The Fourth Revolution – The Nordic Future

In the fourth and last installment of our review and commentary on The Fourth Revolution: The Global Race to Reinvent the State by Micklethwait and Wooldridge, we examine the authors’ contention that Sweden and the other Nordic nations represent the future for the West’s reinvigoration.

Before and After

For most of the twentieth century, Sweden embraced the Fabian ideal for their society. Marquis Childs called their social experiment the “middle way,” one between capitalism and communism. In the nineteen sixties, Sweden moved left as they broadened the meaning of equality in their society. They applied more government and higher taxes to every problem.

Then it ended. Their politicians did what most world leaders know they ought to do but fail because they lack courage. Sweden reduced their public spending in proportion to their GDP. The government required itself to produce a fiscal surplus over the economic cycle. Swedish politicians reinvented the state while reducing its size. They gave their nation’s pension system a sound foundation, they adopted education vouchers, and revamped their health care system.

Sweden focused on reducing waiting times for hospital procedures and on speeding patients through their stays, which also reduced the frequency of hospital communicated diseases. They published data such as operation success rates in health registries for patients and taxpayers to evaluate. And they charged minor fees similar to those that Lee Kuan Yew initiated in Singapore to discourage healthcare system abuse through elective services overconsumption. Swedish health care is now one of the most efficient in the world. Swedes live longer than most in the Western hemisphere and their health costs have decreased too.

Other Nordic countries have improved to a more limited extent. Yet, all four have triple A credit ratings and debt loads below the Eurozone mean. Their economic experiments seem successful. Indices show that they have superior social inclusion, competitiveness, and well-being.

And they’ve done this by serving the individual, employing fiscal responsibility, promoting choice, and encouraging competition. They’ve eschewed state expansion, pump priming, paternalism, and centralized planning. The Nordic countries have extended the market into the state instead of the opposite.

From There to Here

The Nordic countries show what is possible. They had to change because they ran out of money and continued to change because they found they could provide a better state for their citizens.

In 1991, Sweden plunged into their “black of night crisis.” The banking system seized up, foreign investors abandoned their confidence in the third way, and mortgage rates peaked briefly at 500 percent.

In the early 1980s, the people of Denmark faced a “potato crisis.” It was called this because they felt that potatoes might be all they’d be able to afford for their subsistence. Not only was there a cash shortage but the industries which financially supported government programs were strapped.

Now, countries in the West find themselves at or near the same crises. Western states have promised their peoples benefits beyond their ability to provide. The Nordics prove that the state can be brought under control and can be improved for the betterment of their peoples’ future.

But Big Government

History over the last two centuries seems to show that governments grow larger as they accumulate power and control. The Nordic countries provide a counterfactual: government can be contained while its performance and efficiency increases.

The authors pose the question: “How far can you take [the Nordic experiment]?” They argue that neither diminishing productivity returns in the service and government sectors [Baumol’s disease] nor society’s accelerated aging can prevent success. They claim technology is a solution to both problems.

Baumol stated that systems which boost manufacturing productivity are not applicable to the service sector (of which government is a part). The authors suggest that his disease is simply technological lag. As an example, educational efficiency once depended on increasing class sizes.

Now, with the internet, students with drive and grit can access materials from world-class educators. This sort of teaching is even extending into formal classrooms. Accredited degrees are increasingly available online. As a result, universities are having to reconsider the wisdom of administrative bloat and building monuments.

Technology is delayering management and making workers more productive, disseminating health care and school performance data so citizens can make informed choices, and, increasingly, bypassing government by putting power in citizens’ hands.

Law and order, a very labor intensive government function, is also an example. Instead of harsh sentences, increased warehousing, or even a decreasing cohort of young men, the authors maintain that crime prevention is what led to a decrease in crime worldwide starting in the mid 1990s (but varying across the globe). And this decrease has most to do with technology (e.g., CompStat, increased video surveillance, monitored alarms, etc.). Although community policing (directed by CompStat), a hands on solution, is also necessary.

