Published 3 March 2011

It can be argued that Capitalism is far less a prescription than a description of how humans behave when they undertake economic activity under normal circumstances. Create the right (regulatory) environment and let people get on with it and Capitalism is the result. With any luck, prosperity is the eventual outcome. That is the theory, at least.

One of the keys to Capitalism is the role of the entrepreneur. The term, a loanword from French, was first used by the Irish-French economist Richard Cantillon, who is credited with writing the first complete treatise on economics.

An entrepreneur is a term applied to a person who has created a new business venture, and who is generally accountable for its inherent risks as well as its outcome. Although certain entrepreneurial traits are required, entrepreneurial behaviour is usually influenced by environmental factors. The absence of a robust support system can certainly stop it in its tracks, as command economies have demonstrated.

Good timing is often important too, but leadership, management ability, and team-building are all essential qualities, according to Robert. B. Reich.

Joseph Schumpeter expands on this, arguing that entrepreneurs, a nation’s wild spirits, are the catalysts for creative destruction, the essential process in the dynamic of renewal that underpins a successful economy. They create change through innovation by, for example, introducing new technologies, increasing efficiency and productivity in older ones, or by creating new products or services.

The key issue here is an individuals willingness to accept risk, usually with their own money, by deferring gratification and working for a (hopefully) future reward.

The US has traditionally been held up as offering the best environment for entrepreneurial success. As Calvin Coolidge said, “the business of America is business”, and accessing credit to start a business has traditionally been much easier there than in many societies. Moreover, even failure in business has usually been seen as more of a badge of honour than of shame, as it is in many other cultures – with bankruptcy laws much more forgiving as a result.

In fact, it has often been the case that entrepreneurs thwarted in the own countries have emigrated to the US where the fertile soil of the New World has allowed them to taste success they could not have achieved at home.

Many Americans accept this as writ, believing it is unAmerican to suggest otherwise. They are so wedded to this belief that, despite the evidence that deregulation contributed to the recent GFC, they insist the biggest threat to their country’s future prosperity is the government getting in the way. Actually, they wont let any inconvenient facts to get in the way of a good story.

Recently, however, there has been a debate about whether the unique characteristics that helped generate the cornucopia of prosperity over the last century in the US has now come to an end – if the US has now run out of steam – and falling real incomes presage the decline and fall of the American dream. The debate was started by an economist at George Mason University, Tyler Cowen, who penned a 15,000 words e-book “The Great Stagnation” that explores the puzzling fall in America’s real wages since the 1970s.

The received wisdom has been that widening income inequality is a the heart of the problem, but Cowen argues it is in fact falling productivity that is responsible for declining rates of pay and the hollowing out of the middle class in the US. He claims output data have muddied the waters because rising contributions from newer industries used in the economic calculations are much more difficult to evaluate. Comparing productivity in services to that of manufacturing, for example, is like comparing chalk and cheese. Certainly the golden age of highly paid unskilled labour in the US that allowed the working class to enjoy middle class lifestyles is long over.

The crux of Cowen’s argument is not that the US (and Western world economies) have been driven by the magic of entrepreneurialism but by more fundamental and, thereby, less exceptional considerations such as the broader cycle of growth itself. Moreover, the economic engines in the rich world are now running ever slower as countries exhaust easy sources of rapid growth.

The implication is that the US is now confronting a long period of stagnation as business conditions become more difficult. The torch, meanwhile, has now been passed to the expanding economies of the developing world. On this reckoning, the West has lost its state of grace and the outlook for its economies is grim. The new engine of growth is in the East. Here in Cambodia, we are in the right neighbourhood.

The new model these days is now the oft-lauded  example of China’s bamboo (i.e. state-directed) capitalism (otherwise known as the ‘Beijing consensus’ – in contrast to the “Washington consensus’ first identified by John Williamson of the Peterson Institute for International Economics), although a recent Economist magazine claims China’s economic dynamism actually owes much to those outside the government’s embrace (http://www.economist.com/node/18330120).

There is no doubt that China has greatly benefited, as Japan did after WWII, from being able to plug itself into the global supply chain. Its vast, cheap labour force has produced unimaginable economies of scale as it has become the “factory of the world”. Millions have emerged from poverty at a historically unprecedented speed.

However, the bigger question is how well it can now transform itself from a export-driven colossus into a economy fuelled by internal demand. On this, the jury is out. It is one thing to organise vast armies of workers to mass-produce widgets, quite another to create new businesses that the market doesn’t even know it wants.

Cambodia faces a similar dilemma (but of course on a much smaller scale). It’s small population and geological location nestled between much larger neighbours mean the expedient of Chinese (or Vietnamese) style industrialisation, that soaks up lots of unskilled or semi-skilled labour, is not really available here – despite the evidence of the garment industry.

Instead, the country cries out for innovative solutions than can lead to employment opportunities so its burgeoning youth can contribute to both their own and their country’s future prosperity.

How realistic is this?

What we have in Cambodia is a nascent form that is common throughout Asia: Pharaoh Capitalism: a form that is based on “pyramid” business groups that aim to control vast swathes of the economy and is usually controlled by specific families (it could also be called swidden Capitalism).

This is not that different from the rest of the region. In Hong Kong 15 families control corporate assets worth 84% of GDP, according to a 2000 article (“The Separation of Ownership and Control in East Asian Corporations”, by Stijn Claessens, Simeon Djankov and Larry H.P. Lang. Journal of Financial Economics, October 2000). In Malaysia the figure is 76%.

Not only does this system allow the family to consolidate its business interests, in the absence of the rule of law, it gives them scale to survive, because business is generally a zero-sum game. Size in these circumstances is not about wealth per se, it’s about survival.

Either become too big to swallow or expect to be predated by larger fish, is the prevailing wisdom.

Equally, defenestrating the competition before they become a threat makes sense in this environment. It really is the “survival of the fittest”: there is no equivalent of “Queensbury Rules” here. Clan and language group affiliations play a key role in this, as trust is in very short supply. Alliances, often cemented through marriage, are also important survival strategies, which is why the elite here is so incestuous.

A key difference to the US is that historically American robber barons concentrated on doing one thing and doing it well, whereas here the standard form is the diversified conglomerate, often anchored around an initial cash cow.

It is critical to buy protection in this situation, as the government and its putative regulators can be the biggest threat to business survival. So having the right politician or bureaucrat in your pocket is usually a necessity. Fortunately, like most gatekeepers who weld authority on small salaries anywhere, they are usually highly biddable.

At the end of the day, however, there is usually little or no appreciation of the idea of creating wealth by these bourgeoisie or of sustainability. Instead, it is more about dividing up the pie, and then holding on to it, rather than trying to produce a larger one. Rent-seeking behaviour is the norm.

This is why Cambodia’s capitalists are don’t hesitate to take a slash and burn approach to national resources. Getting rich is the goal – at any price – and taking no prisoners is a strategy that works.

Whether this works for the greater good of the country, however is, sadly, looking increasingly unlikely.