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A taxonomy of state capitalism

The developmental phases of Russia, Kazakhstan, South Korea and Singapore - a comparative institutional analysis

by Axel Wölk (Author)
Thesis 336 Pages
Series: Emerging Markets Studies, Volume 7

Summary

What is the economic order of state capitalism? Furthermore,how can its significant performance differences be explained? The firstquestion is tackled with the help of New Institutional Economics by developinga model of state capitalism. This topic is furthermore dealt with in Chapter 3 wherea taxonomy of state capitalism is presented. This chapter already explains someof the performance differences. In the last chapter with the help ofsemi-structured interviews and literature surveys – in four case studies –propositions are forwarded as to why state capitalist orders vary so widely intheir performances. Two points stick out: the quality of the bureaucracy aswell as a varying degree of commitment of the political leadership to adevelopmental course.

Table Of Content


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List of Abbreviations

BTI Bertelmann Transformation Index

CEO Chief Executive Officer

EDB Economic Development Board

EPB Economic Planning Board

et al. et alii

FDI Foreign Direct Investment

GCC Golf Cooperation Council

GDP Gross Domestic Product

GIC Government of Singapore Investment Corporation

GLC Government-linked Corporations

GNI Gross National Income

HCI Heavy and Chemical Industry

HDI Human Development Index

i. e. id est

ICT Information and Communication Technologies

ILO International Labour Organization

KPI Key Performance Indicators

MNC Multi-national Corporations

MOF Ministry of Finance

NIC Newly Industrialized Countries

NIE New Institutional Economics

NGO Non-Governmental Organization

OECD Organization for Economic Cooperation and Development

PAP People’s Action Party

R&D Research and Development

SASAC State-owned Assets Supervision and Administrative Commission

SME Small and Medium Enterprises

SOE State-owned Enterprises

SPIK Spezialni Investnij Kontrakt

SWF Sovereign Wealth Funds

TFP Total Factor Productivity

UNDP United Nations Development Program

WEF World Economic Forum

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1 Introduction

“History is the unfolding of miscalculations.”

Barbara Tuchman

Abstract

In this introduction the research question is formulated and the scientific relevance of analyzing the phenomenon of state capitalism demonstrated. As a matter of fact, the research question can be formulated as follows: “What is state capitalism and how can its profound performance differences be explained?” This topic is to be tackled with the theoretical framework of New Institutional Economics (NIE). So far, in the literature no theoretically based definition of state capitalism has been given and the literature is also largely reticent on reasons for the performance differences. In the course of this introductory chapter there are also antecedents of state capitalism and a short synopsis of the developmental trajectory of Russia and China illustrated.

Keywords: Research question, Performance differences, New Institutional Economics, Developmental trajectory of Russia and China, Antecedents

1.1 Overview

With the fall of the Berlin Wall in 1989 and the demise of the Soviet Union in 1991 there seemed to be no alternative to a market capitalist economic model anymore. In every conceivable way, the possibility of erecting a communist economic and political rule seemed to be outmoded. Some observers even saw a new era coming, where there was no competition between economic systems.

In this regard Fukuyama (1992) even proclaimed the end of history. He argued that market capitalism will be the sole surviving economic order until the end of mankind. In a rather similar fashion Diamond (2018) presented a theory that proclaimed that the course of history is to an overwhelming degree defined by our biology. This extended even to Marshall (2016), seeing topography as providing for the rising and failing. For instance, the rise of China escalating from around the millennium cannot be accounted for with theories of among others Fukuyama. It is especially, the rise of China and its growing competition with the US throughout the world that has highlighted grave differences in the respective economic systems of those rivalling two globally dominant nations (see Dow Jones, 28th of June 2019).

Overall, the economic systems of the US and most other Western societies differ from those of a number of other countries. Similar to the era of the Cold War both sides are convinced that their economic system is superior to the other ←18 | 19→one. This time the economic system of state capitalism competes with market capitalism. Countries such as China and Russia promote their politico-economic systems in foreign countries similar to market capitalist countries such as the US, Germany or Great Britain propagating their orders abroad. This becomes evident in Africa, where both sides seek to convince respective regimes of their economic system. In a number of instances, foreign aid is made conditional on adopting elements of the politico-economic order of the donour country.

