State Capitalism

State Capitalism March 11, 2016

Joshua Kurlantzick defines State Capitalism as “countries whose government has a controlling ownership stake in more than one-third of the 500 largest companies, by revenue, in that country, a situation that gives these governments far greater control over the corporate sector than a government in a more free-market oriented nation like the United States or the United Kingdom.”

By this definition, state capitalism is on the rise, in China for example: “contrary to the impression perpetuated by top Chinese leaders that China continues to open its economy and reduce the power of the government over many sectors, over the past decade Beijing actually has taken back control of many parts of the economy, such as energy and commodities and information technology. . . . Since the mid-2000s, several generations of Chinese leaders actually have reversed economic reforms launched in the 1990s by former premier Zhu Rongji and pushed by admission to the World Trade Organization in 2001. . . . under supposed reformist Xi Jinping, Beijing has been boosting state interventions in equity markets and increasing state subsidies to preferred firms in industries it considers critical, including energy, telecommunications, information technology, and most other areas that Beijing considers important to making the Chinese economy more modern, innovative, and globally competitive.”

The Chinese government exercises authority in the economy through networks that it controls: “Beijing now appoints senior directors of many of the largest companies, who are expected to become Party members, if they are not already. . . . Working through these networks, the Beijing leadership sets state priorities, gives signals to companies, and determines corporate agendas, but does so without the direct hand of the state appearing in public.”

It’s happening elsewhere too: in Brazil, Indonesia, Egypt, Vietnam, the UAE, Venzuela, and Russia. Though these countries are “not returning their nations to the failures of autarky and communism,” they combine “a high degree of state control of major companies with a degree of openness to global trade, as long as that trade does not threaten state control over certain key industries.” According to the Heritage Foundation’s Index of Economic Freedom, “the global advance toward economic freedom, which had taken off in the late 1990s and early 2000s, has stagnated.21 Global economic freedom has stagnated for the past five years, the Index reported, in large part because of the growth of state capitalism in the developing world, and particularly in the group of countries identified here by the definition of state capitalism.”

Kurlantzick argues that this is partly due to the 2008 collapse of the financial markets “dented the ‘Washington Consensus’ idea that a combination of free market economics and free politics is necessarily the wisest course for developing nations.” That dent was in a consensus that was already losing credibility, since “the first post-Cold War years did not produce the kind of growth and equality people in many developing nations had hoped for.”

Kurlantzick doesn’t think that all state capitalism systems will be economically disastrous. Some may manage to prosper, and enable their people to prosper. But there are dangers other than economic: “the most autocratic and powerful state capitalists will use their state companies as de facto weapons of war, creating serious conflict in some of the most strategically important places on earth.” Can you say Putin? Kurlantzick can: “under Vladimir Putin, Russia in the 2000s and 2010s already has developed a reputation for wielding its state-controlled natural gas giant Gazprom, which controls the largest gas reserves in the world, as a weapon against other states. . . . After the 2004 Orange Revolution in Ukraine, which helped bring opposition leader, and vociferously antiKremlin politician, Viktor Yushchenko, into the presidency, the Kremlin warned Ukraine that it would cut gas deliveries. For a time, Gazprom resumed normal commerce with Kiev. . . . in 2013 and 2014, as the situation in Ukraine changed dramatically, Putin once again put Gazprom into play, with the Kremlin using it against Kiev and against Kiev’s allies in Western Europe.” State capitalists are in a position to weaponize economic power, leaving the world a less stable, more volatile place.

Though Kurlantzick’s arguments are well-taken, it’s not clear that the difference between “state capitalists” and everyone else is as sharp as he indicates (and he knows it’s not razor sharp). He argues that “government spending in the United States, supposedly a free-market bastion, now accounts for more than forty percent of GDP. But this government spending is primarily used for social welfare programs (particularly in Western Europe and Japan), as well as for defense; little of it is actually used to own and control corporations.” Well, yes, but: Are those defense contractors not a little bit beholden to the government? He acknowledges that all states, in a pinch, take greater control of the economy, and might even weaponize economic advantage. What makes state capitalists different is that they do it all the time. So: State capitalism is on the rise, but perhaps it’s also the case that all states might become state capitalist when the need arises.

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