The election of Donald Trump as President of the United States has thrown the US and the World into a dangerous era. So, what lies ahead?
I examine here a benign and a catastrophic scenario, not because I believe that they may occur exactly that way, but to allow us to assess the direction the world is taking during his first year in office.
In the benign scenario, the victory of Trump will mean a victory of the anti-politically correct against the politically correct ideology. These two extreme stances in values and policies, would be refuted by a moderate electorate tired of social experimentalism at the end of his mandate(s).
In the catastrophic scenario, Trump will follow his neo-Nazi ideals based on racial (white) supremacy, state capitalism and imperialist arms race, to be paid through predatory conquests, that will lead to a war clash with other aspiring imperialists and terrorists. This, sooner or later, will end in a nuclear war destroying most or all humankind.
So, what forces will drive us in each direction?
For the benign scenario, we need most of following developments:
1) That the madness of crowds who drove Trump into power, subsides;
2) that Trump, himself, moderates his team and policies and be content with a role as the star of a national virtual reality show;
3) that the few moderate republicans remaining are not afraid to join the democrats in defeating any of his attempts to change the constitutional order and balance of power between institutions in the USA;
4) that the democrats avoid becoming taken over by the PC defeated crowd of Sanders left-wingers;
5) that the Trump mania does not spread to Europe with a victory of Marie Le Pen in France and the victory of similar candidates in Germany and the UK;
6) that the European Union does not disintegrate and finds its own Churchill to lead the democratic values in the World;
7) that Putin does not seize the opportunity to retake the Baltics, Ukraine and other former satellites of Russia;
8) that China does not be tempted to seize dominance in Asia and settle its historical grievance with Japan; and, last but not least,
9) that his economic ignorance does not cause havoc in free international trade and financial systems causing a major world recession.
The catastrophic scenario, implies that most of these developments will take place:
1) he fulfils his promise to expel millions of emigrants and build a wall between Mexico, causing havoc in Mexico and other Latin American countries;
2) he promotes the rise of state and crony capitalism through his plans to increase public spending in armaments and infrastructure while making huge tax cuts for the rich, thus creating an imploding public deficit and a declining dollar;
3) he turns his back on his European Allies, weakening (or destroying) NATO, and entering in a kind of Hitler-Stalin deal to give Putin territory in the Ukraine, the Baltics and Poland;
4) he does not enter into a similar deal with the Chinese to give them leeway in the Pacific in exchange for a more or less disguised form of default in America debt;
5) he transforms the American Administration in a Putin-style security apparatus or on a Hitler-style SS militia based on his core fanatic supporters;
6) he implements a Chinese/Russian type of control over social media and the Internet;
7) he tries to curb the rising US external debt and deficit through international debt restructuring/default (after all, his business experience is in bankruptcy deals), protectionism and competitive devaluations;
8) he initially robs migrants (the way Hitler robbed the Jews) and expels them, before bringing them later on into new forms of labour slavery;
9) he promotes the political breakup of the European Union and its invasion by Eastern and African migrants (mostly Muslim) to create a three-power geo-political world;
10) the remaining three totalitarian powers play a game of mouse and cat until one of them decides to try to eliminate the other(s) through a nuclear holocaust. Given his unstable nature, it could be Trump himself to be the first to push the button.
As I said at the beginning, it is unlikely that the world will move immediately into one of these routes. There will be a lot of zig-zagging.
Let’s pray that the USA will move away from the catastrophic route and into the benign direction.
But, for that, it is fundamental that all those who wish peace and progress, do not compromise, lower their arms or support the extremists.
More than ever, the world survival lies on reason prevailing over dogma and fanaticism!
Showing posts with label state capitalism. Show all posts
Showing posts with label state capitalism. Show all posts
Wednesday, 9 November 2016
Friday, 21 August 2015
Russian fears after 20 years
Since the fall of communism, Russia has become again a case study on the loss of freedom in non-capitalist systems, this time the result of a system of oligarchic state capitalism developed in the country.
I am not an expert on Russia, a country I visited only twice and briefly. I visited Moscow in 1991 and S. Petersburg in 2013. The last time, during the visit to the over-crowded Hermitage Museum I seated for a while wondering what had struck me more and it was not the museum.
Mostly, I wondered why after more than 20 years this beautiful imperial city still looked dilapidated and decrepit, and people in the streets and tourist shops still looked fearful, nationalistic and resentful of westerns. It also struck me how limited was the offer of products beyond the babushkas, amber and other semi-precious stones and communist memorabilia.
Having lived my youth under Salazar’s authoritarian regime, a model admired by President Putin, I can understand the Russians’ fear, longing and delusions about past imperial might and equality in poverty. It also lets me sense the body language of those living in fear of the authorities or in servility before those in authority to whom they owe their business.
For instance, a souvenir shop I visited still exhibited a wall plaque stating that it had been opened by special permission of a minister. I also had lunch in a restaurant housed in a former Czar palace and headquarters of the Soviet Trade Unions. It housed many other “companies” which did not have any identification and nobody knew what they did or who owned the place. The meal itself was not much different from what one gets in a workers canteen and the service was very poor. However it have the “luxury” of classical live music played by a young violinist. The whole setting was quite surreal.
Only a lack of truly free enterprise can explain the absence of progress in Russia. In fact, the Russian economy continues totally dependent on the exports of arms and energy, with the later accounting for almost 70% of its exports and, together with other commodities, account for about 50% of the Federal Government tax revenue. Overall, Russian exports are less than 15% of the Euro-Area exports.
