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?

    • Saaketh Preetham
    • saaketh-preetham@blogspot
    Well to start with, quite clearly, there is no correct answer to these questions. While the past decade has seen many major changes in the global economy and the effect of strategic decisions, it has also seen the emergence of state owned corporations and the changes in the conventional laws and regulations allowing these corporations to invest across the globe. Other than few outcries little has been done or can be done to regulate and make the investment strategies and practices more transparent. Necessity is the most critical scamp here and then there are investments due to political reasons.

    It takes a lot of courage for the regional laws and regulations to deal with global markets. But it is not as easy as it seems to be when political interests are involved, and coming up with a global agreement in the near future is very unlikely especially when those to be regulated are state owned firms.

    In many ways these state owned firms insure the world's prosperity as long as the key decisions are in favor of making money for the state but then as mentioned there are inefficiencies like corruption and poor investment decisions which might bring about a new equilibrium when managing huge corporations.

    So what can really be done is make the investments more transparent regionally and keep a check on who is investing and where. While global agreement isn't very easy, some kind of transparency standards can be brought up across the free markets.
    Well as Alexander Pope wrote in his 'An Essay on Man'; "Order is Heaven's first law; and this confessed, some are and must be greater than the rest, more rich, more wise; but who infers from hence that such are happier, shock all commonsense.", and an order can be brought about only when this is accepted by all the markets.
    • Omer E
    Let's get one point out in the open - the fuss is not about the potential ills of capitalism on steroids. It is not about the emergence and potential hegemonic status of the super heavy weight class 'our' capital markets. No, nor is it about state owned enterprise - which, as in the case of PertoChina, can grow bigger than many surrounding states combined.

    The fuss is that these super heavy weight contenders are no longer American - that these are no longer somehow legitimate and that they represent something that free markets should shun.

    There has been no fundamental change - the pooling and deployment of ever larger amounts of capital in capitalism is a cause for celebration - even if those pools do not coalesce in our back yard.

    The alarm bell here does not demand nor does it warrant a new set of rules per economic policy - if so, the lightening movement of hedge fund capital, the vast pools of influence exerted by the biggest banks and corps such as Mobil and GM should have been stimuli enough to to warrrant such regulatory changes long before the emergence of the super heavy weights class.

    What this suggests is nothing more than the emergence of changing political tides. Spheres of influence that are have been part of life, governed at large, by the helping invisible hand, are now coming back to shake that very hand and at the same time call into question the legitimacy of influence.
    • MF Procaccini
    • co-proprietor, Columbia Pacific Communications
    Good article. It raises some important questions. But I think if people want to better understand the phenomenon of state capitalism, we need to look beyond the hype and propaganda out there, especially throughout the 20th century, and realize that state capitalism, in various forms, is quite common and has been with us in most economies for a long time.

    The concept isn't new at all, as state capitalist models are in fact what have cominated the economies of the inaccurately labeled (or self-professed) "socialist" or "communist" countries.

    State capitalism became more significant, as with state-owned services and businesses, in the late 1800s in Europe, denounced by Marx and Engels in http://www.marxists.org/archive/marx/works/1880/soc-utop/index.htm Socialism: Utopian and Scientific as at best a compromise with traditional capitalism and at worst a move toward totalitarian rule.

    But it really took off with the consolidation of state bureaucratic cliques in Russia after the 1917 Revolution in accordance with the supposedly transitional state capitalist policies of the first Bolshevik government:

    Lenin: Industrial Management under a State Capitalist Monopoly Framework

    Lenin: State Capitalism During the Transition to SocialismProgress Publishers, Moscow;

    Lenin and Bukharin on the Transition from Capitalism to Socialism

    The rise of Stalinism, of course, made that "transitional" model permanent (by mostly brute force and oppression).

    As for China, you only need look at Chinese "communist" Party documents, including Mao, going back to the post-1949 Revolution period to see that in fact that's what it's always been:

    Mao: State capitalism on Building the Economy --Conference on Financial and Economic Framework 1953

    It seems the only major difference now is that it has been made more liberalized and dynamic than the closed economic nationalism of the Maoist era.

    China: state capitalism to private capitalism 2003

    Obviously, state capitalism, as in state ownership and state-sponsored businesses and services run by, in many respects, profiteering bureaucracies that act with many of the same self-interests as private stock-holder groups, also exists in the economies of the West, including the US.

    In fact, the whole "mixed economy" models of the 20th century and today are based mostly on combinations of state and private forms of capitalism, not, as so many media and political pundits argue, between capitalism and socialism or communism (which by historic definition are based on the democratic ownership and control of the businesses and economy as a whole by the those working in them and their communities--something which, other than some major successes at the local and regional level, or various specific sectors of economies around the globe, have yet to be the dominant model for any economy).

    So it seems that direct state ownership and participation is always, in various ways and to various degrees, present in any kind of capitalist model. Whether it becomes the dominant model for the global economy is where the debate is, since no one can know for sure. But it's obvious that state capitalism (whether it's given a fraudulent "socialist" label or not) will be with us for some time to come.
    • CJ Cullinane
    The presence of government has always been a given in commerce and industry. Be it government regulations, laws, taxes, and even the Federal Researve, there is an ongoing government presence. Why not in finance? The 'bail-out' of Bear Sterns and the ongoing printing of money and manipulation of interest rates is government intervention.

    But when the government has enormous amounts of cash, and not just as researves, and outright owns companies and industries it is closer to socialism than it is to capitalism. For globalism to work it should be based on a capitalistic system (in my opinion). This is because eventually the government/political system will use the companies as political tools.

    The inefficiencies, and politics, of goverment will not only hurt these industries (look at Venezuela) but will also ruin their economies. Does this mean that government should not be involved? No, what I believe we need is global guidlines and regulations as well as transparency. This would help the flow of money in an orderly fashion and keep the 'rich' governments of the world from using their government owned companies and industries for political reasons.

    Will the present trend expand? I believe it will expand with individual countries owning and operating more and more companies until even they realize they are not good at it and privatize these operations.

    Charlie Cullinane
    • Ulysses U. Pardey, MBA
    • Managing Director, Am-Tech, S.A.,Panama, Rep. of Panama
    What is the Future of State Capitalism?

    Where is this ample money coming from, originally?
    Is this the money western consumers paid for products/services made somewhere else?

    Is not it a consequence of a limited approach of globalization (outsourcing) and dependency upon a frenetic search of outrageous profit growth for several decades which in turn has led to this kind of situation of "begging for what-has-been our own money"? Are democracy and business-libertinage like-minded?

    How come that production-States for the western economies can be more competitive money-wise than the financial stocks of the said world financial centers?

    If only-economic-growth does count in some places, would this "lack-of-competitiveness" on the western side be part of the price (or should I say investment) to pay for social peace and people's well being - and its associated consumerism - which have made and are still making the rest of the world rich?

    What is bigger than the State? We the People.

