State Capitalism ?

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STATE CAPITALISM - What is it?

We can’t speak of ‘state free capitalism’, as in every capitalist system certain forms of state ownership and the complementary state activities exist in some manner

(Pargendler, 2012; 2015)

 

 

Diffuse concept - lacks nuance and analytical argumentation

 

  • 2004-2009: 120 state owned companies entered Forbes list (Bloomberg, 2012)
  • 2011: 10% of largest firms were SOEs and contributed to 10% of global GDP
    (Bruton, Ahlstrom, Stan, Peng and Xu, 2014)
  • After 2008 crisis: government interference in private sector
    (Musacchio and Flores-Macias, 2009)
  • Does the increase of state interference mean: a ‘return of state capitalism’ in the form of inefficient large state owned enterprises? (Musacchio and Flores-Macias, 2009)
  • What are state’s intentions in State Capitalist economies as states grab greater stakes in the private sector?
  • Is it a threat to free trade? (Bremmer, 2010)
  • Could it transform the international economy and international security? (Kurlantzich, 2016)
  • ......................

1. Origins of State Capitalism

Friedrich Pollock, 1941 (Calhoun, 2002 in Dictionary of Social Sciences)

Two Varieties

1. Totalitarian State Capitalism - State is a ruling elite's mechanism to exercise power

2. Democratic State Capitalism - State is controlled by people and led by institutions, preventing it from becoming an instrument for power 

Lenin, 1921

State Capitalism is a transition phase towards a socialist economy

 

Ludwig von Mises, 1922

State Capitalism is yet another label for Socialism, to camouflage its problems

China Communist Party

Foul form of Socialism 

 

Rothbard, 1932

State capitalism = political tyranny

'Free market capitalism is a voluntary mutual exchange transaction in comparison to state capitalism where states push for exchange while holding people at gunpoint'

2. WAVES OF STATE CAPITALISM 

Before WW1

  • State owned most of infrastructure
  • State guarantees

After WW1

  • Continental Europe: state owned most utility companies
  • State Capitalism more prominent in non totalitarian countries
    • The main reason: private capitalism seemed incapable to cope with the tasks of reconstruction

 

 

After WW2 > Major debut of State Capitalism: Nationalisation

  • Supporting economic growth and protecting strategic/fragile industries
    • Industrial powerhouses in Europe and National Champions in Asia
    • Trade barriers in developing countries, to protect newly developed industrial enterprises from outsiders.

 

2. WAVES OF STATE CAPITALISM 

> Various forms of state intervention after WW2 led to increase in State Owned Enterprises, with monopoly/oligopoly tendencies, minimising market competition 

  • Business literature: lack of market competition led to SOEs becoming victim of mediocrity and inefficiency

> Corruption and using SOEs as political tool > Privatisation 1980-1990 > reducing number of SOEs 

  • Nationalistic reasoning or strategies in strategic sectors kept some SOEs

 

Development of 'hybrid' form of State entities:

Minority owned enterprises

2. WAVES OF STATE CAPITALISM 

Some argue: in developed countries more State owned entities after financial crisis of 2008
 

Most literature focused on emerging countries such as BRIC(S): where states used to have more power but capitalism prompted a new economic system: State Capitalism

  • Liberal market capitalism has advanced from Western Europe, North America and Japan towards China, Brazil and India.
  • Globalisation has provoked countries like China to create mechanisms such as economic zones of foreign direct investment to gain from the Western capital while maintaining its concepts of family values and authoritarians

Distinct feature of State Capitalism is the exceptional role of state ownership - providing the possibility to adapt the form of state capitalism 

3. Definitions?

1. Musacchio and Lazzarini (2012)  Varieties of State capitalism

Various state ownership structures

  1. Leviathan as an entrepreneur
  2. Leviathan as a majority investor
  3. Leviathan as minority owner
  4. State as strategic investor (Musacchio, Lazzarini and Aguilera, 2015)

 

Varieties of Capitalism theory?

2. Kurlantzick (2016)
State capitalist countries: those where the state has the majority stake in or significant influence over at least one third of the 500 largest companies.

4. Schmidt (2002)
State capitalism is the interventionist state that organizes cooperation among autonomous economic actors and directs their economic activities - interconnectedness of business, government and labour relations

5. Gilson and Milhaupt (2009)
State Capitalism is a new form of mercantilism

No coherence and definition lacks nuance 

(Musacchio and Lazzarini, 2012)

3. Definitions?

6. Bremmer (2010)
State Capitalism is as a ‘system in which the state uses its role as leading economic actor primarily for political gain’ and will less quickly protect the rights of individuals and economic productivity
Economic growth empowers state's power and it restrains productivity of the global free market system

 

Focussing on effects

7. Aligica and Tarko (2012)
The political strategies in state capitalism are defined in terms of ‘national interest’ and have an influential role on a countries economy

State Capitalism = presence of four mechanisms: National Oil Corporations, other State Owned Enterprises, privately owned state national champions and sovereign wealth funds

3. Definitions - Conclusion?

 

  • Literature shows that state ownership has more presence in the former command economies than in western capitalist economies.
    • Additionally, there are some notable differences between emerging countries and the state ownership structures: in Brazil and India there are more minority investors while in China and Russia there are more majority investors 

Developed towards a combination of various ownership structures
of equity investment

State Capitalist countries?

