Asia and the West need stakeholder capitalism

IIt has not always been easy to discern from a Western perspective, but the rise of China and Asia has been the most important economic development of the past four decades. In 1979, many Chinese had an average income of less than a dollar a day. Today, Shenzhen, the technological capital of China, has a GDP per capita of nearly $ 30,000. The city is home to tech giants such as Huawei, Tencent and ZTE, and a “creators movement” of tech startups. And many other Chinese cities, including Hangzhou, Shanghai, and Zhongguancun in Beijing (home to the creator of TikTok ByteDance), have made equally impressive progress.

When I first visited the country in April 1979, it was still reeling from two centuries of unrest. But the new Chinese leader, Deng Xiao-ping, had already started implementing an experimental set of policies, borrowed from Singapore, called “Reform and Opening”. In its early days, it consisted of creating “Special Economic Zones”. In cities like Shenzhen and Fuzhou, foreign direct investment has been welcomed and many features of a market economy have been introduced. The economic development it stimulated was then used as a flywheel to create more growth and learning on the road.

It turned out to be a runaway economic success. China’s growth skyrocketed, and in the early 2000s it entered the World Trade Organization. Around the same time, it began to gain a technological advantage in various manufacturing industries, including electronic equipment, household appliances and textiles. And, little by little, it began to export its own model of growth to other emerging economies in the region. As a result, just as growth in the West has slowed, it has soared in Asia. By its own calculations, China has lifted 740 million of its own citizens out of poverty. It has experienced double-digit average growth for more than three decades. And it has also helped many other emerging markets achieve higher growth rates.

As a result, the “Asian century” has already begun, by some measures: 2020 was the first time in two centuries that Asia’s GDP, as a percentage of world GDP at purchasing power parity, was higher than that of the rest of the world. the world. The historical importance of this development cannot be underestimated. The last time Asia dominated the world economy was in the early 19th century, when the first industrial revolution was beginning. Today, at the dawn of the Fourth Industrial Revolution, Asia is returning to the dominant position it had occupied for millennia.

But how does China achieve this success? The system which enabled it to leap forward could be summed up as “state capitalism”. It is unmistakably capitalist, since the private sector produces more than 60% of the GDP in China. But the system is also state dominated, as the state retains its primacy over other stakeholders in at least three ways. He keeps a strong hand in the allocation of resources and opportunities. It can work in virtually any industry. And it can lead the economy through large-scale infrastructure, research and development, education, health care or housing projects.

This state capitalist system contrasts with the system of “shareholder capitalism” prevailing in the United States and much of the Western world. In this system, the interests of shareholders take precedence over all others. Companies operate with the aim of returning the highest possible dividends to shareholders. And, according to theory, the invisible hand of the market ensures that the results for the company are optimal. In the 1980s and 1990s, shareholder primacy led to a long period of economic growth in the United States and made it the most prosperous nation in the world.

The two economic systems defended by the United States and China have thus led to enormous economic progress in recent decades. But each has also resulted in significant social, economic and environmental disadvantages. They have led to growing inequalities in income, wealth and opportunity; heightened tensions between the haves and have-nots; and above all a massive degradation of the environment. These shortcomings in the West are well documented. But they are also present in the Asia region.

Let us first consider the environmental crisis. Many cities in emerging markets are among those suffering the worst effects of environmental degradation, pollution and climate change. More than 90% of the world’s population breathe air that the World Health Organization considers dangerous, the organization said in 2016. But the 20 most polluted cities are all in Asia. In recent years, China and India were also responsible for the lion’s share of new coal and gas power plants. In recent years, awareness of environmental concerns such as air pollution and COâ‚‚ emissions has grown significantly in China. The country is committed to becoming COâ‚‚ neutral by 2060. But it still has a long way to go.

The issue of inequalities is also a major challenge for China and other Asian economies. Inequality in China increased almost continuously from the start of Deng Xiaoping’s reforms until around 2010. The policies she pursued, the World Inequality Lab wrote, caused “unprecedented increases in national income” but also “significant changes in the distribution of the country’s income”. In the years that followed, the rate of inequality growth appears to have slowed in China, but the resulting picture is still one of significant economic disparity.

Like the two of the world’s superpowers in the race for economic and political superiority, the question may arise as to which of their economic systems is the best recipe for building prosperous and stable societies. But this is a false dichotomy: neither shareholder capitalism nor state capitalism works for all people and for the planet.

Generating wealth today requires a highly innovative economy driven by an entrepreneurial spirit. But modern societies no longer tolerate excessive inequalities. And the use of our natural capital has a deferred cost, as well as an increasingly intolerable impact on all those who suffer from climate change and pollution. This is why it is imperative to place social, environmental and good governance objectives at the heart of society.

Doing so is possible under a third system: stakeholder capitalism, in which the interests of all stakeholders in the economy and society are taken into account, and the well-being of our people, of our planet and our progress, are anchored in its genetic system.

Stakeholder capitalism would suit many Western societies well, given the damage done by focusing only on short-term profits, not long-term sustainability and fairness. But it would also benefit China and emerging Asian economies, given the shortcomings of state capitalism. It is time for policymakers and business leaders around the world to consider implementing it.

This text has been adapted from Stakeholder capitalism: a global economy serving progress, people and the planet, by Klaus Schwab and Peter Vanham

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