The latest issue of Foreign Affairs has a great piece by Ian Bremmer which describes "state capitalism" and explains why that is the best term for the particular
government expansions currently taking place. Unfortunately, the article is only available to susscribers, but you can listen to an audio of the article here. Bremmer, who is President of Eurasia Group, does not make
modest claims about the economic developments of the past few years. He notes that in developing countries, "the state's heavy hand in the economy is
signalling a strategic rejection of the free market doctrine":
The market tide has now receded. In its place has come state capitalism, a system in which the state functions as the leading economic actor and uses markets
primarily for political gain. This trend has stoked a new global competition, not between rival political ideologies but between competing economic models. And
with the injection of politics into economic decision-making, an entirely different set of winners and losers is emerging.
Bremmer distinguishes between four primary actors in state capitalism: national oil corporations, state-owned enterprises, privately-owned national champions,
and sovereign wealth funds. He notes that the 13 largest oil companies in the world, as measured by their reserves, are owned and operated by governments,
including Saudi Arabia, China, Russia, Venezuela, Iran, Malaysia, and Brazil. These state-owned companies "control more than 75% of global oil reserves". In
addition to oil companies, governments practicing state capitalism also make use of state-owned enterprises (SOEs), which help them use the market to bolster
their own political positions. SOEs allow governments to consolidate entire industrial sectors, thus obviating the need for regulation of critical industries (i.e.
petrochemicals, power generation, mining, steel production, weapons, port management, telecommunications, and aviation). In some cases, the political and
economic transaction costs of creating an SOE are too high. Under such circumstances, large companies that remain in private hands become "national
champions", relying on government in the form of credits, contracts, and subsidies. Governments dish out the rewards because these companies are percieved
as a means of competing with purely commercial foreign rivals, thereby securing a dominant role for native industry in the domestic economy and export
markets. Bremmer observes that, in Russia, "any large business must have favorable relations with the state in order to succeed".
As the task of financing these companies has become more complicated, the role and significance of sovereign wealth funds (SWFs) has greatly increased. As
state-owned investement funds, SWFs serve as repositories for excess foreign currency earned from commodity export or manufactured goods. An SWFs
portfolio often combines foreign currency, government bonds, real estate, precious metals, and direct stakes or majority ownership in a host of domestic and
foreign firms. Rather than finance national champions by printing more money, thus leading to asset-devaluing inflation, governments use SWFs to maximize
returns in both the economic and political arenas.
So why is Bremmer so concerned about a development policy that seems to empower national governments in developing countries? Even asking this question
seems silly. One of the critical-- and critique-worthy-- features of state capitalism is this close relationship between the government of a country and its putative
entrepreneurs. This client-patron relationship threatens to unravel the performance of global markets. Since commercial decisions are often left to political
bureaucrats who lack experience in managing commercial operations, their decisions frequently make markets less competitive and productive. There is no way
for markets to fix these irregularities when distorted by the power of political patronage and the competitive advantage offered by state subsidies. Motivations
underlying investment decisions become political rather than economic. As a result, state capitalism adds costs and inefficiencies to production by injecting
politics and corruption into market operations. The client-patron relationship encourages businesses to put greater stock in maintaining current regimes and
backing an expanded, often dangerous perception of "national interest" and foreign policy goals.
Under state capitalism, economic entrepreneurship is replaced by political entrepreneurship. Unfortunately, one need only take a walk over to Congress to
observe the tawdry power of political entrepreneurs in even the American system.