Searching for explanations for Russia’s poor performance, Chrystia Freeland’s Plutocrats (2013) compares the rent-seeking strategies of the Russian oligarchs with that of the Chinese Communist Party bosses and concluded that “China’s market reforms have been slower and its avenues for rent-seeking have been more varied and more opaque than a quick privatization drive led from the top”. In my view, this does not explain much about the disparate performances of Russia and China.
The key difference resides in the openness and participation of the two countries in international trade. While China began by creating special free trade regions for foreign investors and sought an early entry into the WTO organization, Russia only fulfilled the WTO membership requirements in 2012.
Equally important was the contempt for small business inherited from the communist regime which, coupled with a lack of property protection, rampant corruption and business fear, discouraged free enterprise and entrepreneurship.
The Russian experience confirms the importance of freedom for capitalism and economic development. Otherwise the incumbents fear the loss of power and people the loss of security and sooner or later turn to authoritarian nationalism invoking the risk of social unrest or imaginary external threats.
These fears can only be overcome through genuine democracy and a move towards market capitalism, by opening up to foreign competition and achieving significant progress in complying with the six principles of market capitalism.
I am not an expert on Russia, a country I visited only twice and briefly. I visited Moscow in 1991 and S. Petersburg in 2013. The last time, during the visit to the over-crowded Hermitage Museum I seated for a while wondering what had struck me more and it was not the museum.
Mostly, I wondered why after more than 20 years this beautiful imperial city still looked dilapidated and decrepit, and people in the streets and tourist shops still looked fearful, nationalistic and resentful of westerns. It also struck me how limited was the offer of products beyond the babushkas, amber and other semi-precious stones and communist memorabilia.
Having lived my youth under Salazar’s authoritarian regime, a model admired by President Putin, I can understand the Russians’ fear, longing and delusions about past imperial might and equality in poverty. It also lets me sense the body language of those living in fear of the authorities or in servility before those in authority to whom they owe their business.
For instance, a souvenir shop I visited still exhibited a wall plaque stating that it had been opened by special permission of a minister. I also had lunch in a restaurant housed in a former Czar palace and headquarters of the Soviet Trade Unions. It housed many other “companies” which did not have any identification and nobody knew what they did or who owned the place. The meal itself was not much different from what one gets in a workers canteen and the service was very poor. However it have the “luxury” of classical live music played by a young violinist. The whole setting was quite surreal.
Only a lack of truly free enterprise can explain the absence of progress in Russia. In fact, the Russian economy continues totally dependent on the exports of arms and energy, with the later accounting for almost 70% of its exports and, together with other commodities, account for about 50% of the Federal Government tax revenue. Overall, Russian exports are less than 15% of the Euro-Area exports.
Searching for explanations for Russia’s poor performance, Chrystia Freeland’s Plutocrats (2013) compares the rent-seeking strategies of the Russian oligarchs with that of the Chinese Communist Party bosses and concluded that “China’s market reforms have been slower and its avenues for rent-seeking have been more varied and more opaque than a quick privatization drive led from the top”. In my view, this does not explain much about the disparate performances of Russia and China.
The key difference resides in the openness and participation of the two countries in international trade. While China began by creating special free trade regions for foreign investors and sought an early entry into the WTO organization, Russia only fulfilled the WTO membership requirements in 2012.
Equally important was the contempt for small business inherited from the communist regime which, coupled with a lack of property protection, rampant corruption and business fear, discouraged free enterprise and entrepreneurship.
The Russian experience confirms the importance of freedom for capitalism and economic development. Otherwise the incumbents fear the loss of power and people the loss of security and sooner or later turn to authoritarian nationalism invoking the risk of social unrest or imaginary external threats.
These fears can only be overcome through genuine democracy and a move towards market capitalism, by opening up to foreign competition and achieving significant progress in complying with the six principles of market capitalism.
Saturday, 3 November 2012
Why the IMF therapy is not working in Portugal
The IMF repeats in Portugal the ostrich policy of not recognizing what is fundamentally wrong with its adjustment approach in the Euro Area. In its 5th review of the Portuguese program it states that “authorities have made good progress in reducing macroeconomic imbalances … But after a strong start, the program has entered a more challenging phase … a large and durable fiscal gap has emerged due to a shift in the composition of output from domestic demand to less-taxed net-exports”.
Despite the initial Portuguese external disequilibrium being milder than the Greek or Irish, I anticipated that the program was likely to fail because it had been undertaken reluctantly, too late, with too little and it was too soft. Moreover, its management was weak, incompetent and erratic partly because the Troika was desperate to have a success story and it had in Portugal a Finance Minister – Victor Gaspar – that was seen as one of their men. So, all tough measures (e.g. reducing the number of municipalities and monopolistic rents) were abandoned or reversed. For instance, fiscal consolidation which was to be implemented by 2/3 of expenditure cuts and 1/3 of revenue measures failed completely with the expenditure hardly slowing down and the revenue collapsing.
By now the IMF had to agree to extend its program for one more year and to grant some waivers, while it is already busy working on another package that will inevitably result on more time and more money. This will only raise the Portuguese external debt to new heights without any visible improvement in its economic growth.
Just as a reminder, note that the Greek debt path under IMF management, which started in May 2010 with a general government debt equivalent to 115% of GDP and was supposed to peak in 2012 at 149%, at the start of the second IMF bailout in June 2012 had already reached 165% and is expected to peak at 171% in 2014. For comparison, in Greece the total net external debt rose from 87 to 107% of GDP between 2009 and 2012 while in Portugal (external debt, excluding FDI and reserves) rose only from 98 to 99% of GDP. However, the portion owed by the government increased from 64 to 95% of GDP, degenerating into a sovereign debt crisis.
