The Economist on State Capitalism

[Rooster]

I can't really read this on a computer screen but I'll post a link if anyone can stare at this without getting a headache. This thread can be moved to a more appropriate location.

The rise of state capitalism

The spread of a new sort of business in the emerging world will cause increasing problems

Jan 21st 2012 | from the print edition





OVER the past 15 years striking corporate headquarters have transformed the great cities of the emerging world. China Central Television’s building resembles a giant alien marching across Beijing’s skyline; the 88-storey Petronas Towers, home to Malaysia’s oil company, soar above Kuala Lumpur; the gleaming office of VTB, a banking powerhouse, sits at the heart of Moscow’s new financial district. These are all monuments to the rise of a new kind of hybrid corporation, backed by the state but behaving like a private-sector multinational.


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.


This development raises two questions. How successful is the model? And what are its consequences—both in, and beyond, emerging markets?
The law of diminishing returns
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. Among Westerners there, government delegates often take the opposite view to those from the private sector: Chinese delegates from both sides tend to have the same point of view, and even the same patriotic talking-points.
The new model bears little resemblance to the disastrous spate of nationalisations in Britain and elsewhere half a century ago. China’s infrastructure companies win contracts the world over. The best national champions are outward-looking, acquiring skills by listing on foreign exchanges and taking over foreign companies. And governments are selective in their corporate holdings. Overall, the Chinese state has loosened its grip on the economy: its bureaucrats concentrate on industries where they can make a difference.
Let a thousand mobiles bloom
Yet a close look at the model shows its weaknesses. When the government favours one lot of companies, the others suffer. In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billion—more than China’s 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better by private companies. Studies show that state companies use capital less efficiently than private ones, and grow more slowly. In many countries the coddled state giants are pouring money into fancy towers at a time when entrepreneurs are struggling to raise capital.
Those costs are likely to rise. State companies are good at copying others, partly because they can use the government’s clout to get hold of their technology; but as they have to produce ideas of their own they will become less competitive. State-owned companies make a few big bets rather than lots of small ones; the world’s great centres of innovation are usually networks of small start-ups.
Nor does the model guarantee stability. State capitalism works well only when directed by a competent state. Many Asian countries have a strong mandarin culture; South Africa and Brazil do not. Coal India is hardly an advertisement for efficiency (see article). And everywhere state capitalism favours well-connected insiders over innovative outsiders. In China highly educated princelings have taken the spoils. In Russia a clique of “bureaugarchs”, often former KGB officials, dominate both the Kremlin and business. Thus the model produces cronyism, inequality and eventually discontent—as the Mubaraks’ brand of state capitalism did in Egypt.
Rising powers have always used the state to kick-start growth: think of Japan and South Korea in the 1950s or Germany in the 1870s or even the United States after the war of independence. But these countries have, over time, invariably found that the system has limits. The Chinese of all people should understand that the best way to learn from history is to look at its long sweep.
But it may take many years for the model’s weaknesses to become obvious; and, in the meantime, it is likely to cause all sorts of problems. Investors in emerging markets, for instance, need to watch out. Some may be taking a punt on governments as much as companies. State-capitalist governments can be capricious, with scant regard for minority shareholders. Others may find their subsidiaries or joint ventures in emerging markets pitted against state-backed favourites.
Another concern is the impact of the model on the global trading system—which, at a time when the likely Republican nominee for president wants to declare China a currency manipulator on his first day of office, is already at risk. Ensuring that trade is fair is harder when some companies enjoy the support, overt or covert, of a national government. Western politicians are beginning to lose patience with state-capitalist powers that rig the system in favour of their own companies.
For emerging countries wanting to make their mark on the world, state capitalism has an obvious appeal. It gives them the clout that private-sector companies would take years to build. But its dangers outweigh its advantages. Both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private investors. If these companies are as good as they boast they are, then they no longer need the crutch of state support.

http://www.economist.com/node/21543160

The visible hand

The crisis of Western liberal capitalism has coincided with the rise of a powerful new form of state capitalism in emerging markets, says Adrian Wooldridge

Jan 21st 2012 | from the print edition





BEATRICE WEBB grew up as a fervent believer in free markets and limited government. Her father was a self-made railway tycoon and her mother an ardent free-trader. One of her family’s closest friends was Herbert Spencer, the leading philosopher of Victorian liberalism. Spencer took a shine to young Beatrice and treated her to lectures on the magic of the market, the survival of the fittest and the evils of the state. But as Beatrice grew up she began to have doubts. Why should the state not intervene in the market to order children out of chimneys and into schools, or to provide sustenance for the hungry and unemployed or to rescue failing industries? In due course Beatrice became one of the leading architects of the welfare state—and a leading apologist for Soviet communism.