Thus, a new rivalry between two politico-economic systems appears to emerge again. Market capitalism seems to be well analyzed and understood, since it has been in the focus of economists at least after Smith (1776) dealt with the “wealth of nations”. But for state capitalism the literature appears to be rather scant. In the same vein, the entire concept of state capitalism is characterized by a high degree of fuzziness. It is one of the main aims of this study to increase clarity of what state capitalism is and how it differs from market capitalism.

First of all, it is essential to note that state capitalism is a global phenomenon with a number of commonalities among countries adopting this economic order. At the same time, structure, policies, but especially economic performance of this economic order differ significantly between the respective countries. This does not only relate to the growth rates of real gross domestic product (GDP), but also other development indicators such as income and wealth distribution, life expectancy, literacy, a health indicator such as infant mortality and poverty rates. This divergence could possibly be the outcome of variations in the economic orders of the respective state capitalist countries. So, the research question that is posed is the following: What is state capitalism and how can its significant performance differences be explained?

In the course of this study, before this question is tackled, there is subsequently a comparison of Russia and China as typical examples of state capitalism with widely diverging development trajectories. Afterwards antecedents of modern state capitalism are identified. For reasons of space looking back at prior forms of state capitalism will be done in a rather concise manner, but sufficiently comprehensive to underline that state capitalism is not a completely new phenomenon.

In order to seek for answers to the research question a theoretical basis is needed. Here elements of New Institutional Economics (NIE) are chosen. This is due to the fact that in state capitalism institutions play such a crucial role. In general, there are numerous rules and the respective economies are highly regulated. By the same token growth, or more generally development, hinge crucially on institutions. Since it is the aim of this monography to relate structures and policies to performance, an institutional approach is all the more warranted.

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Generally speaking, state capitalism is far from a system with a minimalist or Nachtwächter state, where the corporate sector acts largely unconstrained. Markets do not work frictionless. Transaction costs are ubiquitous in economic systems, but tend to be even higher in state capitalism with its less perfectly functioning markets compared with market capitalism. In order for markets in state capitalist countries to function at all the state needs to provide the regulatory setting or order policy, but also intervenes into the economy quite frequently and significantly with process policy in the terminology of Eucken (1990). In order to analyze these rules and interventions it seems to be inevitable to apply an institutional approach.

For this purpose, different elements of NIE are applied. First of all, institutions need to be defined, but also their functions and their role in institutional change are of quintessential importance. Since the research question relates to performance and therefore development, it is essential to understand how institutions changed in the course of time. Performance differences appear to be at least partially the outcome of differences in institutional change.

After the introduction and the theoretical part, the next section deals with state capitalism itself from the viewpoint of previous literature. The state of research is illustrated. It will be shown, how state capitalism is looked upon in the literature. This entails different concepts of state capitalism. Numerous scientists have defined state capitalism differently and this includes the fact that they have placed divergent emphasis on central elements of state capitalism. After this comprehensive look into the literature, it becomes evident what state capitalism is in the eyes of different scientists. As becomes obvious by then, no scientist has so far stringently applied theoretical tools in order to analyze state capitalism. So far, no politico-economic model for state capitalism exists, let alone in an NIE setting.

Basic elements of NIE are then to be included in the subsequent models of market and state capitalism. Here the social order approach of North et al. (2009) with mature natural states as examples of models for state capitalism is integrated as well. In this regard, it will be argued that the relatively lower degree of the rule of law is the most evident difference between state and market capitalism when looking at the institutional framework. Based on this difference other key dissimilarities emerge, helping to explain how constituting factors differ from market capitalism. For reasons of juxtaposition a model of market capitalism is provided as well as a reference model and differences as well as similarities are highlighted.

This is one of the key aspects, where this study seeks to contribute to existing research. Based on a NIE approach it theoretically defines and explores the basic ←20 | 21→characteristics of state capitalism. Therefore, the constituting principles of state capitalism are to be identified, differences between state and market capitalism are observed and commonalities as well as cleavages of different variants of state capitalism are to be identified. Here such factors as market protection, innovativeness, state ownership and state financing are taken into account.

