Annals of capitalism

Pranab Bardhan

A little over a decade ago, the American model of capitalism was triumphant. The Soviet Union had recently collapsed, recession took the shine off the vaunted Japanese model of the 1980's, the social-democratic models of northern and Western Europe languished in high unemployment and low growth, and the so-called East Asian miracle was soon to be engulfed in a financial crisis.

For the many developing and transition economies in search of a model, there was only one prescription: Liberalize, privatize and copy the Anglo- American institutions of legal, financial and corporate governance.

Today there is less certainty. The technology and housing booms in the United States have subsided. High American living on borrowed Asian money is now widely considered unsustainable; extreme income concentration at the very top with stagnation at the bottom has made the hollowness of the productivity growth particularly palpable for most working people.

Unemployment in the United States and Britain has generally been lower than in much of Europe, but crises looms in health insurance and social security.

Meanwhile, the social-democratic and Japanese models, after some necessary repair, have come alive. Their economies have revived while still keeping most of their distinctive institutional features, including a continuing emphasis on social protection and on a more coordinated style of corporate governance.

There is an increased appreciation of the fact that countries have different political contexts and the bargaining powers of the different stakeholders in the economic system owners, managers and workers vary.

For developing countries, the East Asian model has not lost its influence. The model is characterized by relative equality at first, followed by land reform and mass expansion of education, which helps smooth the wrenching conflicts and readjustments of early industrialization.

In addition, state coordination of private enterprise strengthens rather than stifles the market processes. The phenomenal growth of capitalism in China under pervasive government control has only added to the attraction of the basic East Asian model.

India, another high-growth country, has also not quite followed the economic orthodoxy in a systematic manner, particularly in matters of privatization, deregulation and fiscal deficit management.

In the 2006 "index of economic freedom" compiled by the Heritage Foundation, China and India rank far below most Latin American and many African countries. Yet the economic performance of the latter countries, which did follow the liberalizing and privatizing reforms of the Anglo-American model more faithfully during the last two decades, has been, with a few exceptions, disappointing.

Capitalism in both rich and poor countries has been afflicted by problems of rising inequality and environmental degradation. Globalization has increased anxiety everywhere about job security. This underlines the value of social safety nets in coping with adjustments to market competition.

We need to explore the many ways in which equity can be enhanced without giving up on efficiency. These include expansion of facilities of education, training and health care. In many poor countries the barriers faced by large numbers of people in credit markets sharply reduces the society's potential for productive investment, innovation and human-resource development.

Protest is not enough. It is necessary to explore viable and sustainable ways of constructing alternatives to capitalism.

On the other side, it is important to stress that single-minded pursuits of efficiency are bound to be counterproductive. In particular, a standardized policy prescription that ignores social and institutional diversities or the complexities of a particular society is a recipe for failure.

The accumulated resentment of the large numbers of losers worldwide in the process of globalization is already in danger of triggering a substantial backlash in many countries. The advocates of capitalism should try to protect it from the enthusiasts for any one particular variety of capitalism.

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