around $ 123 billion of people’s money!

Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy, at the National University of Singapore, recently wrote: “For all its flaws and defects, Capitalism remains the best system to improve human welfare.”

Mahbubani points out that what he terms as Western Capitalism, has today been discredited for three reasons. First, lack of good governance i.e. lack of strict regulation and supervision. Secondly, the benefits of Western capitalism were drawn by only a few – the 1%, of bankers and financial service providers that the Occupy Wall Street-ers were protesting against.

Thirdly, the Western capitalists failed to educate their populace on the fact ‘creative destruction’ was an essential ingredient of capitalism and that out sourcing and off shoring of labour intensive work to economies which provided cheap manpower was inevitable. The workers of the Western Capitalist countries would have to upgrade their skills to remain employable.

The bottom line is that you cannot introduce political criteria into commercial decisions, nor commercial criteria into political decisions. The twain cannot meet. As Rudyard Kipling famously said: “East is East, West is West and never the twain shall meet.”

The conjunction has to be at policy and regulatory level. As Daily FT Columnist W.A. Wijewardena quotes John Exter, the founder Governor of Sri Lanka’s Central Bank, “Eventually, the markets will win.”

When will the politicians learn?

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14 Comments

  1. State controlled media, state controlled judiciary and state controlled terrorism. Do we really now want state controlled Sinhalese Capitalism?

  2. Eventually the markets will win… and the Rajapaske regime and its crony capitalists will crash, but by then economic inequality would be galloping and the poor will have the brunt of the crisis and Sri Lanka will be in the middle of new cycle of conflict!
    This is a good contexualization of larger global economic trends and SL in them. Would have liked to see some analysis of the CHILLING effects on the SL economy (not just on FDI) of the Rajapakse Regimes failure to effect genuine reconciliation and its conflictive attitude with the west and Disapora There is an economic calculation in terms of opportunities lost for postwar economic growth due to the regime’s endless fight with the key players in the international community who are also Lankas key trade partners US AND UK including the negative publicity generated for potential tourists. No economists including those at IPS who counted the cost of war have done this.
    There is in general a poverty of POLITICAL ECONOMIC analysis in Sri Lanka for a long time.
    The opposition UNP has poor largely neoliberal economists who cannot do political economic analysis of economic DEVELOPMENT POLICY and this has exacerbated the crisis.
    Finally, Some words on military business models- as part of a declining trend except in Lanka where postwar the military has emerged as a huge corporation – the Military Business model MILBUS as Pakistan Political Scientist Siddiqua termed it would have been appropriate here. Overall a good piece of work!

  3. great article and make all important points with respect of bogus Government runs capitalism.you just wait and see how central bank fail policy on many fiscal matters makes thinks worst.by nature all bogus financial policy by central bank make no censers very soon and price of worst will be paid people not by uneducated policymakers of central bank.how long you can sale the Dollars to depend currency? do you want to secured local rupee bond holders foreign investors at cost to public?.did Parliament have responsibilities to tops this Governor nonce’s and uneducated policies.

    eventually market will win after you loss all foreign reserves and make bankrupt the nation.it will be too late to stop.open eyes idiotic ministers.

  4. Its intersting that Mr. Rattwatte who comamnded the most currupt cronism under the UNP is taling about thses things. Haaaaaa…………………………………………………..

  5. A prominent politician in Australia,recently said, It is the first time in 400 years that the West is going to hand over the mantle of number one Economic Power .to a non White Nation.

    Markets allways win. But do they improve the lot the great majority of inhabitant population in the market dominanted nations?.

    Russia under Putin has moved the country to number 3 spot.after dabbling in the free market turned most Russians into beggars.

    What is 123 Billion in comparison to the Trillion the Govt had to fork out to save the free market operators in the Epitome of Capitalism?.

  6. Very interesting, but the author (CR) seem to suffer from some amnesia of not thinking much (which has never been the property of some people, he had his say for 30 years, ruining what he has put his hand into) and writing “bahubutha” about what is written (even centuries before)_ by others (this property is called intellectual bankruptcy).

    One needs to remember “evolution” is a very slow process. The observers need to persist and persevere (so are a genuine leadership of a country) and position themselves to “observe” them in an unbiased way (with equanimity), then one will see things as they are.