    "We-the-People" means today essentially consumers with rights. Therefore, does it make sense, business wise, to suppose that consumers'-capitalism could be bigger than State Capitalism? Do consumers in general have the option (or the right?) to lend money directly to these big western companies? This could make western markets more profitable. Could consumers'-capitalism be competitive in the world of big business? Let's remind ourselves that, in general terms, big business is big because of consumers and that the State Capitalism mentioned in the opening article is gigantic perhaps because of the western consumers.
    Would consumers'-capitalism be a rewarding way-to-give-back to the community? A win-win situation?

    This is one of the reasons why I believe that the future of State Capitalism is what we call democracy, the way-of-life State Capitalism depends upon.

    If those who can make things happen could make consumers'-capitalism, or something alike, a tangible everyday-business-reality in the western economies, then they might give other nations one more reason to believe in, in order to become bona-fide democracies.
    • Anonymous
    In the New Market Economy that is dominated by State owned or investment controlled entities the use of these organizations for political leverage is the key. By investing heavily in other countries industries the State has a superior economic hold on their competitor.

    Using the Art of War "Therefore the skillful leader subdues the enemy's troops without any fighting; he captures their cities without laying siege to them; he overthrows their kingdom without lengthy operations in the field." by infiltrating into the political and economic fabric of a country the invader has a clear advantage. Controlling a country through trading partner status is much more sublime and less likely to invoke a response than outright military assault.

    To address Omar's comment that state own business located outside of the United States are not considered legitimate, I would only say that all large corporations take on a life of their own regardless of the location, it the controlling agents that have the greatest impact in the ethics and operations the company employs. In times of adversity it is quite possible that a country may take advantage of its economic might to influence or adversely impact a rival or enemy state.

    Finally, the question of how to combat this advantage; use of political treaties and alliances may be necessary. By forming trading blocks to bind the outcome of trading and ownership of corporation to a larger group (countries) will help protect those in the block from rival competitors or outright assault from enemies.
    • Sam Caruso
    • VP- Supply Chain, Attica Hydraulic Exchange
    Interesting implications for U.S. "free market" worshippers. For the past 28 years, we in America have been busy deregulating industry after industry, in the name of market based capitalism, where the "free market" reigns supream, as we denigrated government as "evil". While we were not looking, state owned industry became a dominant business model for the rest of the world.

    The characteristic that state owned enterprises have that we in America do not is that these state owned entities benefit their own nations, while no one looks after U.S. interests in business, because the "magic of the market" is supposed to regulate economic activity. One hopes that we wake up soon in America and start taking care of our economic interests, especially when our interests do not conform with pure market capitalism. We need to rebuild America, even if it conflicts with "free market" doctrine.
    • Nari Kannan
    • CEO, Ajira Technologies, Inc.
    The biggest threat from State Capitalism to Developed Countries, particularly the U.S, comes not from investment from Soverign State Funds but thoughtless consumerism and dependence on foreign oil.

    China holds the U.S wallet and that's only because of the thirst for cheap chinese goods. Go to any Walmart. Now with the recession even affluent people are buying up cheap chinese goods!

    The Oil countries hold the U.S wallet because of hubris, complacency and the flawed U.S's idea that you can take oil from anybody at gun-point. Bush declared that gas consumption is the "american way of life" and the U.S public agreed. They went and bought gaz guzzling SUVs. American car makers lost the entire gas stingy car markets to asian car makers.

    Like Sun Tzu said "the best victory is the one where no war is fought" . By that measure the developed world has already lost the war!
    • Josh
    What we are seeing is the logical outcome of the past 30 plus years of economic policy. The continuing "off shoring" of US job, free trade zones, etc, have shifted the balance of economic power away from the US citizenry. US corporations remain in the exalthed halls of power, and with the current US administration (a direction started by Reagan) how fine a line is there between state capitalism as describe above and the power and control US based multinations over the US economy. It may be one step removed from Abu Dahbi, but the effect is similar, with one major distinction, the American people do not gain any benefit from the current arrangement, while the citizens of Abu Dahbi and China may reap these benefits.
    • Jim Winkelmann
    • Principal, Blue Ocean Portfolios
    For a long time there are has been this accepted notion that capitalism requires capital availability, technology, transportation and the rule of law to protect property rights. However as technology develops the role of government to protect property rights through the courts is proving to be much more difficult. Nowadays it so easy to produce, market and distribute imitation designer watches, purses and clothing. Even upscale people are choosing $30 "copy purses" over $600 originals. The differences between the original and copies are so subtle that very few people can tell the difference. The demand for status symbols has created the decentralized copy industries - impossible to effectively shutdown. Are these knock off manufactures capitalists or pirates? Are pirates capitalist?

    Are ticket scalpers just filling a void or should the NBA claim that it is their property being sold and they should be entitled to a cut of the scalpers' take ? Of course the chance of that happening is about the same as odds of stamping out prostitution.

    Napster showed the world that intellectual property rights pertaining to media are impossible to protect. While the courts shut down Napster they could not shut down the technology that made it possible. Ask your 14 year old how many songs they actually paid for on their MP3 player. There is hundreds of music sharing websites skirting the intellectual property laws.

    Here in Missouri a recent state Supreme Court ruling (City of Arnold, MO v. Tourkakis) concluded that property rights are not as important as the public good and sided with a shopping center developer to take away a private building owned and occupied by a lawfully practicing dentist. So I think it is a myth that property rights are secure in the United States. If property rights are not secure here in the US I can not imagine what it is like in other countries.

    As long as there is a demand for a good or service there will be Capitalism and no matter what trade restraint or attempted court enforcement takes place their will be an entrepreneur willing to figure out a new way - it only natural and nature seems to always find a way.
    • Lars
    Let's face it, capitalism (under the guise of democracy) is a statistical mean. Capitalism does not progress, socially, technilogically or economically. The cyclical nature of "business" does not afford progress. Why, because those with money/power want things to stay the same, and they expend substantial resources to keep thier positions. New substantially better policies..kill them energy from water...kill it, education, real education (not job programming)..kill it. Progress is made with synergetic balance of people, gov't. and markets. Totally free-markets only serve the leaders, i.e. old money. Emerging markets are progressing using the synergies of people, policy and markets. But will they (state-capitalist) hand the wealth back over to their people once they beat the West at thier own game? If you doubt the statistical mean theory, try these statistics on for size; fuel efficiency is the same or worse from 25 years ago, the U.S. has not upgraded (efficiency) it power grid in 50 years. wages in terms of buying power have been stagnated or declined in the last 15 years. our mass transit systems are 30 years behind 2nd tier nations. Yet the average American has 5 credit cards, has so much crap that storage facilities are the fastest-growing business, we are fatter, less healthy and more unhappy (in aggregate) than we were in 50 years! Capitalism is saprophytic, surviving off of the dead American dream.
    • Sherri Dohemann
    It seems that the question posed points to globalization and the "new superpowers of dominance", namely in the financial sector. As a sales/marketing professional I progessively learned-from my customers, to leverage others' capabilities through "win-win", transparent, and compliant(regulatory) agreements with my customers and partners. I therefore found the book Wikinomics and the foundational ideals of collaboration important not just for business, but for America.

