Monday, May 17, 2010

The Rise Of State-Controlled Capitalism

"State-controlled capitalism" may sound like a contradiction in terms, but author Ian Bremmer says it's a growing threat to U.S. corporations.

In his new book, The End of the Free Market, Bremmer, who runs Eurasia Group, a political risk consulting firm, argues that corporations based in free-market economies face growing competition from companies based in state capitalist economies.

Bremmer defines state capitalism as economies in which the state is the principal actor and judge, and uses the markets for political gains. China, Russia and Venezuela are among the examples. In free-market economies, such as the U.S., Europe and Japan, multinational corporations are the principal actors.

One arena in which free-market multinationals face competition with state companies is the oil industry. Seventy-five percent of the world's oil production is controlled by government-owned corporations, such as in Saudi Arabia and Norway.

And in China, U.S. companies compete against domestic automakers that are closely intertwined with the state. China is also developing its own aviation industry, which Bremmer sees a future threat to Boeing and Airbus.

"There are many, many multinational corporations based in the West who have thought they were going to be able to do great business and suddenly they are going to find they have real competitors on the ground, in the world's second-largest and fastest-growing economy," the author tells NPR's Renee Montagne, referring to China. "But it's not a fair playing field, there is no rule of law, and they are going to get 'Googled' out."

Bremmer is referring to Google's decision earlier this year to shift operations from China to Taiwan. The search engine giant said its intellectually property had been stolen, and it no longer wanted to comply with government censorship. Google also faced competition from the dominant search engine in China, owned by a domestic company called Baidu.

"We are no longer in a global, free-market economy. There are now two systems out there. There is a free-market system, largely in the developed world. There is a state capitalist system in China, Russia and the Persian Gulf. The systems are mutually incompatible," Bremmer says. "When your principal actors are multinational corporations in the private sector and they rely for their growth on unfettered access to global markets, and state capitalist systems don't do that, you are going to have a problem. And we are just at the beginning of that problem."

Despite the dire scenario he lays out in his book, Bremmer ultimately believes free markets will outlast state capitalism. He says the U.S. has a bigger economy, puts more money into research and development, and has stronger educational institutions.

In addition, state control can create inefficiencies, such as in Venezuela, where the state oil company in now much less productive than it was before the government took it over.

However in the next five to 10 years, Bremmer says, the U.S., Japan and Europe will be too busy climbing out of economic holes — created by high unemployment and government debt — to formulate a strategy to confront the growing power of state capitalism.
Excerpt: 'The End Of The Free Market'
by Ian Bremmer

The End Of The Free Market
By Ian Bremmer
Hardcover, 240 pages
List price: $26.95The Rise of State Capitalism and the Future of the Free Market

Twenty years ago, the collapse of Eastern European and Soviet Communism drove a stake through the heart of the argument that governments could generate national prosperity through direct and active management of national economies. Communist China began to generate explosive economic growth only after its leadership began to experiment with market-based capitalism in the late 1970s. When the Soviet Union collapsed in the early 1990s, millions of Russians traded the black market for the free market. Governments privatized state-owned assets in India, Brazil, Turkey, and elsewhere. In America, Reagan administration officials preached the gospel of limited government so successfully that by 1996, a Democratic president used his State of the Union address to declare, "The era of big government is over." In the 1980s, Western European governments followed British Prime Minister Margaret Thatcher's lead in profitably privatizing hugely inefficient state enterprises in energy and power generation (oil, gas, coal, and nuclear), transport (national airlines, railways, and bus companies), and telecommunications. In the 1990s, they preached the virtues of free-market capitalism to their newly liberated Eastern European neighbors and began to integrate them into a single market. Global financial institutions pressed them to embrace U.S.-endorsed liberal economic theories, known collectively as the Washington Consensus.

