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Ian Bremmer is one of Wall Street’s leading political risk analysts and consultants and the president of Eurasia Group. In his new book, The End of the Free Market, he highlights the rise of a new form of capitalism largely in the formerly communist bloc, “state capitalism.” I put six questions to Bremmer about his new book.
1. With the collapse of the Soviet Union in 1992, political scientists were quick to proclaim the final victory of free-market liberalism in the seventy-five year struggle with communism. Now, few are quite so quick to repeat that claim. You suggest that the collapse of communism has not been followed by the globalization of free-market liberalism but by something else. What is it?
Globalization has been the dominant driver of international politics and global markets for a generation. But in several countries around the world, we’re now seeing a fast-emerging struggle between free-market liberalism and a new form of capitalism dominated by the state. The collapse of communism didn’t bring about the final victory of free-market capitalism, because it didn’t put an end to authoritarian government.
Political leaders in China, Russia, the Arab monarchies of the Persian Gulf, and others have had to accept that they can’t mandate long-term economic growth. They know they need to embrace markets. But they also know that if they leave it entirely to market forces to decide who wins and loses from economic growth, they run the risk of enriching and empowering people and institutions that might use their new wealth to challenge the government’s political power. So they’ve built systems, tailored to meet their political needs, which allow the state to dominate domestic economies—state capitalism.
These governments use state-owned companies and privately owned, politically loyal firms to intervene in global markets for energy, aviation, shipping, power generation, arms production, telecom, metals, minerals, petrochemicals, and other industries. People don’t realize that national oil companies now control three quarters of the world’s crude-oil reserves. To help finance the system, these governments use enormous investment vehicles knows as sovereign wealth funds. The state is using markets to create wealth that can be directed as political officials see fit. The ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).
This phenomenon is distorting the workings of free markets in lots of ways. One of the most important is this: Western companies and multinationals are now forced to compete all over the world against companies armed with enormous financial and political support from their home governments.
This trend has been developing beneath the surface for many years, but the financial crisis and the global recession that followed have proven an important tipping point. China, the leading practitioner of state capitalism, grew by nearly 12 percent in the first quarter of this year. America, meanwhile, is muddling along with 9.7 percent unemployment. This is a tough moment for those who believe in free markets to make their case. The result is that the global free-market system as we’ve known it for many years doesn’t exist anymore.
2. You talk about “state capitalism,” but this term carries quite a bit of historical baggage, with links to fascism between the wars and to the socialist model used in East Germany after the war, for instance. Explain how your use of this term differs from earlier usages, and cite the specific national models you expect to be most influential for the coming era.
The biggest difference is that this system is not at all about ideology. State capitalism is not pitched as an attempt to right historical wrongs. It’s more a set of management techniques peculiar to each country than a coherent political philosophy. It’s a means of ensuring political survival by managing the ways in which markets create wealth.
In addition, this is not simply a 21st century updating of Soviet or Warsaw Pact communism. This is absolutely a form of capitalism, but one in which the state plays a much heavier and more direct role in directing market activity.
China is the largest, best-known and most influential of the state capitalists, but we have to remember that no state capitalist model can simply be imported from somewhere else because each state has a unique set of strengths and challenges. Russia has enormous natural wealth. China doesn’t. China does have an enormous workforce that gives it other advantages. The Saudis have oil wealth, but its demographic challenges are entirely different from Russia’s. It needs to create non-energy jobs and to persuade young Saudis to become qualified for them.
China’s success and growing influence may persuade other developing states to embrace elements of state capitalism. But they’ll have to adapt the system to serve their particular needs.
3. Do you see any signs of emerging “state capitalism” in the United States—in the exceptional relationship between key defense contractors and the Pentagon, for instance?
No. The relationship between defense contractors and government is moving more into the information and cyber-security sphere, which is a side point worth thinking about, but the broader ties that bind them are a half century old.
In many ways, the financial crisis clearly shifted the balance of economic decision-making power from Wall Street to Washington. Congress approved a $787 billion stimulus package to revive the American economy, but nearly $300 billion of that takes the form of tax cuts. State capitalism is about more than emergency government spending, implementation of more intelligent regulation, or a stronger social safety net. It’s about state dominance of economic activity for political gain.
Here’s the bottom line: No U.S. presidential administration and no congressional majority has the power within the American system of checks and balances to fundamentally shift the role of the state in the U.S. economy on a scale remotely comparable to the systems already in place in China, Russia, or Saudi Arabia. Arguments to the contrary amount to not much more than partisan political posturing. In Western industrialized democracies generally, there are simply too many institutional checks on the power of the state.