    By collaborating with and educating customers about an enterprise's goals we can unleash external capabilities, thereby leading enterprises can create growth for themselves and all Americans. The authors cite many examples by where needed innovation in sciences, technology, and business processes have been a result of open and intelligently engineered semi-open collaborative innovation networks. They also cite examples whereas holding onto legacy systems that are irrelevant to customers and imposing them upon customers, impeded growth, and turned off customers, which is bad for the ecosystem, not just for business. If all leading businesses could harness the potential of open or semi-open innovation, how good could that be for America in science, technology, and business, thus finance?
    • Kamal Gupta
    • CEO, Delta Petro Additives
    How fundamentally different is State Capitalism, that is funds owned and invested by state like Abu Dhabi or Kuwait or Singapore, from Berkshire Hathaway?

    Both are interested in investing their money to make even more money from such investments, with as little interference in running the companies they own as can be possible.

    German companies are to a large extent owned by banks. Similar phenomena may exist elsewhere. When japan grew out of the ashes of the world war, their businesses were laos propped up by the state with money.

    The rise in oil, and more recently in minerals prices, have led to a huge accumulation of money in the coffers of the oil nations. Some of these countries like Nigeria have been squandering away their wealth, others have accumulated it and need to invest it. And money will flow to the most profitable opportunities.

    Countries like India, which need investments in infrastructure, should make it lucrative for such funds to invest there. India has fallen "behind" China because it is democratic, is a republic, and has a balance between the three estates. It cannot bludgeon its way to build a Three Gorges Dam. Where does it get the money it needs from? From the money owners. How does it matter who they are?

    Remember the fear that the Japanese will buy up America?
    • Shann Turnbull
    • Principal, International Institute for Self-governance
    What is the Future of State Capitalism?

    I have listed below the eight questions raised by Professor Heskett with a separate answer for each question:

    Q: Can national or even regional laws or regulations even begin to deal with what in effect are global markets?

    A: National governments can deal with globalisation as they can determine the rules of ownership and control applicable in their jurisdictions. Regional jurisdictions may be limited to creating incentives to favor corporations that adopt ecological forms of capitalism. Ecological corporations would limit the property rights of shareholders as occurs for all intellectual property that still possess competitive incentives to invest. In this way host countries could attract more investment but on a basis that profits beyond the investor's time horizon transferred to citizens of the host country to avoid exporting surplus profits and/or overpaying domestic investors with surplus profits.

    Q: Will some kind of global agreement be required?

    A: No global agreement would be required but ideally, the World Trade Organization would introduce what I describe as "Community Investment Code" in a number of articles that Google will find with my name. A CIC would determine common operating characteristics for Ecological Corporations that could be introduced on a voluntary basis by the introduction of tax and other incentives that would apply uniformly to domestic or foreign firms.

    Q: Just how easily will that be achieved?

    A: A CIC would be highly attractive because the tax incentives increase the present value of investments, resident citizen stakeholders would obtain a share in the long term ownership and control of their corporations and host governments increase their tax revenue from the tax base transferring from corporations to citizens who typically pay tax at a higher rate.

    Q: Or does this phenomenon really matter in the long run?

    A: External ownership of corporations does matter because they export more economic value and foreign exchange than is required by host countries to attract their resources. This makes the present form of capitalism, inefficient, inequitable and exploitive with the ability to undermine self-determination and self governance of host countries.

    Q: Is state capitalism just another way of redistributing the ownership of the world's assets, something that has gone on for centuries?

    A: Corporations were developed as a way to privatize colonization in the 17th century by the English and the Dutch. This is why when the US obtained independence local corporations were not allowed to exist forever but had a "use by date" like patents. For the reasons raised above, current practices are not longer politically or economically desirable.

    Q: Is it better to have the available money, regardless of origin, invested in assets located in free market democracies than somewhere else?

    A: It is the nature of the property rights used for investment that is more important as to the politics of its location. Ecological capitalism would replace the current static, exclusive and unlimited life property rights with dynamic, inclusive; time limited rights to corporations, realty and currencies.

    Q: 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?

    A: Prosperity, like manure, is best spread around as widely as possible to legitimize capitalism, support democracy and minimize the costs and pain of mitigating global warming.

    Q: 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?

    A: The situation will not take care of itself as it will be overtaken by the need to share the costs of global warming and the remedies required.
    • Adrian Grigoriu
    • Enterprise Architecture consultant
    I am not sure what state capitalism is. In some western democracies the state still owns the key industries such as energy, transport or even telecommunications and airlines. The state also "bailed out" corporations in financial trouble. Is that state capitalism or socialism? One has to look into the wider context. Given the fact that the law of bureaucracy takes over and with it inefficiency becomes a way of life, in the long run, it may be not the best idea to allow for state capitalism.

    Still the power or capitalisation of some corporations is far greater than that of many states and corporations have taken advantage of that for a long time now. The states should fear corporations here since size does matter. But if some large states, with rapidly growing economies, become indeed more powerful while some of the old economies decline it may be because of the fresh energy and innovation of the poor versus the comfort and complacence of the rich. It might be also because the free market doesn't work so well in this era. It looks too wild, unpredictable and uncontrollable for a civilised society. Some free market economies (as opposed to being controlled by the state) stimulating the "win at all costs" and "everyone for thyself" attitudes leave behind a divided society living in solitude, stress, competition and evetually crime, addiction and ignorance by specialisation, i.e. unhappy in the middle of so much wealth.

    If the state capitalism invests in health, infrastructure, security, retirement I would like to be a citizen of that space. As long as Abu Dhabi invests in oases in the desert and resorts in the ocean I heartily support the state capitalism. If they use the money to wage wars I would be circumspect but we know what state does that. State capitalism has also more power and even interest to create expensive infrastructure for the future rather than for profit alone.

    If the problem is the investment of the state capitalism in western economies key industries then this should be regulated with consideration to avoid double standards or contravening your own free market rules the state of your country promoted while convenient . The same rules that apply to corporations may be applied to foreign state capitalism to provide transparency and protection against the investment.

    Since a state, unlike a corporation, has a much wider area of interests, some of which are conflicting and some undoubtable political, regulation to prevent controlling stakes is required. It should be created by your own state or international agreement.

    The state already makes regulations against foreign products to protect the local industry against the free market principles. The role of the state is to defend the key industries and reserves of one's country for maintaining sovereignty.
    • Henry Maigurira
    • Project Co-ordinator, MTk Business Corporate Solutions
    State capitalism can be regarded as government ownership of its country 's wealth. Over the last decades, a tremendous partnership has been observable in securing public/ private partnership deals between governments and the corporate world . The reason being of internatinal capital flows, foreign direct investments, international trade and investment. This is onset to wealth creation to comes with the realisation that effective exchange rates at equilibrium is the path to increased wealth creation across the globe.

