Both Asia and the West Need Stakeholder Capitalism

It hasn’t always been easy to discern from a Western vantage point, but the rise of China and Asia has been the most important economic development of the past four decades. In 1979, many Chinese people had an average income of less than a dollar a day. Today, Shenzhen, China’s tech capital, has a per capita GDP of almost $30,000. The city is home to tech giants such as Huawei, Tencent and ZTE, and a “maker movement” of tech startups. And many other Chinese cities, including Hangzhou, Shanghai and Beijing’s Zhongguancun (home to TikTok creator ByteDance), made equally impressive progress.

When I visited the country for the first time in April 1979, it was still reeling from two centuries of turmoil. But China’s new leader, Deng Xiao-ping, had already begun pursuing an experimental set of policies, borrowed from Singapore, called “Reform and Opening-Up.” In its early days, it consisted of creating “Special Economic Zones.” In cities such as Shenzhen and Fuzhou, foreign direct investment was welcomed, and many features of a market economy were introduced. The economic development it spurred was then used as a flying wheel to create further growth and learning down the road.

It turned out to be a runaway economic success. China’s growth soared, and by the early 2000s it entered the World Trade Organization. Around the same time, it started to gain a technological edge in various manufacturing industries, including electronic hardware, appliances and textiles. And, little by little, it began exporting its own growth model to other emerging economies in the region. As a result, just as growth in the West slowed, it sky-rocketed in Asia. By its own calculation, China has lifted 740 million of its own citizens out of poverty. It averaged double-digit growth for over three decades. And it helped many other emerging markets achieve higher growth rates too.

As a result, the “Asian Century” has already begun, according to some measures: 2020 was the first time in two centuries that Asian GDP, as a share of world GDP at purchasing-power parity, was higher than that of the rest of the world. The historical importance of this evolution cannot be underestimated. The last time Asia dominated the world economy was in the early 19th century, as the First Industrial Revolution got under way. Today, at the dawn of the Fourth Industrial Revolution, Asia is reconnecting with the dominant position it held for millennia.

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But how did China achieve this success? The system that enabled it to leap ahead could be summarized as “state capitalism.” It is undeniably capitalist, as the private sector produces more than 60% of GDP in China. But the system is also state-dominated, as the state retains its primacy over other stake-holders in at least three ways. It keeps a strong hand in the distribution of both resources and opportunities. It can intervene in virtually any industry. And it can direct the economy by means of large-scale infrastructure, research and development, and education, health care or housing projects.

This state capitalist system contrasts to the system of “shareholder capitalism” dominant in the U.S. and much of the Western world. In that system, the interests of shareholders dominate over all others. Companies operate with the purpose of returning the highest possible dividends to shareholders. And, the theory goes, the invisible hand of the market ensures the outcomes for society are optimal. In the 1980s and 1990s, shareholder primacy led to a long period of economic growth in the U.S. and turned it into the most prosperous nation on earth.

Both the economic systems championed by the U.S. and China have thus led to tremendous economic progress over the past few decades. But each has equally brought about major social, economic and environmental downsides. They led to rising inequalities of income, wealth and opportunity; increased tensions between the haves and the have-nots; and, above all, a mass degradation of the environment. Those shortcomings in the West are well documented. But they are equally present in the Asia region.

Consider first the environmental crisis. Many cities in emerging markets are among those experiencing the worst effects of environmental degradation, pollution and climate change. Over 90% of the world’s population breathes air the World Health Organization deems unsafe, the organization said in 2016. But the 20 most polluted cities are all in Asia. China and India in the past few years were also responsible for the lion’s share of new coal and gas plants. In recent years, awareness about environmental concerns such as air pollution and CO₂ emissions has grown a lot in China. The country pledged to become CO₂ neutral by 2060. But it has a long way to go.

The issue of inequality is a major challenge for China and other Asian economies as well. China’s inequality almost continuously increased from the start of Deng Xiaoping’s reforms until around 2010. The policies it pursued, the World Inequality Lab wrote, caused “unprecedented rises in national income” but also “significant changes to the country’s distribution of income.” In the years since, the rate of inequality growth does seem to have slowed in China, but the resulting picture is still one of significant economic disparity.

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As the two global superpowers race for economic and political superiority, the question can be raised which of their economic systems is the best recipe for building prosperous and stable societies. But it is a false dichotomy: neither shareholder nor state capitalism works for all people and the planet.

Wealth generation today requires a very innovative economy driven by entrepreneurial spirits. But modern societies do not tolerate excessive inequalities anymore. And using our natural capital has a delayed cost, as well as an increasingly intolerable impact on all those who suffer from climate change and pollution. This is why it is imperative to put social, environmental and good-governance objectives at the heart of society.

Doing so is possible under a third system: stakeholder capitalism, in which the interests of all stakeholders in the economy and society are taken on board, and the welfare of our people, and our planet and progress, are embedded in its genetic system.

Stakeholder capitalism would fit many Western societies well, given the damages done by focusing only on short-term profits, not long-term sustainability and equity. But it would benefit China and the emerging Asian economies too, given the shortcomings of state capitalism. It is time policymakers and business leaders around the world consider implementing it.

This text was adapted from Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet, by Klaus Schwab and Peter Vanham

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