Two sides of the same coin

Bo Ekman  (Consultant - based in Stockholm)

Democracy is the best method we have for creating political legitimacy. For creating economic values, there is no better method than capitalism.

Capitalism is a method for prioritising capital allocation. Method does not equal ideology. Democracy is a method to choose the ideology that for a certain period will own the political power.

When socialists use the expression "capitalism", they tend to imply that it is a distinct political ideology in competition with others. That is not the case. Capitalism is competing with other methods, such as state capitalism or central planning, for effective value creation. People decide through elections - or revolutions - what method to choose.

Democracy and capitalism-market economy are two sides of the same coin. Markets work if people have the right to private ownership and access to a political democracy that guarantees the honesty and transparency of markets and access to the free flow of information. The financial markets are especially sensitive to restrictions in the free flow of information. Freedom of speech and political transparency are the best guarantors for the sound functioning of stock exchanges and for avoiding financial bubbles that inevitably result in crashes.

But paradoxically, capitalists and other players in the market are not always comfortable with the scrutiny of the media and analysts. Self-regulation has not proved effective. In the wake of corporate scandals and misdemeanours across the world, corporations and their owners are forced to comply with ever-more precisely formulated rules and laws for corporate governance.

As a result of corporate scandals in my country, Sweden, the government was forced to appoint a "trust commission", which now has presented its recommendations. However, it worked closely with the country's leading groups of investors. This has blurred the different roles that government and the market should play: government, the overseer and capital, the risk-taker.

The most dangerous confusion of roles is that between the owners of political power and the owners of capital because they can, more than others, control the behaviour of the markets. When big government and big capital embrace - sometimes referred to as "crony capitalism" - then small investors have every reason to be worried. We have seen the effect of crony capitalism in Indonesia, Russia, Argentina and in many countries where transparency is low and the free flow of information has not been allowed.

China's high-growth, high-pressure economy, especially in the coastal regions, has led to booming property prices and mushrooming stock values. China's banking system is awash with bad loans. The state is obviously a guarantor of the banks. Millions of small-time investors and pension savers around the world have flocked to profit from the China boom.

The Chinese government and the big-time investors have attracted this capital. They are fuelling the China's boom and have every reason to jointly keep property values high and the stock market at unrealistic valuations. China can actually become, as one insightful player in Beijing put it, "the next Indonesia".

The fast growth of China and other countries in the region must rapidly and inevitably require a much higher degree of political democracy to sustain investor confidence. A free press is not a threat. It is the best defence for the efficiency of markets and fairness to investors.

(Originally appeared in the May 13, 2004 issue of South China Morning Post in Hong Kong, reproduced here with permission.)