Zero Cheers for State Capitalism?

(This is Part 1 of a review of Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, 2010).)

Ian Bremmer’s The End of the Free Market is already one of the most celebrated nonfiction books of 2010. Reviewed worldwide, the book has been praised in many quarters. Bremmer’s deep knowledge of world political economy is evident throughout this work. Yet the book’s case for “free market” as opposed to “state” capitalism relies on generalizations that are too gross to capture the real fault lines in globalization. If we are lucky, Bremmer’s work will encourage American policymakers to compare their own interventions in the economy with those of “state capitalist” regimes like China, and to copy best practices. If we are unlucky, its ideas could lead to economic stagnation in “free market” havens and new tensions between the U.S. and China.

For Bremmer, “state capitalism” denotes a level of government control of the market that is less dirigiste than a “command economy,” but more heavy-handed than the social market institutions of Europe. Countries become more state capitalist when their “government[s] play the role of lead economic actor,” moving to the left along a spectrum ranging from communism to libertarianism. They move “right” when the government lets businesses make decisions for “commercial reasons” rather than trying to encourage them to meet political goals.

On this view, moving rightward toward non-intervention is usually advisable, provided some baseline of regulation and sound business culture prevails. Bremmer admits this is a “profoundly simplistic model” (44), and perhaps in penance he explicitly condemns “utopian libertarianism” when he introduces it, declaring that “any argument that the state should remove itself entirely from the marketplace is absurd” (153). He laments the fact that theories of “shareholder value” have led “CEOs and company management [in free market capitalist countries to] become obsessed with maximizing quarterly profits at the expense of investment in a sound long-term growth strategy” (152). To his credit, he explains the recent financial crises in the US as the product of a few decades of deregulatory dogma, and not merely aberrational.

For Bremmer, the leading state capitalist regime is China (128). Even after the bank bailout, the auto bailout, and health care reform, he sees the US as largely on the “right” side of the state-capitalism/free-market continuum. China, however, engages in all the sins of state capitalism:

[To] sustain high growth . . . Chinese companies, backed with every advantage the state can provide, must venture out into the world to lock down long-term access to the crude oil, natural gas, metals, minerals, and other commodities needed to fuel a still-vulnerable developing economy. . . . [T]he National Development and Reform Commission. . . guides macroeconomic planning and intervenes in markets, particularly by setting prices for many products and by influencing national oil companies and other state-owned enterprises [SOEs].

Bremmer describes the advantages of Chinese energy companies over “free market” competitors like BP and Shell, and complains that state subsidies to them “add[] upward pressure on the prices that everyone else pays for energy and other commodities” (136). He also notes that China may be “actively cornering the market” in the types of rare-earth minerals that will be essential to advanced green energy and computer technology (137). Finally, China is capable of funding these projects via sovereign wealth funds (SWFs) that invest with political goals in mind. For example, one SWF purchased Costa Rican bonds in exchange for Costa Rica’s termination of diplomatic recognition of Taiwan. In addition to discussing China and Russia in some detail, Bremmer offers whirlwind tours Middle Eastern, Central Asian, and South American forays into state capitalism.

After describing state capitalism, Bremmer makes a sustained argument about its dangers that boils down to three propositions:

1) China and other state capitalist regimes experience more government intervention than free market regimes like the US.

2) This intervention is harmful because it causes business enterprises to act politically rather than as sustainably profit-maximizing entities. State-owned or “national champion” firms may try to destabilize the U.S. and other political rivals.

3) In response, free market nations should recognize that “the private sector is the only reliable long-term engine of robust and sustainable growth” (186), and should promote free trade and freely accept foreign investment. The US in particular should “keep investing in hard power” so its military can “ensure the free flow of oil and gas supplies” from potentially unstable regions like the Mideast.

The first two descriptive points are disputable, and Bremmer’s prescriptions are troubling given trends in global resource flows. I’ll discuss each of these points in the coming week, in a series of posts on Monday, Tuesday, and Wednesday. On Thursday, I’ll conclude with a discussion of alternate politico-economic models.

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