The End of the Free Market or The End of State Capitalism?

Ian Bremmer will be on The Daily Show with Jon Stewart tomorrow. Below is my review of his new book:

Political risk guru Ian Bremmer examines the growing momentum of "state capitalism" in his new book The End of the Free Market: Who Wins the War between States and Corporations? Bremmer argues that state capitalism differs from free-market capitalism in that politics rather than profit is the main driver of decision-making. For this reason, it threatens to curtail free markets and the global economy. It is the latest chapter in the "rise of the rest," or the expansion of non-Western states in the international system.

Capitalism takes many forms but all of them can be distinguished by their "use of wealth to create more wealth, a broad enough definition to capture both free-market and state capitalism," Bremmer notes. In the free-market form of capitalism, the job of the state is to "enable" wealth generation by enforcing contracts and limiting the influence of moral bads such as greed—the latter can lead to market failures, which have occurred periodically since the Dutch tulip craze of 1637. Free-market governments attempt to ensure that the economic game is played fairly.

In contrast to free-market capitalism, the economy in state-capitalist regimes is dominated by the state agenda. "Forced to choose between the protection of the rights of the individual, economic productivity, and the principle of consumer choice, on the one hand, and the achievement of political goals, on the other, state capitalists will choose the latter every time," Bremmer explains. Continuing the sports game analogy, state capitalists control the referees as well as the main players.

Bremmer admits that state capitalism isn't new. He traces the first reference to an 1896 speech by Wilhelm Liebknecht, a founder of the Social Democratic Party of Germany. But due to recent questions regarding the merits of free markets after the 2008–2009 financial crisis, the need for job growth and economic stability in less-than-democratic regimes, and the growth of the economies and influence of state-capitalist countries, this form of capitalism is catching on worldwide.

While there is "no single model of state capitalism," its leading practitioners, China and Russia, "share a well-developed sense of risk aversion," having recently abandoned communism as their guiding philosophies. Other notable users of this model include energy-rich states, such as Angola, Iran, Kuwait, Malaysia, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. Another cluster of countries in this group, some of which have benefited from rising commodity prices, include emerging markets that have only tentatively committed to free-market principles, such as Brazil, Egypt, India, Indonesia, Mexico, South Africa, and Turkey.

Another way to identify a state-capitalist country is by looking at the use of four specific policy tools. One policy tool favored by state capitalists is the national oil (and gas) corporation (NOC), such as Gazprom of Russia, China National Petroleum Corporation, and the National Iranian Oil Company. NOCs like these own 75 percent of the world's crude-oil reserves. A second tool is the state-owned enterprise, such as China's First Automobile Works.

A third tool is privately-owned companies—so-called national champions—that are supported by the state to develop a "commanding position" in an economy. The Brazilian mining concern Vale, according to Bremmer, is a prominent example of a company that was coerced by its government to advance the state objective of stimulating the economy.

A final tool is the sovereign wealth fund (SWF), the largest of which includes the UAE's Abu Dhabi Investment Authority valued at $300–650 billion and Saudi Arabia's Monetary Agency valued at $430–500 billion. Many types of governments have SWFs but they "tend to be as transparent—or as secretive—as their governments," Bremmer writes, noting that Norway's Government Pension Fund is exceedingly open and accountable. Norway is an example of a country that has some state-capitalist trappings but is not in the state-capitalist camp. Similarly, the U.S. bailout of financial institutions was designed to "save the free market, not bury it," Bremmer notes. "It's not the tools that count; it's how they're used. But countries that have all four of these institutions tend to be state capitalist," he writes.

How do these tools threaten the free market? While Bremmer is careful not to predict a new Cold War, he does worry about fissures in the international system and state-capitalist support for undemocratic regimes such as Guinea. As the head of Eurasia Group, a political risk company, it is Bremmer's job to ask what if. He poses at least ten hypothetical scenarios in the book, including given the mutually assured economic destruction (or interdependence) between the United States and China, what happens if China closes the door?

While the phrase "The End of the Free Market" may capture public anxiety in America today, Bremmer should have called his book "The End of State Capitalism"—he bets that free markets will win the "war" with statists. First, state capitalism just doesn't have the same appeal as an ideology that communism had, it is "more a set of governing principles than a coherent political ideology." Second, state capitalism is actually a sign of domestic political vulnerability. It is a response to the risks countries face as they open up, which Bremmer detailed in his earlier book The J Curve. Meanwhile, free markets hold several advantages over their statist cousins: Most importantly, these systems better facilitate innovation and long-term growth.

Bremmer lays out several recommendations to ensure that free markets do indeed prevail. Most of these recommendations are just good common sense for America: keep markets open, invest in hard power, pick the right fights, and welcome world-class foreign workers. Bremmer is saying subtly that for America to continue to lead it should be strong, smart, and principled. In other words, it should stay true to its values.

Brzezinski: U.S. Needs Social Responsibility

SAIS Professor and former Carter advisor Zbigniew Brzezinski was on the Daily Show this week plugging his new book "Second Chance: Three Presidents and the Crisis of American Superpower." Read the New York Times somber book review here, which ends with this quote from the book:

"Nothing could be worse for America, and eventually the world than if American policy were universally viewed as arrogantly imperial in a postimperial age, mired in a colonial relapse in a postcolonial time, selfishly indifferent in the face of unprecedented global interdependence, and culturally self-righteous in a religiously diverse world. The crisis of American superpower would then become terminal."

On the Daily Show, Brzezinski said that for the United States to lead, it will have to get over its self-indulgence: "We have to make some sacrifices. We have to make some efforts to adjust to the inequalities that prevail in the world." He recommends a large dose of "humility and social responsibility" for U.S. power--a comment that was met with applause from the audience. He said that it is a dangerous posture to believe that U.S. moral superiority justifies immoral acts.

I wonder if the ultimate interviewer Jon Stewart caught the weight of Brzezinski's follow-up comment: "Operating on the international scene has to be based--to an unprecedented degree--on effective consensus, on drawing others to work with us." Stewart joked about the pettily contributions by other countries to the war in Iraq. But Bzezinski's comment reminded me of the universal need for consensus-building across sectors in this era of globalization. An excellent article in Booz Allen's magazine strategy + business traces this phenomenon. "The Megacommunity Manifesto" states:

"Though globalization is often thought of as waxing and waning through history (with the world sometimes growing more closely linked, and sometimes splintering apart), the current wave of globalization involves a permanent structural change in many of the institutions of the world. Nations and companies alike have undergone an irreversible shift toward what management theorist Charles Hampden-Turner calls “universalism.” They move away from reliance on connections and loyalty (typical of societies with selective law enforcement) and toward such principles as merit and universal law.

This kind of shift makes even formerly closed societies more open to outside influence, and thus more powerful. But it also makes them more vulnerable, particularly to the problem of economic “winners and losers,” in which the benefits of globalization are not evenly spread. The megacommunity concept represents a movement toward sustainable globalization, in which contact with the outside world, instead of draining jobs and making a local system vulnerable, strengthens long-term quality of life, economic vitality, and community health."