Milken Institute
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Capitalism's way forward
By: Milken Institute
April 30, 2012
The Global Conference "Future of Capitalism" panel agreed that it indeed has a future - after all, consider the alternatives. But it won't look entirely like capitalism as we know it, largely because it's relocating.

Its destination is China and other emerging markets. Yes, you've heard that before. These scholars in this session, however, drilled down into some of the unanswerable but vital questions that come up as the old gives way to the new, the traditional to trial-and-error.

To put an eye-opening point on it, the discussion featured a chart compiled by Morgan Stanley mapping the share of global consumption enjoyed by middle classes of various regions. Comparing 2009 numbers with 2030 projections, the EU is predicted to shrink by half, while the U.S. may plummet from 21 percent to 7 percent.

Economic historian Niall Ferguson considered that the leading so-called state capitalist countries have outpaced the free-market West in GDP growth. So does that mean the future lies with that model? Not necessarily, despite assumptions. Ferguson pointed out that a higher proportion of GDP passes through Western governments than occurs in China and Russia, and China is expected to launch a sizable round of industrial privatizations, especially after the upcoming change of leadership. Raghuram Rajan of the University of Chicago said that as emerging nations build their corporate economies with the help of the state, there comes a time when those firms can compete on their own. The hard part is knowing when to let go, he added.

As governments in the West rack up bills to bail out their hobbled economies, meanwhile, there's the sense of a convergence of systems.

With momentum building in new climes, the discussion returned again and again to the necessity for reliable rule of law to create stable markets in goods, services, labor and capital. In emerging markets, that's not always assured. Ana Palacios, the former foreign minister of Spain, is big on this theme, unhappily noting Argentina's expropriation of her country's interest in oil giant YPF.

More and more, Rajan admonished, the West will have to learn to sell to the emerging consumer. If you are targeting markets thousands of miles away, you have a challenge on your hands, including the potential theft of your intellectual property. But your other option is losing those prized purchasers to homegrown companies.

Another component of success in emerging markets is human capital. Suffice it to say, there was a bit of lamenting the public education systems in Europe and the U.S., but praise for private schools and the competition among them.

Yet there's no way to escape the fact that the future predictably defies prognostication. "We have little sense for how to manage competing capitalist economies," said the Milken Institute's Peter Passell. "We understand little about how this converged world will look."

Full video of this discussion is available here.


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