In a recent post we called the current IMF (Troika) adjustment program for Portugal a pyrrhic victory because, when compared to previous programs, it had doubled the cost of external adjustment in terms of output loss. We identified as the main culprit a weak foreign trade multiplier. So, the key question is why isn´t the trade multiplier working now as it did in past programs? As we calculated the multiplier effect by assuming a constant income elasticity of demand for imports the explanation must be accounted for by a sluggish international economic growth and or changes in relative prices (terms of trade).
In fact, the growth of the world economy accounts for a small portion of the reduced multiplier effect, since the OECD was growing at 6% during the first two programs but recently it has been growing at only 4.3%. So, the majority (71%) of the blame for the smaller multiplier effect lies in a weak export performance because of lower price elasticities and adverse changes in the terms of trade. Since recent estimates show that the export price elasticity remains low (0.42) and statistically is not significantly different from zero, the core explanation must lie in the terms of trade.
The Portuguese terms of trade did not deteriorate enough to drive a higher level of economic activity because of an irresponsible fiscal policy of indirect tax increases that caused a futile destruction of businesses in the non-tradable goods sector and the failure to confront the powerful lobbies in the energy and transport sectors that hamper the tradable goods sector. This trend in the terms of trade is clearly visible in the following chart.
The persistence of domestic inflationary forces despite an increase of 3.5 percentage points in the unemployment rate which reached 15.5% can only be the result of market rigidities compounded by fiscal mistakes.
The program of fiscal consolidation was not only inefficient, but foolish and poorly sequenced. Instead of targeting the preservation or a small rise in revenue, through the broadening of the tax base and selective competitive tax cuts, combined with substantial cuts in subsidies and other wasteful forms of spending it did the reverse. In terms of sequencing, instead of beginning with spending cuts, followed by a broadening of the income tax base and cuts in corporate taxes it did the reverse. It raised indirect taxes first at the expense of external competitiveness and is now promising a massive increase in income and corporate taxes for 2013 to be followed by spending cuts in 2014, thus perpetuating unnecessarily the current recession for at least another two years.
In conclusion, the program left untouched all the cancers blocking the growth of the Portuguese economy listed in this blog long ago as being: irresponsible recourse to PPP financing, large rent-seeking privatized monopolies, extensive subsidization of energy, environment, technological and other self-serving mafias, too many, too inefficient and too indebted State enterprises for the exclusive benefit of their managers, unions and bankers, a financial sector who suckles on public financing, the uncontrollable spending of the health and social security sectors, the destruction of a professionally independent public service, dysfunctional fiscal and judicial systems and generalized recourse to off-budget operations and creative accounting. Indeed, it made things worse through mismanagement. So, without changing course, Portugal is condemned to more than a decade of slow growth and unbearable indebtedness and sooner or later it will have to default or ask for debt forgiveness for the first time since 1892.
As a Portuguese I am saddened to see my beloved country ravaged by an incompetent government in collusion with useless international organizations at the mercy of an unholy alliance of heartless Teutonic European mandarins, predatory Chinese and Angolan dictators and dubious Latin American business interests. This is the end result of 80 years of state capitalism in Portugal.
Despite the initial Portuguese external disequilibrium being milder than the Greek or Irish, I anticipated that the program was likely to fail because it had been undertaken reluctantly, too late, with too little and it was too soft. Moreover, its management was weak, incompetent and erratic partly because the Troika was desperate to have a success story and it had in Portugal a Finance Minister – Victor Gaspar – that was seen as one of their men. So, all tough measures (e.g. reducing the number of municipalities and monopolistic rents) were abandoned or reversed. For instance, fiscal consolidation which was to be implemented by 2/3 of expenditure cuts and 1/3 of revenue measures failed completely with the expenditure hardly slowing down and the revenue collapsing.
By now the IMF had to agree to extend its program for one more year and to grant some waivers, while it is already busy working on another package that will inevitably result on more time and more money. This will only raise the Portuguese external debt to new heights without any visible improvement in its economic growth.
Just as a reminder, note that the Greek debt path under IMF management, which started in May 2010 with a general government debt equivalent to 115% of GDP and was supposed to peak in 2012 at 149%, at the start of the second IMF bailout in June 2012 had already reached 165% and is expected to peak at 171% in 2014. For comparison, in Greece the total net external debt rose from 87 to 107% of GDP between 2009 and 2012 while in Portugal (external debt, excluding FDI and reserves) rose only from 98 to 99% of GDP. However, the portion owed by the government increased from 64 to 95% of GDP, degenerating into a sovereign debt crisis.
In a recent post we called the current IMF (Troika) adjustment program for Portugal a pyrrhic victory because, when compared to previous programs, it had doubled the cost of external adjustment in terms of output loss. We identified as the main culprit a weak foreign trade multiplier. So, the key question is why isn´t the trade multiplier working now as it did in past programs? As we calculated the multiplier effect by assuming a constant income elasticity of demand for imports the explanation must be accounted for by a sluggish international economic growth and or changes in relative prices (terms of trade).
In fact, the growth of the world economy accounts for a small portion of the reduced multiplier effect, since the OECD was growing at 6% during the first two programs but recently it has been growing at only 4.3%. So, the majority (71%) of the blame for the smaller multiplier effect lies in a weak export performance because of lower price elasticities and adverse changes in the terms of trade. Since recent estimates show that the export price elasticity remains low (0.42) and statistically is not significantly different from zero, the core explanation must lie in the terms of trade.
The Portuguese terms of trade did not deteriorate enough to drive a higher level of economic activity because of an irresponsible fiscal policy of indirect tax increases that caused a futile destruction of businesses in the non-tradable goods sector and the failure to confront the powerful lobbies in the energy and transport sectors that hamper the tradable goods sector. This trend in the terms of trade is clearly visible in the following chart.
