Both free markets and global engagement are strikingly popular in China and India, at least amongst urbanites. As Ajay Shah recently pointed out, survey results from the Pew Global Attitudes Projects found some 80% of the Chinese and Indians were in favour of free markets in 2009, and well over 90% support international economic integration. These are the highest ratios of any country surveyed, and have risen significantly since the beginning of the decade.
But this was the worst of times at the core of global capitalism. Ten years ago, most people would have said the US exemplified the most advanced form of capitalismwhether they liked it or not. America was the home of diversified ownership, as opposed to old-style family business, of venture capital, of the transparency of sound accounting and of the most sophisticated forms of finance, all complemented by consolidated institutions of democracy to provide checks and balances against any capitalist abuse.
Today, as the decade ends, we see a system mired in instability, rents and influence. Early in the decade, accounting scandals at Enron and WorldCom revealed corruption at the heart of great American corporations, alongside failures in institutions of accountability. Steady growth for much of the decade delivered remarkably limited material benefits to most of the population: median incomes stagnated, even as top executives got seemingly obscene salary increases. Financial innovationoften of dubious or negative social valuedistorted the market for talent, pulling some of the brightest minds into finance and away from elsewhere. And, of course, asset bubbles were a defining theme, culminating in the financial crash. Yes, an impressive policy response averted catastrophe, but taxpayers will be picking up the bill for a long time.
A major thread has been revelations of the distorting role of influence over the state. This was evident in the role of big finance in the crisis response, large distortions shaping the food industry, resistance to health reform from private health insurers, and rearguard action against sound policy on climate change.
So, where does this contrast leave us The question is not whether there is a better system than capitalism, but whether overall societal structures can be designed that support dynamic, innovative and inclusive capitalism and widespread social protection.
Karl Polanyi had two relevant insights, writing in the middle of the last century.
The first is that markets dont operate in a vacuum; the institutional context for market functioning is created by state action. The 19th-century movement to market liberalism was one of proactive state endeavourdespite the ideology of a self-regulating market. A second insight is that societies will always, sooner or later, seek social protection, through formal or informal political means, vis--vis the vicissitudes and inequities of the market. The issue is the form this takes and how this interacts with broader questions of conflict and change.
Both insights are relevant to Indiaand indeed to China and other countries. While surprisingly resilient growth is a source of short-term optimism, there remain big questions over the institutional bases for capitalist functioning and protection in the coming decade. As both history and the contemporary experience of the US show, there is a high risk that sectional interests and the functioning of the political market will create systems that are both distorted and inequitable. Yet it is possible to imagine designs that provide incentives for innovation, foster competition, protect minority shareholders, take account of environmental and social externalities of capitalist action, and protect all workers and households in ways that do not make a mess of the functioning of formal labour markets.
The state will be the main site in which such designs are shaped. It is easy to decry the ills of the Indian state and look to the private sector to solve the future. This is a mistake. For good or ill, political and administrative forces that meet in the varied arms of the state will be decisive in these institutional designs. Absent deep, continuing reform of state functioning, the goals of long-term dynamism and a socially acceptable level of protection will be in jeopardy.
The author is at the Harvard Kennedy School and the Centre for Policy Research