Features | Economy | East Asia

Western Vs. Authoritarian Capitalism

By John Lee for

In 1990, American political commentator, Charles Krauthammer, famously introduced the notion of the ‘unipolar moment’ to denote the age of the triumphant and unchallenged American superpower. Liberal democracy had won and Francis Fukuyama contemplated the ‘end of history’. After 9/11, many placed their bets on the ‘clash of civilisations’ and the battle against Islamists in particular. After America’s 2003 invasion of Iraq, the talk was of American decline and the re-emergence of a multipolar system with Washington, Beijing, Moscow, Tokyo, Brussels and New Delhi as the new centres of power.

Very recently, another paradigm has emerged. Prominent figures such as Robert Kagan have spoken about two competing systems that will define international relations over the next few generations: capitalist authoritarian states with their booming economies will be pitted against liberal-democratic counterparts. But the current economic crisis has already led to the waning of confidence of capitalist authoritarian states.

China and Russia are at the vanguard of this alleged authoritarian bloc. They are the two key members of the Shanghai Cooperation Organisation – referred by many as the authoritarian counterpoint to NATO. In 2005 and again in 2007, China and Russia illustrated their new ‘strategic partnership’ with a series of joint military exercises involving thousands of soldiers, combat vehicles and even long-range strategic bombers.

China and Russia rank second and third behind the US in the world in terms of military spending, at around US$100 billion and US$50 billion respectively. Significantly, both Beijing and Moscow speak frequently about building cooperative resources to resist the ‘underhanded’ democratising agenda of America and the West.

But thinkers such as Kagan are not just repackaging the old Cold War paradigm in fresh wrapping. The new contest is different and more complicated. During the Cold War, the competition was between capitalism and communism. China and Russia have adopted capitalism in one form or another. They are also participants in the global economic system. The new argument is about which side does capitalism better: liberal-democratic versus authoritarian states.

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It is a question worth asking if recent performance is anything to go by. The IMF recently released a study showing that economic growth in ‘capitalist’ authoritarian countries averaged 6.28 per cent over the past 15 years, while liberal democracies only averaged 2.62 per cent. Over the past decade, the Chinese economy has been growing at an average of 10 per cent in real terms each year. Since defaulting on its sovereign debt in 1998, Russia has grown seven per cent in real terms each year. Importantly, over the past 10 years, both countries have become more authoritarian rather than less. Russia under Vladimir Putin is much less liberal and democratic than it was under Boris Yeltsin. Since the Tiananmen protests in 1989, the Chinese Communist Party (CCP) has regrouped, consolidated and enhanced its power for the foreseeable future.

Moreover, in both countries, the state has advanced rather than retreated in terms of its economic role.

Russia is trending towards the Chinese business model

For example, in China the most important and lucrative industries are dominated by enterprises owned or controlled by the state. The banking sector is state dominated, and the state sector receives more than three-quarters of all loans. Genuinely private companies account for fewer than five per cent of all listed companies on the Shanghai and Shenzhen stock exchanges. Russia is trending towards the Chinese model. The most compelling illustration is Russia’s lucrative energy sector. In 2004, private firms accounted for 90 per cent of Russian oil production. The figure is around 50 per cent today.

Many believe that the current global financial crisis is a huge setback for liberal democracies and might even be a turning point. At the very least, many agree that America and Europe will be forced to play a less active role in global affairs than they otherwise would have expected.

Many are also arguing that the crisis that ostensibly began in America has severely dented the reputation of liberal democracies. The Western financial system almost collapsed. Western models of regulation and supervision have patently failed. Liberal-democratic institutions, having boasted of superior standards of prudence and accountability, are just as capable of sleeping on the watch as anybody else. Self-confessed criminal Bernard Madoff’s US$50 billion Ponzi scheme is just the latest in a series of revelations that remind us that corruption is not exclusive to developing countries outside the West.

Finally, the weaknesses of the American democratic system, in particular, to repair the economy has been laid bare for all to see. Back in 2005, the prominent New York Times columnist Thomas Friedman admitted to ‘casting an envious eye to the Chinese political system’s ability to get things done’. The editor of Newsweek, Fareed Zakaria, previously lamented the seeming incapacity of insiders in Washington both to identify and respond to the problems facing America.

Many applauded as Beijing expedited without obvious delay a half a trillion dollar stimulus plan to deal with the crisis. In contrast, Congress in Washington argued and squabbled over details of the US$700 billion bailout package, requiring two sittings and a host of pork-barreling concessions before it was passed. As a former Chinese official mockingly exclaimed to me in referring to the messy decision-making structure within liberal democracies: ‘Now I know what it means to say, “Nero fiddled while Rome burnt”.’

America and Europe are suffering, but the global crisis has spared no-one. The weaknesses and flaws within the Chinese and Russian systems are also being ruthlessly exposed. For example, Russian stock markets have fallen around 75 per cent from their January 2008 highs. The growth in the Russian economy was largely fuelled by record oil and gas prices, which peaked in mid-2008. Since then, the price of oil has fallen by two-thirds. Oil wealth offered Russia an illusion of resilience. Russia grew richer without building strong and stable institutions normally required for wealth creation. Putin-led Russia experienced a boom without actually building a sound economy. Given Russia’s current convulsions, there is now severe doubt that Putin can find the money to fund the double-digit increases in military expenditure that he had planned previously.

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A recent study by two Stanford University academics, Michael McFaul and Kathryn Stoner-Weiss, also shows that the common assumption that Putin rescued Russia’s economy is questionable. Russia’s growth rates under Putin are below the post-Soviet average. When Putin became the president in 2000, Russia was the second-fastest growing economy in the region behind Turkmenistan. By 2005, Russia had fallen to 13th and was outdoing only Ukraine and Kyrgyzstan, whose economies were disrupted by their respective ‘colour revolutions’. Revealingly, life expectantcy in Russia has actually declined under Putin.