The persistence of domestic inflationary forces despite an increase of 3.5 percentage points in the unemployment rate which reached 15.5% can only be the result of market rigidities compounded by fiscal mistakes.
The program of fiscal consolidation was not only inefficient, but foolish and poorly sequenced. Instead of targeting the preservation or a small rise in revenue, through the broadening of the tax base and selective competitive tax cuts, combined with substantial cuts in subsidies and other wasteful forms of spending it did the reverse. In terms of sequencing, instead of beginning with spending cuts, followed by a broadening of the income tax base and cuts in corporate taxes it did the reverse. It raised indirect taxes first at the expense of external competitiveness and is now promising a massive increase in income and corporate taxes for 2013 to be followed by spending cuts in 2014, thus perpetuating unnecessarily the current recession for at least another two years.
In conclusion, the program left untouched all the cancers blocking the growth of the Portuguese economy listed in this blog long ago as being: irresponsible recourse to PPP financing, large rent-seeking privatized monopolies, extensive subsidization of energy, environment, technological and other self-serving mafias, too many, too inefficient and too indebted State enterprises for the exclusive benefit of their managers, unions and bankers, a financial sector who suckles on public financing, the uncontrollable spending of the health and social security sectors, the destruction of a professionally independent public service, dysfunctional fiscal and judicial systems and generalized recourse to off-budget operations and creative accounting. Indeed, it made things worse through mismanagement. So, without changing course, Portugal is condemned to more than a decade of slow growth and unbearable indebtedness and sooner or later it will have to default or ask for debt forgiveness for the first time since 1892.
As a Portuguese I am saddened to see my beloved country ravaged by an incompetent government in collusion with useless international organizations at the mercy of an unholy alliance of heartless Teutonic European mandarins, predatory Chinese and Angolan dictators and dubious Latin American business interests. This is the end result of 80 years of state capitalism in Portugal.
Saturday, 15 September 2012
Why the IMF therapy is not working in Ireland
After a remarkable economic success based on market capitalism, Ireland has drifted back into misery since the crisis of 2008 and risks turning into a Southern European type of state capitalism. Back in January 2011 we explained in this blog (see here) why the IMF program for Greece’s external adjustment would not work. Some of the reasons given then apply equally to Ireland (or Spain for that matter).
First, the Troika misdiagnosed the situation as a liquidity problem while in fact Ireland and Greece faced a solvency problem (albeit of a different nature).
Then, they treated the problem of excessive leverage in the wrong way. The two major mistakes in Ireland were the conversion of private debt into public debt and the reliance on internal devaluation to deleverage. It is easy to see why both policies were wrong.
Ireland had a typical situation faced by a family with irresponsible children that took excessive debt to pay for gambling losses at the Casino (or in its case to speculate in real estate). An obvious option to erase gambling debts was to default on the casino loans (in the case of the Irish real estate bubble the British and German banks). They could be charged with allowing bets that the gambler could not pay. One alternative would be to demand a debt restructuring involving partial debt forgiveness and a longer repayment period, so that with the help of family and friends (i. e. grants by national and EU institutions in the case of Irish borrowers) they could repay the remaining debt without damaging the credit of his family. Another alternative would be to ask the casino to accept an IOU without a redemption date (in case of the British and German banks accept money printed by the ECB).
Yet, the casino owners decided instead to force the collection of their loans from the children’s parents (i.e.Irish government). To save its reputation the family promised to honor the debts by putting them in their business balance sheet (the state budget in the case of Ireland). However, the debts were so huge that they would necessarily cripple an otherwise successful business (economy). It is easy to see why.
First, such an increase in leverage would bar the firm from market financing. Second, it would be forced to halt all modernization and maintenance investments. Finally, it would force the family to downsize by selling some of the best assets. Combining these three measures would inevitably lead to a lower competitiveness, declining productivity and a depressed local economy. As expected, in the last four years, investment in Ireland more than halved in real terms, while domestic demand declined by about one third.
However, the recourse to internal devaluation only made things worse. Imagine that the clientele of the parents business was mostly local (i.e. produced non-tradable goods in economists’ parlance). Therefore, cutting the wage of their workers would reduce its sales proportionally and reduce further the firms’ debt capacity.
Moreover, reducing nominal contracts in the labor market without a concomitant reduction in credit markets would inevitably lead to an increase in non-performing loans (which in 2011 indeed rose from 12% to 20%).
It is obvious that the policy of switching the debt burden from the private to the public sector only made things worse in Ireland. What we said about Greece applies equally to Ireland. It has only three options: a) to force a significant hair-cut on its bond-holders, b) to receive a major grant from other EU countries, or c) a mix of both. None of these is a pleasant solution but there is no other way out.
First, the Troika misdiagnosed the situation as a liquidity problem while in fact Ireland and Greece faced a solvency problem (albeit of a different nature).
Then, they treated the problem of excessive leverage in the wrong way. The two major mistakes in Ireland were the conversion of private debt into public debt and the reliance on internal devaluation to deleverage. It is easy to see why both policies were wrong.
Ireland had a typical situation faced by a family with irresponsible children that took excessive debt to pay for gambling losses at the Casino (or in its case to speculate in real estate). An obvious option to erase gambling debts was to default on the casino loans (in the case of the Irish real estate bubble the British and German banks). They could be charged with allowing bets that the gambler could not pay. One alternative would be to demand a debt restructuring involving partial debt forgiveness and a longer repayment period, so that with the help of family and friends (i. e. grants by national and EU institutions in the case of Irish borrowers) they could repay the remaining debt without damaging the credit of his family. Another alternative would be to ask the casino to accept an IOU without a redemption date (in case of the British and German banks accept money printed by the ECB).
