Opinion

Ian Bremmer

The secret to China’s boom: state capitalism

By Ian Bremmer
November 4, 2011

By Ian Bremmer
The views expressed are his own.

One of the biggest changes we’ve seen in the world since the 2008 financial crisis can be summed up in one sentence: Security is no longer the primary driver of geopolitical developments; economics is. Think about this in terms of the United States and its shifting place as the superpower of the world. Since World War II, the U.S.’s highly developed Department of Defense has ensured the security of the country and indeed, much of the free world. The private sector was, well, the private sector. In a free market economy, companies manage their own affairs, perhaps with government regulation, but not with government direction. More than sixty years on, perhaps that’s why our military is the most technologically advanced in the world while our domestic economy fails to create enough jobs and opportunities for the U.S. population.

Contrast the U.S. and its free market economy with China’s system.  For years now, that country has experienced double digit growth. Many observers would say that China’s embrace of capitalism since 1978, and especially since joining the World Trade Organization in 2001, has been responsible for its boom. They would be mostly wrong. In fact, a new study prepared for the U.S. government says it’s not capitalism that’s powering China, but state capitalism — China’s massive, centrally directed industrial policy, where the government positions huge amounts of capital and labor in economic sectors it intends to nurture. The study, prepared by consultants Capital Trade for the U.S.-China Economic and Security Review Commission, reads in part:

In a world in which central planning has been so utterly discredited, it would be natural to conclude that the Chinese government and, by extension, the Chinese Communist Party have been abandoning the institutions associated with the communist economic system, such as reliance on state‐owned enterprises (SOEs), as fast as possible. Such conclusion would be wrong.

In a G-zero world where no country can claim the mantle of international leadership, China has pulled an accomplished head fake. While the media focuses on China’s special economic zones, like Hong Kong and Macau, and the rise of the banker class and Chinese tech industry, state directed spending is the real engine of growth.  Capital invested in infrastructure like factories, heavy industry, roadways, and high speed trains continues to power annual double digit growth in GDP. Reliable data from 2004 shows that 76% of Chinese non-financial firms are classified as State Owned Enterprises (firms with government ownership of greater than 10%).

In short, while the U.S. has spent decades and vast treasure building up its defense system (and yes, by extension, the sectors of the economy that service it), China has spent its time and money building up control over the broad direction of its entire economy. In today’s world, where the first sentence of this essay rings true, which country currently looks better positioned to, pardon the pun, capitalize, in the years ahead?

During last week’s euro zone bailout talks, French President Nicolas Sarkozy went hat in hand to China, painting a stark picture of China’s still-growing economic importance internationally. Never mind that the phone call didn’t result in any particular action; the mere act raised Chinese President Hu’s profile going into the G-20 talks in France this week. Not only that, the entreaty by Sarkozy made plain that China has nothing to hide about the economic path it’s chosen for itself. After decades of hectoring from the West, the tables are perhaps about to turn. After all, what economic model should China emulate? Europe’s? The United States’? “With all due respect,” you can almost hear President Hu saying, “we like the way our system is working, thanks.”

There is, though, a fatal flaw with state capitalism. It works, and it will continue to work, until the day that it doesn’t. China’s economic growth is built on the back of cheap labor. As China’s wealth and per capita GDP (currently $4,400 compared to the U.S.’s $47,000) continues to rise, that labor will one day cease to be cheap — perhaps not compared to the U.S.’s, but certainly compared to the labor forces in India, Turkey and across Southeast Asia.  This trend is already beginning, as we have seen multinational companies turn to countries like Indonesia, Vietnam, and Thailand for cheaper labor in the region.

State capitalism requires that the state have access to a cheap good or service that has high value in trade. Saudi Arabia has oil, Argentina has mines. Reaching back further, as New Yorker writer John Cassidy has recently noted, the British had access to cheap Indian opium that 19th century China snapped right up. When China’s emperor protested the drugging of his people, the British sent warships to force its ports open. State capitalism, in other words, has a long history as midwife to economic powerhouses. China’s cheap resource continues to be its labor. The leadership there is going to protect that resource as long as it can, through any lever its government can control.   When state capitalism breaks down, the results will be ugly if the government has not adequately braced the economy for fundamental change.

