The Rise Of State Capitalism (original) (raw)

The financial meltdown of 2008-09 brought unprecedented disrepute to capitalism and its proponents alike. Many sceptics even termed the crisis as the beginning of the end of free markets. But there is another monstrous trend that threatens the existence of the free-market system as we know it: the obtrusive ascent of command economies on the back of ‘state capitalism’ — a system in which ruling elites use markets to extend their own political and economic leverage. In The End Of The Free Market, US-based political analyst Ian Bremmer expertly illustrates the rise of state capitalism and the threat it poses.

Bremmer says China is experimenting with a form of state capitalism that is being increasingly emulated by others such as authoritarian governments in Russia, Saudi Arabia, Egypt, Ukraine and Algeria. The trend is also seen in democracies such as India and Brazil, though in a limited way. Bremmer says some state-owned energy companies have grown so big that they will play a dominant role in international politics in the years ahead. China’s rush to take control of oil assets in foreign land exemplifies this. Three quarters of global crude oil reserves are now owned by national oil companies such as Aramco (Saudi Arabia), Gazprom (Russia), CNPC (China), NIOC (Iran), PDVSA (Venezuela) and Petrobras (Brazil).

The book also focuses on the rising influence of sovereign wealth funds (SWFs) on financial markets. Economists have highlighted how SWFs are focused more on national interests rather than on profits. The World Bank says, globally, the collective SWF investment will reach 10trillionby2013,from10 trillion by 2013, from 10trillionby2013,from3.5 trillion now. China, UAE and Saudi Arabia are the biggest investors through SWFs. China Investment Corporation, a secretive SWF, has been consistently investing in the US and Europe and data reveal that any mass selling by them influence investors’ sentiment hugely.

But is state capitalism sustainable? The book tracks an interesting trend. Free markets created big middle classes in the US and Europe; big middle class demanded better governance, resulting in more accountability. Though Bremmer has not dug into the green shoots of democracy in China, its rising middle class is getting more vocal — the labour strikes demanding higher salaries are testimony to that.

Can state capitalism ensure sustainable growth? Not really. The robust GDP growth in state capitalist countries has benefited only a small section of population. Latest Gini Coefficient measures show the gap between the rich and poor is much worse in China compared to, say, India. There’s no denying that the excesses of free markets have pushed millions into bankruptcy, but free markets have lifted billions out of poverty as well.

The book explains why the US should be worried. Rapid economic growth in state-capitalist countries can inspire them to increase trade ties between themselves rather than with the US. Bremmer argues that if developed countries want the free-market system to thrive, they need to offer the concessions needed to complete the WTO-sponsored Doha Development Round of global trade talks quickly. Any indulgence in populist politics by US lawmakers will be a recipe for disaster, he says.

In the latter chapters, the book lays out dos and don’ts to ensure free markets — resisting protectionist moves, not hampering the flow of foreign workers through harsh immigration rules, etc. Perhaps, the US needs to just follow what former President George W. Bush said to G20 leaders in November 2008: “The answer is not to try to reinvent that (free-market) system. It is to fix the problems we face, make the reforms we need, and move forward with the free-market principles that have delivered prosperity and hope to people around the world.”

The author is not predicting a Cold War between free-market champions and state-capitalist economies, but he has clearly outlined the shift in the balance of power from the former to the latter. The onus now is on free-markets champions to ensure they make necessary reforms to reverse the trend. Let’s hope they don’t choke on their alibis.

Author's Details: American political scientist Ian Bremmer is the president of Eurasia Group, a leading global political risk research and consulting firm. Bremmer created Wall Street's first global political risk index, and has authoured several books including The J Curve: A New Way to Understand Why Nations Rise and Fall. He holds a PhD in political science from Stanford University (1994).