Yet, the casino owners decided instead to force the collection of their loans from the children’s parents (i.e.Irish government). To save its reputation the family promised to honor the debts by putting them in their business balance sheet (the state budget in the case of Ireland). However, the debts were so huge that they would necessarily cripple an otherwise successful business (economy). It is easy to see why.
First, such an increase in leverage would bar the firm from market financing. Second, it would be forced to halt all modernization and maintenance investments. Finally, it would force the family to downsize by selling some of the best assets. Combining these three measures would inevitably lead to a lower competitiveness, declining productivity and a depressed local economy. As expected, in the last four years, investment in Ireland more than halved in real terms, while domestic demand declined by about one third.
However, the recourse to internal devaluation only made things worse. Imagine that the clientele of the parents business was mostly local (i.e. produced non-tradable goods in economists’ parlance). Therefore, cutting the wage of their workers would reduce its sales proportionally and reduce further the firms’ debt capacity.
Moreover, reducing nominal contracts in the labor market without a concomitant reduction in credit markets would inevitably lead to an increase in non-performing loans (which in 2011 indeed rose from 12% to 20%).
It is obvious that the policy of switching the debt burden from the private to the public sector only made things worse in Ireland. What we said about Greece applies equally to Ireland. It has only three options: a) to force a significant hair-cut on its bond-holders, b) to receive a major grant from other EU countries, or c) a mix of both. None of these is a pleasant solution but there is no other way out.
Wednesday, 20 July 2011
Capitalism, What Capitalism?
In most countries wealth is created under various economic systems. An economic system is defined by a set of rules defining the relationship between interacting economic agents. For instance, in a feudal system the relationship between the landlords and their subjects was based on serfdom. Similarly the relation between the state and its citizens is exerted through coercion.
By contrast in voluntary and capitalist sectors the relationships between economic agents are defined freely through contractual arrangements. The first is based on bundling resources, risks and benefits while capitalism is based on unbundling them. In a capitalist system capitalists own the resources and profits but take the risks, while guaranteeing a contractual wage paid to workers. Both systems require the right to private property and its protection but only capitalism requires that most transactions between different agents be carried out through free and competitive markets.
The study of wealth predates the emergence of capitalistic systems but the modern economic science has its foundations in Adam Smith’s book on the Wealth of Nations. His book does not use the words capitalism or capitalist (curiously, the word capitalism had been used since 1633 but it was only popularized in the mid 19th century by the Marxist opponents of capitalism). Instead, the book is centered in showing why competition through competitive markets is the most efficient way of allocating resources and producing wealth. Since the capitalist system is the only system dependent on market competition it follows that, apart from a short experiment with communism, the history of modern economics and capitalism are inextricably intertwined.
Yet, the statisticians who have been developing the system of national accounts since the 1930s have never attempted to report the wealth contributed by each economic system – state, voluntary and capitalist. Instead they give us a breakdown of employment and GDP by sectors of activity and type of organization (e.g. households, government, financial and non-financial firms). Thus, when one wants to measure the contribution of the agents working in the capitalistic sector the task becomes almost impossible.
This is so because the so-called for-profit sector includes many types of capitalism. Moreover, the exchanges between for-profit firms and the other two sectors (state and voluntary) have reached a large volume of transactions which are not always executed on a competitive basis. Often such activities create a sector called grey-capitalism.
The various types of capitalism must be defined on the basis of their reliance on free and competitive markets. The purest form of capitalism is called market capitalism and it includes all self-employed and investor-controlled firms which are basically price-takers trading in free and atomistic markets. Other types of capitalism include the regulated industries, oligopolies, and management-controlled firms that operate under various not-fully-competitive systems, namely: managerial capitalism, crony capitalism, socialist state capitalism, corporatist state capitalism or social market capitalism.
Since economic theory has only proved the supremacy of pure competitive systems, any departures from such systems should be accepted only as a second best option justifiable solely by market failures and externalities. However, in the absence of entirely free markets, competition between the various types of capitalism does not ensure that the winner in terms of market share will be market capitalism. Indeed, quite the opposite may happen.
So, paradoxically, a rising share of market capitalism can only be achieved by regulating the growth of the other not-for-profit and capitalistic sectors. The rationale for such regulation is that the maximum collective welfare can be only achieved by a growing sector of market capitalism. That is, true capitalism ≡ market capitalism!
By contrast in voluntary and capitalist sectors the relationships between economic agents are defined freely through contractual arrangements. The first is based on bundling resources, risks and benefits while capitalism is based on unbundling them. In a capitalist system capitalists own the resources and profits but take the risks, while guaranteeing a contractual wage paid to workers. Both systems require the right to private property and its protection but only capitalism requires that most transactions between different agents be carried out through free and competitive markets.
The study of wealth predates the emergence of capitalistic systems but the modern economic science has its foundations in Adam Smith’s book on the Wealth of Nations. His book does not use the words capitalism or capitalist (curiously, the word capitalism had been used since 1633 but it was only popularized in the mid 19th century by the Marxist opponents of capitalism). Instead, the book is centered in showing why competition through competitive markets is the most efficient way of allocating resources and producing wealth. Since the capitalist system is the only system dependent on market competition it follows that, apart from a short experiment with communism, the history of modern economics and capitalism are inextricably intertwined.
Yet, the statisticians who have been developing the system of national accounts since the 1930s have never attempted to report the wealth contributed by each economic system – state, voluntary and capitalist. Instead they give us a breakdown of employment and GDP by sectors of activity and type of organization (e.g. households, government, financial and non-financial firms). Thus, when one wants to measure the contribution of the agents working in the capitalistic sector the task becomes almost impossible.