At the heart of every military conflict, after all, is some sort of trade war. It’s not a bad thing that the U.S. has invested so much in its own security. But in a world where economics drives geopolitics, the U.S. will be in a decades-long race with China to maintain its perch as the world’s largest economy, and it will have to do so with a much smaller population and relatively anemic growth, compared to China’s rapidly urbanizing population and its double-digit annual GDP bonanzas.  That assumes, of course, that China weathers the shocks that state capitalism will bring, and manages to overcome a looming demographic problem as the population ages without an adequate social safety net in place.

Make no mistake — China’s leaders are well aware of the economic power they currently hold, but they also recognize the potential for more prosperity and influence if they can carefully manage their economy for future generations — and the consequences should they fail. It’s good — and long overdue — that the U.S. learns more about their system, and Capital Trade’s important new study is a step in the right direction.

This essay is based on a transcribed interview with Bremmer.

Photo: China’s President Hu Jintao (L) and France’s President Nicolas Sarkozy (R) discuss  before the start of the G20 Summit of major world economies in Cannes November 3, 2011. REUTERS/Charles Platiau

Comments
26 comments so far | RSS Comments RSS

While China’s international competitors are busy and distracted with internal “free-market” competition; China’s state-directed industries take a coherent competitive position against outsiders; employing a long-term strategy to use each new monopoly (e.g. rare-earth-metals) as a spring-board to corner the next market in a strategic hit-list (e.g. semiconductors, => high-tech products…)

America needs to wake up!

Posted by matthewslyman | Report as abusive
 

“China’s economic growth is built on the back of cheap labor.”==>Why don’t you mention about those land selling by the governments. Or do you think that there would be no shortage of land in the future?
“State capitalism requires that the state have access to a cheap good or service that has high value in trade. “==>That what exactly LAND is in China.

Posted by miyoyon | Report as abusive
 

Good article. Bill Clinton made the point in a recent interview that while people are upset with the government and for valid reasons the only way for a country to be successful in the long term is when the government works with and for the benefit of it’s people. Sounds good. The problem though is what is the best interest of the people in the US? The US government has no long term vision especially with regard to where to invest in jobs for the future. DARPA used to invest in high technology to benefit the military but the government is spending less and less on research, squandering their resources on so called Wars and Bank bailouts to support government sanctioned financial gambling.

The biggest problem in the US today is a lack of decent jobs. There are plenty of people looking for work. One problem is that companies can export jobs and benefit from tax incentives for doing so. Another option which is common here in the Bay Area is to just hire foreign workers mostly from countries such as India/Pakistan/Sri Lanka because people from those countries are so desperate to come to the US and will work for very low wages. There are even a lot of people from those countries working at fast food restaurants here. No wonder fewer people from Mexico are coming to the US, they can’t find even entry level jobs. US workers without skills have little hope and workers with skills may still lose because they are too expensive to hire.

China has no problem with people immigrating to their country to take jobs. Since the real unemployment figures in the US is at least 18-19% not 9%, counting millions of people who have given up looking for work after unemployed for years, we could end up as a country with 20%-25% or more permanently unemployed, a prescription for chronic dysfunction and instability.

As pointed out in the article the Chinese government is willing to make short term sacrifices for long term gains. They are using US money to finance this because so many US manufacturing jobs have been out sourced there. The US government has no policies to counter this. Rather, the Obama administration and the GOP spends far more on wars and bailouts then they do on trying to support the creation of jobs in the US. Must be because US politicians listen to business interests while Chinese politicians put national interests first. Unfortunately business and national interests are not the same. Businesses exist to make money for owners/executives and investors. Workers are an expense to be minimized. Maybe some day the US government will learn how to take a more balanced approach to supporting national versus business interests, but don’t hold your breath.

Posted by BayAreaReader | Report as abusive
 

Not going to be easy to maintain a supply of cheap labor as long as the Chinese population becomes more and more affluent. As the middle class grows, more and more demands are going to be made, and the last thing the Chinese government wants is instability.

Posted by wildblueyonder | Report as abusive
 

This article misses the fact that along with other multi national companies, China itself opens factories in other low wage countries.

Posted by diddums | Report as abusive
 

Well, they can remain ….and will remain…on top while they keep a tied control on their economy…who is producing what, where… (now they are building industrial cities in the West, so they can give the people there jobs too.