4. You write that Ukraine’s “state capitalism,” focused on the energy sector, has been necessary “to protect the country’s independence from the powerful and predatory energy producer next door,” namely Russia. But the recent triumph of Viktor Yanukovych at the polls has led quickly to a proposal by Vladimir Putin to merge Russia’s Gazprom with Ukraine’s Naftogaz. How do you explain this proposal and what broader significance do you accord it?
It appears that Prime Minister Putin failed to give Ukraine’s President Yanukovych much of a heads-up before announcing that idea. It’s posturing, an opening bargaining position toward a deal that will fall well short of a merger. Naftogaz is a bit too much of a basket case for this proposal to make economic sense for Gazprom, and the politics within Ukraine are too hot for the deal to win friends and influence people within Ukraine.
But the larger point is that state capitalism can’t be exported, because each government needs it and uses it for reasons that are unique to each country and its politics. There isn’t going to be a Moscow Consensus or a Beijing Consensus because state capitalism doesn’t merge the interests of one country with another. Governments of Ukraine have used dominance in the energy sector precisely to establish some level of independence from Russia. That has worked only to a limited degree, but the strategy remains alive and well. Russia uses state capitalism to, among other things, build new political leverage within the former Soviet neighbors. The strategy’s success is limited by the strong pushback from inside countries like Ukraine, Kazakhstan, and others that prefer to play Russia, China, and the West off one another for security and commercial reasons.
State capitalist countries will cooperate where their interests converge. But where their interests conflict, they won’t.
5. In your analysis, the struggle for control over and development of natural resources plays a central role. Much of this struggle is fought out in natural-resource rich but institutionally poor states—such as Angola or Guinea—and one current aspect of the clash between the free-market world and the “state capitalists” has centered on the notion of transparency, as reflected in the Extractive Industries Transparency Initiative. How do you expect to see EITI play out in the coming conflict?
You mention Guinea. There’s a perfect example of the way in which state capitalism and the lack of transparency it encourages threaten multinational companies, particularly those that make their money in commodities. In December 2008, longtime dictator Lansana Conté finally died, and a group of military officers grabbed power. Guinea is a mineral-rich country, and there were spoils to be divided. Over time, multinational mining companies like Rio Tinto have found themselves competing for access to gold and iron ore with state-owned companies from China and Russia, companies that have ties to their home governments that aren’t always clear.
Last September, Guinean soldiers opened fire on thousands of unarmed pro-democracy protestors in the capital city of Conakry, killing more than 150 people. Western companies pay a reputational price for making deals in countries like this. But just two weeks after this state-ordered bloodbath, the Guinean government announced a multi-billion-dollar mining contract with an unnamed Chinese company that it said had become a “strategic partner in all mining projects” in the country. State-owned companies don’t answer to shareholders; they answer to political bureaucrats. And they don’t face the same level of domestic media scrutiny that a Western multinational will. Both these factors help state-owned companies make deals in secret, deals that multinationals are in no position to make.
Beyond tilting the commercial playing field away from privately owned companies, this secrecy also helps a government like Guinea’s make the deals that raise the cash that helps the elite hang on to power. This is a reality that multinational companies and the governments of free market democracies are going to have to learn to live with.
6. Jeff Mankoff has recently made the argument that the economic crisis makes the World Trade Organization more important and provides added incentive for states still outside, like Russia, to join it. WTO can be seen as the principal vehicle for globalization, but it is also closely associated with free-market liberalism. You appear to take the opposite view in your book, writing that the economic crisis will assure state capitalism many robust years even if its longer term prospects are dim. Explain how you come to that conclusion.
We’re not going to see more liberalization anytime soon. The WTO is a valuable institution, and the fact that China became a member a decade ago has proven to be a very big deal. But given the lasting damage imposed by the financial crisis and the global market meltdown, we’re done for awhile with global free-trade initiatives. The Doha talks are going nowhere. We’re already seeing a regionalization of trade flows and a new emphasis on bilateral deals as trade disputes complicate political relations between free market and state-capitalist governments.
This trend is exacerbated by populist and protectionist pressures within developed states. This is an election year in America. Unemployment is high. Public fury at Washington is peaking. No wonder that embattled incumbents are saber-rattling at China. Take the currency issue. The Treasury Department has kicked the can down the road on punishing China as a “currency manipulator.” But that issue will be back sooner rather than later. The Europeans are angry at China over the currency issue. Even Brazil and India have complained publicly about it. Yet China is not going to take any moves that risk its ability to maintain jobs (and political power) to appease anxious officials in other countries. Its leadership will use all available economic tools to maximize its political leverage. And the WTO can’t do much about that.
More from Scott Horton:
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