Technology is even reducing costs in the military. By replacing soldiers, sailors, marines, coast guard and air men with automated hardware and software systems, lifecycle costs such as salaries, healthcare, and pensions are decreased. Operations, maintenance, and personnel costs are an overwhelming proportion of total cost of military systems when compared with initial development and procurement costs.

Technology, in the authors’ view, is taking out costs while increasing efficiency in many, if not all, public sector activities.

But Greying Demography

The authors’ ask: “won’t any gains from treating Baumol’s disease be wiped out by demography?” They note that the Nordics have changed the basis for their retirement systems from totally defined benefits to partially defined contributions. Swedes put some of their pension money into private plans. The government indexes the retirement age to life expectancy and decreases pensions during economic declines.

Delaying retirement increases worker payments into the system, reduces outlays, and enhances economic productivity of older workers through entrepreneurial activity and skills transfer. And Sweden made these improvements with cross party consensus: the “people’s home” survives only if finances are handled competently.

A Call to Action

There are many ways to improve the state that increase benefits to citizens while decreasing the cost of (and frustration with) government. While the Left argues cutting government will hurt the poor and the Right cries that expanded welfare will collapse the economy, the authors assert that it’s not a zero sum proposition.

Nineteenth century Victorian liberals went after “Old Corruption” in its various forms. Subsidies for the wealthy and middle classes at the expense of the poor are easy to correct via means testing, flat taxes, and repealing funds for government agencies that provide unfair aid where it is not needed (e.g., if I own suitable land that I have no intention of cultivating, should I be paid for not growing tomatoes or some other crop?). It only takes the will to do it.

Rather than take away from the poor, remedying this one situation actually helps the poor. Entitlement programs on which they depend will not run out if we fix who pays in, for how long, up to how much, and who gets to collect and when. There are many other substantive instances of waste, fraud, and abuse that we’re spending trillions on (i.e., not just shrimp on treadmill studies). Fixing these will make the country run more efficiently, benefit those who really need benefits, and increase citizens confidence in government.

Just as Sweden updated their “middle way,” using capitalist competition to efficiently provide socialist services successfully, the United States, Great Britain, and other Western states can shrink government, improve their economies, and restore confidence in Democracy (or the Republic, in our case) while providing the safety nets they’ve promised to those who need them for as long as they need them.

Halfhearted efforts rooted in selective interests just won’t do. We have serious problems to solve, and we need serious people to solve them.

RSA Replay: The Fourth Revolution

The Fourth Revolution – Lee Kuan Yew and the Asian Consensus

Lee Kuan Yew (16 September 1923 – 23 March 2015) was founder and Prime Minister of the Republic of Singapore. He started out as an advocate for Beatrice Webb’s societal view.

Lee shifted right to counteract communism and tighten control over Singapore. He ended closer to Hayek‘s views while developing a unique blend of authoritarianism, self-sufficiency, and meritocracy. In the process of his transformation, Lee Kuan Yew molded Singapore according to his principles.

As a result, Singapore has become the economic success it is today. Micklethwait and Wooldridge, the authors of The Fourth Revolution: The Global Race to Reinvent the State portray Lee and his Singapore as the model for the economic rise of China and the rest of Asia. They also pose the possibility that Singapore is the model for success of authoritarianism over democracy.

Asian Ascent

Singapore is a night-watchman state that provides its citizens with economic opportunities and control over how they fund their healthcare and pensions. In return, citizens must not challenge the social order.

Rather than Western democratic governance and generous benefits, Lee’s model is elitist, authoritarian, and parsimonious. This approach follows from Lee’s fundamental axiom: “human beings, regrettable though it may be, are inherently vicious and have to be restrained from their viciousness.”

Like Lee, other Asian nations sense that Western political dead lock and economic sluggishness point to the failure of liberal democracy. Additionally, their own economic growth puts them in competition with each other and good government seems to be the way to succeed. Asian nations are therefore looking at Lee’s model.

