Are state-led economies better?

July 3, 2012

This piece originally appeared in Reuters Magazine.

As Europe’s leaders struggle to restore confidence in the single currency and America’s economy limps ahead at a painfully slow pace, China’s economy continues to power forward at its now characteristically strong clip. For the past three decades, China has been the world’s fastest growing economy—and within the next several years, the People’s Republic will overtake the United States as the world’s largest. Some economists have even argued that, measured by purchasing-power parity, China has already pulled ahead. Such prognostications, accurate or not, have led to dire warnings that liberal capitalism’s best days are behind it, that the future lies with authoritarian market managers who are able to relocate populations and move mountains by decree. For the moment, at least, state-managed capitalism appears to be triumphant.

Such appearances, however, are misleading. The appeal of state capitalism lies in its ability to withstand the occasional crises that afflict market systems, thus shielding the general population from politically inconvenient disruptions. It is a system in which the state uses state-owned enterprises, national champion firms, sovereign wealth funds, and politically loyal banks to dominate the process of domestic wealth creation. To be sure, this is not communism; significant segments of state capitalist economies are in private hands. But the state plays the largest role in ensuring that market forces serve political ends—by ensuring that, profitable or not, businesses invest in projects that bolster social stability and protect the ruling elite’s political control.

China is not the only state capitalist economy producing impressive results. As the Arab world continues to contend with the risks of political turmoil, Saudi Arabia and the United Arab Emirates have stockpiled the cash they need to maintain stability by controlling much of the wealth produced by national oil companies. Even some emerging democracies have begun to flirt with limited forms of managed capitalism. Brazil’s private sector remains crucial for the country’s expansion, but its government leans on state-owned energy firm Petrobras and privately owned mining champion Vale to help create jobs. President Dilma Rousseff’s government won’t milk cash from these firms as President Hugo Chávez has done with state-owned oil company PDVSA in Venezuela, but Petrobras is already at risk of becoming a much larger, less efficient, and thus less profitable company.

State control is not the future of capitalism. It is a dead end from which China will have to free itself if it is truly destined to dominate the world economy. As a system and by design, state capitalism ensures that wealth creation does not threaten the leadership’s hold on political power. Its ability to stimulate growth and general prosperity is a secondary benefit. Forced to choose between public wealth and political survival, state capitalists will always protect their own interests first. In China, as elsewhere, commercial activity depends on access to information, and the Internet provides the best and most efficient access to it. Yet if the Internet threatens to enable popular resistance to China’s authoritarian government, and if political officials have the means to shut the Internet down, even temporarily, they will do just that.

State capitalism’s greatest weakness lies in its intolerance of “creative destruction,” a process that invests liberal capitalism with vital self-regenerating momentum. The liberal capitalist model makes it possible for the workers, resources, and ideas invested in a dying industry to spontaneously recombine in novel configurations to produce goods and services that satisfy emerging demand. But the economic engineers of state capitalism fear any form of destruction that develops beyond their control. This is why state-owned companies, which build influence within government over time, often succeed in resisting the need to adapt to changing times.

Then there is the question of openness. Within autocratic state capitalist systems, government-owned companies like China National Petroleum Corporation and some of the Arab world’s sovereign wealth funds shun the transparency that long-term resilience and adaptability demand. This opacity can benefit a country’s ruling elite by hiding unsuccessful investment decisions, but it is very harmful for the system’s long-term health. When such institutions can hide their failures, they are free to inflict much more lasting harm than they otherwise could.

Managed capitalism also falls short when it comes to exploiting innovation, though government-directed investment can play an important role in the development of new technologies. The Internet arose from a U.S. government subsidized defense project, but it was profit-driven companies that developed and reimagined the Internet and thus transformed the world. History shows that over time state officials never value assets and allocate resources as efficiently as market forces can.

Even in China, state officials understand that citizens are the engine of economic vitality. That is why the state has embarked on an historic and ambitious plan to shift wealth from China’s largest companies to the country’s consumers. China’s leaders know that the next generation of economic growth must be less dependent on exports to Europeans and Americans; creating domestic consumer demand is crucial. Thus the process of empowering Chinese consumers will undermine state capitalism’s appeal even within the country that has made this system so seductive.



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Govt provides the muscle, the Capital backstop, and secure communities to raise children, which allows for markets to exist at all. Thank You!

Modern american govt and what it should look like was resolved after years of consideration, the US Constitution including the first 10 Amendments. It most certainly resolved to keep two powers in check, Institutional Religion and the Aristocracy.

