Why communism is bad for business

According to the WIPO Global Innovation Index 2022, the top 10 most innovative economies in the world are Switzerland, the U.S., Sweden, UK, Netherland, South Korea, Singapore, Germany, Finland and Denmark.  The rankings are based on categories which included business sophistication, human capital and research, institutions, infrastructure, market sophistication, knowledge and technology outputs, and creative outputs.  

Interestingly but unsurprising, Communist China, with the second biggest economy in the world, is not on the list.  A communist regime is not conducive to innovation.

Innovation is a hallmark of a prosperous and sustainable economy.  Innovation is important because it leads to the creation of completely new industries, which helps to diversify and strengthen the economy.  For example, the development of mobile apps like food delivery apps and ride hailing apps, a significant part of the technology-driven world we live in and which enhance the productivity of both individuals and companies, led to the mushrooming of entirely new industries and the creation of millions of jobs.

Innovation leads to economic growth and improved productivity. When businesses are innovative, they create new products and services that offer a higher value to consumers, which increases demand and generates revenue. Innovation also leads to cost savings, as new technologies and processes make it possible to produce goods and services more efficiently.  

In addition, innovation helps to create higher-paying jobs that require specialized skills and knowledge. As businesses invest in new technologies and innovations, they need skilled workers to develop, implement, and maintain these new systems.

Overall, innovation is critical to a prosperous economy because it drives economic growth, improves productivity, creates new industries, and generates higher-paying jobs.  It is clear that democracy is a better system than communism for innovation to thrive, and by extension, a free, open, and democratic country’s economy is more prosperous, competitive dynamic and sustainable than a communist regime’s economy.  

A democracy provides an enabling environment that encourages innovation, creativity and entrepreneurship, resulting in a healthy and robust business environment.

With a democratic model of governance, businesses are allowed to operate freely and have the flexibility to make their own decisions and pursue their own interests without government interference. Additionally, democratic countries typically prioritize the rule of law, transparency and protection of property rights, creating a stable and predictable environment for businesses to operate. 

A lack of fair, safe and transparent business environment

Communist regimes tend to be centrally planned and controlled by the government, which create bureaucratic red tape and limit business innovation and growth. Government control also creates uncertainty and risk for businesses, and property rights can be highly restricted or even non-existent.

The lack of autonomy and unpredictability makes it difficult for businesses to thrive in a communist regime.  For example, Chinese supreme leader Xi Jinping espouses common prosperity, which targets the rich to redistribute their wealth.

In China, businesses do not have the freedom to make decisions that suit their best interests.  Rather, they have to cater to the wishes of Xi, toe the everchanging red lines, navigate the political minefield and make decisions for the best interests of the Chinese Communist Party (CCP).  

The CCP is notoriously opaque when it comes to decision-making processes and the enforcement of laws and regulations, which makes it difficult for businesses to understand how the regulatory environment will affect them. 

Communism undermines incentives, which is in direct contrast to democracy where incentives are one of the critical drivers of entrepreneurship and innovation.  This hope of making a profit and the idea that hard work should be rewarded by economic gains pushes individuals to take on risky ventures that benefit society as a whole.

In a communist society, however, there are no incentives, and the idea of profit is absent.  People work only for the collective good, which results in a lack of drive towards innovation, creativity, and entrepreneurship.  There is no competition and there is no reward for going beyond the minimum requirements.

The chairman of everything

China’s communist regime is anti-capitalism and Xi, a dictator, seeks to exert control over everything and everyone.  In consolidating his power, he has built up a cult of personality in the mold of Mao Zedong, the previous dictator who destroyed the economy and brought deaths to tens of millions of Chinese through disastrous policies like The Great Leap Forward, and Cultural Revolution, among others. 

Xi, in recent years, has instituted crackdowns on the private sector, arrested prominent businesspersons and entrepreneurs, and pushed through the catastrophic zero-Covid policy.  In a new round of crackdown, Xi focused his attack on the consultancy and due diligence industry, sending chills through the foreign business community and damaging investor confidence.  

From March through May, officials raided the offices of Capvision, Bain & Co. and Mintz, and arrested some staff.  Also, China’s regular detention of Japanese citizens, on alleged charges of spying, is worsening an already bad situation.  Since 2015, at least 16 Japanese have been detained.

This intensifying attack on the private sector, against both local and foreign companies, has heightened uncertainty, instability and gave rise to an unfair and unsafe business environment that will turn off foreign investment.  As it is, the Chinese economy is already facing slowing growth and other challenges like high unemployment, low consumption and brain drain. 

In China, it is not what you know but who you know that matters.  For his unprecedented third term in power, Xi has stacked the all-powerful Politburo Standing Committee with loyalists, with no regards for their lack of experience and qualifications.  His action has reinforced the reality that meritocracy is dead and that the government now plays a pivotal role in deciding who should occupy what position.  

This lack of meritocracy, diminishing economic opportunities and totalitarian control have hasten the exodus of talented individuals to other countries such as the U.S. where their skills are valued.

Communism, as an economic and political ideology, is detrimental to private enterprise.  By doubling down on the path of Maoism, Xi has made it increasingly difficult for businesses to operate and is giving out the signal that China is no longer welcoming to foreign companies.  With Xi at the helm of the second biggest economy in the world, there is a general sense that China’s star is losing its shine.

Photo credit: iStock/ SCM Jeans. Portrait of Mao Zedong at the entrance to the Forbidden City.

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