The results speak for themselves. Between 1980 and 2002, world trade more than tripled. The costs of doing business—especially in transportation and communications—fell sharply. Many protectionist barriers, like tariffs and import quotas, went the way of the Berlin Wall. Tariff rates (as a percentage of total import costs) were halved during this period in America, were more than halved in Europe, and fell by 80 percent in Canada. Following the 1948 inception of the General Agreement on Tariffs and Trade (GATT), eight rounds of talks helped create the World Trade Organization (WTO) in 1995. With 153 member states, the WTO promotes international trade and arbitrates commercial disputes. Both developed and developing countries have continued to protect inefficient and strategically vital economic areas, but liberalized trade policies in dozens of countries have added momentum behind the increasingly free flow of goods and services, sharpening competition, incentivizing innovation, and giving consumers all over the world better products at lower prices. By 2000, global foreign direct investment topped $1.4 trillion, a level not exceeded since. Multinational corporations and a host of smaller companies went global to both drive down production costs and target new customers: the hundreds of millions of people within emerging market states moving from poverty toward a middle-class lifestyle. Neither an economic slowdown in the early 1990s nor the damage wrought by the 9/11 attacks a decade later could challenge the dominance of the liberal economic model. Private wealth, private investment, and private enterprise appeared to have carried the day.

But as the sun sets on the first decade of the twenty-first century, that story has already become ancient history. The power of the state is back. Over the past decade, a new class of companies has pushed its way onto the international stage: enterprises that are owned or closely aligned with their home governments. By 2008, Mexico's Cemex, now the world's third-largest cement maker, was valued on par with Coca-Cola and owned more foreign assets than Dow Chemical or Alcoa. Brazil's Companhia Vale do Rio Doce mining company (popularly known as Vale) claimed total assets worth more than traditional industry leaders like Roche, Anglo-American, and BHP Billiton. Cemex and Vale enjoy close ties with their respective governments, which allow them to protect their dominant commercial positions through hostile takeovers of smaller domestic competitors. Both companies are essentially privately owned "national champions." Over the past several years, lists of the world's largest companies published by Forbes, Fortune, and other publications have begun to feature state-owned energy giants like China National Petroleum Corporation, Petro China, Sinopec, Brazil's Petrobras, Mexico's Pemex, and Russia's Rosneft and Gazprom. This trend toward ever larger state-owned enterprises is not just an energy phenomenon. By 2008, China Mobile claimed the largest number of mobile phone subscribers in the world (488 million). These are not traditional multinational companies, because those who run them answer first to political masters, not shareholders.

Between 2004 and the start of 2008, 117 state-owned and public companies from Brazil, Russia, India, and China (the so-called BRIC countries) appeared for the first time on the Forbes Global 2000 list of the world's largest companies, measured by sales, profits, assets, and market value. A total of 239 U.S., Japanese, British, and German companies fell off the list. The percentage market value of this latter group of companies dropped from 70 percent to 50 percent over those four years; the value of the BRIC-based companies rose from 4 percent to 16 percent. The corporate failures and government bailouts of 2008–2009 accelerated the trend. Following the meltdown and takeover of many large U.S., British, and other banks, Bloomberg News reported in early 2009 that three of the world's four largest banks by market capitalization were state-owned Chinese firms—Industrial and Commercial Bank of China (ICBC), China Construction, and Bank of China. The 2009 Forbes Global 2000 listed ICBC, China Mobile, and Petro China among the world's five largest companies by market value. In other words, privately owned Western multinationals are in no danger of replacing the nation-state as the primary actor in international politics and global markets, because the state now owns and operates some of their largest competitors.

Over the past decade, the governments of several developing countries have worked to ensure that valuable national assets remain in state hands and that governments maintain enough leverage within their domestic economies to safeguard their survival. In some cases, they've used state-owned energy companies to amass wealth or to secure access to the long-term supplies of oil and gas that their still-vulnerable economies will need to fuel further growth. They have created wealth funds from pools of excess capital and have begun to make strategic investments beyond their borders.

