The Economist - that bastion of free market ideology - has run a whole issue on state capitalism, something I've been writing a lot about recently. The evocative front page image has Lenin smoking a cigar. Its editorial says the following:
State-directed capitalism is not a new idea: witness the East India Company. But as our special report this week points out, it has undergone a dramatic revival. In the 1990s most state-owned companies were little more than government departments in emerging markets; the assumption was that, as the economy matured, the government would close or privatise them. Yet they show no signs of relinquishing the commanding heights, whether in major industries (the world’s ten biggest oil-and-gas firms, measured by reserves, are all state-owned) or major markets (state-backed companies account for 80% of the value of China’s stockmarket and 62% of Russia’s). And they are on the offensive. Look at almost any new industry and a giant is emerging: China Mobile, for example, has 600m customers. State-backed firms accounted for a third of the emerging world’s foreign direct investment in 2003-10.
With the West in a funk and emerging markets flourishing, the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model.
State capitalism’s supporters argue that it can provide stability as well as growth. Russia’s wild privatisation under Boris Yeltsin in the 1990s alarmed many emerging countries and encouraged the view that governments can mitigate the strains that capitalism and globalisation cause by providing not just the hard infrastructure of roads and bridges but also the soft infrastructure of flagship corporations.
So Lee Kuan Yew’s government in Singapore, an early exponent of this idea, let in foreign firms and embraced Western management ideas, but also owned chunks of companies. The leading practitioner is now China. The tight connection between its government and business will no doubt be on display when the global elite gathers in the Swiss resort of Davos next week.The Economist goes on to point out the familiar free market claims that state capitalism is inefficient and cannot match free market innovation. It also makes clear that state capitalism is not necessarily friendly to western multinationals, and that, really, is the point as far as The Economist is concerned, Because the real threat of state capitalism is to western multinationals' ability to make big gains in emerging markets. Until recently they were able to do this, but state capitalism in China, Russia or South America curtails their activities and rents. This is the wake up call that The Economist is making. This is not just a fad, these state-backed giants are not going away anytime soon. So the US/EU model of capitalism, already in crisis, faces a hostile environment, with state companies muscling in on their terrritory, at home and abroad. I say good luck to them. The advantages of state capitalism, that it can work for longer term socio-economic goals, rather than just shareholder returns, are not made clear by The Economist. But they are one reason why it is a powerful model of the rising powers of the early 21st century. These are uncomfortable times for the neoliberal free marketeers.
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