    The potential is on the basiscs that both securities and bonds in government and corporate finances are determinants of asset classes with excellent return on investments congruent to financial markets performance systems. State regulation of water utilites, energy and other business entities is a pragmatic approach and due dilligence to equity in business and human Rights. Future of Capitalism is value for democracy, freedom and property rights.

    Ultimately government is a democratic instituion that purpots ideals of social justice in respect of people 's economic needs. Capitalism is a process it is inescapable and harmless but a destiny in finance and capital advancement for expanding economic basis for business improvement whether in large industries/ medium enterprises or SMMEs . T. Moss; V. Ramachandran from the Center for Global Development, USA, 2005 in their paper titled Foreign investment and economic development: evidence from private firms in East Africa makes important points
    African host governments should reconsider some of their skepticism toward foreign investment and move to lower barriers to entry and operations through further liberalisation.

    Donors should continue to work with African governments to take steps to directly ameliorate some of the binding constraints on firm entry and expansion measures in multilateral trade or investment agreements to protect low-income countries, such as excluding them from reciprocal obligations on non-discrimination and national treatment need to be addressed.
    • jack cramer
    • Managing Director International, JWCA, Inc.
    Our firm advises two Sovereign Funds on investment strategy in the US. The principal concern is getting the money out of the host state and its economy and into another economy without opportunity costs, or at least minimize the costs. It is not a case of agressive investment as a rule, but avoidance of the inflationary effects of too much money in circulation. We find some sensitivity to appearing to use the fund for political ends, they usually want to avoid appearing to do so, but they are aware of not helping others do things not desired.

    Are such funds really capitalism? Not as I can see; it is likely a symptom of the failure of trade theory especially regarding the pricing of currency pairs. Since repricing does not happen easily, the currencies pile up in vendor states who refuse to let prices rise to ration demand. In the end this become aggressive socialism to construct the best possible state and society given the largess at hand. The Funds are excellent clients, but in no sense agressive or eager to lead in a sector. As a rule, they want safe investments: a return of capital with no conflicts; the return on capital is negotiable since it is not required. Overall they are a negative to efficiency in a global economic system.
    • Akhil Mehta
    As a phenomena pioneered by Temasek of Singapore of maximizing the returns on sovereign forex reserves, the idea of sovereign funds has traveled a long distance.

    In the present times this idea has evolved from merely any other economic standpoint to a political and strategic choice, and it's in this form that this idea presents an ethical dilemma.

    Some countries have been slowly, yet increasingly, using these sovereign funds to acquire strategic assets in foreign nations. The target of such acquisitions usually lie in poor and underdeveloped countries (for example, the oil assets in sub-Saharan Africa), where the political leadership is either naive enough or is guided by other motivations, to forsake their long term interests in these assets to mundane short term benefits. This position is untenable and should be challenged.

    This idea would also help the richer to remain and to become even more rich and poorer still remain poor, and from an ethical point of view is questionable.
    • Sameer Kamat
    • MBA, University of Cambridge
    The last question about achieving equilibrium is the most interesting, as it indirectly incorporates most of the other related aspects about laws, regulations, global agreements, timing, et al.

    Economies try to 'balance' themselves out, not in calculated and discrete steps, but in uneven swings. The process is often iterative in nature as governments, regulators and captial providers try to tweak parameters under their control to achieve desired states of stability within the economy. And this process can have serious implications on the functioning of these economies as issues related to liquidity, volatile interest rates, asset ownership/control and political interests take centre stage. Even mature economies have the wind knocked off their sails, albeit temporarily, if any of these key levers get out of control.

    Capital will continue to chase opportunities and it's just that the game has now grown global and more complex in nature. Hedge funds and private equity funds have played this game for quite a while, and sovereign wealth funds have now jumped onto the bandwagon. As the pressure to generate better returns grows, the investment strategies adopted by governments (in the guise of state run funds) seem to gaining speculative overtures. Eyebrows were (and still are being) raised at the strategies adopted by many of the private equity/hedge funds and with the advent of SWFs, the same concerns are being raised higher.
    • Anonymous
    I would reckon that the most important point about state capitalism is that it is systematically inefficient - from a profit maximisation perspective. That may very well be because that is not the /only objective of this pool of capital. That is indeed the key difference between state capitalism and the private sector.

    The private sector's objectives are clear - they work to maximise shareholder value (ethically or otherwise), and therefore the market is able to predict their actions. This is critical for the existence of a rational market-place - tending towards what is traditionally called an 'efficient market'. Despite all the challnges from behavioural finance, markets are still grounded on a fundamental assumption of a 'rational investor'.

    With state capitalism dominating the marketplace - markets become less efficient - as decision making is no longer transparent, no longer guided by a shareholder maximisation objective and instead guided by a number of other factors that markets can only perceive as irrational. Bottom line - markets will become incrementally inefficient as state capital ownership of listed assets increases. This will throw up opportunities for a new class of arbitrageurs to profit from these inefficiencies. These arbitrageurs are less likely to be traders on the trading floor and more likely to be policy insiders....

    This is more and more evident in the investments/acquisitions being made /attempted by the Chinese state owned companies in the commodities/energy space. The rationale for these investments rarely looks to be shareholder valuemaximisation - they appear to further national objectives of energy security and securing commodity supplies.
    • Fernando das Neves Gomes
    • Consultant, Independent
    Trying to say something deep and intelligent in such an important meter, it's a hard challenge!

    But I would like to say one or two things to think about... we are talking about markets, small, large and extra large per your article ... so at that point we are talking about the economy as their base, and that influence can change the equilibrium!

    Think about one little store in your street. You sell and buy to sustain the business, you don't go to national television or show in your business plan that with that strategy you attract tourists and sell a billion!

    Imagine that a rich man came to your street and paid you one billion just to keep the doors open! You are arguing at this time: what a crazy example, isn't it? But I think that this is the true example. If global economic leaders like ocde can't/don't stop actions the market value disappears and deep problems can emerge in global economies.

    More things come to my head as I start thinking about this problem: currency, financial markets, information society, secret services, intelligent business information....
    • Anonymous
    Sovereign funds are obviously driven by the high price of oil, controlled by, at best, national governments of limited democratic standing, and at worst, and perhaps the majority of cases, by modern despots. All of these know they have the rest of the world "over the barrel" (pun intended). Is it not irresistable to foment religious and political unrest, create great risk, and thereby drive up the cost (and wealth creation) of an increasingly scarce commodity as oil?

    It is a very simple economic-political equation. The users of oil simply must find more of the stuff or find the next alternative. In the meantime, the other "cost" will be sovereign acquisition of assets, not unlike the wealth "created" (read acquired) by the British Empire. The big question that I see is whether the new owners of that wealth will squander it (yes, because they are despots) or will create the next industrial revolution (highly unlikely).

    In the meantime, it will be interesting to see if the users, who generally are the creators of wealth, have the wits, courage and stamina to break the dependency/monopoly/sovereign control cycle.