This is so because the so-called for-profit sector includes many types of capitalism. Moreover, the exchanges between for-profit firms and the other two sectors (state and voluntary) have reached a large volume of transactions which are not always executed on a competitive basis. Often such activities create a sector called grey-capitalism.
The various types of capitalism must be defined on the basis of their reliance on free and competitive markets. The purest form of capitalism is called market capitalism and it includes all self-employed and investor-controlled firms which are basically price-takers trading in free and atomistic markets. Other types of capitalism include the regulated industries, oligopolies, and management-controlled firms that operate under various not-fully-competitive systems, namely: managerial capitalism, crony capitalism, socialist state capitalism, corporatist state capitalism or social market capitalism.
Since economic theory has only proved the supremacy of pure competitive systems, any departures from such systems should be accepted only as a second best option justifiable solely by market failures and externalities. However, in the absence of entirely free markets, competition between the various types of capitalism does not ensure that the winner in terms of market share will be market capitalism. Indeed, quite the opposite may happen.
So, paradoxically, a rising share of market capitalism can only be achieved by regulating the growth of the other not-for-profit and capitalistic sectors. The rationale for such regulation is that the maximum collective welfare can be only achieved by a growing sector of market capitalism. That is, true capitalism ≡ market capitalism!
Friday, 3 June 2011
The dangerous rise of managerial capitalism
In yesterday’s post we argued for limits on the rise of corporate wealth in the managerial capitalist sector. Concentration of wealth comes together with concentration of assets which necessarily reduces the scope for competitive market transactions.
Since then we collected the following data which gives us an overview of the size of the sector in a selected number of countries, as measured by the percentage of assets controlled by the largest one percent of all companies.
The data used excludes insurance, securities and banking firms because the assets held by these are mostly cash or securities issued by non-financial corporate. It probably over-estimates the size of the managerial sector because it is based only on listed public companies and the listing in individual countries may differ. This is partly offset by the fact that the number of management-controlled firms is usually more than just the top 1%.
Nevertheless the figures are sufficiently expressive to show that the virus of managerial capitalism is more widespread than we had thought. Even in countries closer to a system of market capitalism, such as Hong Kong and Singapore the top 1% of firms controls more than 22% of total assets.
Also interesting is the fact that among the countries where the problem is more serious we have three different regimes of capitalism. The most problematic situation occurs in the Mediterranean countries (Greece, Slovenia, Italy, Spain and Portugal) with a regime of state capitalism inherited from dictatorial regimes. Surprisingly this group is followed by the UK, a country traditionally identified with the so-called Anglo-Saxon liberalism. Next, comes China a country with a non-democratic regime of socialist state capitalism.
When we take together the shares of total assets (32%) and the share of regulated industries in the USA (25%, in defense, energy, utilities and telecoms) it turns out that here the threat of managerial capitalism is not as serious as we had anticipated. This seems to contradict other factors pointing in such direction, namely the obscene rise in CEO pay which now is over 300 times that of the average worker. So we may take this result with some reserve before we investigate further the impact that the size of the market has in these indicators.
Finally, another surprising case is Germany. We often identify the German style of capitalism as very socially-responsive, but it turns out that it is closer to market capitalism than we could imagine.
In conclusion, we may say that the danger posed by managerial capitalism is a global phenomenon. Moreover, its strong presence in regulated industries demands that we understand better the triangle between government – financiers – and managerial-controlled corporate. Only then can we understand how they constrain the move towards dominant market capitalism.
Since then we collected the following data which gives us an overview of the size of the sector in a selected number of countries, as measured by the percentage of assets controlled by the largest one percent of all companies.
The data used excludes insurance, securities and banking firms because the assets held by these are mostly cash or securities issued by non-financial corporate. It probably over-estimates the size of the managerial sector because it is based only on listed public companies and the listing in individual countries may differ. This is partly offset by the fact that the number of management-controlled firms is usually more than just the top 1%.
Nevertheless the figures are sufficiently expressive to show that the virus of managerial capitalism is more widespread than we had thought. Even in countries closer to a system of market capitalism, such as Hong Kong and Singapore the top 1% of firms controls more than 22% of total assets.
Also interesting is the fact that among the countries where the problem is more serious we have three different regimes of capitalism. The most problematic situation occurs in the Mediterranean countries (Greece, Slovenia, Italy, Spain and Portugal) with a regime of state capitalism inherited from dictatorial regimes. Surprisingly this group is followed by the UK, a country traditionally identified with the so-called Anglo-Saxon liberalism. Next, comes China a country with a non-democratic regime of socialist state capitalism.
When we take together the shares of total assets (32%) and the share of regulated industries in the USA (25%, in defense, energy, utilities and telecoms) it turns out that here the threat of managerial capitalism is not as serious as we had anticipated. This seems to contradict other factors pointing in such direction, namely the obscene rise in CEO pay which now is over 300 times that of the average worker. So we may take this result with some reserve before we investigate further the impact that the size of the market has in these indicators.
Finally, another surprising case is Germany. We often identify the German style of capitalism as very socially-responsive, but it turns out that it is closer to market capitalism than we could imagine.
In conclusion, we may say that the danger posed by managerial capitalism is a global phenomenon. Moreover, its strong presence in regulated industries demands that we understand better the triangle between government – financiers – and managerial-controlled corporate. Only then can we understand how they constrain the move towards dominant market capitalism.
Friday, 31 December 2010
New Year Wishes
I end this year with an apology to my readers for not having posted anything lately. I will start the New Year with the customary list of resolutions and wishes. My first and most obvious promise, starting in February, is to write here more often. The second pledge is that I will explore further the relationship between aims and means to reflect in particular on the role of fairness and fraternity as important parts of human happiness.
