The triumph of democracy and market-based economics – the “End ofHistory,” as the American political philosopher Francis Fukuyama famouslycalled it – which was proclaimed to beinevitable with the fall of the Berlin Wall,soon proved to be little more than a mirage.However, following China’sintellectual pirouette to maintain one-partyrule while embracing the capitalist credo,history’s interpreters shifted their focus to the economy: not everybody wouldbe free and elect their government, but capitalist prosperity would hold sway worldwide.  

Now, however, the economic tumultshaking Europe, the erosion of the middleclass in the West, and the growing social inequalities worldwide areundermining capitalism’s claim to universal triumph. Hard questions are beingasked: Is capitalism as we know it doomed? Is the market no longer able togenerate prosperity? Is China’sbrand of state capitalism an alternative andpotentially victorious paradigm?

The pervasive soul-searching prompted by such questions has nurtured agrowing recognition that capitalism’s successdepends not only on macroeconomic policy or economic indicators. It rests on abedrock of good governance and the rule of law – in other words, awell-performing state. The West overlooked the fundamental importance ofthis while it was fighting communism.

The standard bearers of the Cold War were not just the United States and the Soviet Union, but, in ideological terms, the individual and thecollectivity. When competing in newly independent or developing countries, thisideological opposition became Manichean,fostering a fierce suspicion, if not outrightrejection, of rival principles. As a result, strengthening state institutionswas too often seen in the West as communist subterfuge,while the Soviet bloc viewed the slightest notion of individual freedom andresponsibility as a stalking horse forcapitalist counter-revolution.

Leading economists have long argued that the West’s greater reliance onmarkets resulted in faster and more robust economic growth. But viewing thestate and the market in terms of their inherent conflict no longer reflectsreality (if it ever did). Indeed, it isincreasingly obvious that the threat to capitalism today emanates not from thestate’s presence, but rather from its absence or inadequate performance.

Consider recent events in Argentina, which is facing certain economiclosses as anxious investors have second thoughts about the country in theaftermath of the government’s nationalization of energy giant YPF. Thatresponse is only logical, as investors seek the security of a well-functioninglegal system to protect them from capriciouspolitical decisions.

Mexico provides further proof that the market alone is notenough. An efficient judiciary and effective policingare necessary for capitalism to thrive. In Brazil, the government is daring, for the first time, to address thelawlessness of the overcrowded favelas thatring the country’s large cities. Or consider Ghana’sprosperity and how, like Brazil’s,it is going hand in hand with improved governance. At the opposite extreme,Venezuelan President Hugo Chávez’s undermining of his country’s institutions, prodding it onto a narco-statetrajectory, places Venezuelaalongside Haiti as anexception to Latin America’s recent economicsuccess.

More generally, the world’s thriving countries are those with strong andeffective institutions, backed by legal frameworks that guarantee the rule oflaw. Latin America and Africa are not the onlyexamples that prove the point. The European Union’s internal problems, and itsongoing sovereign-debt crisis, are clearly linked to the weakness of itsinstitutions, and, on Europe’s periphery, itstill confronts feckless democracies.

Indeed, on Europe’s doorstep, the showtrial and imprisonment of former Ukrainian PrimeMinister Yulia Tymoshenko is jeopardizing her country’s international economic standing. In particular, President ViktorYanukovich’s contempt for the rule of lawhas put Ukraine’s relations with the European Union in coldstorage, with a comprehensive free-trade and association agreement on hold pending（prep） the release ofTymoshenko and other political prisoners. Meanwhile, political trials in Egypt areattracting international attention and deterring foreign investment.

In Asia, Chinais exposing the fallacy of looking at statecapitalism as a competing alternative to liberal capitalism. Approaching themas alternatives is, in fact, little more than anintellectual remnant of the Cold War, much like the concept of “statecapitalism” itself. With its remarkable ability to adapt, China is makingstrides to accommodate the rising power of its markets and people. In theprocess, officials are acknowledging the importance of good governance, asdemonstrated by recent efforts to justify the purgeand investigation of Bo Xilai as an example of the Communist Party“safeguarding the rule of law.”

Adam Smith, that icon of market theory, argued that wealth is created when public institutions enable the “invisiblehand” of the market to align interests. The Cold War distorted thatwisdom. In a world free of that era’s ideological constraints, it is time tosay loud and clear that the future of capitalism is linked to effectivegovernance and the rule of law, and thus to the consolidation ofwell-functioning states.