Where Capitalism Is Working

Widespread disaffection with the current capitalist systems has led many countries, rich and poor, to look for new economic models. Defenders of the status quo continue to hold up the United States as a shining star, its economy outpacing Europe and Japan, its financial markets as dominant as ever. Yet its citizens are as pessimistic as any in the West. Barely more than a third of Americans believe that they will ever be richer than their parents. The share that trusts the government keeps trending downward, even as the state builds an ever more generous safety net. Seventy percent of Americans now say that the system “needs major changes or to be torn down entirely,” and the younger generations are the most frustrated. More Americans under 30 have a more positive view of socialism than of capitalism.

In countries with emerging economies, it has been a shock to see “the land of the free” abandon its traditional skepticism of centralized power and planning and instead promote big government solutions. Many of these countries, from India to Poland, have not forgotten their own failed trysts with socialism. They were surprised when U.S. President Donald Trump led a revolt against free trade and open borders, and when his successor, Joe Biden, began promoting what National Security Adviser Jake Sullivan called an “economic mentality that champions building.”

And they can no longer look for inspiration to China. The “economic miracle” that began after the Communist Party started ceding power to the private sector in the late 1970s is faltering under leader Xi Jinping. China has returned to its old command-and-control ways, punishing businesses who grow too powerful in the eyes of the ruling party. Weighed down by heavy debts, an aging population, and an overreaching state, China’s economy has fallen off the miracle path.

Yet as these major countries seem to be retreating from capitalism, there are a few places across the income curve, including Switzerland, Taiwan, and Vietnam, where capitalism still works—and their examples are worth emulating. Their governments value economic freedom, limiting their own role in managing the economy and regulating businesses. They recognize that public debt and deficits are serious risks, and so spend public money carefully. They tend to avoid the worst excesses of the current American approach—overspending to stimulate the economy, coddling big corporations, pumping up financial markets mainly to the benefit of billionaires. Above all, these capitalist success stories maintain the key balance of government, providing help for their most vulnerable citizens without narrowing economic freedom.

AN UNLIKELY HAVEN

American progressives often trace their vision of socialist paradise to Scandinavian countries such as Denmark, Norway, and Sweden, which are as wealthy as the United States but feature more equal distributions of wealth and offer affordable health care and free college for all.

But Switzerland, although it is rarely held up as an exemplar by those on the political left, is far richer than the Scandinavian social democracies and just as fair. Its $700 billion economy is larger than any in Scandinavia, and it delivers welfare benefits as comprehensive, with more streamlined government, lower taxes, and more financial stability than Nordic social democracies, which have faced several financial crises in the recent past. Switzerland boasts a higher average income, with levels of income inequality that have become comparable to those in Scandinavia. Average family wealth in Switzerland is $685,000—twice the Nordic average. Switzerland is also among the world’s happiest countries, typically scoring in the top five in the Organization for Economic Cooperation and Development’s Better Life Index. And it has accomplished all of this with a surprisingly lean state: public spending accounts for 35 percent of GDP, versus 55 percent in Sweden.

The Swiss health system requires residents to buy insurance from private providers but offers subsidies for the poor. Its world-class universities charge $1,000 in annual tuition, on average, leaving graduates with far less debt than their peers in most developed countries. Relatively open borders, meanwhile, help make the landlocked country an incubator of globally competitive companies. Forty percent of the population is foreign born.

Switzerland ranks second after Japan in the “sophistication” of its exports, according to the Observatory of Economic Complexity. The premise of OEC rankings is that making complex exports such as biomedicines or digital hardware require a range of the strengths, from quality universities to research hubs, that drive economic progress. Thriving in every major sector other than oil, Swiss firms account for 15 of the top 100 European companies by stock market capitalization, more than any Scandinavian rival.

The Swiss model has been hiding in plain sight.

The Swiss economy is as decentralized as its federal political system. Many of its most iconic exports come from the country’s provinces: Swiss Army knives from Schwyz, watches from Bern, cheese from Fribourg. Small companies anchor the economy, accounting for two of every three jobs. Only one in six Swiss work for the government, half the Scandinavian average. And the Swiss prefer to work than to collect state benefits. In a 2016 referendum, Swiss voters overwhelmingly rejected a guaranteed monthly income of $2,500, which critics called “money for nothing.”

Over the last decade, most rich countries saw their share of global export revenues fall, but Switzerland’s continued to rise. As a result, the Swiss franc rose in value faster than any other currency, yet exports still thrived. Customers seem glad to pay more for Swiss goods. That inflow of funds helps power the economy.

Swiss fiscal policy is not without its flaws. Trying to slow the rise of the franc over the last decade, the central bank cut interest rates sharply. The result was a lending boom that drove private corporate and household debt up to 280 percent of GDP, a risky height that raises the risk of credit and banking crises in the future.

