Illiberal Capitalism

In the past decade we have seen the emergence of the new global economic powerhouses- China, Brazil and Russia. The general consensus amongst political scientists is that these developing nations will gradually evolve into the Western model of a liberal capitalist economy. However, contrary to this belief, it seems that China, Brazil and Russia, to different extents, have adopted an economic model based on state, rather than liberal, capitalism. This new form of state capitalism has created vast state-owned enterprises which pose viable competition to private Western enterprises. This hybrid of state and private sector control is certainly an effective means for developing nations to play catch up with the West- but will this model provide the sustainable economic development that these countries ultimately need?

State capitalism refers broadly to an economic system based on capitalism where large corporations are either wholly or partly owned by the government. The model is not a new phenomenon- for the most part of the 20th century Western economies heavily employed state intervention, such as in Europe, which gave rise to the creation of welfare states. Since the 1970’s however, Western economies have become a lot more liberal- leaders such as Thatcher and Reagan introduced economic policies such as deregulation and privatisation which freed up the market. However, many view the 2007-2008 financial crisis, that engulfed most of the developed world, as the end of the reign of this ‘free-market triumphalism’.

Whilst turbulence amongst liberal economies continues, the GDP growth rates of the state capitalists Brazil, China and Russia have remained stable. A feature that makes this new form of state capitalism stand out is the management of state owned companies. Over the past 20 years, the state capitalist governments have pruned their portfolio of enterprises, but have held back a few businesses in which they wish to heavily invest, in order for them to become national champions on a global scale. The state capitalist governments believe that these SOE’s (state owned enterprises) combine the best features of the state and the market.  For example, the benefits of long term planning of the allocation of resources and an efficient relationship with the government are combined with the efficiencies of the market: being listed on the stock exchange and having professionally trained managers in charge. This is opposed to the pre-WW2 state capitalist model where companies were wholly nationalised and were run by inexperienced government bureaucrats.

Another advantage of this model is the fact that revenue is often reinvested into national infrastructure. In Western states however, private companies may not be incentivized to invest in infrastructure unless given government support. Whilst the UK is struggling to find funds for the new high speed railway HS2 to desperately enhance its dilapidating rail network, China has already built 8,123 miles worth of high-speed railway, which according to the BBC, is more than the rest of the world’s high speed rail track combined. This is achievable through the large revenues that the biggest SOE’s turnover.

One may think that these state run companies may suffer from monopolistic laziness, however these companies are far more dynamic than the old style ‘socialist mega-firms’. SOE’s tend to have both an outward vision to expand globally, as well as an inward, domestic vision. As opposed to previous forms of SOE’s which sought to protect themselves from the threat of globalisation, current SOE’s rather embrace globalisation in order to force themselves to continually innovate. Additionally, state capitalist countries have the benefits of being able to bunch their SOE’s horizontally in order to exploit each other’s resources and contacts as they are all ultimately owned by the same institution- the government.

On the other hand, state capitalism is a breeding ground for corruption and cronyism (partially to long-standing friends) which threatens its chances of success. The major countries that employ state capitalism are politically problematic- Russia is an astounding 143rd on the world’s corruption index, whilst China and Brazil are 75th and 73rd respectively. With power in so few hands, it is important that those who are in power are reliable politicians- this certainly cannot be said for Russia.

In addition, there is the question of fairness when it comes to state capitalism. It is a hard feat for any private company to become richer than the state as they will lack vast governmental support and subsidies from which SOE’s greatly benefit. This is likely to stifle lower level entrepreneurship. Xiaonian Xu, an economics professor at the China Europe International Business School comments that “nobody can get in”, when referring to the nature of the state dominated Chinese market. He also expressed further doubts about the economic model, explaining that returns of capital investment on SOE’s would be significantly lower if it weren’t for government subsidies- this suggests there are great inefficiencies within these enterprises. Moreover, due to the oligopolistic nature of the state capitalist market, there is a tendency for SOE’s to overcharge.

There is also the question of foreign investment. Foreign investors may fear that as the majority shareholders of the SOE’s are the government, SOE’s will try and fulfil social policies of the government rather than the business goals of the shareholders. Even more worryingly, there is the fear that government bureaucrats may instantly change policies in the business that could adversely affect them. There is certainly less predictability for third parties in this system as the companies are markedly less transparent than Western firms.