    It would seem that a great opportunity was lost when Russia was on the verge of democracy but fell to that siren song.
    • Russell Widener
    • Lead Consultant, ValueManagement
    Is worry necessary at this juncture? I would worry more if they began to use their scale of economy to shake and shift markets. I would really want regulations if they started eliminating waste, corruption and understood market driven economics. I would truly be concerned when they started delivering a better product at or below market or an equal product at greatly less than market.

    While I await these trends to come to pass and while most of these behemoths still run roughshod over their peoples while producing human subsidized products, goods and services, I'll ponder it and still take pride in what America has produced and the blessings showered upon us despite our self loathing ways, our goodness as a people and then simply wish, they too, would succumb to free market economics, empower their peoples and then complain about it after the fact. We then will have more in common and the problem will solve itself.
    • Michael
    I agree with Anonymous poster #20 who said that,
    "I would reckon that the most important point about state capitalism is that it is systematically inefficient - from a profit maximization perspective."

    The role of corporations is to maximize profit while the role of government is to protect the welfare of it's citizens. Those roles are conflated in State Capitalism and the conflict produces either inefficiency or loss of public welfare or both.

    In his recent book "Supercapitalism", Robert Reich makes an excellent case for severing not just the State's operational control of corporations but also the social responsibility aspect of private corporations. As he says,
    "Corporations are not citizens. They are aggregations of contracts." Therefore, corporations have neither rights nor responsibilities. It is the responsibility of corporate management, as individuals, to obey the law and it is the responsibility of employees and stockholders to pay taxes.

    That leaves the government free to follow a clear obligation to use the taxes generated by an efficient corporate community to protect and provide for the citizenry. This "Chinese Wall" [awkward in the globalist context :>) ...] between business and government is the clearest practical route to avoid corruption and conflict of interest.
    • Paulo Wilson Rodrigues
    • Chemical Engineer, EEL-USP
    The greatest misuse of public money made by economic state controlers if invested to buy companies around the world could make the state prosperity perennial.

    I am talking about the waste of money into needless weapons like obsolete tanks, submarines and ships among others; it could be enough to buy giant worldwide enterprises like Coca Cola and the best known beverage brands in the world.

    State owned enterprises are less profitable than particular owned enterprises for one reason: State administrators are less motivated. Even if their administrators are as good as the other companies in the market, these state companies do not work well as a team and their "esprit de corps" is the most weak; and thanks to their inefficiencies their failures cannot be delayed forever.

    There are a lot of state owned enterprises, but I do not see one profitable yet.
    • Sandesh N. Shringarpure
    • Finance Analyst
    It is really a provoking thought to think about who is "Truly" controlling and dominating economic resources. Whether it is pure economic value add drives the same or socio-political philosophies drives the same.

    There is a great distinction between, based on value add drives and drivers based on maximization of perceived social welfare. Further, the philosophies also varies in method and form of exercising option of selecting a state agency. However, the nomenclature given to an "Agency" who is exercising the option is mere replication of philosophy followed. If we talk about PetroChina - an outfit of communist philosophy. If we take the example of Indian "Navratna" - these are Public Sector Units with abundant economic resources.

    The same is an outcome of democratic set up and mixed economy. If we talked about Abu Dhabi - It's monarchy. It is interesting thing to note that none of China and India are not economies meant for capitalist set up where in Abu Dhabi may par with single capital source to a greater extent. US and Europe are considered to be capitalist markets.

    As the Law setters , these agencies, can increase or decrease barriers to suit there play in the market. At the same point of time it will be worth while to examine dominant players in capitalist market and there proximity with controlling agencies.

    As long as there is a global philosophy and need to have a super power to take care of "Geographically Divided Economic Resources" the intervention of said agency will continue only the magnitude will change based on philosophy followed. Also , the selective dilution / acquisition of economic resources will continue, to suit timely needs of chosen agencies.
    • Cole Woodson
    • IT Manager, Commonwealth of Pennsylvania
    I find the question to be somewhat delinquent...to the tune of several centuries. From the Dutch trade empire through the British Empire (and before to a lesser extent), states have funded and profited from business ventures. I find the artificial wall built between business and government to be an interesting manifestation of denial.

    The key point is that governments have expenses...many of which they actually can't expunge without relinquishing control of certain leadership functions. In this age of "deregulation", provisions must be made to cover those expenses and maintain the public interest. Most countries have no compunction with the governmental execution of profit-making ventures, therefore this trend should come as no surprise.

    "Free markets" have never been but so free. Whether they were controlled by government or a merchant oligopoly, some entity has had a vested interest in business control. The "new" funds like the Abu Dhabi fund are no different than the Dutch East India Company in principal. The concept of mercantile colonialism has merely had physical invasion supplanted by cyber securities. We still discuss resource control in the same manner, only the resources are financial instruments rather than physical real estate...and at times, depending on the transaction, physical real estate is involved as well.

    Power is the primary issue throughout this discussion. As I said earlier, governments require money. Money = power. Without control of a certain revenue-producing base there is a shortage of money which will lead to shortages in services the people demand (if in fact the people genuinely matter). In the U.S., taxes are the means by which governmental revenue is generated. If tax revenue decreases beyond a certain point programs get cut. A neglected populace will demand new leadership, hence a shift of power.

    Ultimately for government, the logical course of action to both maintain power and its own level of funcion will be to engage in some sort of revenue generating activity. The alternative will be to increase the tithe of the citizenry to a level where the stated objectives can be met. Who here is for increased taxes?
    • Anonymous
    I agree with this "In many ways these state owned firms insure the world's prosperity as long as the key decisions are in favor of making money for the state but then as mentioned there are inefficiencies like corruption and poor investment decisions which might bring about a new equilibrium when managing huge corporations"

    ONLY these States take advantage of other tax payers money that could be well invested in their own country and in the needs of their people .... these "States" that have money for foreign investments and making sure that they belong to the future "BIG ONES" now pretend to be poor and take money from the 1st world countries, this should give something for the 1st world countries to think about?? Helping is one thing, taken for a ride is another.
    • Michael
    Post 27... The alternative will be to increase the tithe of the citizenry to a level where the stated objectives can be met. Who here is for increased taxes?
    Cole Woodson, IT Manager, Commonwealth of Pennsylvania

    I would be for increased taxes on the wealthiest in society (including myself) if that is necessary to provide education, health care and other optimizing functions for society.

    It's not clear that higher taxes would be necessary once deficit spending, trade deficits, volitional wars, and corporate corruption were eliminated.

    For example, if the obligation to provide health care were removed from American corporations, they would be more competitive with companies in other industrialized nations that have national health insurance. And our own universal heath care system would be much more efficient in giving the most care to the most people rather than leaving many with no care until they have serious problems that must be treated in emergency rooms...the most expensive care there is.

    And if companies were maximally efficient because they no longer had the conflicting social responsibilities, they could afford to pay me more so I could more easily afford higher taxes.