The world tends to ignore the Swiss model, perhaps owing to the country’s outdated reputation as a tax haven where illicit fortunes hide behind strict bank secrecy laws. In 2015, Switzerland, under pressure from foreign governments, agreed to open its banks to more scrutiny, and the economy did not miss a beat, proving that it owes its success to more than ultra-discreet bankers.

The Swiss model has been hiding in plain sight. Scandinavia has started moving in its direction. Battered by debt crises in the 1990s, which began in the property and banking sectors, Sweden lowered its top tax rate and cut public spending from 70 percent to 50 percent of GDP. It became one of the few developed countries to run budget surpluses, so it was in a strong financial position when the global financial crisis occurred in 2008. Other Scandinavian countries followed suit; in 2015, Danish Prime Minister Lars Lokke Rasmussen even lectured a U.S. audience to stop thinking of Denmark as “a planned socialist economy.”

STARTUP ISLAND

After World War II, Japan, South Korea, and Taiwan came to be known as the “Asian miracles,” because they invested more heavily in research and development than other poor countries and rose rapidly into the ranks of the rich. Competent governments, working in partnership with industry to export products, guided these miracles. South Korea’s shepherding of Samsung and Hyundai, now massive corporations, stands as a prime example.

Today, Taiwan is the most intriguing among the miracles. Opting to focus on developing smaller companies that manufacture parts for foreign corporations, rather than multinationals that sell products under their own global brands, Taiwan has in recent years surpassed South Korea and the United States as the world leader in advanced computer chips, the critical building blocks for artificial intelligence and other industries of the future.

Until the 1970s, Taiwan was primarily an exporter of textiles and apparel. Then, like many of its peers, it began to modernize its economy by copying Western technology. In 1980, Taiwan’s government, taking cues from Silicon Valley, started setting up “science parks,” each with its own university campus, across the territory to ensure regionally balanced growth. The parks became hothouses for startup companies, which drew talent from those universities and used government bonuses to lure experienced expats back home. A few of these startups would grow to vast scale.

To build its chip industry, Taiwan recruited an MIT grad and Texas Instruments veteran named Morris Chang. Just as Taiwan once made plastic toys for global giants such as Mattel, Chang created a “pure foundry”—a contract manufacturer of chips. He bet billions on the construction of chip fabrication plants, building an insuperable lead over rival countries. The smallest and fastest chips, indispensable for the most advanced digital technologies, are fabricated in foundries. Two-thirds of foundry chips are made in Taiwan. And most of those come from Chang’s creation, the Taiwan Semiconductor Manufacturing Company.

Today, Taiwan is the most intriguing among the miracles.

TSMC is a product of the kind of industrial policy now embraced by many Western politicians—but in the case of Chang and Taiwan, executed by a streamlined government. Public spending hovers around 20 percent of GDP, public debt around 34 percent, and one in 30 workers is employed by the state; all are fractions of the average for other developed countries. By limiting the role of government as spender, debtor, employer, and regulator, Taiwan has created an economy that punches above its weight.

Now a fixture among the world’s largest tech firms, TSMC is rich enough to buy up the island’s best talent, drawing the ire of domestic critics for departing from Taiwan’s roots as an egalitarian society of small entrepreneurs along the way. But unlike American tech titans such as Jeff Bezos and Elon Musk, Chang has not become a lightning rod for public protests against wealth inequality, at least in part because his net worth of around $2 billion is barely a rounding error compared with the fortunes of those executives.

Taiwan does not step in to rescue the financial markets every time they falter or bail out big banks and corporations. Whereas other governments meet every new financial crisis with increasingly generous relief, Taiwan has exercised restraint—even during the COVID-19 pandemic. In 2020, its combined fiscal and monetary stimulus amounted to less than seven percent of GDP, one-fifth the average of the stimulus packages passed in the United States, Europe, the United Kingdom, and Japan.

Though Taiwan’s tax rates are typical for a developed economy, its spending habits are different: light on social programs and health care, heavy on education and research. The result is extraordinary productivity. Output per worker has grown faster in Taiwan than in the G-4 nations every year for four decades. Over the last four years, it has grown eight times faster. These gains may be attributed to the fact that Taiwan generates an unusually high share of its GDP—30 percent—from manufacturing, the industry most closely associated with productivity gains.

As it has endeavored to remain neutral, Taiwan has arguably become the single most valuable prize in the emerging cold war between China and the United States. As the maker of the world’s most advanced computer chips, it is an indispensable link in the tech supply chain. Without access to Taiwan, neither the United States nor China can achieve its ambition of global tech supremacy.

With this critical role, however, comes heightened risk. U.S. defense analysts worry that with its chip fabrication plants clustered on the home island, Taiwan is highly vulnerable to missile threats or naval blockades from mainland China, just 100 miles away. This is a source of perpetual anxiety for a relatively small place—and a tribute to its successes. Taiwan has created a business environment that generates startups alongside giants and produces great wealth, relatively well distributed. If China were not working so successfully to block international recognition of Taiwan, its model of capitalist democracy would be more widely studied.