Western economists seem very sceptical about the success of state capitalism- economic historian Niall Ferguson says that: “State capitalism is not China’s solution to the problem; it is China’s problem. The future of the global balance between the West and the rest will depend on whether China solves that problem…” So far, state capitalist methods have been a success story for Brazil, China, Russia and the Arab world. This is evidently shown by four of the biggest global companies being state owned. Regarding long term economic development, there is no real evidence to suggest that this success won’t be sustainable. However, this is dependent on the fact that the governments maintain the right formula, constantly evolve to the global market and don’t become too overbearing upon their respective SOE’s.

Contributed by Kapil Vijh


The Tuition Fee Rise: Betraying a Generation or Protecting Their Future?

In December 2010, the controversial austerity measure was passed to increase the student tuition fees cap from £3,290 to £9,000. The policy means that this year, 38% of English universities will charge students the maximum rate of £9,000, and the remaining universities will still increase their fees considerably. The principally Tory-backed legislation has received an outpour of objection over the past year, most strongly channelled through the nationwide student protests which are still taking place to date. However, as future undergraduates, how much will the changes worsen our financial future? The sovereign debt has to be ridden of somehow, but was this Cameron’s only choice to protect Britain’s future, or was there a far better alternative?

The increase in tuition fees poses several potential issues. The obvious concern for many students is the large amount of debt with which they will be burdened after education. To tackle the higher debts from raising the fees, the government is implementing a new current student loan scheme whereby students will repay the 9% of their annual salary when they earn over £21,000, rather than the previous £15,000. However, this measure to facilitate the repayment of higher loans is not enough to help the students manage their huge overall debts that are likely to average around £53,000. In the bigger picture, with higher debts come higher interest payments, which reduce the dispensable income of the post-graduates. This of course will slow down Britain’s economy, as its overall demand will have shrunk.

Another likely issue that the new tuition fees present is the deepening of social immobility within society. For a country that prides itself in allowing those from the bottom rung of the economic ladder to reach the top, a raise in fees would create a block to the obvious way of getting out of low paid jobs.

Although undergraduates will not have to pay a penny during the course, in economic conditions where the unemployment rate is steadily increasing (2.62 million currently) and the job market is contracting, it is not taken for granted that universities will secure a profession straight away. Consequently, potential students from poorer backgrounds will be less likely to attend university lest they are not able to handle the student debt after their degree.

Despite the immediate negative implications, we must not ignore the long-term motives behind the implementation of the rise in fees. Britain reached a trade deficit of 10.3% of GDP in 2010 which ranked them 163 in the world between Nepal and Greece, and indicated huge over spending. In the long run, the UK needs to maintain itself as a competitive economy in the world market, and cannot do so sustainably if it were to carry its huge debt. Doing so could result in Britain being in a position similar to Greece, on the verge of default, so it is without saying that it is imperative that the debt be paid off.

Nevertheless, it is worth questioning whether the government is ignoring an even more efficient alternative to tackle the higher education system. The Conservatives are adamant in raising the tuition fees in order to deal with Britain’s debt. However, an alternative could depend on the transformation of thousands of the skill based degrees to more industrial based diplomacies. This could be beneficial in many ways. Apprenticeships are less costly for the state to run than degrees, therefore the government would save money which could be used to pay off its debt. The vocational nature of the apprenticeships would be likely to increase the employability of each student far more than certain academic degrees. This concept is very similar to the current German higher education system where specialised vocational schools known as Berufsschule are available as a viable alternative to university. Students work in their desired industry for 2-3 years on a part time salary and at the end of the course they are ready for a career up to a low management post. The scheme has successfully diversified Germany’s economy; the same method could too diversify Britain’s economy from one specialized in services to an industrial-based economy as well.

The compromise between spending cuts and making higher education available to everyone is a difficult one to formulate. Yes, the tough austerity measure to raise the tuition fees is likely to remove a large burden off the government, and in the long term this will maintain Britain’s economic competitiveness. However, it is certainly not the best way to bring about a reduction in Britain’s debt. Via this method, a whole generation will suffer from great financial difficulties and it is arguable that the economic effects of this could counteract the government’s long term plans to amend the economy.

Contributed by Kapil Vijh