• 02 May 2008
  • What Do You Think?

What is the Future of State Capitalism?

In state capitalism, is the operative word "capitalism"? State capitalism is neither to be applauded nor feared, judging from the tone of responses to May's column. Jim Heskett sums up. Online forum now closed.
by Jim Heskett

Summing Up

In state capitalism, is the operative word "capitalism"? State capitalism is neither to be applauded nor feared, judging from the tone of responses to this month's column. That is, "as long as the key decisions are in favor of making money for the state," as Saaketh Preetham commented. Omer E. put it this way: "What this suggests is nothing more than the emergence of changing political tides." In fact, in M. F. Procaccini's words, "the whole 'mixed economy' models of the 20th Century and today are based mostly on combinations of state and private forms of capitalism." Citing examples of Dutch and British investments abroad, Cole Woodson comments, "I find the question to be somewhat delinquent ... to the tune of several centuries." He adds that to the extent that returns from investments of governments and state-owned sovereign funds can replace taxes, they can be beneficial to a citizenry.

There seemed to be little concern among respondents that states will use their sovereign funds to foster their political interests. Russell Widener comments that "I would worry more if they began to use their scale of economy to shake and shift markets." One advisor to two sovereign funds, Jack Cramer, points out that at least in his experience "the funds are ... in no sense aggressive or eager to lead in a sector. As a rule, they want safe investments."

The current boom in state capitalism stems, in part, from investment opportunities in developed countries. Nari Kannan suggests that it is a product of "thoughtless consumerism ... (the thirst for cheap Chinese goods) ... and dependence on foreign oil," particularly in the United States. But the phenomenon isn't limited to the U.S. As Kamal Gupta comments, "Countries like India ... need investments in infrastructure .... Where does it get the money it needs? From the money owners. How does it matter who they are?"

Could global financial markets accommodating state (and private) capitalism be improved? Yes, according to several respondents. Shann Turnbull points out that "National governments can deal with globalisation as they can determine the rules of ownership and control applicable in their jurisdictions." Nevertheless, he proposes the creation of a "Community Investment Code" to be administered by the World Trade Organization. C. J. Cullinane comments, "We need ... global guidelines and regulations as well as transparency." Jacoline Loewen, concurs, saying that "there may not be global rules for State Capitalism yet, but these will come because ... The market ... is demanding transparency."

The question remains as to whether states make very good capitalists. As investors, Michael points out that they are "systematically inefficient—from a profit maximization standpoint." As Paulo Wilson Rodrigues puts it, "State owned enterprises are less profitable ... for one reason: state administrators are less motivated." Mixed motives may get in the way of long-term financial performance. If this is the case, do we view the success or failure of state capitalism, even if the emphasis is on capitalism, through too narrow a prism? Are state capitalists a different breed of investor? Do their behaviors pose any kind of long-term challenge that needs to be addressed now? What do you think?

Original Article

Whether we think we are part of a free market or not, are we really living in an era of state capitalism? What are we to make of estimates that state-owned sovereign funds, led by Abu Dhabi and fueled mostly by oil revenues and trade surpluses, now total more than the value of the world's hedge funds and will grow by six times over just in the next seven years? Or that states like China and Russia now own the world's largest corporations? Or that, according to an estimate by the American Enterprise Institute, economies of countries with authoritarian regimes have grown faster over the past ten years than economies of the most politically free countries?

Whatever happened to the fears just a few short years ago that global corporations with allegiance to no government would constitute an important challenge to the world economic order, one that would be impossible to control with conventional laws and regulations? One doesn't hear much about that these days as state-owned corporations now dwarf even the largest privately-owned global organizations, with PetroChina currently leading the list with a market value of more than $1 trillion. The impact of this phenomenon on competition is interesting. Just ask the manager of a privately-owned global corporation how easy it is to compete with a state-owned institution (and the state's sovereign fund investors) when his competitor is able to arrange to have state aid or investment provided or withheld in large quantities to a potential customer's country of origin depending on whether that customer favors a private or state-owned vendor.

The phenomenon has interesting implications for those in need of capital, particularly if the source of the capital is your strongest economic competitor. For example, the United States, European Union, and South Africa recently have seen several of their very large financial institutions seek help from sovereign funds or state-owned companies with ample money to invest. Among the largest investors have been Abu Dhabi's and Kuwait's Investment Authorities and the China Investment Corporation. There have been outcries for measures requiring investors to adhere to certain practices regarding disclosure and intent. But typically, unless majority investments are at stake, there is little other than moral suasion that can be used to persuade investors to avoid making investments for political reasons or adhere to certain standards for transparency in their investment practices. The stronger the need for capital, the fewer even the most modest requests placed on the investors. Only when investments in what is perceived as critical infrastructure, such as ports, is involved has the U.S. Congress, for example, drawn the line in prohibiting a transaction.

This raises a number of questions. Can national or even regional laws or regulations even begin to deal with what in effect are global markets? Will some kind of global agreement be required? Just how easily will that be achieved? Or does this phenomenon really matter in the long run? Is state capitalism just another way of redistributing the ownership of the world's assets, something that has gone on for centuries? Is it better to have the available money, regardless of origin, invested in assets located in free market democracies than somewhere else? Will this help insure the world's long-run prosperity and security as lenders or investors increase their stake in the success of currencies in markets in which they invest? Or, alternatively, will the situation take care of itself as a new equilibrium reoccurs when those managing huge pools of money and gigantic corporations succumb to inefficiencies of size, poor investment decisions, and the potential for corruption? What do you think?