The return of political economy
The first time I saw an article headed “State Capitalism and the Crisis” in McKinsey Quarterly (free, but registration required) I thought I had slipped into an alternate reality. But even when I pinched myself it was still there. In it, the political risk analyst Ian Bremmer argues that one of the results of the financial crisis is a resurgence of political economy (although he doesn’t use the phrase). Markets are now far more influenced by national politically influenced decisions than at any time in the last thirty years; this is not a temporary phase but a permanent shift; and as a result the ‘globalised markets’ paradigm is no longer the dominant model, even if some politicians and corporations haven’t caught up with this yet.
Bremmer defines state capitalism as “an economic system in which governments manipulate market outcomes for political purposes.” He charts this trend to before the crisis, since most of the ’emerging market’ economies had used public investment and public enterprise to foster their development. The difference – post-crash – is that these states have more global influence and a greater share of the available global capital, and the ‘globalised markets’ model has been severely discredited.
The energy markets are a case in point:
The world’s 13 largest oil companies, measured by the reserves they manage, are now controlled by governments. … Exxon Mobil, the largest of the multinationals, ranks 14th in the world and collectively, multinational oil companies produce just 10 percent of the world’s oil and gas and hold about 3 percent of its reserves. State-controlled companies now are in charge of more than 75 percent of global crude oil reserves. …
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 defense, a growing number of emerging-market governments—power generation, telecom, metals, minerals, and aviation—not content with simply regulating markets, are moving to dominate them.
All of this is supported by the emergence of sovereign wealth funds, overwhelmingly held by governments in emerging markets. And while Ian Bremmer is largely talking his consultancy book here, the implication is that watching political fundamentals is as important as watching economic fundamentals; China and Brazil probably good, Russia, Ukraine, and Pakistan less so.
There are likely to be second order effects as well; restrictions of access to some markets; high risks of protectionism; subsidies (as in Russia); and a reframing of regulation.
Early on in the article, Bremmer argues, “Governments embrace state capitalism because it serves political as well as economic purposes—not because it’s the most efficient means of generating prosperity”, and there are other points where he says much the same thing. The implication, spelt out elsewhere, is that prosperity needs open globalised markets. Of course, he may need to say this sort of thing so as not to scare his clients, but it really depends on what you mean by ‘generating prosperity’, and for whom. Certainly state capitalism – in his definition – has been the most reliable way of developing an emerging economy, ever since Britain did it in the 19th century. The only globally poor group pulled out of poverty by the late 20th century boom were the millions of Chinese who benefited from their government’s version of managed capitalism. In the US, it’s clear that few of the middle class and none of the working class prospered from those globalised markets.
And, of course, we now know how big the cost of the collapse has been – and (although I can’t find the reference for this) that regional financial crises had been increasing in scale and severity over the last twenty years.
Nor is it coincidence that the most developed ‘state capitalist’ sectors are in energy. State capitalism isn’t just about local political elites protecting their patronage and influence. In the coming world of resource competition and likely shortages, it may be the only way to ensure that prosperity is reasonably well spread,
The image at the top of the post is from The Smart Asset, and is used with thanks.