It's Denmark Versus Singapore for the Growth Crown

It's Denmark Versus Singapore for the Growth Crown

(Bloomberg View) -- Communism is officially dead. North Korea, the last holdout of the 20th-century Soviet-style central planning, is moving toward a hybrid economy. David Volodzko in a Bloomberg View op-ed reports:

Economic reforms made in 2011 have begun to take hold, allowing factory managers to set salaries, find their own suppliers, and hire and fire employees. Farming collectives have been replaced by a family-based management system, which has led to far greater harvests. The government has even come to tolerate private enterprise on a limited basis…By some estimates, the private sector now accounts for up to half of GDP.

North Korea’s conversion follows similar transitions by Cuba and Vietnam. With the grudging capitulation of these last bastions, the great experiment that Vladimir Lenin and Joseph Stalin began is over. And that experiment was a colossal failure. Market economies are necessary for getting rich.

This doesn't mean, however, that North Korea and the other post-communist states will become liberal democratic states. As China, Russia and other countries have demonstrated, it’s possible to combine authoritarian governance with a largely market economy. In these systems, sometimes grouped under the rubric of state capitalism, the government still controls large portions of the economy -- usually natural-resource extraction, finance and telecommunications. The rest is largely left to the private sector, though the state still maintains the prerogative to intervene anywhere, at any time, if it so chooses.

Conceptually, this isn't really that different from what rich Western countries do. Governments in Europe, the U.S. and East Asia tightly regulate utilities, build and maintain roads, own and insure large parts of the mortgage market, bail out and regulate big banks, operate health-care systems and intervene in their economies in a number of other ways. Telecom and natural-resource companies are private, but this is a minor difference compared to the vast gulf between the Eastern and Western bloc systems during the Cold War.

Meanwhile, democratic countries are embracing other kinds of big government. Europe, developed East Asia and the U.S. have large and generous welfare states. Most of these countries actually spend more than authoritarian Russia as a percentage of gross domestic product:

It's Denmark Versus Singapore for the Growth Crown

Much of this spending is on transfer payments -- health care and social security in particular. And the political winds may be pushing toward even more redistribution. Even in the U.S. -- generally considered the bastion of free-market capitalism during the Cold War -- the stigma attached to the word “socialism” is disappearing, and there is strong support for a universal health care system:

It's Denmark Versus Singapore for the Growth Crown

Meanwhile, Finland, Canada and the Netherlands are experimenting with universal basic income, a program that pays everyone a regular government stipend. Even some libertarians in the U.S. are warming to the idea.

Why are democratic countries turning to redistribution, while authoritarian powers seem to be reducing the role of government? One reason is that democracies tend to be richer, and wealthier nations simply have more money to spend on safety nets for their poorer citizens. It’s possible that as autocracies like China grow richer, their citizens will also demand generous welfare states -- or even a transition to democracy.

But this isn't written in stone. Many see Singapore as an authoritarian capitalist success story. The tiny nation is wealthier than almost any democratic nation, yet it remains a one-party state with low levels of government spending and a light regulatory touch. It seems possible that instead of following the path of the democratic-socialist nations, China and other post-communist countries will end up looking more like Singapore. They certainly seem to be aiming for something along those lines.

So although it’s too early to know for sure, it looks like a new division is replacing the old Cold War dichotomy of democratic capitalism versus authoritarian communism. In the new system, democratic-socialist countries will face off against authoritarian state-capitalist ones. It will be the Denmark model versus the Singapore model.

Will the democracies prevail this time around? No one knows. But the authoritarians could have several advantages. First, redistribution costs a lot of money. Resources that are spent on caring for the sick and the poor can’t be spent on military power -- this is the famous “guns versus butter” trade-off.

Second, democratic-socialist nations may be tempted to do some of their redistribution through heavy regulation of private industry or trade protectionism; this could potentially distort their economies and allow authoritarian countries to catch up or even surpass them. No one really knows how damaging the various forms of protectionism and regulation really are, but this worry can’t be dismissed.

Finally, there’s the possibility that open, democratic societies may be at a disadvantage in the modern age of information warfare. Russian interference in Western politics is now a regular phenomenon, while Chinese and Russian control of the internet limits democracies’ ability to retaliate in kind.

So while democracy defeated authoritarianism in the Cold War, this time around it won’t have the deck stacked in its favor. When authoritarian countries embraced Stalinist communism, they hobbled their economies. Don't assume they will make that mistake again.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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