The argument about the relative merits of the state and the market that preoccupied young Beatrice has been raging ever since. Between 1900 and 1970 the pro-statists had the wind in their sails. Governments started off by weaving social safety nets and ended up by nationalising huge chunks of the economy. Yet between 1970 and 2000 the free-marketeers made a comeback. Ronald Reagan and Margaret Thatcher started a fashion across the West for privatising state-run industries and pruning the welfare state. The Soviet Union and its outriggers collapsed in ruins.


The era of free-market triumphalism has come to a juddering halt, and the crisis that destroyed Lehman Brothers in 2008 is now engulfing much of the rich world. The weakest countries, such as Greece, have already been plunged into chaos. Even the mighty United States has seen the income of the average worker contract every year for the past three years. The Fraser Institute, a Canadian think-tank, which has been measuring the progress of economic freedom for the past four decades, saw its worldwide “freedom index” rise relentlessly from 5.5 (out of 10) in 1980 to 6.7 in 2007. But then it started to move backwards.


The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses capitalist tools such as listing state-owned companies on the stockmarket and embracing globalisation. Elements of state capitalism have been seen in the past, for example in the rise of Japan in the 1950s and even of Germany in the 1870s, but never before has it operated on such a scale and with such sophisticated tools.
State capitalism can claim the world’s most successful big economy for its camp. Over the past 30 years China’s GDP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion. China has taken over from Japan as the world’s second-biggest economy, and from America as the world’s biggest market for many consumer goods. The Chinese state is the biggest shareholder in the country’s 150 biggest companies and guides and goads thousands more. It shapes the overall market by managing its currency, directing money to favoured industries and working closely with Chinese companies abroad.


State capitalism can also claim some of the world’s most powerful companies. The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world’s oil reserves, are all state-backed. So is the world’s biggest natural-gas company, Russia’s Gazprom. But successful state firms can be found in almost any industry. China Mobile is a mobile-phone goliath with 600m customers. Saudi Basic Industries Corporation is one of the world’s most profitable chemical companies. Russia’s Sberbank is Europe’s third-largest bank by market capitalisation. Dubai Ports is the world’s third-largest ports operator. The airline Emirates is growing at 20% a year.




State capitalism is on the march, overflowing with cash and emboldened by the crisis in the West. State companies make up 80% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil (see chart). They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world’s ten biggest companies by revenue, against only two European ones (see chart). Add the exploits of sovereign-wealth funds to the ledger, and it begins to look as if liberal capitalism is in wholesale retreat: New York’s Chrysler Building (or 90% of it anyway) has fallen to Abu Dhabi and Manchester City football club to Qatar. The Chinese have a phrase for it: “The state advances while the private sector retreats.” This is now happening on a global scale.


This special report will focus on the new state capitalism of the emerging world rather than the old state capitalism in Europe, because it reflects the future rather than the past. The report will look mainly at China, Russia and Brazil. The recent protests in Russia against the rigging of parliamentary elections by Vladimir Putin, the prime minister, have raised questions about the country’s political stability and, by implication, the future of state capitalism there, but for the moment nothing much seems to have changed. India will not be considered in detail because, although it has some of the world’s biggest state-owned companies, they are more likely to be leftovers of the Licence Raj rather than thrusting new national champions.


Today’s state capitalism also represents a significant advance on its predecessors in several respects. First, it is developing on a much wider scale: China alone accounts for a fifth of the world’s population. Second, it is coming together much more quickly: China and Russia have developed their formula for state capitalism only in the past decade. And third, it has far more sophisticated tools at its disposal. The modern state is more powerful than anything that has gone before: for example, the Chinese Communist Party holds files on vast numbers of its citizens. It is also far better at using capitalist tools to achieve its desired ends. Instead of handing industries to bureaucrats or cronies, it turns them into companies run by professional managers.


The return of history
This special report will cast a sceptical eye on state capitalism. It will raise doubts about the system’s ability to capitalise on its successes when it wants to innovate rather than just catch up, and to correct itself if it takes a wrong turn. Managing the system’s contradictions when the economy is growing rapidly is one thing; doing so when it hits a rough patch quite another. And state capitalism is plagued by cronyism and corruption.