Also important for them is that they keep on top of the pressure to raise the value of the Yuan…which rtheys should do, this control, but then worldwide, was suggested by Keynes in Bretton Woods, but not accepted by the US, hence the current deflationary effect on the employment within our societies.

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living).

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living). That imbalance has to be counter balanced. The low cost countries have had their kick star by now. Nuclear powe, the race to the moon…let the take their responsibity towards a healthy WORLD

Posted by Checksbalances | Report as abusive
 

Well, they can remain ….and will remain…on top while they keep a tied control on their economy…who is producing what, where… (now they are building industrial cities in the West, so they can give the people there jobs too.

Also important for them is that they keep on top of the pressure to raise the value of the Yuan…which rtheys should do, this control, but then worldwide, was suggested by Keynes in Bretton Woods, but not accepted by the US, hence the current deflationary effect on the employment within our societies.

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living).

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living). That imbalance has to be counter balanced. The low cost countries have had their kick star by now.

Nuclear power, the race to the moon…let the take their responsibity towards a healthy WORLD economy..they might than do it better than the US did in 1944 With the apotheosis in the eighties under Reagan, than affordable and probably just..at the time… but those ultra liberal economic policies should have been abandoned in the mid nineties, then they started to have a negative effect on employment in the private sector. Slave labor (market conform salaries…world wide…)against well paid jobs.

Posted by Checksbalances | Report as abusive
 

Well, they can remain ….and will remain…on top while they keep a tied control on their economy…who is producing what, where… (now they are building industrial cities in the West, so they can give the people there jobs too.

Also important for them is that they keep on top of the pressure to raise the value of the Yuan…which they should do, this control, but then worldwide, was suggested by Keynes in Bretton Woods, but not accepted by the US, hence the current deflationary effect on the employment within our societies.

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living).

That imbalance has to be counter balanced. The low cost countries have had their kick star by now.

Nuclear power, the race to the moon…let them take their responsibity towards a healthy WORLD economy..they might than do it better than the US did in 1944.

With the apotheosis in the eighties under Reagan, than –socially- affordable and probably just..at the time… but those ultra liberal economic policies should have been abandoned in the mid nineties, when they started to have a negative effect on employment in the private sector. Slave labor (market conform salaries…world wide…)against well paid jobs.

Posted by Checksbalances | Report as abusive
 

I take from this thought-provoking op-ed, not that free market economies are bad and socialized economies are good, but that there is an important role for government to play in a free market economy, and it’s more than just staying out of the way.

For any kind of system to work there must be rules and regulations. Can anyone name a system where this is not the case? In the case of economic systems, its structure should be designed in such a way where the greatest number of people benefit. That’s not saying that all people must be equal. Those who work harder and smarter should earn more. But there needs to be balancing mechanisms in place so that those with the most money don’t use that money to exert their power and influence to make their path to greater riches and influence easier at the expense of the majority, which is where America finds itself today, which is fast leading to a lot of civil unrest. And rightfully so.

The United States needs to takes steps to implement greater fairness in our economic structure and we need to forcefully point out the fallaciousness in the predictable charge that such government intervention amounts to socialism, which has been made into a political “n” word. Throw “socialism” and “class warfare” at anything the government even considers doing and immediately half of the nation will oppose it. How utterly and easily convenient.

Consider any attempt to make healthcare in America affordable to all Americans. No matter how you try doing that, it will be labeled “socialism” by those who are financially benefiting from our current broken system. This is one of those examples of the nefarious influence of money to benefit a few at the expense of the many. What a shame we don’t have a well-known, repulsion-evoking label for that.

One way or another, change will come. It is up to us to decide if we implement such change in a constructive way or where we have to first burn down the house.

Posted by doggydaddy | Report as abusive
 

Another, larger difference between what this essay calls “state capitalism” and the “crony capitalism” that reigns in the USA is that crony capitalism is manipulated to benefit only the friends of political power. The market, so to speak, is not free but directed and protected from competition. That is similar in both the USA and China. But in the USA it has turned into a frenzied plundering of public money in general for the benefit of the few. China does not give public money (“bailouts”) to its wealthiest citizens. The USA does. Trillions of dollars.