Apart from the usual longing for good health and peace, here are two of my wishes for 2011:
a) A return of enlightened reasoning in the media and politics. The “celebrity” &”sound-bite” takeover of modern culture has to be reversed. As a strong believer in individualism and market competition I am still hoping that the ongoing revolution in the entertainment and publishing businesses will be able to generate quality products. However, failing daily to find a single worthwhile prime time TV program after zapping more than 100 channels is getting me distressed. After all, even during the Roman Empire decline there was more than the Coliseum.
b) On the Portuguese (domestic) front my wish is that 2011 will see the departure of the current Prime Minister. He bankrupted the country and, to add shame to injury, rather than go to the IMF he is now peddling the world’s dictators (China, Libya, etc.) for financial assistance. What a disgraceful record for the democratic process in Portugal. After dilapidating the huge reserves inherited from Salazar and wasting the billions in grants received from the European Union the country is now broke. And for what? For an economic record that pales in comparison with that of Salazar, an unprecedented rise in inequality, a frightening increase in criminality and an education system in disarray? Still, despite this horrendous cost I would still chose the freedom gained in 1974. It was not democracy’s fault that we replaced a right wing form of state capitalism with a left wing variety. Nor do I believe that replacing Socrates will necessarily reverse the situation. But, even if the outlook is the same as with his predecessor, and the new Prime Minister turns out to be worst than the current one, it is still essential to change him to reach the bottom and get rid of the generation of “Jotas” who is destroying the country.
To finish on a positive note: best wishes for 2011!
Apart from the usual longing for good health and peace, here are two of my wishes for 2011:
a) A return of enlightened reasoning in the media and politics. The “celebrity” &”sound-bite” takeover of modern culture has to be reversed. As a strong believer in individualism and market competition I am still hoping that the ongoing revolution in the entertainment and publishing businesses will be able to generate quality products. However, failing daily to find a single worthwhile prime time TV program after zapping more than 100 channels is getting me distressed. After all, even during the Roman Empire decline there was more than the Coliseum.
b) On the Portuguese (domestic) front my wish is that 2011 will see the departure of the current Prime Minister. He bankrupted the country and, to add shame to injury, rather than go to the IMF he is now peddling the world’s dictators (China, Libya, etc.) for financial assistance. What a disgraceful record for the democratic process in Portugal. After dilapidating the huge reserves inherited from Salazar and wasting the billions in grants received from the European Union the country is now broke. And for what? For an economic record that pales in comparison with that of Salazar, an unprecedented rise in inequality, a frightening increase in criminality and an education system in disarray? Still, despite this horrendous cost I would still chose the freedom gained in 1974. It was not democracy’s fault that we replaced a right wing form of state capitalism with a left wing variety. Nor do I believe that replacing Socrates will necessarily reverse the situation. But, even if the outlook is the same as with his predecessor, and the new Prime Minister turns out to be worst than the current one, it is still essential to change him to reach the bottom and get rid of the generation of “Jotas” who is destroying the country.
To finish on a positive note: best wishes for 2011!
Tuesday, 28 September 2010
Hayek vs. Keynes: The role of government and the dangers of totalitarianism and economic decadence
There is currently a generalized view of Keynes as the paragon of state intervention and of Hayek as the quintessential laissez-faire economist. Both views are wrong.
Keynes basic philosophy, as stated in his General Theory, is that governments should be entrusted with “the task of adjusting to one another the propensity to consume and the inducement to invest” to prevent effective demand deficiency. For him, the state should decide how much to produce (to achieve full-employment) while individuals should decide what to produce, with which resources (labor and capital) and to whom it should accrue.
For Hayek popular terms like “full employment”, “planning”, “social security”, and “freedom from want” were the fool’s-gold words, often invoked with catastrophic consequences, as in Germany where the full-employment between 1935 and 1939 was achieved at the expense of expropriating, deporting or killing 600 thousand Jews. For him monetary policy cannot provide a real cure except by a general and considerable inflation. Moreover, for him the rising monopolization of the economy was not inherent to capitalism (economies of scale) or justified by technological necessities but was instead the result of collusive agreements promoted by public policies.
Given the circumstances when they were writing, we can understand Keynes’ fear of recurrent massive unemployment destroying capitalism as well as Hayek’s alarm about the danger that rising government control would inevitably lead to a totalitarian state. However, after more than 70 years, and with the benefit of hindsight, we may now question if such fears were warranted.
After all, some of the totalitarian regimes were military defeated (e.g. the German Nazis and Italian Fascists), some imploded through inefficiency (e.g. communism in the Soviet Union and Eastern Europe) or have postponed their demise by embracing authoritarian mercantilist capitalism (e.g. the Chinese communists).
Equally, the subsequent recessions and accompanying massive unemployment were overcome without major social unrest, partly due to the generalization of unemployment insurance.
Nevertheless, we should not forget the tremendous losses caused by such collectivist experiments. The more than 60 million of casualties during the World War II started by Hitler, the 15 million victims of Stalin's reign of terror in the 1930s and Mao’s more than 20 million victims in the 1950s and 1960s during the so-called Great Leap Forward and the Cultural Revolution. Also pointless has been the waste of manpower as result of involuntary unemployment experienced in many countries ruled by collectivist (mostly socialist) regimes in 2009, namely: Zimbabwe (95%), Turkmenistan (60%), South Africa (24%), Spain (19%) or Tunisia (16%).
Given this grim past, the question is: could it have been avoided if the policy advice of Keynes and Hayek were more widespread and better understood? If not avoided it could at least be minimized. In particular this would be so, if the “prophets’ followers” shared their common care for capitalism.