In 2008, this trend toward greater state power reached a tipping point. During the financial crisis and global recession, an enormous market meltdown that provided globalization with its first true stress test, political officials in both the developed and the developing worlds seized responsibility for decisions that are usually left to market forces—and on a scale not seen in decades. Governments around the world responded to the implosion of major financial institutions and key economic sectors with massive doses of state spending meant to kick-start growth and, in some cases, to bail out companies considered "too big to fail." States grabbed control of firms once considered industry flagships. They did all this because they believed it was necessary—and because no one else could do it. During the financial crisis and its aftermath, this dynamic generated a massive shift in financial decision-making power from New York to Washington. In fact, a transfer of market power from capitals of finance to capitals of political power took place all over the world—from Shanghai to Beijing, São Paulo to Brasilia, Mumbai to Delhi, Sydney to Canberra, and Dubai to Abu Dhabi. The trend was also apparent within cities where finance and politics coincide—London, Paris, Berlin, Tokyo, and Moscow.

This is an enormously important change. In emerging market countries, political factors still matter at least as much as economic fundamentals for the performance of markets. That's a useful way of understanding the intersection of politics and economics within China, Russia, India, Brazil, Turkey, Mexico, and many other increasingly influential international players. The financial crisis pushed America, Britain, and Japan in that same direction—and a global audience increasingly skeptical of free-market capitalism's ability to generate sustainable, long-term prosperity is watching closely. Their massive state-managed injections of capital were necessary to refloat a global economy unhinged by a massive failure to regulate international financial flows. Market advocates will now have to work that much harder to persuade skeptics that the world's richest states remain committed to free-market capitalism.

On both sides of the Atlantic, political officials say they've tried to rescue drowning banks and economically vital private-sector companies to breathe new life into them—before releasing them again to swim on their own. They insist they will claim victory only when all those they've saved no longer need them. But this is not how political decision makers in China, Russia, and many other emerging markets see their roles in the future of their domestic economies. Their words and actions reveal that they believe that public wealth, public investment and public enterprise offer the surest path toward politically sustainable economic development. These governments will continue to micromanage entire sectors of their economies to promote national interests and to protect their domestic political standing. Their market clout is growing. Governments own the oil and gas companies that now control the lion's share of global reserves. They own (or actively favor) companies in direct competition with Western multinationals in power generation, telecommunications, mining, arms production, automotives, and aviation. They own and operate investment portfolios—including sovereign wealth funds—that are fast becoming a key contributor to global capital flows.

State capitalism is not the reemergence of socialist central planning in a twenty-first-century package. It is a form of bureaucratically engineered capitalism particular to each government that practices it. It's a system in which the state dominates markets primarily for political gain. As this trend develops, it will generate friction in international politics and distortions in global economic performance. There are times when governments must protect citizens from the worst effects of underregulated markets. But over the longer term, there is no evidence that political officials regulate economic activity better than market forces can. When U.S. policy makers temporarily seize responsibility for decisions on how best to value assets and allocate resources, they inject short-term waste, inefficiency, and bureaucracy into domestic and global markets. But when officials in several of the world's most dynamic emerging markets embrace this system as a long-term means of protecting their political survival, they undermine the power of the global economic system to generate sustainable growth.

For the moment, many of the governments that practice state capitalism have profited from it—both economically and politically. This might encourage some of them to rely for future growth less on commercial ties with the United States and more on one another. If so, this trend will have important consequences for America's global political influence and the longer-term health of the U.S. economy. Does state capitalism doom the United States and China to some form of direct conflict? Will it fundamentally undermine globalization—the system that has lifted hundreds of millions out of poverty and into an emerging global middle class? Is state capitalism sustainable? If politicians fail to keep their promises to consistently generate jobs and long-term prosperity for fast-growing middle classes, will state capitalism go the way of communism? Are we on the verge of a new global struggle—one that pits free-market capitalists and state capitalists in a battle to win over countries that might still tip either way? If so, who will win?

These are the questions that will determine the future of international politics and the global economy over the next decade.

Excerpted from The End of the Free Market: Who Wins the War Between States and Corporations? by Ian Bremmer by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Ian Bremmer, 2010.

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