Their system develops their economy. Ours develops a mega-rich political class. We are rebuilding old style aristocracy.

Posted by txgadfly | Report as abusive
 

The parallel to Hitler’s Germany is striking. Hitler created double digit growth and 7 million jobs in his first 6 years under the bare-knuckled capatalist system of National Socialism. Capitalism under a totalitarian regime is economically increadible productive as the cases of today’s China and the German Reich both demonstrate. The world hopes China’s politicians choose a better path than Hitler to spend the wealth that is created by the growth.

Posted by warwilder | Report as abusive
 

State Owned Enterprises (firms with government ownership of greater than 10%).

So a big chunk of the US financial sector is state owned, wow.

@txgadfly I think you summed it up pretty well.

Posted by Sinbad1 | Report as abusive
 

Well, they can remain ….and will remain…on top while they keep a tied control on their economy…who is producing what, where… (now they are building industrial cities in the West, so they can give the people there jobs too.

Also important for them is that they keep on top of the pressure to raise the value of the Yuan…which they should do, this control, but then worldwide, was suggested by Keynes in Bretton Woods, but not accepted by the US, hence the current deflationary effect on the employment within our societies.

Laissez-faire in a -globalized- supplyside economy promotes the race to the bottom for the global workforce in stead of lowering the stakes for people to work themselves up to a better future The imbalance in the communicating vessels (globalized production) with the fat and the thin bottom (cost of living).

That imbalance has to be counter balanced. The low cost countries have had their kick star by now.

Nuclear power, the race to the moon…let them take their responsibity towards a healthy WORLD economy..they might than do it better than the US did in 1944.

With the apotheosis in the eighties under Reagan, than –socially- affordable and probably just..at the time… but those ultra liberal economic policies should have been abandoned in the mid nineties, when they started to have a negative effect on employment in the private sector. Slave labor (market conform salaries…world wide…)against well paid jobs.

Posted by Checksbalances | Report as abusive
 

I am sorry about the misuse of space, is it possible to remove the older contributions, something went apparently wrong because 1 moment there were six comments and the next moment one so I thought that things got lost…apologies!

Posted by Checksbalances | Report as abusive
 

Hi Ian, usually your articles are quite erudite.

However this one is missing some information regarding actions in the name of national security that masked the justification of war for economic interests, especially the US covert wars in Latin America (e.g. McShery´s “Predatory States: Operation Condor and Covert War in Latin America”). Similarly the sale of weapons “to grow” the UK economy.

I think your binary argument US “security” versus Chinese “state capitalism” is selectively narrow in its focus.

Posted by scythe | Report as abusive
 

I do not think Hong Kong, praised by Milton Friedman before as the free market economy, and Macau should be treated together with China when it comes to economic policy. They were colonies and had nothing to do with the Chinese state capitalism, and my understanding of Chinese special economic zones are Shenzhen, Zhuhai, Xiamen and Shantau. It seems that this article failed to provide accurate facts.

Posted by history_student | Report as abusive
 

Obama tried throwing several hundred billions of dollars at big infrastructure projects across the nation for so-called “shovel ready” jobs.

But anti-development environmentalists, bidding disputes, union disputes, local politics, and right-of-way land use disputes – have crushed our ability to address large infrastructure needs, much less create much needed heavy industry.

We have handicapped ourselves with out-of-control and corrupt legal and political systems.

And the anti-growth segment is still growing in power. But do they realize they WILL impoverish us if they have their way?

Posted by Parker1227 | Report as abusive
 

In America, capitalism is the state religion, only with the financial crisis, the US government has rightly chosen to ignore that dogma and save the banks, hence circumventing market ‘cleansing’ mechanisms.

In China, capitalism was seen as a way of increasing productivity, not of changing their religion wholesale. And their phenomenal success mixing capitalim with strategic governement planning is testament to the (overall) soundness of their approach.

Just goes to show, economics is not an exact science, though it certainly is a dogmatic one, and very very much overrated…

Farfoor

Posted by Farfoor | Report as abusive
 

Not only is China growing, but they are clever in their choice of strategy, wiser to remain focus while they manage well the internal and external influences. What do I mean by this? The laws that work in the US will not work in Sudan neither in China, vice versa. Why then should developing countries continue to copy the laws they no nothing about? The freedom of speech campaigned by America is now being used against the state in making useful regulation to amend their economic woe.

