Wednesday, May 19, 2010

Politicians As Plutocrats

It is certainly a challenge, when major Western economies are wobbling and statist "solutions" are once again winning favor: What is the best way to describe the mixed economy of China, where statism is a way of life and yet markets keep appearing? Consider two recent actions by the Chinese government. It has proposed requiring local procurement officials to favor products that are based on China's own intellectual property—a strikingly protectionist measure. But it has also announced that it will begin to allow margin trading, short selling and the trading of stock index futures. Chairman Mao would have regarded such investing possibilities as a great leap into the abyss.

According to Ian Bremmer in "The End of the Free Market," China is the exemplar of "state capitalism," a form of government that, he believes, is gaining in popularity throughout the world. Russia and Saudi Arabia are two other well-known practitioners, but state capitalism can be found everywhere—in Africa (Egypt), Eastern Europe (Ukraine), Asia (India) and Latin America (Brazil). While the precise criteria for membership in the state-capitalist club are a bit fuzzy, as Mr. Bremmer admits, the common denominator seems to be that the government (not the private sector) serves as the major economic player and intervenes in the market primarily for political gain.

What is clear is that state-capitalist countries make up ever larger slices of the global economic pie and that free-market economies, like those of the U.S. and the European Union, are doing more and more business with their state-capitalist counterparts. U.S.-China trade, for instance, increased to $400 billion in 2008 from a mere $2.4 billion roughly three decades ago. This integration—and interdependence—is one reason why Mr. Bremmer believes that state capitalism threatens "the future of the global economy": Free-market policies, he says, may lose favor among the world's developing nations, choking off long-term economic growth.

State-capitalist economies are helped by fairly disciplined monetary and fiscal policies, Mr. Bremmer claims, and by the state ownership of valuable natural resources. That last claim is particularly important. Mr. Bremmer notes with alarm that 75% of the world's crude-oil reserves are owned by state-run companies and that the 14 largest of these state-run companies control 20 times more oil and gas than the eight largest multinational corporations. Such proportions give state-capitalist countries a massive source of capital and the opportunity to make mischief (think of Iran and Venezuela). At the same time, their inevitable mismanagement could jeopardize the stability of the world's commodity markets.