Instead, most followers continued to ignore them on this, as well as the failure of all past predictions by both friends and foes of capitalism that it was doomed to fail. All such theories, from Karl Marx surplus value theory of capital accumulation, to Schumpeter’s claim that that the success of capitalism would lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals, Milton Friedman’s theory on the suicidal nature of capitalists to Solzhenitsyn's attack on the commercialized nature of Western culture have been proved wrong.
Even more importantly, all attempts to create a pragmatic so-called “third-way”, from the recent British experience by Tony Blair’s New Labor, the Czech and Hungarian attempts to create a democratic socialism in 1968 and 1956, to the more distant Fascist “third way” of the 1930s, aimed at keeping the best of socialism and capitalism ended up dramatically retaining the worst of both systems, creating more collectivism, corruption and inequality.
For Keynes or Hayek there was no alternative to capitalism or “third-way”, simply a choice about the degree of government intervention in the economy. While assessing the supply of goods and services not provided by the private sector or the regulation aimed at promoting a level playing field, Keynes, the politician, was obviously more compromising about accepting a substantial role for the government while Hayek, the theorist, was more puritan.
Some types of state capitalism (notably the Scandinavian type) have now shown that fears about the rise of authoritarianism as a result of greater state involvement in the economy, as feared by Hayek, do not materialize until a high level of public spending as a percentage of GDP is reached (about 50%). Equally, the rising share of government in the economy has some smoothing effect on the business cycle as advocated by Keynes, but after a certain level (again, about 50%) it triggers a slowdown in productivity and consequent economic decadence. Thus, Keynes and Hayek’s views are correct within a given range of state intervention, but its limits are imprecise and poorly understood.
Keynes basic philosophy, as stated in his General Theory, is that governments should be entrusted with “the task of adjusting to one another the propensity to consume and the inducement to invest” to prevent effective demand deficiency. For him, the state should decide how much to produce (to achieve full-employment) while individuals should decide what to produce, with which resources (labor and capital) and to whom it should accrue.
For Hayek popular terms like “full employment”, “planning”, “social security”, and “freedom from want” were the fool’s-gold words, often invoked with catastrophic consequences, as in Germany where the full-employment between 1935 and 1939 was achieved at the expense of expropriating, deporting or killing 600 thousand Jews. For him monetary policy cannot provide a real cure except by a general and considerable inflation. Moreover, for him the rising monopolization of the economy was not inherent to capitalism (economies of scale) or justified by technological necessities but was instead the result of collusive agreements promoted by public policies.
Given the circumstances when they were writing, we can understand Keynes’ fear of recurrent massive unemployment destroying capitalism as well as Hayek’s alarm about the danger that rising government control would inevitably lead to a totalitarian state. However, after more than 70 years, and with the benefit of hindsight, we may now question if such fears were warranted.
After all, some of the totalitarian regimes were military defeated (e.g. the German Nazis and Italian Fascists), some imploded through inefficiency (e.g. communism in the Soviet Union and Eastern Europe) or have postponed their demise by embracing authoritarian mercantilist capitalism (e.g. the Chinese communists).
Equally, the subsequent recessions and accompanying massive unemployment were overcome without major social unrest, partly due to the generalization of unemployment insurance.
Nevertheless, we should not forget the tremendous losses caused by such collectivist experiments. The more than 60 million of casualties during the World War II started by Hitler, the 15 million victims of Stalin's reign of terror in the 1930s and Mao’s more than 20 million victims in the 1950s and 1960s during the so-called Great Leap Forward and the Cultural Revolution. Also pointless has been the waste of manpower as result of involuntary unemployment experienced in many countries ruled by collectivist (mostly socialist) regimes in 2009, namely: Zimbabwe (95%), Turkmenistan (60%), South Africa (24%), Spain (19%) or Tunisia (16%).
Given this grim past, the question is: could it have been avoided if the policy advice of Keynes and Hayek were more widespread and better understood? If not avoided it could at least be minimized. In particular this would be so, if the “prophets’ followers” shared their common care for capitalism.
Instead, most followers continued to ignore them on this, as well as the failure of all past predictions by both friends and foes of capitalism that it was doomed to fail. All such theories, from Karl Marx surplus value theory of capital accumulation, to Schumpeter’s claim that that the success of capitalism would lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals, Milton Friedman’s theory on the suicidal nature of capitalists to Solzhenitsyn's attack on the commercialized nature of Western culture have been proved wrong.
Even more importantly, all attempts to create a pragmatic so-called “third-way”, from the recent British experience by Tony Blair’s New Labor, the Czech and Hungarian attempts to create a democratic socialism in 1968 and 1956, to the more distant Fascist “third way” of the 1930s, aimed at keeping the best of socialism and capitalism ended up dramatically retaining the worst of both systems, creating more collectivism, corruption and inequality.
For Keynes or Hayek there was no alternative to capitalism or “third-way”, simply a choice about the degree of government intervention in the economy. While assessing the supply of goods and services not provided by the private sector or the regulation aimed at promoting a level playing field, Keynes, the politician, was obviously more compromising about accepting a substantial role for the government while Hayek, the theorist, was more puritan.
Some types of state capitalism (notably the Scandinavian type) have now shown that fears about the rise of authoritarianism as a result of greater state involvement in the economy, as feared by Hayek, do not materialize until a high level of public spending as a percentage of GDP is reached (about 50%). Equally, the rising share of government in the economy has some smoothing effect on the business cycle as advocated by Keynes, but after a certain level (again, about 50%) it triggers a slowdown in productivity and consequent economic decadence. Thus, Keynes and Hayek’s views are correct within a given range of state intervention, but its limits are imprecise and poorly understood.
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.
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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