But the report will also argue that state capitalism is the most formidable foe that liberal capitalism has faced so far. State capitalists are wrong to claim that they combine the best of both worlds, but they have learned how to avoid some of the pitfalls of earlier state-sponsored growth. And they are flourishing in the dynamic markets of the emerging world, which have been growing at an average of 5.5% a year against the rich world’s 1.6% over the past few years and are likely to account for half the world’s GDP by 2020.


State capitalism increasingly looks like the coming trend. The Brazilian government has forced the departure of the boss of Vale, a mining giant, for being too independent-minded. The French government has set up a sovereign-wealth fund. The South African government is talking openly about nationalising companies and creating national champions. And young economists in the World Bank and other multilateral institutions have begun to discuss embracing a new industrial policy.


That raises some tricky questions about the global economic system. How can you ensure a fair trading system if some companies enjoy the support, overt or covert, of a national government? How can you prevent governments from using companies as instruments of military power? And how can you prevent legitimate worries about fairness from shading into xenophobia and protectionism? Some of the biggest trade rows in recent years—for example, over the China National Offshore Oil Corporation’s attempt to buy America’s Unocal in 2005, and over Dubai Ports’ purchase of several American ports—have involved state-owned enterprises. There are likely to be many more in the future.


The rise of state capitalism is also undoing many of the assumptions about the effects of globalisation. Kenichi Ohmae said the nation state was finished. Thomas Friedman argued that governments had to don the golden straitjacket of market discipline. Naomi Klein pointed out that the world’s biggest companies were bigger than many countries. And Francis Fukuyama asserted that history had ended with the triumph of democratic capitalism. Now across much of the world the state is trumping the market and autocracy is triumphing over democracy.


Ian Bremmer, the president of Eurasia Group, a political-risk consultancy, claims that this is “the end of the free market” in his excellent book of that title. He exaggerates. But he is right that a striking number of governments, particularly in the emerging world, are learning how to use the market to promote political ends. The invisible hand of the market is giving way to the visible, and often authoritarian, hand of state capitalism.

http://www.economist.com/node/21542931


The article goes on for about 14 pages in the paper (which I don't have) and on the site there are links to other topics. I'll try to read the part about history before my eye balls melt. Interesting that they don't equate soviet economy with state capitalism though.

[Ocean Seal]

State capitalism is the only capitalism that will be possible in the future. As neo-liberalism proves itself to be not only a failure for the workers but also for the bourgeoisie. Soon we will see a hybrid of neo-liberal austerity + strong state management.

[blake 3:17]

Hey rooster -- if you`re going to start threads made up of links could you at least motivate them beyond I couldn`t read it & it might be of interest?

[ernie2]

RedBrother we live under state capitalism now. It was the state that saved the financial sectors bacon for it. All the talk of the banks etc going beyond the national state evaporated faced with the crisis. On the capitalist state had the means to pour countless billions into the sector, to consciously lower interest rates and to being slaughter was little there is left of the social wage. This is all dressed up in fine democratic clothing but it is still the iron first of the dictatorship of capital in a velvet glove: as lenin said.
This was confirmed by the repression that the British state unleashed faced with the student demos in 2010 and its use of the riots to let lose the police onto working class housing estate in London etc.

[28350]

Interesting that they don't equate soviet economy with state capitalism though.

Of course not, that was "Communism."

[daft punk]

Russia was a degenerated workers state, or a bureaucratically deformed one, same thing really. It was nothing like communism, and it wasnt state capitalism, although Lenin sometimes used the phrase to describe various practices at the time, when they were in transition towards socialism, before the revolution was reversed starting around 1925.

[Vladimir Innit Lenin]

State capitalism is the only capitalism that will be possible in the future. As neo-liberalism proves itself to be not only a failure for the workers but also for the bourgeoisie. Soon we will see a hybrid of neo-liberal austerity + strong state management.

No, Capitalism has always had a strong state, whether it was the neo-liberal, Keynesian or classical 'Ricardian/Smithian' type of economic management.

The idea of the strong nation-state goes back to before the beginnings of Economics as a discrete academic discipline. That Capitalism hasn't always had a strong, interventionist state is a myth propagated by...Capitalists. We would be stupid to swallow their bullshit.

[Die Neue Zeit]

No, Capitalism has always had a strong state, whether it was the neo-liberal, Keynesian or classical 'Ricardian/Smithian' type of economic management.

