How does state capitalism work

Thus, state capitalism will inevitably have negative consequences. When this happens in systems of state capitalism, the public blame falls on ruling elites, not evil capitalists. One of Mr. Rather like fascism, state capitalism tends to be nationalistic. So international cooperation is difficult. Countries usually act against something particularly the United States rather than for something.

So domestic constraints will limit the reach of such systems. The challenge posed by state capitalism is obviously real. But Mr. Bremmer believes real capitalism will win out. The financial crash demonstrated how the supposed friends of capitalism often number among its greatest enemies. Live Now. This article appeared in The Washington Times on June 28, About the Author. Over the past several years, an era of state capitalism has dawned, one in which governments are again directing huge flows of capital—even across the borders of capitalist democracies—with profound implications for free markets and international politics.

State capitalism is an economic system in which governments manipulate market outcomes for political purposes. It puts vast financial resources within the control of state officials, allowing them access to cash that helps safeguard their domestic political capital and, in many cases, increases their leverage on the international stage. But state capitalism also stems the rise of globalization, because to varying degrees it hampers the flow of ideas, information, people, money, goods, and services within countries and across international borders.

Yet, despite the massive state interventions in economies across both the developed and developing worlds, many corporate leaders and investors act as though globalization remains the dominant paradigm. That is a mistake. In fact, the new importance of the state had become obvious well before the onset of the current crisis.

Energy markets provide a good example. State-controlled companies now are in charge of more than 75 percent of global crude oil reserves. Multinationals continue to hold competitive advantages in development and production of deep-sea and other technically difficult projects, but this advantage is eroding as the better-managed of the national champions learn from the industry leaders.

The story extends well beyond energy. Across a broad range of economic sectors, China and Russia are leading the way in the strategic deployment of state-owned enterprises, and other governments have begun to follow their lead. In the defense industry—as well as power generation, telecommunications, metals, minerals, and aviation—a growing number of emerging-market governments, not content with simply regulating markets, are moving to dominate them.

Such state-corporate activity is fueled in part by the emergence of a new class of sovereign wealth funds. States with large holdings in the currencies of other countries are establishing ever larger risk-taking funds meant to maximize their return on investment—and their political influence. With the global credit squeeze making funds harder to come by, sovereign wealth funds have become even more important for the financing of state capitalism.

The global recession has accelerated the trend of state involvement in markets as governments around the world spend billions to stimulate growth and bail out vulnerable domestic industries and companies.

The need for political leaders of the G nations to build consensus behind the establishment of new rules for financial institutions and more reliable international oversight will add to the trend. These governments may be reluctant state capitalists, forced into the role by political necessity, but the effect is the same: a bigger dose of politics in the financial markets. As the landscape shifts around them, international companies and investors will discover that the large-scale injection of politics into market processes will produce its own set of winners and losers.

Because political factors unique to each state will determine the response to each domestic economic slowdown, countries with relatively strong political fundamentals will have a better shot at a quick recovery. This helps mask their connections to the Chinese government and circumvent competition regulation, commercial and investment law, and sanctions. S government. With obvious exceptions, the majority of U. More robust and readily available tools and information must be made available to U.

Absent a deep and enduring commitment to rebuilding internal competitiveness, as well as creating an economic system that is vastly more inclusive, the United States can only tread water while China continues to march toward the future.

While still considered a four-letter word to some, the United States should begin a conversation on creating its own market-friendly industrial policy. Indeed, as my colleagues Matt Goodman and Dylan Gerstel have pointed out , the United States has already seen a number of important technological successes as a result of industrial policy initiatives.

Yet there is no other path. Adopting a unilateral approach to deterring problematic Chinese investments is unavoidably inadequate, given the highly integrated nature of global technology, human capital, and financial markets. The United States should start by finding ways to accumulate small, ad hoc partnerships where they can be forged. One concrete example: the creation of a coalition of like-minded market economies to share intelligence that tracks the transactions, ownership, and financing of firms SOE or otherwise suspected of working to further the interests of CCP and PLA geostrategic goals.

Of course, the grouping can be expanded, assuming applicants can ensure they are capable of protecting sensitive intelligence. Related to this, my colleague Bonnie Glaser has also recently outlined several smart steps the United States can take to work with partners and allies in order to blunt Chinese economic coercion, which is often implemented through Chinese commercial firms. Last, the United States should lead a global conversation about creating new sets of rules and institutions that can facilitate and sustain cross-border trade, investment, and technology given the extraordinary changes in just the past few decades.

Commentary is produced by the Center for Strategic and International Studies CSIS , a private, tax-exempt institution focusing on international public policy issues.

Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author s.

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