Japan astounded the world with its economic performance for decades. Reuters/Toru Hanai

Why policy differences continue to exist despite globalisation’s evolution

Most experts say globalisation spreads wealth, bringing people out of poverty and nations closer together. But right now some politicians and their supporters are arguing it simply increases inequality. What’s really going on? Our Globalisation backlash series offers some answers.

The study of “globalisation” has been distinguished by unresolved disagreements about exactly what it is and how much of it may have actually occurred. One thing most observers agree on, though, is that economic processes have been central drivers in its evolution and gone further than anything else.

In the first flush of globalisation studies this led to some rather excited claims about the imminent “end of the state” and the possibility public policy would eventually converge on the world’s “best practice”.

In reality, however, national economies continue to look rather different, and so do their comparative performances. Southern Europe’s notoriously high levels of youth unemployment, for example, have added to the general sense of disillusion with the European Union.

Such problems were one of the reasons that Margaret Thatcher famously claimed that in an era of footloose capital and powerful money markets and ratings agencies:

There is no alternative.

Yet even before the 2008 global financial crisis demonstrated the ratings agencies were either too close to their clients or equally beguiled by the now-discredited efficient market hypothesis, it was clear not every country had embraced neoliberalism, nor succumbed to its excesses and flaws as a consequence.

Whatever the Cold War may or may not have done in the strategic arena, one thing became dramatically apparent in the economic sphere: capitalism was ubiquitous, but it looked very different in Japan, Germany, the US and China.

One of the reasons the global financial crisis did not badly affect China was that its policymakers still retained high levels of control over its version of the free market.

The varieties of capitalism

In the absence of alternatives, academic interest increasingly focused on what came to be known as the “varieties of capitalism”.

While the borders of formerly discrete national economies may have become a good deal fuzzier than they once were, differences persisted – nowhere more so than among Australia’s all-important Asian trade partners.

I wrote my PhD thesis on what was then Australia’s most important bilateral economic relationship and Japan’s very different competing form of capitalism. While Japan may be a byword for stagnation and underperformance these days, it’s important to remember it astounded the world with its economic performance for decades.

It led the entire East Asian region in an unprecedented and highly successful process of industrialisation.

Equally importantly, Japan provided a blueprint for state-led development, which has been replicated with varying degrees of success throughout East Asia. While they may be loath to admit it, China’s policymakers have drawn heavily on the Japanese model.

Concern is growing that China may be about to experience some of Japan’s problems, too. It is struggling to find a balance between state guidance and control and the introduction of a greater role for market mechanisms and the private sector.

Learning the lessons?

One of the points that came out of the comparative study of divergent forms of capitalism is that different economic systems have their own strengths and weaknesses.

Crucially, weaknesses may persist and prove impervious to reform – because they are embedded in a political context that mitigates against change, even when it is obviously needed.

Western critics frequently point to the continuing importance of supposedly inefficient state-owned enterprises in China, or to powerful, politically connected construction companies in Japan, as evidence of the shortcomings of Asian-style “crony capitalism”.

But let he who is without structural defects cast the first reform package.

For example, the pervasive influence of an unreformed Wall Street has become a major problem in the US and a prominent election issue. Similarly, Francois Hollande’s efforts to reform France’s rather archaic and divisive labour relations system reflect a unique constellation of historically contingent forces that distinguish politics and economics in that country.

Capitalism in Australia may have much in common with its Anglo-American counterparts, but it is equally hamstrung by the path-dependent legacy of the past. There is no greater illustration of this possibility than the endless debates about the federation and the division of tax revenues and responsibilities between Canberra and the states.

Many of Australia’s Asian neighbours may be just us astounded and incredulous about the way we do things as we often are about them. Historically embedded relationships, powerful vested interests and even ways of thinking about economic and public policy make it as difficult to bring about change here as it is just about anywhere else.

Consequently, one of the greatest insights that comes from the study of comparative capitalism is that there is actually something to compare in the first place. Significantly, the differences are not disappearing despite the processes associated with globalisation.

On the contrary, the competition between different forms of capitalism I became obsessed with 20 years ago has not disappeared, even if the arena and the key protagonists have shifted somewhat.

The rise of Chinese-style capitalism may yet rewrite the international regulatory rule book in the way the Americans did when they became the world’s most successful economic power.

Or, then again, it may not. The one really universal and unchanging reality about capitalism everywhere is its vulnerability to periodic crises.

China may be teetering on the brink of what would be its first major experience of something that has plagued the West for as long as capitalism has existed. How China deals with it really might throw up some important comparative lessons, even if the differences persist.