The coming back of state capitalism

An interview with Ian Bremmer, president of the Eurasia Group. Bremmer just published a «shocking» article at Foreign Affairs magazine questioning «The End of the Free Market?». «State Capitalism comes of Age» (FA, May/June 2009, volume 88, number 3) is an inspiring article for a political and economic discussion that is essential for the coming years, during and beyond the current Great Recession.

An interview by Jorge Nascimento Rodrigues ©

BREMMER’S INTERVIEW IN BRIEF

. «But angry activist response to the global economic crisis—and the fact that the crisis originated inside western financial institutions—provided the real tipping point. »
. «There is no “global financial crisis,” because there is no real financial crisis inside state capitalist countries.»
. «The conflict between liberalization and increased state intervention will not take place within these developed states. It will take place internationally, as we see these competing models create friction in international politics and global markets.»
. «The most surprising of these horsemen would probably be the sovereign wealth funds (SWF), because they rocketed to prominence so quickly.»
. Two major risks: stiff innovation for growth and rising protectionism in world trade

INTERVIEW
Q: What was the main reason for the coming back of state capitalism around the world? The recent policy activism against the global crisis or the longer geopolitical transition with the emergence of new great powers using various state “tools” in its go-global strategies?

A: The rise of state capitalism really began several decades ago with the rise in importance of oil in the global economy. It accelerated with the growth in importance of emerging markets to global economic growth. But angry activist response to the global economic crisis—and the fact that the crisis originated inside western financial institutions—provided the real tipping point. An important additional point: there is no “global financial crisis,” because there is no real financial crisis inside state capitalist countries. There is a global recession brought about by the developed world’s financial crisis. China, for example, doesn’t have a liquidity problem. Its economy has taken a hit because consumer demand for Chinese-made products inside the European Union, the United States, and Japan—it’s largest trade partners—has fallen sharply. China has plenty of money with which to begin financing the next phase of its expansion.

This is not a return of socialism or even Marx’s revenge

Q: Are we assisting to the swinging of the pendulum in economic doctrines? State interventionism won the “battle” against the deregulation and privatization wave of the 1980s?

A: Only a bit. Certainly, we’re going to see a lot of partisan political rhetoric inside the United States around this subject—and there’s a real risk of over-regulation in the US, Europe, and Japan. But it’s highly unlikely that any of these countries will simply embrace state capitalism. In other words, the conflict between liberalization and increased state intervention will not take place within these developed states. It will take place internationally, as we see these competing models create friction in international politics and global markets.

Q: From a theoretical point of view these new trends are the coming back of the socialist mantra (even some talk of Marx “revenge”)? Or these economic fragmented arguments – for the moment not yet an articulated theory- are nowadays basically a disguise for geopolitics action for certain emergent powers or populist politics for certain politicians?

A: This is a good question. No, this is not a return of socialism. This is capitalism as practiced by the state. That’s a very big difference. It’s capitalism with a different set of rules and a different cast of characters. In a political context, state capitalism makes sense as a tool for authoritarian governments, because it allows them to micromanage both political and economic challenges that have a direct impact on state stability. But in an economic context, state capitalism is not a particularly efficient engine for long-term expansion. You get excessive leverage and high growth…until you don’t. By the way, the financial crisis and global recession have revealed that the lack of regulation of recent years is hardly a durable model for long-term growth either. There is a delicate balance between these two extremes that policymakers all over the world will have to find.

Q: From the “four horsemen” of state interventionism – SWF, state “strategic” companies (full owned by the state or with golden shares, including the energy sector), privately owned “national champions”, and government policies – which examples from reality surprised you more?

A: The most surprising of these horsemen would probably be the sovereign wealth funds (SWF), because they rocketed to prominence so quickly after having existed as a very small factor in global market performance for many years. Over-leverage has made them much more influential.