 ‘Private ownership is now mingled with state capital on a global scale’

(Musacchio and Lazzarini, 2014) 

4. Motivations vs Manifestations

YES, needs further research

Combining definitions

Comparative framework

Global State Capitalism- ORBIS database

4. Motivations vs Manifestations

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Examples: sovereign wealth funds, pension funds (?) and when a state has a minority stake invested in an enterprise.

e.g. Norwegian Sovereign Wealth fund - slogan is also ‘to safeguard and build financial wealth for future generations’, they invest in 9000 companies in 78 countries (NBIM).

Return on Investment

Issues >

  • State and profit?
  • Social, political and economic returns on public services programs
  • Mechanisms and methodologies

4. Motivations vs Manifestations

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Force for innovation and change, with the intention to create a path for actors in the private sector, by taking the role of key partner, willing to embark on risks businesses are afraid to undertake. In this position the state acts much more as a leader or a partner, rather than a provider of means, and provides aid to the private sector where it would have problems to thrive on its own. The state plays the role of venture capitalist (Mazzucato, 2014). 

e.g.     Nano Technology, various developments in the pharmaceutical industry, GPS, the internet and Silicon Valley and the current important innovative state investment is the stimulation of the new green technology 

Innovation

Issues >

  • Innovation or industrial policy? (Rodrik, 2007)

4. Motivations vs Manifestations

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Financial support to a companies with financial difficulties. Usually with the intention to prevent further socioeconomic failures, however protecting a nation’s geopolitical power could be another reason. Therefore, bail-outs usually occur within strategic industries, e.g. transportation: airlines, petrol companies or auto industries.

e.g. US government approved low interest loans intended for the auto industry which got a big hit in 2008. General Motors, Ford and Chrysler & financial system after the financial crisis in 2008 is a rather prominent example. In the US a law called ‘The Emergency Economic Stabilization Act of 2008’ was enacted to spend $700 billion on distressed assets to banks such as Bank of America and Citigroup. 

Bail-out

4. Motivations vs Manifestations

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Strategically encourage growth and development of various sectors in an economy through industrial policy, improving competitiveness and efficiency of (domestic) businesses. The manufacturing sector plays a key role in industrial policy. These policies are sector specific rather than having a macroeconomic perspective. These corrective interventions are useful to allocate an efficient free market, and prevent or hinder the emergence of market failures.

e.g.  ‘import substitution industrialisation (ISI) enacted by countries in the Global South

Special Economic Zones in Asia in countries such as China and Malaysia are good examples of how industrial policy leads to ‘industrial clusters’ (UNIDO, 2009),

Strategic Industrial Policy

Issues >

  • Special Economic Zones - purely a short term investment as it won’t provide enough positive spill-over effect into the wider economy (Good and Hughes, 2002 in DCED, 2014). 

4. Motivations vs Manifestations

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'[Goods] which all enjoy in common in the sense that each individual's consumption of such a good lead to no subtractions from any other individual's consumption of that good’ (Samuelson, 1954).

 

e.g. National security and defence

Partially public goods: shopping malls

Infrastructure: public-private partnerships (PPPs)

 

Public goods/ Infrastructure

4. Motivations vs Manifestations

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Executing political power in relation to other geographical areas. The current most important concern in geopolitics is oil; many countries try to claim oil rich areas

e.g. Melting of the Northwest passage on the icecap & the prospect of a sustainable future, and the accompanying climate change issues are dominant geopolitical issues

Sovereign Wealth Funds are often viewed as a state owned tool to implement geopolitical goals (Helleiner, 2009). According to some critics (e.g. Kimmit, 2008; Monk, 2009; Haberly and Wojcik, 2015) China is using its Sovereign Wealth Funds as geopolitical mechanisms. 

Geopolitics

4. Motivations vs Manifestations

Definition

 

Issues?

Ownership structures - Manifestations

 

State motivations:

 

- Business literature makes it sounds 'easy'

- Power relations?

- Is there a state capitalist country? 

- Accumulating data from Orbis

- Data?

- Distinction between motivations - criteria?

- Case studies?

5. why important

  • National security, e.g. SWFs used for overt political purposes (Cohen, 2009) or an investment tool to forge relationships with foreign multinationals (Haberly, 2011)
  • Some states are disproportionally influential in the global company networks
    • Especially oil exporting countries, e.g. Singapore, Qatar, Abu Dhabi and Norway (Haberly and Wojcik, 2015) 
  • Significant state capital present in global ownership (by portfolio firm assets): 1. Blackrock 2. British government 3. Government of China 

 

  • Inefficiency – liability of stateness
  • Political risk = ‘the impact of politics on markets’ (Bremmer, 2010)

             Understanding the state as competitor on the market 

  • Threat to globalisation and free trade
  • Threat to market capitalism

1. Understanding and providing first overview of global state capitalism

  • Where are the state owned entities situated - cross comparison
  • In which sectors are they active?
  • In which countries do state owned entities invest?
  • ..................

2. Provide answers to many uncertainties in literature

International relations / Political Economy debates

Business debates

Thank you!

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By Javier GB

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