Although self-sufficiency is a core Eastern value, the entire experiment might derail as their populations prosper and age. Almost everyone eventually wants bread and circuses if they can get it.

The Singaporean State

“We decide what is right,” Lee once said. “Never mind what the people think.” “I do not believe that democracy necessarily leads to development,” Lee remarked to Philippine hosts in 1992. “The exuberance of democracy leads to undisciplined and disorderly conditions.” He also said, “what a country needs to develop is discipline more than democracy.”

To Westerners, Singaporean government looks like Plato’s Republic, composed of chosen guardians of society. Actually, it is modelled on China’s mandarin tradition of merit selected elites who rule administratively.

Singapore identifies individuals with potential early. It gives them scholarships and trains them afterward for service. Those that make it can receive pay packages upward of two million dollars per year. Those who don’t are thrown overboard.

This elite acquires over time both private and public administration experience. They apply best practice management techniques to both state dominated enterprises and government. They rotate between the two for the benefit of the citizens and shareholders that they serve.

With regard to social benefits, Lee had said: “westerners have abandoned an ethical basis for society…In the East, we start with self-reliance. In the West today, it is the opposite.” Western leaders made charity an entitlement: “and the stigma of living on charity disappeared.”

Lee also said: “When you have popular democracy, to win votes you have to give more. And to beat your opponent in the next election, you have to promise to give more away. So it is a never-ending process of auctions—and the cost, the debt being paid for by the next generation.”

Self-reliant Singaporeans pay a fifth [although the rate has varied] into the Central Provident Fund. Employers pay about fifteen percent more to the fund. Most of what a citizen receives from the fund (about 90%) is tied to what they pay in. Hard work is thereby rewarded.

Other countries are trying to duplicate Singapore’s success. Dubai has a modern financial district, exclusive shopping malls, state-run companies, a Government Excellence Program, and they use Harvard Business School professor Robert Kaplan  ‘s key performance indicators (KPI) as metrics of their progress.

China’s Rise

China shares Lee’s concerns about the west: democracy isn’t efficient, society and the economy need direction, and right governance means success and survival. It has the world’s second largest economy. It is the largest energy consumer, merchandise exporter, smartphone market, and foreign holder of US debt. China is home to the most of the world’s millionaires and billionaires and has accomplished the largest poverty reduction in history. Lee had said that China will reach its former prominence in thirty to fifty years but warned, if it pursued liberal democracy, “It would collapse.”

However, China’s leadership is not so credulous to ignore the fact that most cities use land grabs as a means to balance their budgets. While Shanghai is ranked at the top of OECD’s Program for International Student Assessment (PISA), primary and secondary education receives short shrift when compared with bribing local officials. Old corruption, similar to early nineteenth century Britain, is pervasive.

According to the authors, China has tried to follow Singapore most closely in state capitalism and in meritocratically selected administrators (rather than democratically elected officials). China’s implementation of these two aspects of state control are good in part, say the authors.

State Capitalism

China’s state directed capitalism follows a long tradition from the East India Company to Korea’s Chaebol. However, they’ve taken control further. The authors quote the Party Committee of the China Civil Engineering Construction Corporation (CCECC): “Where there are people, there are Party organizations and Party activities.” The state directs many state-owned enterprises (SOE)

The State-Owned Assets Supervision and Administration Commission (SASAC) oversees the SOEs by appointing top executives, approving mergers, approving stock or asset sales, and drafting SOE related laws.

The Organization Department of the Communist Party of China controls more than 70 million personnel assignments throughout government and industry. In that role it compiles detailed and confidential reports on future Party leaders. It is a highly trusted and secretive agency at the institutional heart of the Party system.

According to the authors, the SOEs are still expected to compete abroad and use modern management techniques internally. They have to meet common industry wide strategic goals while exercising relative freedom in daily operational decisions. Company management informs government management and vice versa in what the authors call “joined-up capitalism.”