    The assumption that a low tax environment for the individual provides a more prosperous society as a whole is highly questionable. Just look at the US median personal income which peaked in 1971. It has continued to fall under the current administration even as taxes were reduced on the wealthy.
    • Henry Maigurira
    • Project Co-orporate Associate, MTK Corporate Solutins
    State capitalism is what we see everyday, it could be benefits from our jobs, businesses, organizations, clubs, universal adult sufferage, established institutional, business and governmental structures.

    Capitalism has evolved to be the most viable and best form of economic governance in the global economy. Evidently best perfoming countries in the world presently have stable legal systems that promote economic growth at all levels, that seeks to empower society, business and broader macro economic frameworks. Characteristics of State Capitalism are desiarable the value for Corporatism and transnationalisation of products, goods and services. This comes with an enlightened skilled labour force with wealth creating ability with excellent managerial and financial expertise for businesses and personal finance. State capitalism is proactive, forecasts, harmonizes issues, works with reality of commodity prices, stabilises economic conditons, redress for development and realises that time is value for making the best of the ordinary.

    Future of state capitalism is exploring new opportunities everyday in science and technology. Above all the central thrust of State Capitalism global democracy, free society that is able to think and speak without threat of violence. State capitalism is enriching the masses, economic growth, military might and a global society developed free of violence.

    Microsoft has brought economic and social benefits to world.
    • Ludwig Toledo
    • independent
    Capitalism will flourish and counterbalance the resurgence of the state run enterprises when while looking for the maximization of shareholders equity, it also looks for the welfare of the people, at least for the ones where it operates, not only for humane reasons but the sake of the creation of a larger market instead. With the so called concept of a "good corporate citizenship" which is mostly a sort of charity and window dressing, it will keep lagging as compared to the left wing movements of many countries, including the US.
    • Jacoline Loewen
    • Partner, Loewen & Partners
    Raising capital today means that private equity companies are bumping into these state owned funds, particularly when seeking capital for larger deals. If a fund manager tells a client their capital will come from a state owned fund, often the client's first question is how ethical is that fund? How did they make that money? Who benefits from the incoming revenues from these investments?

    The concern arises as there is the perception that some States do not channel money to their own people's social welfare. This is State Capitalism at its worst.

    If the answers to customer concerns can be given easily, then that capital will be willingly accepted. The West is able to think beyond xenophobic attitudes that if money is not money made here, we don't want it. Remember the Nineties when Japan bought up property?

    We do need to look at why so many citizens of some countries with these huge funds are choosing to vote with their feet and leave their home land for the West? This has been developing for decades. Why did these people travel far to North America, Europe and Australia? Being an immigrant myself, I have put this question to other immigrants many times over the years. The answer is the same - my government has leaders enriching themselves rather than taking up the role to help everyone in the nation.

    Otherwise, I see business leaders - my clients - embracing seeing other nations rising up, experiencing their own industrial revolutions and going global.

    There may not be global rules for State Capitalism yet, but these will come because the customers are asking the questions more and more. The market -human beings- is demanding transparency and states need to show where they spend their money and who benefits from it. No, it's not perfect in any country so let's not be grand standing and silly about who is pure and who is not. The point is we have now arrived at a point in history where every human being on this planet now understands that their State is obliged to look after their people first, before enriching themselves and endulging in their vanity projects.

    Otherwise, the steady outflow of their best and brightest will continue.
    • Rok Spruk
    • Economist
    Although the idea of state capitalism seemed viable at the first sight it is unsustainable in the long run. Decades of cascading Keynesian economic policy that included attempts to boost the economy through the infusion of additional aggregate demand into the economy, have resulted in surging inflation and macroeconomic instability.

    The empirical evidence is clear: government ownership of companies is inferior to the private initiative. The future perspective on state capitalism is a mixed picture. On one hand, high-growing emerging market economies are hitting double-digit growth rate and on the other hand, surging issues of intragenerational welfare accounts are posing a real threat to macroeconomic instability but also a viable opportunity to private investors.

    In the near future, there are well-anchored expectations that high-growing economies in the emerging markets such as China, India, Russia and Brasil will step-by-step move closer towards the liberalization of international exchange conditions as well as domestic business environment. Looking to the data, emerging market economies score fairly poor in terms of business environment quality which gives the initial evidence that output growth in emerging market countries is not driven by innovation but by factor and efficiency enhencers besides robust investment in the share of the GDP.

    Taking the law of diminishing return into account, output growth in emerging market economies in the near future is expected to decline over time. However, the idea of state capitalism has no empirical support. Perhaps there is a divergence of informal institutions. For example, Arab countries have long been the cradle of government's economic policy of regulation and tight control over the economy.

    Recent headlines in the state of the world economy give a clear sign that state capitalism where few major firms control the entire market structure is actually the major source of rigidities and also of the inflexibility. An insight into microeconomic theory gives us a clue. Wherever the imperfect comptition is place, inefficiencies and rigidities will occur.

    For example, demand for oil is quite inelastic but the slope of price inelasticity of demand for oil is expected to decline due to going-green initiatives. Monopolies, oligopolies and cartels tend to stabilize the market volatility of supply as they wish to see the entire demand going rigid. At that point, there is the highest probability of seeing monopolies therein. There is also the question of the rule of law and property rights. Empirical evidence has shown that high barriers to entry which potential entrants have to face lead to rigid market structure where rigid prices prevail over flexible ones. Letting barriers out of the way is certainly the question of time that state-controlled economies will have to face in the future.

    In China, for example, two distinguished economists have examined the effect of Chinese government-owned enterprises on output growth and showed that there is a negative effect of state-owned enterprises on economic growth.

    The fact that nations under authoritarian rule have grown faster is not because of the institutional course. It is mostly because catch-up effects tend to generate faster rates of output growth. Combined with favorable external conditions, the output growth in countries such as Russia, Indonesia and Brasil hit historic highs.

    A few years ago, Russia also adopted flat-rated income tax which gave tremendous boost to near-term output performance and also generated significant tax revenues, showing the real Laffer curve effect. Unseemingly, recent empirical evaluations of determinants of economic growth have shown that even minor changes in economic policy towards favorable private sector conditions have significant contributions to economic growth.

    State-dominated enterprises score poorly compared to private-owned enterprises on most issues and indicators that can be obtained from stock market and various databases over company performance. Considering the arguments I exposed above, I predict a decline in state capitalism around the world as a neccesary condition for enhenced economic growth and microeconomic fluidity.
    • Mustafa A. Aysan
    • Member of the Board, Finansbank, Istanbul, Turkey
    The two economic recessions of the last decade and the serious questions they raised on the intergrity, soundness, accountability and social responsibilities of the private enterprise, resulted in a loss of public trust enjoyed by the capitalist systems, prviously. Some giant ptivate enterprises resulted in bankruptcies costing losses of thousands of jobs and huge amounts of production.

    Of course, capitalism will survive in the future with all it offers for the individual drive of individuals to improve their food, other belongings and wealth.

    Unfortunately, the capitalist system system has a long way to go for improving a fair distribution of value created in companies by the participation of all the stakeholders of the business unit.