China in trouble and facing bad debts

Even China’s ‘miracle economy’ is now in trouble. The Shanghai Exchange has seen its index decline by two-thirds. The Chinese export sector, responsible for 40 per cent of Chinese growth over the past decade, is tanking. Overall economic growth is likely to dip below the eight per cent mark – the point at which unemployment (and therefore unrest) begins to rise dramatically. This is despite the trillions of dollars – in addition to the half-trillion-dollar stimulus package – that its state-owned banks regularly but inefficiently pump into state-controlled businesses to maintain the growth levels it has enjoyed up to now.

Domestic investment (from bank loans) was responsible for around half of Chinese GDP growth. Even before the onset of the financial crisis, there was an estimated US$1 trillion worth of bad loans in the Chinese financial system as a result of this flawed investment strategy. A new and massive spate of bad loans is inevitably around the corner for Chinese banks.

Even before the global financial crisis, absolute poverty (those earning less than US$1 a day) doubled in China over the past decade. More than 400 million people had seen their net incomes decline over the same period despite record GDP growth. It is no wonder that domestic consumption growth has been slow and will not be able to take up the slack as the export sector suffers. Instead, China must rely on state-led fixed investment to keep growth at eight per cent, despite acknowledging that this strategy is becoming more inefficient, wasteful and, therefore, increasingly unsustainable. The general economic outlook is so dire that Chinese President Hu Jintao has increasingly issued warnings about the possibility of political and social collapse.

These examples suggest that the world’s booming autocracies were never in as good shape as many recently believed. China and Russia continue to depend on healthy American and European economies in order to thrive. Liberal democracies might be suffering, but these autocratic states are in a poorer position to take advantage of the crisis than many had anticipated.

The Chinese Communist Party and the United Russia Party depend on permanently high rates of economic growth and prosperity to remain exclusively in power. Their situation is precarious because it means these regimes play a high-stakes game with their population where the margin for error is small. For example, even at the height of China’s boom, the latest figures released by Beijing reveal that there were 87,000 instances of mass unrest in 2005 alone.

The fact that the Chinese and Russian economies continue to depend on Western markets and are beneficiaries of the existing Western-led liberal order means that an ‘autocratic bloc’ is in a poor position to launch a formidable challenge against liberal democracies. If Western economies were truly brought to their knees, the legitimacy of ruling regimes in Beijing and Moscow would be severely threatened. A motley crew of autocratic allies consisting of Iran, Myanmar, North Korea, Zimbabwe, Sudan and so on can hardly create an alternative market large enough for China and Russia to grow. Entangling China especially in the global economic system was, of course, a deliberate policy of the West to ‘manage’ China’s rise and limit Beijing’s strategic choices.

China and Russia are still immensely poor

The absolute output of countries with large populations can be impressive but misleading. China and Russia are still immensely poor countries. According to the IMF, they rank 107 and 56 respectively in terms of nominal GDP per capita. They have ‘top heavy’ economies with a small number of state-sponsored businesses dominating the most lucrative sectors, while the bottom-up private sector remains relatively stifled. This is necessary for authoritarian governments because they need to hold on to the levers of economic power to retain political power.

Stable societies and even wealth creation need broad, robust economies. But creating the conditions for good bottom-up economies to evolve is something capitalist authoritarian states continue to struggle with.

Any strong capitalist economy needs strong institutions – particularly a reliable system of property rights, dispute resolution, contract enforcement and ‘rule of law’. In Russia, Putin’s seizure and renationalisation of assets in the energy industry when the political need arises is not encouraging. In China, the absence of clear land rights in rural areas is a huge impediment to improving the lives of the approximately 800 million who still earn less than $2 a day. In these authoritarian systems, courts and tribunals are used as tools by the regime and are less transparent and unpredictable. This is a problem especially in China. For example, there are now laws in place for aggrieved citizens to sue the state. However, a recent study by Professor Yu Jianrong from Beijing’s Academy of Social Sciences indicates that only three out of 10,000 petitions resulted in a resolution.

Not surprisingly, rule of law is difficult to achieve in one-party systems, and corruption serves as a serious impediment to broad-based economic development and building stable civil societies. Transparency International recently ranked Russia 143 out of 180 countries in terms of corruption, while China ranked at 72. In the World Bank’s Ease of Doing Business index, Russia was ranked 106 out of 178, while China came in at 83. Imprecise as these indices are, these figures hardly indicate that the two authoritarian giants are ready to challenge and export their model of doing capitalism to the world.

This lack of stable and independent institutions – political, economic, social and legal – within large authoritarian states is a serious shortcoming. America and Europe might be suffering, but they do not face the possibility of social and political chaos. Liberal democratic systems are frustrating, messy and tedious, but they have huge advantages in finding solutions to problems, and in peaceful and orderly change and adaptation. Authoritarian states might be more efficient at silencing debate and passing ‘emergency’ measures, but they usually lack the same capacity to deal honestly and effectively with crises.

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It is true that liberal democracies remain suspicious of authoritarian states such as China and Russia, and vice versa. Political values have strategic significance. But even if these authoritarian powers manage to overcome their daunting domestic weaknesses and continue to rise, they can only still rise within the liberal democratic global system.

Russia, or more likely China, might yet emerge as the primary great power rival to the US, signalling a return to traditional great power rivalry. But it is something else to conclude that authoritarian states have found a better way of ‘doing capitalism’ – and that the rivalry between ‘liberal democratic’ and ‘authoritarian’ capitalists will be the defining contest of our age.

Dr John Lee is a visiting fellow at the Centre for Independent Studies, Sydney. He is the author of ‘Will China Fail?’