Capitalism varies across as well as within individual countries

Developing countries are often described as dualistic societies, where the private sector comprises a formal sector of large firms and an informal sector of medium or small enterprises.  (Bloomberg)
Developing countries are often described as dualistic societies, where the private sector comprises a formal sector of large firms and an informal sector of medium or small enterprises. (Bloomberg)

Summary

  • A useful way to sub-classify a capitalist economy is to map its enterprises by nested dualisms that assess their size, degree of formality, political linkages and exposure to market competition.

There is a large literature on the varieties of capitalism seen around the world. In their Introduction to the much-cited volume on Varieties of Capitalism (Oxford University Press, UK, 2001), Hall and Soskice classified capitalist countries into two broad groups: Liberal market economies (LMEs) such as the US, UK, Canada, Australia, New Zealand, and coordinated market economies (CMEs) such as Germany, France, Japan, Sweden and Austria. In LMEs, firms coordinate their interaction with each other and other stakeholders through hierarchies and the market. In CMEs, firms rely more heavily on non-market institutions to coordinate their interactions.

LMEs and CMEs are polar models. Capitalist countries in the real world lie along a spectrum between these two ends, yielding intermediate models such as Mediterranean capitalism, East Asian capitalism, Social capitalism, state-guided capitalism, etc. This taxonomy is usually used to classify whole countries as belonging to one or another group. In this column, I suggest that varieties of capitalism are to be found even within countries. I should add that the lens of nested dualisms proposed here is a by-product of my ongoing conversation with Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, though he is in no way responsible for the views expressed here.

Developing countries are often described as dualistic societies, where the private sector comprises a formal sector of large firms and an informal sector of medium or small enterprises, including small farms in agriculture. However, the existence of thousands of small businesses alongside a small number of large firms is not limited to developing countries. It is also typical of advanced capitalist countries, such as Italy, Germany, Japan, Singapore, South Korea, the UK and US.

Global generalizations are inevitably heroic over-simplifications. Nevertheless, mom-and-pop stores, small restaurants, pharmacies, mechanic workshops, etc, are global examples of the informal sector. Though employing perhaps 20 employees or less, these enterprises are ‘for profit’ businesses, just like the large corporations. Beyond that, however, these businesses belong to a very different eco-system of technologies, organization, markets and institutions. Typically, they are labour-intensive, low-productivity enterprises, though some may also be quite capital-intensive, high-productivity. One important feature of this sector is that these businesses operate in highly competitive markets, with a very large number of competitors, offering us the closest real-world example of a text-book model of ‘perfect competition.’ Medium sized enterprises employing up to, say, 100 employees belong to the same ecosystem. But, being larger, they enjoy some scale economies. Their size also provides them space to adopt more productive capital-intensive technologies. Together, medium and small enterprises constitute the informal sector in a capitalist country. The difference between the informal sectors of advanced and developing countries is that in the former, informal sectors are better regulated and have much higher levels of technology, productivity and wages.

The ‘formal’ private sector in capitalist countries broadly has two distinct groups of firms. The first group is of firms operating in competitive markets with a large numbers of competitors. They may employ, say, 100-1,000 workers, though there would be large variations in this across countries and industries. They may have high or low labour intensity and high or low productivity, depending on their industry or service. Their defining feature is that they have no market power and are price-takers, not price makers. I call this the competitive formal sector.

In contrast, there is the oligopolistic formal sector, comprising a small number of large firms, each with a large market share in its industry or field of service. Sometimes, these are conglomerates operating in multiple industries or services. They may be labour or capital intensive, depending on the industry or service. Productivity would also vary accordingly. The main difference between firms in the oligopolistic formal sector of advanced and developing countries is that productivity and wages in the latter are likely to be much lower.

Finally, the oligopolistic formal sector is further partitioned in terms of political influence. There are oligopolistic firms which enjoy the goodwill and support of their governments, but do not or cannot influence government policy. They are not ‘politically connected.’ In contrast, there are a few oligopolistic firms that not only have market power, but also political influence. They can manipulate government policy to their advantage. They sometimes use such influence to erect entry barriers to competition. This is the subsector of politically connected oligopolistic formal sector firms. Developing countries are sometimes described as ‘crony capitalist’ countries due to the presence of such firms. But even the most advanced capitalist countries have such politically connected firms in their formal sector.

The broad template of varieties of capitalism within individual countries has been presented above as nested dualisms: informal sector versus formal sector; small versus medium enterprises within the informal sector; competitive versus oligopolistic sub-sectors within the formal sector; and politically connected versus politically unconnected firms within the oligopolistic formal sector. It is a very broad template, since it is a global lens. Its application to individual countries would have much greater granularity. In India, too, the informed reader can judge for herself whether this template, applied with greater granularity, can be a useful lens through which to study the varieties of capitalism present in the country.

These are the author’s personal views

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