23 January 2012
As part of its special report on state-sponsored capitalism, published in its January 21st issue, the Economist berated emerging markets, including China, and some developed countries, for adopting a model of capitalism in which the state owns many of the prize corporate assets.
The special report was credited to the magazine’s management editor and Schumpeter columnist Adrian Wooldridge, who may also have penned the magazine’s ridiculous column, published on January 7th, in which it was argued that anti-banker feelings could create a new holocaust!!
The special report, replete with a cover showing Lenin brandishing cigar with a ‘$’ band, culminated with an article headlined “And the winner is… For all its successes, state capitalism has fatal flaws“.
In this the Economist wrote: “But state capitalism nevertheless suffers from deep flaws. How can the state regulate the companies that it also runs? How can it stop itself from throwing good money after bad? How can it remain innovative when innovation requires the freedom to experiment?”
I don’t dispute the existence of “fatal flaws” in the state-sponsored model, and fully accept that it gives rise to a heightened risk of cronyism, stasis and corruption. What infuriates me about the article is that it is so one-sided. Wooldridge seems to be completely oblivious (or perhaps he is wilfully blind?) to the fact that exactly the same problems exist in developed countries, including the UK.
He might, for example, have mentioned that the same the inability to regulate, the same tendency to throw good money after bad, the same inability to innovate arises when the state ‘sponsors’ an oligopoly (as it arguably does in UK electricity supply) or where it nationalises the key players in an oligopoly, as it did with Royal Bank of Scotland and Lloyds Banking Group, in October 2008, whilst mollycoddling the others.
The magazine’s failure to even point out that cosy links between state and business have strengthened in countries such as the US and UK in recent years, through the growing ‘corporatisation’ of our politics, is an astonishing lapse.
In the UK context, the problem of revolving door corporatism is perhaps illustrated by the career of Sir Steve Robson. In 1997-2001, while serving as the second most senior Mandarin in the Treasury, Robson played a part in introducing a series of reforms that were highly beneficial and advantageous to bankers; after leaving the Treasury, he accepted a non-executive directorship at the Royal Bank of Scotland in July 2001; then in February 2009, despite his part in leading RBS to near collapse in October 2008, Robson retained his positions both as director of the UK’s principal oversight body for corporate governance and accounting integrity, the Financial Reporting Council, and as a non-executive directors of the global mining group Xtrata.
Perhaps the existence of a rapidly-spinning “revolving door” between politics/government/Whitehall/regulators and business/finance/the professions is no less corrosive or corrupting than the more overt cronyism highlighted by Wooldridge in the special report? Just because the links between politics and business are more overt in the emerging economies doesn’t mean the magazine, which pretends to believe in free markets, should ignore their flowering in the West.
I went as far as adding a comment to The Economist piece, accessible via this permalink.
You make no mention of the corporatisation of politics in western countries, including the US and UK, nor of the corrupting influence of Gordon Brown’s decision to nationalise and part-nationalise a number of UK banks.
The socialisation of bank losses that occurred as a result of the government recapitalizations of RBS and Lloyds in October 2008 has corrupted regulation and created intense moral hazard.
The ‘revolving door’ that exists between business/the City/the professions and Whitehall/politics/government/regulators is no less harmful to the fabric of our economy.
When senior PWC staff are seconded to HM Treasury, they are likely to put the interests of their firm (and probably also the interests of their friends in the City) ahead of the interests of the wider economy or UK citizens.
They are unlikely to have many qualms about promoting policies (e.g. PPP/PFI and tripartite regulation of the financial sector) that are good news for their firms’ bottom lines, even if there’s a risk these will end up being disastrous for the taxpayer. Surpisingly however, government departments are awash with secondees from ‘Big Four’ accountancy firms, and they are still given a lot of credence.
The so-called ‘revolving door’ also works in the other direction, ensuring that UK politicians and regulators will, for example, “go easy” on a particular sector, especially when they have the “carrot” of a lucrative post in that sector once they leave politics/regulation dangled in front of their nose. From the FSA alone there are scores of examples.
But former prime minister Tony Blair is, perhaps, the best example of all.
(1) In 1997-2007 Blair and his new Labour government introduced a regulatory regime that was ultra-favourable to banks and the financial sector.
(2) In June 2007 Blair stepped down as prime minister.
(3) In January 2008 Blair walked into $1m a year ‘part-time senior adviser’ role with JP Morgan Chase.
Whether or not that JP Morgan sinecure was dangled in front of Blair while he was still in office, it is extremely likely that the prospect of such a thing influenced his decisions and policies when in Downing Street. That in itself is anti-democratic.
Sir Steve Robson, who once ran the Treasury, is another example of someone who has hopped between public and private sectors with sometimes disappointing results.
Your failure to even mention bank bailouts in western countries or the pernicious influence of this ‘revolving door’ between private and public sectors in western economies mars an otherwise good piece.