Thursday, July 08, 2010

One Cheer for State Capitalism

Frank Pasquale

(Review of Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, 2010).)

Ian Bremmer's The End of the Free Market is already one of the most celebrated nonfiction books of 2010. Reviewed worldwide, the book has been praised in many quarters. Bremmer's deep knowledge of world political economy is evident throughout this work. Yet the book's case for "free market" as opposed to "state" capitalism relies on generalizations that are too gross to capture the real fault lines in globalization. If we are lucky, Bremmer's work will encourage American policymakers to compare their own interventions in the economy with those of "state capitalist" regimes like China, and to copy best practices. If we are unlucky, its ideas could lead to economic stagnation in "free market" havens and new tensions between the U.S. and China.

For Bremmer, "state capitalism" denotes a level of government control of the market that is less dirigiste than a "command economy," but more heavy-handed than the social market institutions of Europe. Countries become more state capitalist when their "government[s] play the role of lead economic actor," moving to the left along a spectrum ranging from communism to libertarianism. They move "right" when the government lets businesses make decisions for "commercial reasons" rather than trying to encourage them to meet political goals.

On this view, moving rightward toward non-intervention is usually advisable, provided some baseline of regulation and sound business culture prevails. Bremmer admits this is a "profoundly simplistic model" (44), and perhaps in penance he explicitly condemns "utopian libertarianism" when he introduces it, declaring that "any argument that the state should remove itself entirely from the marketplace is absurd" (153). He laments the fact that theories of "shareholder value" have led "CEOs and company management [in free market capitalist countries to] become obsessed with maximizing quarterly profits at the expense of investment in a sound long-term growth strategy" (152). To his credit, he explains the recent financial crises in the US as the product of a few decades of deregulatory dogma, and not merely aberrational.

For Bremmer, the leading state capitalist regime is China (128). Even after the bank bailout, the auto bailout, and health care reform, he sees the US as largely on the "right" side of the state-capitalism/free-market continuum. China, however, engages in all the sins of state capitalism:

[To] sustain high growth . . . Chinese companies, backed with every advantage the state can provide, must venture out into the world to lock down long-term access to the crude oil, natural gas, metals, minerals, and other commodities needed to fuel a still-vulnerable developing economy. . . . [T]he National Development and Reform Commission. . . guides macroeconomic planning and intervenes in markets, particularly by setting prices for many products and by influencing national oil companies and other state-owned enterprises [SOEs].

Bremmer describes the advantages of Chinese energy companies over "free market" competitors like BP and Shell, and complains that state subsidies to them "add[] upward pressure on the prices that everyone else pays for energy and other commodities" (136). He also notes that China may be "actively cornering the market" in the types of rare-earth minerals that will be essential to advanced green energy and computer technology (137). Finally, China is capable of funding these projects via sovereign wealth funds (SWFs) that invest with political goals in mind. For example, one SWF purchased Costa Rican bonds in exchange for Costa Rica's termination of diplomatic recognition of Taiwan. In addition to discussing China and Russia in some detail, Bremmer offers whirlwind tours Middle Eastern, Central Asian, and South American forays into state capitalism.

After describing state capitalism, Bremmer makes a sustained argument about its dangers that boils down to three propositions:

1) China and other state capitalist regimes experience more government intervention than free market regimes like the US.

2) This intervention is harmful because it causes business enterprises to act politically rather than as sustainably profit-maximizing entities. State-owned or "national champion" firms may try to destabilize the U.S. and other political rivals.

3) In response, free market nations should recognize that "the private sector is the only reliable long-term engine of robust and sustainable growth" (186), and should promote free trade and freely accept foreign investment. The US in particular should "keep investing in hard power" so its military can "ensure the free flow of oil and gas supplies" from potentially unstable regions like the Mideast.

The first two descriptive points are disputable, and Bremmer's prescriptions are troubling given trends in global resource flows.

1. Some Realism About Interventionism

Throughout his book, Bremmer contrasts "state capitalist" regimes (where the government is the lead economic actor) with "free market" nations which preserve more room for private initiative. While virtually every country has a few state-owned enterprises (SOE's), in state capitalist regimes like China SOE's predominate in "diverse sectors" and are used to enhance the political power of government (65). Such regimes also intervene in the economy pervasively. For example, Russia in 2008 "identified forty-two 'strategic' economic sectors in which restrictions applied for foreign investment" (109). In a chapter entitled "State Capitalism Around the World," Bremmer piles up a litany of suspect interventions in places ranging from Nigeria to Mexico to Saudi Arabia.

