Calls to bail weak companies out with public funds must be resisted for true capitalism to prevail
Once upon a time, it was useful to think of free enterprise-based capitalism and electoral democracy as buddies. One supported the other, since both were about freedom. But trends in two versions of capitalism—the free enterprise one of the US and the authoritarian variety of China—should force us to re-examine this hypothesis. Faced with periodic economic crises, American politicians are wooing voters with socialist rhetoric and promises of a bigger state; the authoritarian Chinese state is metamorphosing into a new kind of imperium that is inimical to democracy. China is growing richer, but neither more democratic nor responsible.
The wooing of domestic audiences, whether through the ballot box in the US and Western democracies, or through an implicit social consensus in China, where citizens trade political freedoms for greater prosperity, has resulted in a blurring of the line that separates politics from economics.
Four major economic crises seem to have hastened that trend: the global financial crisis of 2008, the eurozone crisis of the subsequent period, the post-covid economic collapse this year, and the 30-year Japanese debt binge. From the current mania of endlessly printing money to appease voter anxieties, it would seem that economics is just politics by another name. Despite its flaws, capitalism works only when a free market is allowed to play its role in separating the strong from the weak; creative destruction is the key to innovation and viable growth. If deadbeat companies are allowed to remain afloat by taxpayer-financed bailouts, especially if the funds are obtained not from tax revenues but debt, then even competitive companies will end up sinking under the pressure. In short, trying to save too many bad apples could leave the whole basket rotten.
Few observers seem willing to give India’s Narendra Modi government credit for trying to follow relatively sensible economics (during the first four years of its first term) and pushing unviable companies towards liquidation or sale to stronger companies. At no time in the history of India have companies owned by some of our biggest promoter groups—the Tatas, Ruias, Ambanis (the Anil Ambani part), Dhoots, Jaiprakash, Binanis, GVK, GMR—been forced to either sell their troubled companies or opt for bankruptcy proceedings. The process is far from complete, or even smooth, and unviable parts of the micro, small and medium enterprise sector are likely to see a gruesome shakeout in terms of jobs lost and loans gutted. But at the end of it all, there is a possibility that only relatively viable firms will remain afloat.
It is easy to say that “matsya nyay"—where the big fish swallow or kill the small—is morally reprehensible, but protection should be restricted to human beings, not companies.
In the current covid crisis, the Modi government has tried hard to protect the fisc by focusing its expenses in cash and kind only on the most vulnerable (migrant labour, the poor, etc.), and avoiding massive bailouts for the multitude of sectors now in distress. While there is little doubt that the fisc is going to be overstretched for a while, the government has so far resisted calls to open the spigots of massive debt-financed cash bailouts for all and sundry.
India is at least attempting to maintain some modicum of fiscal restraint in how it deals with the covid-induced economic crisis. We can’t say that about the US, Europe or Japan.
In an article for The Wall Street Journal, Morgan Stanley’s Ruchir Sharma says that the world has repeatedly been using debt to fund stimulus programmes on the assumption that all these are not only necessary, but can easily be financed in a near-zero interest rate regime. But cheap money enables even “zombie firms" to borrow, leading to huge losses in productivity.
The downside of such fiat money- fuelled assaults on market mechanisms is that debt keeps piling up, and this debt may be financing not good quality investment, but stock market binges or gold purchases. It enables giant monopolies to become even bigger and more menacing. If capitalism is supposed to prevent monopolies, either by allowing market forces to produce competent rivals or through sensible regulation, prolonged cheap money policies have delivered the exact opposite. Big Tech monopolies and other megacorps seem to have gained the most. The same speculators who brought on the 2008 crisis are again the prime beneficiaries of covid bailouts in the US.
Capitalism is already under attack on many fronts, from trade barriers to its curbs on the free movement of people. It hardly needs the world’s big capitalist democracies to use any and every economic crisis to print more currency in the name of helping the poor and then ending up financing the speculative wealth of the richest of the rich.
The ever-growing State and push for welfarism are slowly ruining capitalism, as democratic politics requires politicians to make payouts to voters at the cost of fixing the structural problems that constrain growth. These policies could bankrupt economies as well as democratic politics.
Capitalism faces an existential crisis, just as communism did in the late 1980s.
R. Jagannathan is editorial director, ‘Swarajya’ magazine