You’ve written that free markets must now compete with the rise of something called “state capitalism.” What is that?
State capitalism is a system in which the state acts as the dominant economic player and uses markets to advance political goals. It’s a trend we see primarily in China, Russia, and the Arab monarchies of the Persian Gulf, but individual elements of it exist in democracies like Brazil and India. In this system, governments use national oil companies and other state-owned enterprises to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).
National oil companies and even sovereign wealth funds have been around for many years, haven’t they? How and why have they become a threat to free-market capitalism?
Yes, some of these tools have been around—in one form or another—for decades. But the governments that now use them play a much larger role in shaping international politics and fueling the global economy than did the developing states of decades past. For the past quarter century, globalization has been the defining force in political and commercial relations, with capital markets, labor markets, and consumer markets becoming increasingly global. We’ve seen a wave of democratization since the end of the Cold War—in Eastern Europe, East and Southeast Asia, Latin America, and Africa. But some authoritarian governments have bucked this trend. They’ve learned from the failure of communism that to survive, they must embrace capitalism and the power of markets to generate prosperity. But they know that if they leave it entirely to market forces to decide who wins and who loses from economic growth, they risk empowering those who might use the new wealth to challenge their political power.
Even in some democratic countries that face no real danger of becoming authoritarian, the state can use state-owned companies or heavily subsidized privately owned “national champions” to advance political goals. In Brazil, President Luiz Inacio Lula da Silva’s government has used both a state-owned oil company (Petrobras) and a privately owned national champion mining company (Vale) to invest state resources in ways that create and protect jobs at home. These moves have helped Brazil weather the global recession—and they’ve helped the ruling Workers Party maintain its high popularity. But over the longer term, Petrobras may become a much larger and much less efficient company.
The Western financial crisis and global recession have also encouraged governments in some of the world’s wealthiest countries (including the United States) to take a larger and more direct role in attempts to spark growth. That said, the phenomenon we see in places like Brazil, India, and South Africa—to say nothing of the temporary shift toward greater state involvement in economic decision-making that we’ve seen in the US and EU—is nothing like state capitalism as practiced in China or Russia. There, the government’s first priority is political survival and a lack of independent institutions—including courts, media, and rival political parties—enable long-term state dominance of the economy.
Where did this system of state capitalism come from?
The rise of state capitalism began decades ago as crude oil became an essential element of economic and political power. The ability to seize control of valuable domestic assets provided local leaders with unprecedented political leverage, both at home and abroad. The development of state capitalism accelerated in the 1980s and 1990s with the rise of emerging markets and their growing importance for the global economy. Over the past decade, we’ve seen the remarkable growth in importance of sovereign wealth funds. But the crisis of 2008—and the fact that it originated inside Western financial institutions—provided the real tipping point.
The Chinese government can (and does) argue that its approach to economic development and its ability to mobilize a large-scale targeted response to a severe economic slowdown argues for the wisdom of its state-centric model of development—particularly as the free-market West struggles to regain its footing. Other governments around the world are watching. They can compare China’s 10% growth with America’s 10% unemployment and draw their own conclusions about what works and what doesn’t. They see that the Chinese leadership can use its country’s growing wealth to tighten its hold on domestic political power. For insecure political officials in historically volatile countries, that’s an attractive proposition—one that promises sharp economic growth without genuine political sacrifice.
So, is Karl Marx having the last laugh?
Not if he sees what’s really happening here. This is not the return of command economics; it’s capitalism practiced by the state. Those are two very different phenomena. State capitalism makes sense for authoritarian governments, because it allows them to micromanage both political and economic challenges that have a direct impact on their own survival. But in an economic context, state capitalism is not a particularly efficient engine for long-term expansion. State-run companies and state-managed investment funds tend to be burdened with the same sorts of bureaucracy, waste, and corruption that plague their governments. Norway has a national oil company and a sovereign wealth fund. But it is also blessed with an efficiently run, democratic, and transparent government. Russia can’t make the same claim, and this problem is reflected within the institutions that allow its government to manipulate domestic market performance.
That’s an important part of why free markets are worth competing for—and why free-market capitalism may well win out in the end. But that’s a long-term process. We’ll be living with state capitalism and managing the challenges it creates for decades to come.
In the meantime, developing states like China, India, Brazil, Indonesia, Russia, and others will continue to cut into US political, economic, and cultural hegemony. If these emerging powers embraced free-market capitalism, America might still hold a somewhat smaller piece of a much bigger global economic pie. The risk from state capitalism for the United States—and for free-market democracies generally—is that the pie isn’t expanding quickly enough to accommodate all the new mouths it will soon have to feed.
In the United States and Europe, is the government’s bigger role in economic decision-making a part of this same trend?
Deeper and more direct state intervention in rescuing failing financial institutions and other companies is a temporary phenomenon in the West. It has grown from the immediate need to jumpstart growth and job creation following the global slowdown. In the fall, we’ll certainly see plenty of election-year political rhetoric on this subject in the United States—and there’s a real risk of over-regulation in the US, Europe, and Japan. On the other hand, it’s highly unlikely that any of these countries will embrace state capitalism. The real conflict between free markets and state capitalism will be fought in the international marketplace of ideas, as these competing models create friction between governments as well as between governments and privately owned companies.
Looking at the headlines, don’t those who say free markets have failed have a point...?
Anyone who has read a newspaper in the past 18 months is aware that under-regulated markets can generate turmoil throughout the global economy. The free-market capitalism we’ve seen in recent years in the United States is hardly a model for consistent long-term growth—in part because there are too many incentives within the current system for short-term expansion at the expense of sustainability. There’s a delicate balance between these two economic systems that policymakers all over the world will have to find. But the engine best capable of powering the global economy through the future will be powered primarily by the forces that fuel globalization: the innovation, creativity, and talents of entrepreneurs and workers outside the public sector.
Let’s not allow the financial crisis, serious as it was, to make us forget the quarter century that came before. Between 1980 and 2007, the global economy grew by almost 150%. That’s the global economy. The world’s wealthiest countries saw a serious increase in their standards of living. In developing states, hundreds of millions of people moved from poverty into the marketplace. The slowdown has temporarily pushed some of those people back toward poverty, but decades of growth have created rising expectations that, over the long term, only free markets can meet.
State capitalism deserves some of the credit for the expansion, especially in a place like China, which has grown from a very low base. But the broader story of the past three decades is one of command economies embracing capitalism and of states loosening their grip on economic activity. As I argue in the book, the strength and durability of recovery will depend on the willingness of those who believe in free markets to learn from the failures that triggered the crisis, to practice the kind of capitalism they preach, and to renew their commitment to the principles that have helped them prosper.
No comments:
Post a Comment