European Affairs

Only yesterday, state control over the economy seemed to be in full retreat. Communism, state management and ownership of the “commanding heights” (in Lenin’s phrase) were widely discredited as a system. The collapse of the Soviet system was blamed partly on the bankruptcy of its economic ideas. Looking forward, “globalization” appeared to drive and dominate world economic growth and privately-held multinational corporations seemed to be the best-adapted mechanism for success. Mikhail Gorbachev told the Russian nation that it needed to move toward a market economy. In China, Deng Xiao Ping took his famous “southern tour” designed to introduce a liberalizing strand in the nominally Communist economy of China. The “end of history,” famously proclaimed by author Francis Fukuyama, ushered in a prospect, stretching out as far as the eye could see, of free market capitalism and liberal democracy. The role of governments was to get out of the way and thus foster spiraling wealth creation.

But not so fast. It turns out that the end of history was not the end after all. As frequently noted, the nation state did not wither away under globalization. Although democracy has made gains, dictators and autocracies have not vanished. And the meltdown of the global economic boom has exposed the vulnerability of a world devoted to free markets at any price. As these factors coalesce, the situation has incited many people to question their “free market ideology” and many countries to recalibrate how far they want to go in deregulating their economies. Indeed, some countries think (or at least hope) that they can get back to a system where market forces can still be controlled from the commanding heights of government. In places around the world, this balance of power is shifting toward state control. As recent events have demonstrated, even in Europe – indeed, even in the U.S., bastion of unfettered capitalism – the financial crisis has triggered some actions of recently unprecedented state control, notably in actions to take over, probably temporarily, stricken banks, car companies and insurance firms.

“The state is back,” Bremmer crisply puts it.

In Europe, of course, the appeal of corporate direction by the state never completely withered; it lives on, for example, in France and some other EU countries where governments foster “national champions” notably in the energy business but also in sectors where consolidation is forcing a shake-out of companies such as the auto industry.

Bremmer says he got the idea for the title of his book, “The End of the Free Market,” from a 2009 conversation with China’s Vice-Foreign Minister He Yafei in which the minister opened with this question: “Now that the free market has failed, what do you think is the proper role for the state in the economy?” Bremmer pushed back, he says, insisting then as now that he does not believe that the free market has ended. So he seems to have adopted the provocative title as a marketing gimmick, but if so he can be forgiven because his book pulls together so well so many threads of state capitalism, defining the strengths, threats and weaknesses of this model of economic management.

“State capitalism,” says Bremmer, “is a system in which the state dominates markets, primarily for political gain.” This is not old-fashioned socialism of using the means of production to redistribute work and wealth: instead, the companies in this system are operating in the market place. Profit is an objective, but management in these ventures answers first to political masters, not shareholders.

Bremmer notes that between 2004 and 2008, 117 state-owned and public companies from Brazil, Russia, India and China (the BRIC’s) were listed for the first time on the Forbes Global 2000 list of the world’s largest companies. 239 private companies from the U.S., Japan, Britain and Germany fell off the list.

Sovereign wealth funds, state-managed pools of cash, have emerged as a huge force in the market. The largest such funds are found in authoritarian, “state- capitalist” nations. Abu Dhabi, Saudi Arabia and China top the list: the Abu Dhabi Investment Authority is believed to be the largest, with an estimated net value between $300 billion and $650 billion. See recent European Institute meeting on sovereign wealth funds.

National oil and gas companies are also big players in state capitalism. While the phrase “big oil” conjures images of Western-run multinationals like ExxonMobil, and BP, Bremmer points out that three-quarters of global crude-oil reserves are owned by national oil companies like Saudi Aramco, Gazprom (Russia), CNPC (China), NIOC (Iran), Petrobras (Brazil) and Petroleos de Venezuela. The increase in oil prices has created huge revenue windfalls for these nationally-held companies.

The rise of state capitalism does not mean a return to communism or to some economic version of the cold war. But what it does mean, says Bremmer, is that when a multinational goes up directly against a state, the state will win. As he said at a recent talk about his book: “Look at the recent Google dust-up with China. Score? China 1, Google zero.” In some sectors -- oil, aviation, telecoms and automobiles -- state capitalism will make it difficult for private multinationals to operate in competition with state-owned companies. According to Bremmer: “The level playing-field? It’s not going to happen.” Because state capitalism has political objectives – primarily maintaining governing elites in power and maintaining public and social stability – it will result in slower economic growth, more regionalism, more protectionism. And, of course, the market-driven multinationals will be squeezed.

At the end of the day, in 15-20 years, Bremmer thinks it likely that state capitalism will fail. “Free markets will probably outlast state capitalism as it is now practiced in China, Russia, the Gulf States and elsewhere -- just as they bested Soviet-style communism.” The West, led by the U.S., has advantages: huge size (with the U.S., Europe and Japan operating as a fairly homogenous open market system), the rule of law, superior educational systems, the military dominance of the U.S. – and a high ability to adapt.

But for the next 10 years or so, state capitalism has some powerful attractions as a whole or perhaps a partial model in some countries, including some in Europe. In these places, state capitalism may pose a potent challenge to market capitalism as a way of harnessing the potential of globalization.

Bill Marmon is Managing Editor of “European Affairs.”