Concerning bureaucratic capacities and a penchant for industrial policy state capitalist countries differ from market capitalist ones, too. The same holds true in general for institutional divergences. But at the same time state capitalist countries allow for the coordination mechanism of the market with an acceptance of private property rights. These seven elements of state capitalism are to follow from the model of state capitalism. In this sense state is differentiated from market capitalism as well as socialism and thereby an insight should be gained, as to what state capitalism is in the reasoning of this study.

In a second step, with regard to significant performance differences among state capitalist countries, which have rather heterogenous structures, it should be established, how the respective forms of state capitalism are constituted. As mentioned above, it is the aim of this monography to give explanations as to why state capitalism worked in a number of countries and in a number of other countries obviously not. Here with regard to methodology a qualitative – interview-based –, grounded and comparative approach is chosen. In order to achieve this, it is first of all essential to build a taxonomy of different forms of state capitalism.1 This taxonomy will be based on four constituting principles. As a matter of fact, this approach serves to increase the degree of the taxonomy’s theoretical foundation, since the constituting principles are derived from the previously developed model.

It is a key goal of this project to develop a varieties of state capitalism proposal. In this regard, the seven constituting principles are applied to explore diverging structures and policies in respective state capitalist categories. In the end, typical archetypes of state capitalism shall be identified. In all probability, single state ←21 | 22→capitalist countries do not fit perfectly into one of the groups, but there is to be an evident proclivity for a country to plausibly fall into one of the categories.

After having differentiated state from market capitalism and developed a taxonomy, these concepts are to be applied to the real world. Therefore, it will be assessed, which countries among upper middle income countries of the World Bank Development Indicators are state capitalist and which ones are not. This approach is chosen for reasons of scope. Taking into account all countries of the world, would exceed the scope of this study by far. As a matter of fact, research (see for instance Bremmer 2010 and Kurlantzick 2016) hints to the fact that state capitalist countries are significantly overrepresented among middle income countries. Then, in an ultimate step based on the idea of different varieties of state capitalism the economic performance of separate state capitalist groups will be compared.

Thus far, there is a short-coming in the line of argumentation. The respective forms of state capitalism are derived from a number of figures and a first qualitative approach. These findings need to be substantiated through a more thorough input. For reasons of scope and space this analysis needs to be confined to a limited number of cases studies with countries from separate varieties of state capitalism. Here the four countries of South Korea from the 1960s to the 1990s, Singapore from the 1960s, Russia and Kazakhstan from the 1990s are chosen.

For this purpose, a qualitative approach for the latter two is chosen with the technique of interviews. A number of experts from both countries will be interviewed and thus a comprehensive picture of the form of state capitalism in those cases should emerge. Interviews clearly display perceptions and views. They are not molded into hard figures. This gives a qualitative analysis the reputation of being rather soft evidence. But overall agents tend to base their decisions on perceptions and views. Second, in a number of cases no documents exist, which refer for instance to bureaucratic quality, for example when it comes to corruption. Third, de jure rules often differ tremendously from how these rules de facto work. Since the trajectories of the developmental states of South Korea and Singapore are very well researched – some even say over-researched – an analysis of the literature is chosen for these two countries.

In the end, there should be four distinct case studies giving an in-depth analysis of those countries. This should pave the way for illustrating structural and policy differences among varieties of state capitalist countries and explaining their diverging development trajectories. Should this not be the case, it is obligatory to partially or entirely resort to different countries. Under the positive scenario this study will thus help to explain, which structural, policy and ←22 | 23→performance varieties exist in state capitalism and furthermore which elements of state capitalism are development-enhancing and which ones are not.

Details

Pages
336
ISBN (PDF)
9783631853085
ISBN (ePUB)
9783631853399
ISBN (MOBI)
9783631853405
ISBN (Hardcover)
9783631849088
Language
English
Publication date
2021 (April)
Published
Berlin, Bern, Bruxelles, New York, Oxford, Warszawa, Wien, 2021. 336 pp., 3 fig. col., 6 tables.

Biographical notes

Axel Wölk (Author)

Axel Wölk is an economist. He currently works as a freelancejournalist and translator for a financial news agency and various localnewspapers. In the course of his career, he also had stints at the economicnews agency dpa-AFX and the Frankfurter Allgemeine Zeitung as well as publishedbooks on Russia.

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Title: A taxonomy of state capitalism