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The Rise of State Capitalism

The Rise of State Capitalism

By Ian Bremmer - May 21, 2010

In September 2008, just as the Western financial crisis was beginning to dominate the world's attention, Chinese Premier Wen Jiabao sat down for an extraordinary interview with CNN's Fareed Zakaria. During their conversation, Wen provided what amounts to a precisely worded definition of Chinese state capitalism: "The complete formulation of our economic policy is to give full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government. We have one important piece of experience of the past thirty years, that is to ensure that both the visible hand and invisible hand are given full play in regulating the market forces."

*****

Imagine you're a senior executive at X5 group, Russia's largest retail food chain. Hard at work in your office, you're informed that, for reasons unknown, Prime Minister Vladimir Putin wants to talk to you. With television cameras recording your every gesture, you find yourself walking alongside Russia's most powerful man for a surprise inspection of the meat counter at one of your neighborhood supermarkets, where he informs you that you charge too much for pork. You assure him that prices will soon be slashed. Unimpressed, Putin heads for the dairy aisle. This was the fate that awaited Yuri Kobaladze as he arrived for work on June 24, 2009. The next day, X5 announced a "grand sale," with steep discounts on all sorts of things. Four days later, Russia's Federal Anti-Monopoly Agency announced an investigation into price collusion between retail chains and distributors in a number of product categories.

No story better illustrates Russian-style state capitalism, which combines a drive to manage the performance of markets with a habit of deflecting blame onto available scapegoats when things go badly. The Kremlin relies on both direct government intervention in key sectors of the Russian economy and control of politically connected businessmen to further the political and commercial interests of the Russian state and those who run it.

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The fall of communism did not mark the final triumph of free-market capitalism because it did not put an end to authoritarian government. The Chinese and Russian governments in particular have learned to compete internationally by embracing market-driven capitalism. But they know that if they leave it entirely to market forces to decide winners and losers from economic growth, they risk enabling those who might use that wealth to challenge their political power. Certain that command economies are doomed to fail but fearful that truly free markets will spin beyond their control, these and other authoritarian governments have invented something new: state capitalism.

Using this system, governments dominate key domestic economic sectors. They use state-owned and politically loyal privately owned companies to intervene in global markets for energy, aviation, shipping, power generation, arms production, telecommunications, metals, minerals, petrochem­icals, and other industries. The oil companies they own now control three quarters of the world's crude-oil reserves. These governments also control enormous investment vehicles known as sovereign wealth funds that have become vitally important sources of capital. In each case, the state is using markets to create wealth that can be directed as political officials see fit. And in each case, the ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival).

The main characters in this story are the men who rule China, Russia, and the Arab monarchies of the Persian Gulf, but the apparent success of this new model has attracted imitators throughout much of the developing world.

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We're going to see governments around the world that no longer feel bound to follow the Western rulebook of decades past. We'll see multinational corporations struggling to adapt, because foreign investment will become much less predictable and much more complicated. And the backing they get from their home governments won't carry as much weight.

Yet, some of them will be more successful than others at learning to compete on a playing field that isn't level. There are very good reasons to doubt that the state capitalists will have staying power. But for now, they have lots of new clout and plenty of advantages. Over the next five, ten, twenty years, state capitalist governments and the companies and institutions they empower will be a serious-and global--force to be reckoned with.

The threat for Americans is that all this is happening at a moment when people are struggling, and their elected leaders have every incentive to respond to that fear and anger with promises to throw up walls meant to protect them from all these changes. Americans have always prided themselves on tearing down walls, not building them. State capitalism and American populism will put that faith to the test.

Ian Bremmer is the president and founder of Eurasia Group, a global political risk research and consulting firm. You can follow him on Twitter at @ianbremmer.

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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