The most effective tool capitalist nations have used in the past to suppress other nations from competing with them is to make them embrace laws and political terrain that would ordinarily not work for them, or fit into their fundamental culture and history. We see this in Africa. Effort to woo China to embrace full democracy and their declination, I will say, contributes to their on-going economic successes. As long as they hold on to what they can, what they believe and restrain external influence from the like of “western countries”, IMF, World Bank, UN, etc and rely on personal strengths, they will continue to grow. However, the day the bow to pressure is the day they will start to fall.

I will argue, from basic economic principle of comparative advantage, that any nation that simply copy democracy or simple privatisation of government properties as constantly proposed by capitalists and their machineries without considering her internal structure, culture and visions will fail.

I will argue, China is successful today because they chose to control from intern rather than to be controlled from extern. This success will continue as long as they hold on to this strategy. That is while I agree with HU when he said, “…if we help the EU, we have to have a say”. Just like they, the capitalist are having a say in Africa. After all, “he who has the pipe, dictates the tone”, meaning, whoever has the largest economy controls the world. That is real capitalism, and that is what China currently has.

Posted by POSA | Report as abusive
 

The US destroyed it’s military and Treasure in Iraq, while China was sitting pretty. This was simply a matter of corruption which has become systemic in the US while seriously undermining democracy. You have a small cabal of people owning the media, pushing for their small little self interests at the expense of a large Majority.
Everywhere you look the corruption is wending its way, from the Casino capitalism on Wall street to literally the Supreme court in the pocket of billionaire brothers who have now legalized this corruption with “citizens united”

Posted by Dyota | Report as abusive
 

Well, also Japan tried the State Capitalism approach to economic success, although in a different form. Although it was a great success at first, they got stuck and are now in a permanent crisis characterized by low growth and high debts. One reason, also similarly for other developed countries, of course, is the wage competition driven by globalization.

But in the case of China and of India, there is a big difference: When they will be fully developed, there is not much wage competition possible, as the world runs out of poor, but reasonably well run countries. Should be good news for the Chinese people. On the other hand, at that point, maybe in 20-30 years, the wage competition by autonomous robots will start for good.

Posted by dingodoggie | Report as abusive
 

State capitalism a.k.a. mercantilism?

Posted by borisjimski | Report as abusive
 

@parker1227
“But anti-development environmentalists, bidding disputes, union disputes, local politics, and right-of-way land use disputes – have crushed our ability to address large infrastructure needs, much less create much needed heavy industry.”

Was not it just unwillingness from the side of the GOP that stopped Obama from creating at least some jobs that could not be exported and would leave a stronger backbone to the American Society?

Then…laissez faire prohibits import duties, so if you would try to balance out too cheap imports…the only way to recreate heavy industry…you would find the “trade liberals” against you.

I am afraid that if the West will not introduce limitations to the supply side economy we will never survive this game. We only think markets(money), not people (work)

Posted by Checksbalances | Report as abusive
 

This article does a great job of describing China’s state guided system, but check out my article which is about the Middle Kingdom’s mutated, unique form of capitalism, and the relationship between the Communist Party and the private sector.

http://www.worldreportnews.com/7/post/20 11/11/the-middle-kingdoms-capitalism-tug -and-war.html

Posted by baronlaudermilk | Report as abusive
 

Whenever statistics (ie GDP) are given, relative costs should be taken into consideration.

Comparing Chinese military spending to American military spending, for example, should take into account that building something in China costs perhaps 1/300th of the cost as in America.

Posted by FTC | Report as abusive
 

At last a glimmering of intellectual honesty. Since it was taken over by Mao and his cronies, China has been a state capitalist entity, differing only in details from other state capitalist entities like Soviet Russia, North Korea, and Cuba. All this talk of ‘communism’ is pure nonsense. How could such undemocratic regimes be called ‘communistic’ when they retained such integral features of capitalism as money, wages, profits, commodity production, and so on? Genuine communism eschews all of the foregoing, and operates on the basis of free access to all goods and services
andycox
http://andycox1953.webs.com/apointofview .htm

Posted by andycox | Report as abusive
 

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