Bremmer paints a stark contrast between the economies of liberal democracies and the state capitalist other. But at least since legal realist Robert Hale published his Coercion and Distribution in a Supposedly Non-Coercive State in 1923, the question of what constitutes state "intervention" in the market has been contestable. For example: at what point does licensing of doctors move from being a natural aspect of any competent health system to being termed a suspect "intervention"? If there is to be free trade in services, don't we at least need some information about what constitutes genuine medical care? "Perfect information" is a cornerstone of idealized markets---isn't some baseline of information necessary to any actual market?

The Health Care "Market"

Bremmer does not talk much about health care in his book, but it appears to be one important sector where the relative role of the government in state capitalist and "free market" regimes is flipped. On a cursory reading of Blumenthal and Hsiao's 2005 article in the NEJM, the US would appear to be more interventionist than China:

In the early 1980s, China virtually dismantled its . . . health care and public health system overnight, putting nothing in its place. In retrospect, this startling and almost inexplicable event seems to have been collateral damage from a much more carefully planned and successful policy strike: the privatization of China's economy and a general effort to reduce the role of Beijing's central government in China's regional and local affairs. Only recently have Chinese authorities recognized the pain and the massive disruption in health care that they have caused.

In China, "public spending as a proportion of medical expenses . . . stands at 25 percent;" in the US, by some calculations, the "tax-financed share of health spending [was] . . . 59.8 percent" even before the ACA passed this year. Very recent Chinese stimulus spending may be reversing prior privatizations there. But it's clear that Chinese savings rates are still high, largely because so many citizens are scared of being sick and broke in a market-driven health care system.

Admittedly, there are many important developments in Chinese health care nowadays---some moves appear to be doubling down on privatization, and others recall the types of reform we've recently seen legislated in the US. It is hard to develop any clear metric of private/public here; Blumenthal and Hsiao's piece may only speak to financing and not criminal law or ultimate ownership of health facilities. If Americare fails, the US and Chinese health care systems may well be en route to the "superfusion" of Chimerica. Nevertheless, it's important to note that state intervention in the economy differs by sectors, and that intervention comes in many forms.

Political vs. Commercial Ends?

Bremmer's fallback position is that the state capitalist regime intervenes in the economy for political ends, or to preserve itself, whereas the free market regime promotes the commercial purposes of the entities it funds or regulates. But the finance sector challenges any effort to distinguish the U.S. from state capitalist regimes on this measure as well. The Chinese banking sector is clearly more tightly controlled than the US one is; but is there any doubt that both, at their root, depend on the state for their lifeblood (cheap capital)?

The US finance sector has parleyed its resources into enormous political power. As one critical commentator puts it, "The fact that the Fed is charged with being the lender of last resort ultimately puts it in a position of socializing financial losses (while privatizing gains)." During the crisis, the Fed chose winners and losers, and the banks left standing are essentially "taxpayer supported entities." Given the failure of the banks to engage in anywhere near the amount of business lending they were supposed to do, it would appear more accurate to characterize the US bank bailout as a government self-preservation mechanism (state capitalism) rather than a promotion of commercial ends ("free market" capitalism).

As Johnson & Kwak's 13 Bankers shows, this is not anomalous---the role of finance in the American economy has been politicized repeatedly, in fights ranging from the authority of the Bank of the US to Fed "independence" to the gold standard to derivatives and futures regulation. The rising tide of "deregulation" in finance was not merely an axiomatic application of economic principle. One can easily redescribe it as the occidental version of the fusion of politico-economic elites in China and other more familiarly "state capitalist" regimes.

The Intellectual Property Paradox

Finally, Bremmer talks about intellectual property rights as if they are a natural cornerstone of free market practice. Certainly there is some core of protection of property that we should afford to those who develop our drugs and gadgets and movies. But as many commentators have noticed, often times these protections look far less like plain-vanilla "property" than administered pricing schemes or welfare. As Dean Baker puts it,

The government’s involvement in the economy has grown substantially in important areas, including patent and copyright protection. The percentage of GDP that is diverted to holders of patents and copyrights has increased enormously over the last three decades as Congress has approved a number of measures that increase the length and scope of these protections. . . The government’s role in protecting intellectual property has led to increasing interference with the free market in other ways. The Internet has made copyrights far less enforceable, yet rather than modernizing our system for financing creative work, the government has taken extreme measures to preserve copyrights. . . .