State capitalism is an instrument of foreign policy and initiative. SOEs fund eighty percent of foreign direct investment. Through loans from state banks, China has woven a web of foreign economic and policy advances. China is fostering Lee’s ideas through the China Executive Leadership Academy in Pudong (CELAP) which trains their best and brightest leaders. They also counterbalance Davos with the Boao Forum for Asia. This is how China exercises soft power.

However, SOEs are viewed by investors as favoring government interests over their own. Corruption is a disincentive for investment. SOEs can be forced to implement state policy. Further, SOEs attract capital that more independent Chinese companies might otherwise put toward more innovative use leading to faster growth.

The authors point out that intellectual and cultural freedom lead to breakthrough ideas and vibrant competition. Although some think that SOEs will wither away as the economy grows, others are not so sanguine. For state capitalism to work well, you need a strong and competent state. We’ve see how that’s worked in the past.

State Meritocracy

China originated the concept we in the West refer to as mandarin administration. They instituted formal civil service examinations in 605 AD. The authors quote a common saying, popular for a thousand years, that Chinese parents tell their children: “those who work with strength are ruled. Those who work with their minds manage others. Those who excel in scholarship become officials.”

China’s elite agrees with Lee Kuan Yew’s opinion that meritocracy offers more benefits than democracy such as long term planning and leadership succession without pressure to win votes at the expense of societal breakdown.

Recruitment starts at university rather than the factory. Candidates need to excel at the Central Party School and CELAP. Then they prove themselves as competent administrators by running a province (maybe as large as several European countries combined). More recently, these leaders are called to prove their business skills running an SOE.

Young leaders of the future, selected and promoted up the ranks based on merit, tackle big problems. They’ve had both government and industry experience. Increasingly, they have had graduate level training or work experiences in countries around the world. They conduct civil service in a business-like manner using best practices culled from successful examples proven globally.

The authors are quick to point out that elitism comes with problems. They cite the example of a deputy who was denied office space to meet with locals to conduct his part in an anticorruption drive. Ordinary citizens with legitimate grievances are hard-pressed to get a hearing with officials, let alone a satisfactory resolution. They vent their anger on one of many Weibo, a Twitter equivalent, complaining of inefficient government, failing schools, unsanitary hospitals, and inept officials.

President Xi Jinping sends leaders from Beijing into the provinces to instill order. But, citing a Chinese proverb, the authors point out: “the mountains are high and the emperor is far away.” And the leaders are not as meritorious as they would have everyone believe. Many in the upper echelons are “red princelings:” offspring of the Communist Party elite.

Inside or outside the party, leaders systematically accumulate wealth and privilege using their power. The authors cite an internet posting:

They drive top-brand cars. They go to exclusive night bars. They sleep on the softest beds in the best hotels. Their furniture is all of the best red wood. Their houses overlook the best landscapes, in the quietest locations. They play golf, travel at public expense, and enjoy a life of luxury.

But, the authors say, it is the same the world over. And it is, unfortunately.

A Reckoning

China’s economic and world power rise validates its authoritarianism to its people and many in the world at-large. It poses a challenge and viable alternative to the Western liberal democratic, capitalistic model. Singapore has managed its success on the strength of its now deceased leader. However, Asians, like the rest of the world, increasingly want a generous social safety net.

China’s economic growth is slipping as its population is aging. Corruption at the local level and vast unpaid (and unpayable?) debts threaten stability. Western impulses for bread and circuses already surge through its citizenry. Although there is hope that representative democracy might develop, the populace is so diverse that the center is sure not to hold. Censorship can prevent unrest only so long.

However, Asia as a whole is still trying to improve government. They have a fresh start and innovative technologies and techniques may yet provide efficient social services and governance (even if not democratic) that are responsive to their citizens. Singapore and the Nordic countries provide a way forward. If only the West would follow suit to revamp their now illiberal democracies.

Here is yet another presentation by the authors of: The Fourth Revolution: the global race to reinvent the state.