    The author (CR), writes : State capitalism can work well only when it is directed by a competent state – e.g. Singapore

    Those of us who probably lived through to observe the Singapore miracle (and perhaps the same could be said about Malaysian miracle and even Chinese miracle) would know that government there were identified anything but “competent state” then (move your mind back to the 1965-70 period). But having performed the miracle we could say that it was a “competent state”. Having generated 3 trillion of trade surfaces (i.e. enough to bail out the rest of the world financially), who are we not to say (I guess the current rulers of Sri Lanka might also think this way) that China is not a “competent state”. Remember governing 1.5 billion heads is unique enough to call a different system (than the crap that is quoted in the article.

    Think (on your own) before you write would be a good advice (it is never too late). Similarly, it is easier for us to see others errors while we are unable to see our own. Some of us also have very short memories (perhaps it is the depletion of cholesterol).

    Be patient, it will happen, but not thank to you generation of leaders, thanks to young ones who were born to the crap that your generation of (fake) leaders have created. T

  7. Thanks DBS. CR wrote well and deeply analysed the SL economic trends by analysing the trends of CHINA, RUSSIA — . His last words or remarks are thinkable. Eventually , the markets will win ‘ I can say , eventually UNP will win.

  8. Economic wellbeing of individuals as well as society is the root cause of most troubles’.

    I used to see vast amount of motivated (racially) commentators in this page.

    DBS you see the importance of difference of state capitalism -social capitalism etc…

    do our people and commentators have any understanding about
    link between social conflicts and economic policy of a state ?

    if so there should have been much more active participation in this topic.

    lack of comments in this article really shows we are ( I mean WE) VERY POOR IN UNDERSTANDING ROOT CAUSE of social conflicts.

    we will not be able to solve any social issue without proper understanding about social economic policy and its influence in social conflicts.

  9. i concur with the author.any economy if it has to flourish has to have minimal control with a strong regulatory authority which is staffed with independent professionals.despite all the opprobriums that america is receiving it has ged ot strong regulatory mechanism and rule of law.law does not make any difference whether the violator is a billionaire or a pauper as seen in the case of raj rajarathnam.as noted by kishore mahbubani despite all the flaws in capitalism it is the best system where winners are innovators who create value for shareholders at the same time helping society to reduce the poverty.despite the recent ev is ents which has resulted in people losing confidence in capitalism it will bounce back for a simple reason that it is in sync with human desire to earn more money.

  10. Hey guys the latest news is that three soldiers were killed in Jaffna last night.
    At last here is something for the diaspora to celebrate.

  11. [Lee Kuan Yew’s Singapore is the poster boy for state capitalism with a human face. The People’s Republic of China, post Deng Xiaoping, is the much touted model for corporatism, just falling short of fascism by a whisker.

    State capitalism can work well only when it is directed by a competent state – e.g. Singapore . Kleptocratic states rip off the system for the benefit of politicians and their cronies.]

    So therefore we should become a competent state first like singapore.After that we can embrace state capitalism if we want to.At the moment we are a kleptocratic state.I don’t know how our future generations are going to pay off the enormous losses incurred due to the plunder of the country by the politicians and corruption.Today we are ranked 86th out of 182 countries in corruption,while singapore is 5th.Obviously singapore can afford to embark on state capitalism,but if we do we will be buggered.I noticed gota talking a lot about corruption,but action speaks louder than words and i hope he starts doing something about it.Implementing the 17th amendment is vital for srilanka,as it establishes commissions such as for bribery and corruption etc.The present ones all work based on the whims and fancies of the people in power. We need a permanent fix,not temporary ones that rely on individuals,and when they pass off the rotters come back again.The politicians will not allow the 17th amendment whether they are UNP or SLFP because they know it is against their interest and negates the very purpose for which they entered politics,which is to help themselves and their kith and kin.The people should be agitating for these kind of amendments to be implemented,but they are very apathetic and only do so when the politicians themselves organise them for some demonstration or other that serves their own interests.There does not seem to be a peoples movement or organisation in the country which has nothing to do with politicians.One such organisation should be created for the people by the people and with the power of the internet today you can easily do so.It should not be done to topple government because that will create more chaos,only to make governments better and more focused on the peoples needs.

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