Wednesday, 10 February 2010

How close are we getting to a market capitalism ideal?

The ideal of market capitalism is necessarily vague, but can be broadly defined as an economic system where individuals execute most of their economic transactions in competitive markets. It requires a reasonably atomistic distribution of economic resources and well-regulated markets. A few indicators come to mind on how to rank countries in accordance on how close they are to this ideal system. Among such indicators, we must include the share of large corporations and governments in GDP and some index of economic freedom. Traditionally we tend to identify the OECD member countries as representative of what we would call capitalist markets. However, when we scrutinize its members we find that only a few countries come near to the market capitalism ideal.

Take the case of the USA for instance. The USA would normally qualify under the share of government in GDP criteria (around 35%) and in terms of economic freedom (among the top ten in the Fraser Institute list). Nevertheless, its share of big business in GDP remained at around 50% throughout 1998 to 2004 as estimated by the SBA. Another interesting case is South Korea, which has the smallest weight of government in its economy (about 26% of GDP) but ranks very low in terms of economic liberty (32 in the Fraser list). Disregarding the share of big business criteria, which is difficult to obtain for most countries, we end up with just a handful of nations (Australia, Switzerland, Luxembourg and Ireland) that qualify for the status of close to the ideal of market capitalism.

Among the Western countries with a mixed economy system in the sense defined by the late Paul Samuelson we have two models of state capitalism that are worth considering - the Scandinavian and the Southern European types of state capitalism. There are many other types of state capitalism, ranging from democratic systems of big-business capitalism in Europe and North America to crony/oligarchic systems in Russia or dictatorial systems like in China, but these are of no concern to us in this post. We need to compare the performance of those two sets of countries against those closer to the market capitalism ideal to verify if there are substantial differences. Note that the Southern European system would be more interesting because it went through two distinct periods of about forty years each – an authoritarian right wing and another period of democratic socialism. However, we only have comparative data for the recent period where both groups had generally socialist governments.

Over the last 37 years, the real annual GDP growth in the market capitalism group ranged from 1.43% (Switzerland) to 4.71% (Ireland) against a range between 2.00% (Sweden) and 3.76% (Norway) for the Scandinavian state capitalism, and from 2.66% (Italy) to 3.61% (Portugal) for the Southern European system. Overall, with the exception of Switzerland, the growth of the market capitalism economies was faster than that of all economies under state capitalism. These growth rates were achieved by 80% of the Swiss working an average of 1702 hours per year and 55% of the Irish working 1966 hours, while among the Scandinavians 78% of the Swedes had to work 1570 hours and 74% of the Norwegians worked 1599 hours. In Southern Europe it took 53% of the Italians working 1870 hours, while 68% of the Portuguese worked 1917 hours. In terms of productivity growth, Switzerland is the odd case lagging substantially behind all the state capitalism countries. In terms of ranking, Ireland tops the league, followed by Luxembourg, Norway, Spain, Australia and Portugal. In terms of purchasing power relative to the OECD average, Ireland again improved the most (89.4%) between 1971 and 2008, followed by Norway (80.2%), Luxembourg (57.0%) and Portugal (23.2%). During the same period, Switzerland was the country that declined the most (30.1%), followed by Sweden with a decline of 14%.

Despite the exceptions of Switzerland and Norway, overall, the countries with a system closer to market capitalism outperformed both groups with a system of state capitalism. Nevertheless, definitive proof will require a more detailed study taking into account the fact that during this period, some of the countries have gone through several changes in relation to their pro-market stance. Equally, we have a few countries that benefited from exceptional shocks like the North Sea oil and gas in the case of Norway and the process of decolonization in the case of Portugal. For instance, if we look for periods where a major roll back on the weight of the state in the economy occurred we find that they took place in Ireland, Finland, Norway and Sweden during 1994-2000, in Australia during 1986-1988 and again in Norway during 2004-2006. Conversely, there were episodes of state build-up in Switzerland and Finland during 1990-1993.

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