The idea of the strong nation-state goes back to before the beginnings of Economics as a discrete academic discipline. That Capitalism hasn't always had a strong, interventionist state is a myth propagated by...Capitalists. We would be stupid to swallow their bullshit.

What you and various left-coms are forgetting, however, is interventionism on behalf of whom. Inclusive of this is interventionism ("state aid") on behalf of labour.

[Vladimir Innit Lenin]

When has there ever been unilateral interventionism on behalf of labour, under a Capitalist system?

Please don't insult my intelligence. I haven't forgotten something that plainly doesn't exist. Politics, whether you like it or not, is about the relationship between class and power. The ruling class will not forgo power - including state power - and, we shouldn't be content to let one class or intra-class group rule on behalf of the rest of the class, simply because their interventions could be seen as pro-worker. That, is called Social Democracy.

[Die Neue Zeit]

When has there ever been unilateral interventionism on behalf of labour, under a Capitalist system?

Bolivarianism comes to mind. All those left-of-social-democratic positions from Minsky to Meidner come to mind as well.

My point is that interventionism on behalf of labour is something to advocate, because it brings basic politics into the fray. The more this interventionism is radical and excludes residual benefits for capital, the better.

[GatesofLenin]

Do not for one second call the post-2008 cash infusion from the various govts around the world to save failing corporations as state-capitalism. The greedy corporations cried for money and they got it but they're back to their old tricks of hiding profits, cheating the little taxes they pay, etc .... If you really want state-capitalism, force the closure of all private banks and force corporations to run all their accounting through a state bank. That you could call state-capitalist! At least the state will know how much money is made and would end corporate tax loopholes.

[Psy]

State-Capitalism as we know it dates back to the ideas of Fredrich List that looked at the powerful British capitalist class and concluded the only path for German capitalists was to empower the German bourgeois state with the task of modernizing German means of production so German capitalists could compete with British capitalists in the world market.

Basically Fredrich List got to point, the sole reason that states exist is so their nation can accumulate more capital thus for the (bourgeois) state not to subsidize the industrialization of the national economy is nothing short of treason (from the point of view of the domestic capitalist class) in the idea that as a underdeveloped nation increases its industrial production everyone in the nation will benefit, capitalists get more profits and peasant/artists become industrial workers.

Of course Fredrich Lists writings came before the bourgeoisie learned of overproduction and saw a utopia at the end of global capitalist industrialization.

[Revolting Rebel]

State capitalism would be any form of Capitalism which is centally planned either by the state, which acts as a corporation extracting surplus-value from the workers, or by banks and financial capital.

Globalization is just the extension of state capitalism on a global scale, creating institutions like the IMF and World Bank, and increasing collusion between the capitalist classes around the world. One could argue, China and the banks own wall street, and Lenin proved the stock market is simply manipulated by the banks to create profit for themselves. Globalization led to right wing nationalist movements as a result, as national state-capitalism and global state capitalism have come into conflict.

Raya Dunayevskaya proves using the published 5-year-plans and Marx's Capital, that Russia did indeed transform into a state-capitalist society. State-capitalism became the way for the day, as every major nation adopted some for of centralised state planning (the New Deal in the US).

[Die Neue Zeit]

Do not for one second call the post-2008 cash infusion from the various govts around the world to save failing corporations as state-capitalism. The greedy corporations cried for money and they got it but they're back to their old tricks of hiding profits, cheating the little taxes they pay, etc .... If you really want state-capitalism, force the closure of all private banks and force corporations to run all their accounting through a state bank. That you could call state-capitalist! At least the state will know how much money is made and would end corporate tax loopholes.

Bravo!

Also, I have not known a single case of real state capitalism wherein the workers' real wages (i.e., after inflation) went down. Even Chinese workers, after considering all the post-Mao shit, haven't experienced this.

[Psy]

Bravo!

Also, I have not known a single case of real state capitalism wherein the workers' real wages (i.e., after inflation) went down. Even Chinese workers, after considering all the post-Mao shit, haven't experienced this.

Yet this doesn't solve the crisis of capital, we saw this in 1980's Japan where the bourgeoisie state rushed to privatize its massive holding of means of productions as it was facing a falling rate of profit combined with rampant worker militancy as workers directed their frustration at the workplace towards the state. I.E JNR (Japanese National Railways) workers escalated their grievances with JNR towards the state of Japan that owned and operated JNR.

[Die Neue Zeit]

True, but I wanted to point out a key rebuttal against those defending small-l liberal economics against particular forms of "intervention." Also, I'm not sure Japan back then would qualify as "state-capitalist."