One could characterize certain trade rules the same way; as Kevin Outterson writes, the "AUSFTA selectively exports US generic drug laws . . . and is uniquely intrusive into domestic pharmaceutical and political spheres." The more one understands the role of the USPTO, the USTR, the FDA, the ITC, and now Medicare Part D in affecting pharamceutical company practices, the more the US looks like the state capitalists Bremmer tries to contrast it with. Does the byzantine structure of Medicare Part D reflect an efficient way to get drug coverage for the elderly---or the optimal way to secure campaign contributions and keep the revolving door of lobbying spinning? Is there any doubt that the provisions of the loophole-ridden finreg bill have as much to do with supplying the "New Democrat Coalition" with campaign funds as they do with preventing another crisis?

Without acknowledging these ugly realities, Bremmer cannot say with confidence that the most progressive state capitalist regimes are any more recklessly self-regarding than current US elites. Of course, we are not Nigeria. But there's a reason the leading public intellectual analyzing the US financial crisis has compared American political economy to that of Indonesia and Russia.

2. The Messy Political Economy of Finance and Energy

If pervasive governmental intervention is inevitable in any developed economy, the question then becomes: what intervention is worthwhile? For Bremmer, the answer appears to be either a) not much or b) intervention that is not designed merely to enhance the power of the governing regime. Unfortunately, one of his central arguments for the value of the free market---the performance of multinational oil and gas companies---founders on the messy politics of energy. The second category of "pro-commerce" intervention appears less and less coherent as we look at the full breadth of programs state capitalist regimes engage in. State capitalists in China may well be promoting the sustainable commerce of the future by forcing certain sectors to act "politically" today.

Crude Distinctions in the Petroleum Industry

Bremmer notes that "the 14 largest state-owned energy companies control twenty times as much oil and gas as the eight largest multinationals" (56). He accuses state-owned energy companies of being corrupt, inefficient, and dangerous, and makes that case in some detail. He also says many of them are amoral, willing to work with the most repressive regimes imaginable. By contrast, he lavishly praises multinationals like Shell, BP, and ExxonMobil:

[E]fficiency gaps between privately owned companies and their state-owned rivals wider in the energy sector than in any other area of an economy. Multinationals offer higher wages, attracting better workers. They're more likely than state-owned firms to benefit from economies of scale. They're more innovative. Their managers and engineers are more experienced, and they use better equipment. These advantages will continue to matter in places like the Gulf of Mexico . . . where the technical demands of bringing oil to the surface are extraordinarily high. (62) (emphasis added)

If the BP hemorrhage continues indefinitely, that hole in the world might shake Bremmer's confidence. Admittedly, the disaster happened after the book was released, but the more we dig into it, the more we find permanently captured regulators at Interior giving these companies whatever they want. Stories of the environmental devastation of Nigeria and Ecuador by Shell and Chevron have been familiar for years.

Peter Maass tells the story of the devastation left behind by many multinational oil companies in Crude World: The Violent Twilight of Oil. In a scintillating description of corruption in Equatorial Guinea (the third largest oil producer in sub-Saharan Africa) and pollution in Ecuador, Maass describes the arguments of those who, like Bremmer, think that multinationals offer more moral business practices than state oil companies. One oilman claims that if American firms don't do the messy work of securing and extracting the fuel, more repressive regimes will influence oil-producing regions. Maass responds:

The argument made sense in theory---America is a democracy and China is not---but in the real world of deeds and misdeeds, it can be hard to see a great difference. The American government was paying rent for its embassy [in Malabo] to a minister accused of torture. [Equatorial Guinea's dictator] Obiang's family was reaping huge profits from sweetheart deals with American companies. There seemed to be more in the way of reward for bad behavior than pressure to change it. (50)

In another section of the book, Maass interviews Salad al-Husseini, a former vice president of the Saudi state oil company, Aramco, whom Maass calls "one of the most respected oil experts in the world." al-Husseini made the following points about multinationals:

They have brilliant leaders, they have brilliant engineers, but they get exposed to commercial pressures which they have to live with. If they are in financial trouble and have to cut corners, they will cut corners. It means that if your tanker is old and you ought to retire it, you keep it working. It means that if you have an offshore platform that is beyond the national boundaries of a certain country and you can dump chemicals into the sea, you do. It means that if you have to abandon a facility that is a pollutant, you abandon it. . . .All of these are ways in which you say, It's not my problem, it's not my cost. (113)

By no means does Maass make a case that the state-owned oil companies are better than private multinationals, but he does not paint with a broad brush. He reserves judgment. Bremmer, on the other hand, is too quick to apply a double standard. He complains of the outsized influence of Russian oligarchs, but doesn't mention the fact that Lee Raymond earned $686 million for his time at the helm of ExxonMobil. The Chinese may be manipulating their national champions to find more and more oil for a burgeoning home market, but US regulators are often directed by "political appointees" to do whatever it takes to keep royalty revenue flowing and to get campaign contributions from big oil and its numerous allies. The stark distinction between fair and foul approaches to oil wealth only really appears when one compares these examples of excess with Norway's enlightened approach. But that egalitarianism is less an expression of the free market than a check upon its worst tendencies.

Allocating Capital: An Inescapably Political Task

The finance sector offers another counterpoint to Bremmer. Consider that, "In 2008, the CEO of the world’s largest and most successful bank earned £150,000 [for running] the Industrial and Commerce Bank of China [while] . . . the head of the most unsuccessful investment bank [Lehman Brothers' Dick Fuld] earned £22 million." If the Chinese government is actively suppressing exorbitant CEO salaries in the banking sector, what is so bad about that? Perhaps Japan shows that CEO salaries can also be controlled in a "freer" market. But in the US, the financialization of the economy driven by the "free market" has both driven jobs overseas and spawned near-oligarchic tendencies in the financial elite. If there is indeed a "war between states and corporations," as Bremmer puts it, this is what it looks like when corporations win.

Finally, Bremmer is notably quiet about some of the most laudable aspects of Chinese state capitalism. Perhaps the country is raising prices for oil by aggressively securing supplies, but don't may experts agree that carbon's current price does not reflect its negative externalities? Moreover, China's commitment to developing green energy is enormous:

R. & D. expenditures have grown faster in China than in any other big country—climbing about twenty per cent each year for two decades, to seventy billion dollars last year. Investment in energy research under the 863 Program has grown far faster: between 1991 and 2005, the most recent year on record, the amount increased nearly fifty-fold. In America, things have gone differently . . . . By 2006, according to the American Association for the Advancement of Science, the U.S. government was investing $1.4 billion a year—less than one-sixth the level at its peak, in 1979, with adjustments for inflation.

The US has done so poorly in this area that one ex-president of an oil company laments that democracy cannot give us a coherent long-term energy policy. Meanwhile, another ex-businessman, former Intel CEO Andy Grove, says that Chinese-style job creation programs may be the only way to prevent another Great Depression in the US:

Our fundamental economic belief, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems . . . [W]e stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better. Such evidence stares at us from the performance of several Asian countries in the past few decades.

Consider the "Golden Projects," a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks—used for transactions, communications, and coordination—in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time they contributed to the rapid development of China's information infrastructure and the country's economic growth.

A dirigiste state may mandate investment in technology and access to resources. We may not like seeing the Chinese state "lock up" various pools of resources, but consider the needs of its people:

China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C. — and its public schools have no heating. (Go to a classroom when it’s cold, and you’ll see 40 children, all in their winter jackets, their breath forming clouds in the air.)

If China is building infrastructure in Africa in order to gain access to heating oil, who cares if this is being done for "political" rather than "commercial" reasons? Perhaps the biggest story of the decade will be the extraordinary spectacle of the world's superpower investing in McMansions, war, SUVs, and useless financial instruments, while its putative rival built up its capacity to meet real human needs. America's wasteful finance, insurance, housing, and auto sectors have shown what can happen when policy unattuned to environmental concerns attempts to promote a "free market" economy.