    The deficient implementation of the principles of corparate governance in large and medium sized private companies have caused many failures of enterprises and increased take-overs and/or participation of government capial in enterprises. Hence, we seem to be headed for a mix of government of private enterprise in the future, with more involvement of government initiative, capital and political interference in the management of the resulting mixed enterprises. Charecteristics and the outcomes of the economic recession of 2008, suggest that we need a different kind of economic order in the future. A much different order than total dependence and or major dominance of private companies.

    Our problem is that we now know that the opposite economic policy, depending on to total dominance and/or major dominance of government enterprise was rejected by human nature some thirty years ago, with the fall of the "Berlin Wall".

    Whether a business enterprise comes originally from private or government enterprise, business organisations of the future should improve their governance with the following measures as soon as they enjoy initial successes:

    1. Have more dependable, understandable and timely financial disclosures,
    2. Be more accountable to the national and international public for their outputs,
    3. Be more willing for a more equitable distribution of the outputs with all stakeholders,
    4. Contibute more to the preservation of the natural resources of the societies,

    To summarize, to be implementing meausures of better corporate governance.

    We should find an optimum mix of government and private enterprise, to be operating for the benefit of all the "passengers" of the great ship of "The Earth"!
    I hope we can meet the challenge.
    • Dr. Hemjith Balakrishnan
    • Sr. Vice President- Strategy & HR, Health Prime International
    It is now very obvious that the new era of State Capitalism has finally arrived and is in. Even the Marxist govts in India and countries like China started speaking capitalistic lingo that runs counter to their basic philosophies they have been professing all along. They started realizing that private capital has a role to play in certain controlled conditions. State Capitalism is just a global version of that new found ideology.

    Therefore, now the issue is whether it needs to be regulated or it would find eventually its own level of equilibirium. If it is to be controlled , by whom and how.

    I think there is one thing common between Money power and the Nuclear power. Both can be put to constructive or destructive use depending on whose hand they are in. It is not surprising to see many of the questions posed on State Capitalism apply to Nuclear power as well. Do we regulate through some global agreement?

    Yes. The destructive side of State Capitalism is the enormous money power that would accrue to a rogue state who can manipulate the financial markets around the world and bring about a disaster like the South Asian meltdown triggered by someone who had the money power to trigger a downfall of currencies of the South Asian countries.

    Ideally they need to be regulated or brought under a supervisory regime of a global body for the simple reason that such money power cannot exist without political overtones which will eventually upset the potical power equation of countries and may lead to a domino effect in political arena.

    The inseperability of State Capitalism from Political overtones is the main cause of concern. If the agenda of such neo-money centres is beyond commercial considerations, which obviously they will be , then the world need to sit up and take note of such a potential threat to the system as a whole.

    Yes, it makes lot of sense to invest the surplus in the assets of a free market economy as they would atleast have some semblance of transparency and bound by rules of the game. State capitalism could just be playing as one more lethal weapon to any authoritarian regime which has evil designs. It could just be empowering such regimes to realize their ulterior motives and agenda other than commercial ones.

    Yes. State Capitalism may end up as an unfair play not conforming to any rules of the game designed by the world of trade and investments, but create its own agenda to subserve its own parochial interests.

    Like the Nuke, State Capitalism can grow out of control and one day the world may have to fight with one more menace. Hence a collective body at the global level should initiate some action to lay down certain broad rules atleast in the interest of all nations.
    • Anonymous
    "The moment the idea is admitted into society that property is not as sacred as the laws of God, and there is not a force of law and public justice to protect it, anarchy and tyranny commence. Property must be sacred or liberty cannot exist." -- John Adams
    • AMP Graduate
    • CEO, USA Manufacturer
    Great article. I began to believe that my warnings to others was going on deaf ears. If one looks out only a few years it is easy to see how the US squandered its wealth to make "countries" world scale mega corporations. I ask people how they will feel when GE moves its headquarters to another country or GM is purchased by China for a few dollars a share as the GM CEO is quoted as saying "it will take Chinese auto manufacturers 10 years to bring cars to the US." Capitalism works but if its "vision" is to dominate other countries then acquisition or domination of private companies is just part of the strategy. China et al is/will use everything in their power to enhance their own well being i.e. capitalism without laws.

    They know that companies such as "drug company" will buy drugs instead of making them if the price is right. They have also found that as they gain dominance in markets they can raise prices by factors of 4-6 and still retain their control and gradually drain all of the resources from their competitor, another country. The strategy is simple and I could site 100's of examples where they have succeeded.

    What is the impact of competition on the US? It is obvious we are losing our ability to compete at the lower levels such as manufacturing but we somehow feel secure that such things as financial, technical, insurance and educational dominance will not move elsewhere. Why will China Inc. employ expensive employees in the US if they can find them elsewhere for much less (and also control their wages and benefits).

    The US is unwilling to face the future or even accept that we are already in a "war" with China, India, Russia and the EU. What is most distrubing is that we are aiding the enemy!
    • David August Smith, MBA '83
    • Consultant
    My own experience with state-owned-enterprises (SOE's) is that they ARE inefficient compared with their free-market competitors. I've been called on to work with perhaps 100 of them in developing countries, and I've seen little to recommend them as an organizational or economic structure.

    1. SOE's become a convenient way to absorb labor and either create or pay off political favors. Examine the annual reports of almost any SOE and you will see steadily increasing employment married to flat or declining output.

    2. The SOE's don't transfer many lessons to other companies. Labor productivity in the SOE's is usually atrocious. Output is usually flat or declining, but even if it increases, productivity declines as the SOE hires even more labor, often supporters of the ruling party.
    I reviewed a mattress company in East Africa some years ago that had added hundreds of workers over a five year period without increasing production by a single mattress! In Venezuela, President Hugo Chavez Frias fired some 20,000 employees of Venezuela's state-owned oil company (PDVSA) that had opposed him and replaced them with 40,000+ workers who had to sign political loyalty statements. True to SOE form, they are having a hard time maintaining even former production levels and despite record prices are spending the funds even faster.

    3. SOE's can usually rely on the government to control the entrance of competitors and provide capital at low cost but often get stuck with below-market pricing in the domestic market; for example, in Venezuela, gasoline costs less than $.05 a liter at the pump. The distorted pricing appeases potential voters but encourages inefficient domestic consumption of resources that could generate higher returns overseas.

    4. Corruption will often distort the capital budget and reinvestment process. Managers who control the purchasing side of the business and those who control the distribution when product is scarce can be strongly tempted by the opportunities to supplement their salaries. I've found that when there seems to be no economic rationale for a decision in an SOE look for a financial rationale that involves someone's self-interest.

    5. As the SOE's are often concentrated in strategic, i.e., capital-intensive sectors, they take a disproportionate share of the investment capital and managerial talent available. This holds back other enterprises in the country. Many oil-producers are one-shot economies with all the political and economic thinking focussed on distribution of the oil wealth. The question is not, what business can we start to make more money, it is what business can we do with the government or SOE to get our share of the wealth. Look at historical labor productivity figures in some of these countries and you will find that labor productivity has declined despite increases in capital investment.