The Fourth Revolution: the global race to reinvent the state

A memorial tribute to Mr. Lee Kuan Yew.

Passing of Mr Lee Kuan Yew

The Fourth Revolution – Review and Commentary

The book by former Economist Editor in Chief John Micklethwait and Management Editor Adrian Wooldridge: The Fourth Revolution: The Global Race to Reinvent the State contends that states in the West must complete the revolution started by Reagan and Thatcher and become smaller, more efficient systems that provide greater individual liberty.

In 1814, during the first revolutionary period, John Adams said: “Democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.” He also said: “It is vain to say that democracy is less vain, less proud, less selfish, less ambitious, or less avaricious than autocracy or monarchy…” The authors of The Fourth Revolution contend that the secret of good governance lies in checking human desires, not letting them run free.

America’s founding fathers also worried that democracy would crush individual liberty. The majority would use pressure and regulation to press the minority into conformity. The authors say few examine these issues now. In the vacuum, voters regard the practice of democracy as corrupt and inefficient. And yet they won’t question the theory. Their contempt delegitimizes government and turns setbacks into crises.

Democracy is overloaded with obligations, overburdened with unfulfillable expectations, and distorted by special interests. The population’s dependency forces government to continuously expand. During the second revolution, nineteenth century liberals in Great Britain reformed both the state’s machinery and its form of representation. The authors suggest today’s politicians should trim the state and renew democracy.

The rise of the Beijing consensus’s top down modernization and meritocratic governmental institutions makes the west’s democratic alternative seem regressive. America demonstrates too many of democracy’s vices and Europe too few of its virtues.

America’s checks and balances, though successful in the past in preventing the tyranny of the majority, has been subverted to become a political tool that decreases efficiency, compromise, and justice. America’s gerrymandering voting districts entrench special interests, extremism, and mediocre representation for a lifetime. America’s lobbying by special interests awash in money begs the question of graft and favoritism.

Europe, in an effort to stifle popular passions that caused two world wars, has sacrificed national sovereignty to technocratic governmental, financial, and trade bodies and, in the process, are vivifying national populist movements.

Economic inequality is putting western democracy to the test. Quoting Louis Brandeis, “we can have a democratic society or we can have great concentrated wealth in the hands of a few. We cannot have both.” In the era of financial crisis with less to go around and a bloated but inefficient welfare state, the West must stop democracy’s decay or risk their people’s ire.

The authors call for limited government that constrains itself through self-denying ordinances. In the process, three government dangers must be overcome: liberty encroaching expansion, surrender to special interests, and making unfulfillable promises.

As remedies, the authors propose balanced budgets over the economic cycle, fully funded and means tested entitlements tied to life expectancy, and sunset clauses for laws and regulations. Handing some economic power to technocrats and independent commissions and pushing decisions to the states and cities are ways to limit centralized power.

Micklethwait and Wooldridge say that the cost of inaction is high—unreformed, the welfare state will collapse under oppressive debt. The opportunity is great—the rewards to states that revive democracy and reduce the burden of the state will sprint ahead of its peers economically and in life satisfaction. History will be on the side of the nations that promote individual liberty.

We in the West are polarized politically. Our leaders pander to special interests instead of providing for the common good. How much longer can we mortgage our children’s future to pay for our pensions and health care? We are getting less benefit from and paying more for our educational system. We’re transferring tax revenues to the middle classes and crony capitalists in agriculture, defense, finance, etc. at the expense of caring for the truly poor.

The world is looking to the East as the model for economic advances and a better life at the expense of individual liberties. We in the West must become serious about reforming our systems or be left behind in the rubbish heap of history. Some western states, provinces, and cities are becoming more efficient through experimentation. There are lots of ideas to try, if only we were willing to start.

In the coming weeks we’ll cover how Beatrice and Sidney Webb laid the foundations for the welfare state in the third revolution, how Lee Kuan Yew created the Asian Consensus, and how the Nordic states point the way to the future.

The Fourth Revolution: The Global Race to Reinvent the State