China tops the list…of the likeliest winners

Q: As in the 1890s and 1900s with the new financial capital or in the 1970s with the Pension Fund Revolution (Peter Drucker coined the concept), are we living now a new profound world financial restructuring after the crash of the “innovative financial vehicles” of the last Wall Street bubbles? Who will gain the race?

A: There is a restructuring underway, and there will be clear winners and losers. Of the likeliest winners, China tops the list. Beijing has responded to its economic slowdown with a massive state spending spree, and it has the reserves to do a lot more. Once China resumes its former growth pace, its large supply of low-cost labor and growing capacity for innovation in higher value-added manufacturing sectors will still be there. Politically speaking, 30 years of double-digit economic growth has earned the communist party leadership a lot of domestic political capital, and despite the social turmoil provoked by growing gaps between rich and poor, severe environmental damage, endemic local-level corruption and other chronic problems, hundreds of millions of Chinese citizens are freer today than they’ve ever been to decide how and where to live. As a result, the leadership has proven a major beneficiary of a rising tide of national pride. We’ll find more winners in the Persian Gulf. Major Arab energy producers like Saudi Arabia, the United Arab Emirates (Abu Dhabi, not Dubai), and Qatar are coping well with the global slowdown, despite the fall in energy prices since last summer. For the most part, gulf banks avoided exposure to the financial products that did so much damage in the west, and budget planners in these governments made wisely conservative assumptions about crude oil prices. Brazil will also re-emerge from the financial crisis with it status as an emerging market power intact. President Lula da Silva has helped forge a consensus in favor of responsible macroeconomic policy that spans most of Brazil’s political spectrum. His still high public approval ratings suggest his government will ride out the current crisis with its market-friendly reputation secure. India has several advantages which help limit political risk in the country. Most important is the decentralization of economic power that ensures that, though reform often proves a (very) slow process, Delhi’s enormous state bureaucracy can no longer easily obstruct the entrepreneurial talents and energies that have transformed the country over the past two decades.

Risks in Russia

Q: And those who won’t fare so well?

A: Among the countries that won’t fare as well is Russia, where there is a growing risk of elite divisions over economic policy—particularly if the slowdown creates severe hardships and high unemployment in many of the one-company towns in the Urals and Siberia. Infighting among key politicians in Ukraine prevents its government from moving forward on implementation of changes needed to ensure IMF help is not delayed. In turkey, conflicts between the ruling Justice and Development Party and influential secularists among the country’s media, military, and business elite have alternated between simmer and boil. These tensions aren’t likely to be resolved anytime soon, distracting the government from the kinds of reforms needed to address serious structural problems. Finally, the dollar will probably eventually take a hit, but that’s a longer-term issue.

Q: Innovation, and particularly innovation diffusion through the economic tissue, is the engine of growth. State pro-activism is good for some breakthrough projects, like the Soviet Space Korolev program in the 1950s or the DARPA in America in the 1960s. But it is poor in the diffusion phase. The new trend will stiff innovation and growth as the Soviet implosion reminds us?

A: That’s right. Innovation in these states won’t be as efficient—and, as a result, global growth won’t be as robust. Over the longer-term, however, technological innovation will have a transformative effect.

Q: The rising of state interventionism grows the risk of protectionist policies around the world? WTO will have a bad time?

A: It certainly does. This is something that believers in free markets in the West must fight hard to resist, even though worsening economic conditions will always incentivize populist/protectionist policies.

3 Responses to “The coming back of state capitalism”

  1. Greatings, Super post, Need to mark it on Digg
    Have a nice day

  2. […] Contudo, este guinar do pêndulo nos países ocidentais em prol de uma alegada eficácia das estatizações contra a vaga anterior das privatizações é apenas um dos quatro «cavaleiros» da reemergência do capitalismo de Estado, alerta Ian Bremmer, presidente do grupo americano de consultoria Eurasia group, sediado em Nova Iorque, em entrevista que pode ler, no original, na íntegra aqui. […]

  3. I Don?t Usually Reply to Posts But I Will in this Case! Great Site and Informative Post, Thank You!

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