    So my objections to state-owned-enterprises aren't particularly theoretical; I've just found that they don't work well and see little economic or financial reason for a government to own them.

    So, why do the continue? I've found that citizens of a country often get caught up in the idea that their state must own the company or they will have given up their patrimony to foreigners or to a few wealthy individuals. But, it usually turns out that their SOE's belong less to the country than to the politicians and managers who control them. Oil companies, in particular, seem to generate the resources (capital, projects, employment) that enable these groups (few of whom have been popularly elected) to maintain themselves in power for decades.
    But, my argument is if you move the SOE into the private sector the country can benefit immediately.

    First, there is the immediate benefit of either capturing the revenues from the sale of shares and/or stopping the cash injections required to keep it going.

    Second, the government can and will collect funds from the private firm's earnings through its various forms of taxation. Third, the private company can call on the private capital markets when it needs to expand which greatly exceed those available locally.

    Fourth, the company must get more efficient if it is to sell abroad and the lessons learned in that process often leak to other enterprises. Finally, pricing changes can both lower artificially high domestic consumption, they can increase total revenues earned abroad by freeing up more product for export.

    Capitalism works because it enables the mobilization of capital beyond the resources of the individuals or government involved, it provides more accurate information to producers and consumers through the pricing mechanism, and it involves more persons in the decision-making process. When the state owns the enterprise it becomes responsible for raising the capital, setting the amount that will be produced, and providing the return needed to insure repayment. For the reasons listed above, it is rare for the SOE to be either economically or financially efficient and the great majority of SOE's I've studied are financial drains in capital poor economies. Those involving petroleum are a unique case.

    Will the SOE's continue? Yes, as long as the political leaders can mislead the population into thinking that the state must own the company. Are they a good economic model? No.

    So we come back to the real reason to be concerned--the massive transfer of wealth from consumers to suppliers, especially in the energy sector. Many of these countries do not have freely elected governments and fewer still are close allies of the consumer nations.

    As painful as these prices are, one hopes, that this time, in contrast to the shocks of the 1970's, that consumer nations (especially the US) will make the behavioral changes necessary and develop the technologies that lessen their dependency on petroleum. Ultimately, that is both the economic and technological solution to the problem.
    • Shailesh Naik
    • Business Head, ITC
    Future ...

    1) There are cycles wherein States use Money, Military, Religion (spiritual) influences to control critical assets like population, intellectual capital, natural, etc...

    The state capitalism of different nature started when all exporting states started hoarding dollars as foreign reserve rather than increasing gold or any other asset ...

    US has woken up now when these dollars are moving into companies ... Luckily states are acting like investors only and not influencing market trends and consumer prefrences ...
    • Sunil Varughese
    • Director, Brand Indigo LLC, Dubai
    The extant construct of capitalism appears to have major fault-lines and the recent credit crisis, galloping oil prices and food crisis highlight the congenital flaws.

    State capitalism is merely a sub-set of capitalism in general and predictably the losers are crying foul. Somewhere down the line we all seem to have forgotten that topics like SWF and state capitalism are not exactly issues we need to lose our sleep.

    Almost 2/3rd of humanity is still struggling to make ends meet and coffee-table discussions like state capitalism are really arcane subjects when one considers the time-line of human existence. A hundred years down the line SWF and state capitalism may not even be a footnote in corporate history. On the other hand the fact that cash-rich corporates, wealthy individuals or resource-rich states were mute observers while UN Millenium Development Goals were unmet might be the headline of a chapter in developmental economics or maybe a new stream called Inclusive Growth Economics in year 2050 A.D.

    We must question the basic assumptions of extant capitalism and not cry foul when the winner goes for the kill (be it a corporate,individual or even a city-state) -- truly that is a fundamental premise of capitalism.
    • Siva Subramaniam
    • Consultant
    The future of state capitalism will be stoked by its own economic "invisible hand" and the results could range from ecstatic market efficiencies to complete meltdown. But how did we get there is also an important question to ponder. Take the example of oil and gas consumption and also the myth of internet driven business for economizing energy efficiencies. The former is the obvious culprit for much of the new found state wealth globally that were directly contributed by oil's downward spiral over the previous generation and the ensuing justification for both the gas guzzlers to fill the highways, and the human spirit to conquer geography with large earth shaking vehicles.

    The data server farms which are the modern age equivalent of jets and gas guzzling SUV's are completely absent from the present discussion on mainstream energy management and this is not responsible decision making from either technology giants who have advantages on their side or the competing state agencies who ignore long term peril. What is going to be the plight of the planet in a decade or a generation is everyone's blindspot.

    Now, both these things come back to the binge and bubble nature of free market enterprise. When things seem to go great for some markets like SUV's and jets in the past or ethanol and server farms in the present, the larger gloom in the ever uncertain future ( is lost ) to the perils of the present binge in sunrise market opportunities.

    In a big way this is what contributed to the wealth of state capitalism in middle east and other authoritarian regimes, but the longer context of Adam Smith's invisible hand which generally prevails will take care of its conundrum.

    Again state capitalism is not always incorrect if we see in context. Is it not state capitalism which is responsible for soaring and inequitable healthcare costs in Europe and North America? We left a generation of indulgent adults practice unhealthy habits like smoking, alcoholism, and personal sex gratification who in later ages are taken care by state assisted healthcare resulting in huge drag on present day adults and there offspring's. As physicians and nephrologists in particular would point out, each year of extra life for the greatest generation in America bleeds a family's annual income in state costs, which henceforth results in general healthcare cost escalation. Now, this present generation's responsibility is therefore squarely on our own choices as the funds evaporate and alternatives dwindle.

    In a business universe where there are tectonic changes taking place in terms of cultural influences, economic philosophies, resource and skills leverages, We can't choose some aspects of free market enterprise and other aspects of Mechanism Design as the 2007 Nobel laureates postulated and then hope for the best outcomes that benefits our ways better than others who are practitioners of locally justified social and economic principles

    In the end, I stilI see that free markets get better outcomes where there is undiluted free market principles, and state capitalism when not managed effectively crumbles under the weight of its own monstrosity. The visible hand which includes all human choices and wants will direct the invisible hand to find a new workable equilibrium
    • Perry
    'Or that states like China and Russia now own the world's largest corporations?'

    As opposed to individuals with no allegiance to a country assuming rights to all mineral resources through questionable methods?

    I think state capitalism is a very good thing. It retains an element of control and reassures a population.

    I believe the consequences of free market (Deregulated) capitalism always run too far with predictable consequences.
    In 5 years we will see this in the West. The structure of capitalism will always tend to inequality which at critical points in time and welfare will create revolution and war. Only with balance can this be avoided. And only an honest state can provide this balance (Note the UK and US have seriously failed in this matter).
    • Anonymous
    Fabian Socialists?

    "State capitalism" is communism by another name.

    It stinks, and will always fail in the long run, because it makes the false assumption the state is smarter than the individual, and "knows what's best."

    Adam Smith, where art thou?