A QUIET MIRACLE?

China’s historic rise began only after Mao’s dominance of the country ended in the late 1970s and his successors loosened state controls. The country’s minuscule private sector grew to account for more than half of urban jobs and GDP. As its share of world GDP tripled to 15 percent, China reemerged as a global powerhouse. Yet by the late 2010s, it had reasserted state control, and growth slowed sharply. Chinese “state capitalism,” now so widely admired by some in the West, was devouring its economic miracle.

Today, Vietnam, led by a pragmatic communist government, looks much like China did during its miracle phase 20 years ago. With a population less than one-tenth the size of China’s, Vietnam will never have the same global impact, but it, too, shows that capitalism can work even under authoritarian, single-party rule.

Devastated by its civil war, Vietnam was by the late 1980s living on handouts from the Soviet Union. Growth was stagnant. Inflation ran at 700 percent. Hanoi responded by opening the state-run economy to private business, abolishing collective farms, and leasing land to individuals, who were allowed for the first time to sell their produce at a profit, at home or abroad. Output rose fast. Long a rice importer battling hunger, Vietnam became a rice exporter. Even now, as many countries are raising trade barriers, Vietnam remains a communist champion of free markets.

Vietnam steered all its resources toward building an export manufacturing powerhouse, modeled after China’s early reforms. To stabilize its currency and control inflation, Hanoi worked to contain budget deficits. To energize the private sector, it sold off more than 11,000 state companies, leaving just 600 in existence by the late 2010s. To support factories, it invested heavily in transport systems to bring goods to market and schools to educate workers. The country now gets higher marks from the World Bank for the quality of its infrastructure than any nation at a similar income level. Its international high school test scores are often in the global top ten, higher than those of many developed nations, including the United States.

Today, Vietnam looks much like China did during its miracle phase 20 years ago.

Skilled labor is allowing Vietnam to produce ever more sophisticated goods. Giants such as Samsung and Apple have been moving smartphone production into the country. It has staged a multidecade run of export growth near 20 percent and GDP growth above five percent, matching feats achieved by the Asian miracle countries. In three decades, Vietnam’s average annual income has tripled to nearly $3,000—out of poverty and into the lower-middle income class. The share of the population living on less than $2 a day has fallen from 60 percent to less than five percent; nearly 90 percent have health-care coverage and less than one percent live without electric power, making Vietnam a leader in the war on poverty.

A functioning capitalist system will generate pockets of great wealth, and in 2013 Vietnam produced its first billionaire, Pham Nhat Vuong. A graduate of a university in Russia, Vuong got his start introducing instant noodles to Ukraine, a venture that grew into the Vingroup conglomerate. A self-made billionaire, he is more likely to be celebrated than demonized in an entrepreneurial society where most people have seen real progress.

The question is how long Vietnam’s boom can last. Authoritarian rule tends to work best in early stages of development, when strong leaders can force-march the completion of simple tasks such as road building. Over time, unencumbered by democratic checks and balances, autocrats often push policies to irrational extremes, triggering major crises that set their countries back. Vietnam’s Communist Party has been in power for half a century, so far without generating any of the financial warning signs of a miracle-ending crisis. New Party General Secretary To Lam’s consolidation of power, however, may put this track record to the test.

And although relatively few, Vietnam’s surviving state firms are huge, accounting for a third of GDP and many of the banking system’s worst loans. If trouble comes, it could start in these opaque state firms. But for now, Vietnam is exporting its way to prosperity, and proving that even communists can successfully manage capitalism by giving people more economic freedom and streamlining the role of the state.

THREE CHEERS FOR CAPITALISM

Switzerland, Taiwan, and Vietnam show that giving people more economic freedom is still humanity’s best hope for economic and social progress. The endless expansion of the state is not a viable solution to the crises of the twenty-first century. It is possible to restrain the state, target public spending more strategically, and leave enough room for people to invest as they see fit, unburdened by a tangle of red tape and government interference.

Though founded on the ideal of limited central authority, the United States has for decades been building a bigger government by running up public debt, rolling out new regulations by the thousands each year, and responding to every new crisis with ever-larger bailouts. This distorted form of capitalism has been aptly lampooned as “socialism for the very rich,” but the cracks in U.S. economic policy run deeper than that slogan suggests.

The United States has increased spending on social programs for the poor and the middle class, especially the elderly, while also carrying out financial-market rescues that mainly benefit the super-rich, who tend to be older and own the lion’s share of stocks, bonds, and property. This is socialized risk—a system of state guarantees against economic pain—for everyone.

The balance of the American “mixed” capitalist system has shifted too far toward state control, which ends up benefiting the established elites. What the United States and other countries around the world need instead are policies that encourage private competition by supporting young people and startups rather than protecting aging incumbents—the oligopolies, billionaires, and tycoons who now dominate the American system. Restoring faith in capitalism will require learning from countries where the system still works for ordinary people, thanks in good part to more limited government.