3. Doubling Down on Privatization and Militarization

By the end of the book, Bremmer offers a mercifully short list of recommendations for future policy action in the US and other free market countries. Despite the enormous market manipulations by state capitalist regimes that he's just cataloged, he still encourages free trade (190). Despite raising worries that sovereign wealth funds could try to destabilize the US, he warns politicians not to "play populist politics with foreign investment" (193). Finally, he advises that the US government "can extend its singular international influence for decades by working to preserve the country's hard power" (197). If we assume that other countries are going to be upping their military spending, that could translate into massive new investments for the US to preserve the already immense advantage it now enjoys. Rather than promoting an industrial policy that might help reduce our dependence on foreign oil, Bremmer counsels that a renewed effort to maintain US capacities to project force abroad is the best route to future prosperity and influence.

Unfortunately, it's just as likely the opposite is the case. War costs are enormous, even after hostilities have ceased. Blowback is always a possibility. Andrew Bacevich "traces the long-term erosion of America's economic, political, and military might to the peculiar delusion that history's direction is preordained, and that the United States is destined to play the lead role." In The Limits of Power, Bacevich puts Bremmerian aspirations in a darker light, arguing that resort to hard power often amounts to little more than an effort to maintain outsized US use of world resources. For Bacevich, this leads to a "condition of dependence---on imported goods, on imported oil, and on credit." It's hard to see how the US will fund the hard power Bremmer seeks without endless deficits. Bremmer's promotion of hard power may have less to do with a coherent grand strategy than with the cultural currents of contemporary American politics---for, as Bacevich notes in The New American Militarism, “Today as never before in their history, Americans are enthralled with military power.”

Admittedly, as Brad DeLong & Stephen Cohen note, there is a real economic rationale for building up hard power: it can amount to an industrial policy, fostering innovation that is politically impossible to fund otherwise. But Bremmer does not appear open to the virtues of industrial policy. Bremmer instead engages in what James Kwak calls the private sector fallacy, assuming that the most important private companies must be more efficient than parallel entities in the nonprofit or government sectors. Bremmer is not as doctrinaire as Casey Mulligan, but the ideology he subscribes to is clear. The extraodinary economic failures of the past decade have rendered that belief system untenable. It's time to move on, but Bremmer appears stuck in the Washington Consensus of the past.

4. Conclusion

One often hopes that a highly successful nonfiction book owes its popularity to its original insights or compelling research. Ian Bremmer's The End of the Free Market has both, but I fear its popularity owes more to its complacent "stay the course" message for globalizing elites than to its author's deep understanding of the world economy. After discussing all the cunning ways "state capitalists" are improving their position in the world, Bremmer advises the United States to double down on "free trade" and "defense" policies that have already brought enormous debt and dislocation to its population. It's music to the ears of blue dogs and Rubinites who are at the center of political gravity in the Obama Administration's economic teams and the austerity bandwagon in Europe. But it strains credulity to think that these ideas will bring real economic security to a country facing a tsunami of outsourcing.

Bremmer's blinkered prescriptions are a natural outgrowth of a bien-pensant Washington Consensus worldview of the relationship between government and business. I looked in vain to see a reference in Bremmer to Charles Lindblom's Politics and Markets, another ambitious work that aimed to explain "fundamental politico-economic mechanisms." One of Lindblom's great contributions to the political science literature is the concept of "circularity," or the creation of values and volitions by those who are supposed to respond to and satisfy extant desires and preferences. As Ian Ayres and Bruce Ackerman describe the problem,

A liberal democratic regime accepts the legitimacy of market-generated differences in wealth provided that they survive the critical scrutiny of democratic citizens. But critical scrutiny by the political system requires it to function relatively autonomously from the economic system – otherwise politics merely becomes a means by which big money praises itself.

Even in 1977 (one year after Buckley v. Valeo), Lindblom could observe the "disproportionate participation of businessmen in electoral politics," which generated a large "corporate advantage in manipulation of volitions" (210, 213). A book like Bremmer's, concerned about the "war between states and corporations," should have done more to observe what happens when capital---and finance capital in particular---wins that war. Failing to fully explore that side of the equation leaves the book fundamentally unbalanced. But it's a necessary aporia, for filling it would demonstrate the untenability of the neoliberal policies promoted in the book's conclusion. A fairer reckoning would teach a different lesson: not to induce the state capitalists to copy a chimerically "free market" America, but to learn from the best of their interventions and avoid the rest.

Older Posts
Newer Posts