And, as I read it, the idea was to create a United States that would allow all citizens and soon to be citizens an environment where all could achieve ENOUGH success to provide for a more perfect union. My Christian upbringing tells me, we also believe, that we will also provide for those who are unable to provide for themselves.

So how do we get there? Seems WE took a wrong turn somewhere. So “what should” China do?

Posted by Ray2000 | Report as abusive

So, the author is comparing the state capitalism of China with the liberal capitalism of north America and Europe.

I disagree. Consider the Too-big-to-fail fiasco, the bailouts, the taxbreaks. The way I see it, western economies are as state-controlled as China!

Everything the author wrote about state capitalism’s supposed weaknesses also applies pretty well to western economies.

He said that authoritarian organisations tend to hide any failure or blunder in order to maintain an illusion of control. Didn’t Greece did some accounting magic in order to veil its broke-ness? Didn’t the US treasury print dollars to “boost” the US economy?

He said that state capitalism resists inovative changes that might disturb the status quo, whereas liberal capitalism allows malfunctioning companies or entities to fall apart and recombine in a more efficient way.

Didn’t the european government pump billions into Spain and Italy to “prop up its economy”? Didn’t the US government pump billions into many big companies who are facing bankruptcy BECAUSE they are inefficient?

tell me, is there a truly liberal capitalist economy left on Earth?

Posted by AliceCengal | Report as abusive

Why even write the article?

Only fools believe in state-led economies. They are a form of socialism. Socialism never works.

The only reason socialism is ever mentioned, is because societies have allowed masses of freeloaders to get government benefits. End the benefits to freeloaders and end the talk of socialism; this would get the world economy back on track.

The facts no one wants to read.

Posted by ALLSOLUTIONS | Report as abusive

As a layman, I know only a little bit of politics and economics. I therefore cannot discriminate state managed, state regulated, state manipulated economies, companies etc.

If the US government had to bail out General Motors, their banks etc and to do quantitative easing. Then why not control some big business directly like Brazil and China. It will be easier to creat jobs when needed.

I don’t think most people understand socialism, capitalism, totalitarian, liberty in depth. They just know what is a good living or bad.

Posted by Kailim | Report as abusive

As the author correctly points out, state capitalism (fascism) can be more efficient than democracy, but it also breeds corruption.

Despite widespread corruption, China has prospered, by manipulating its currency to gain an unfair advantage in world trade. This artificial prosperity has enabled the Chinese dictators to retain their grip on power. They are thus able to oppress the Chinese people, and strengthen the Chinese military to bully their neighbors.

Obama has not effectively resisted China’s currency manipulation, even though it has devastated the USA and EU economies.

In contrast, Romney has promised to get tough with China. Unfortunately, he is the candidate for rich people, and his policies will only increase income disparity, which will increase social problems and violence.

Hence, Americans need to persuade Obama to change his approach to China.

Reference from thefreedictionary dot com:

“A system of government marked by centralization of authority under a dictator, stringent socioeconomic controls, suppression of the opposition through terror and censorship, and typically a policy of belligerent nationalism and racism.”

Posted by DifferentOne | Report as abusive

Not surprisingly, the author is, whether he knows it or not, profoundly biased in favor of liberal, western-style capitalism. So am I.

However, when he speaks of how state-managed capitalism a la China “breeds corruption”, I have to laugh! As if the form of capitalism that has been practiced in the West over the past two decades doesn’t also do so on a grand scale???? It breeds destructive corruption and greed, throughout both the public and private sectors – what does the author think lies at the root of the private sector collapse of 2008 and the sovereign debt crisis of 2011?

Liberal capitalism has brought upon itself all these woes, and they are not merely temporary or ‘just part of the business cycle’. They signify the fundamental failure of the system.

Governments of the group called “the over-developed economies” are being forced to enact measures that corrode away the very liberties and freedoms the author seems to think are irrevocable. They most certainly are not! They are being forfeited, sacrificed upon the altar of social/civil order and security via government control. There is a very strong socialistic trend taking root in the West (witness the rise of socialistic leaders in Europe and the U.S.) as economic crises erode any temporary benefits that were brought on by liberal free market capitalism. Thus, the frightened and suffering electorate is participating with ever-more-totalitarian democratic governments in the forfeiture of traditional western freedoms and liberties. “Cover us and take care of us!” is the cry of the electorate to their governments.

Matters will worsen much more from here, and democratic governments throughout the West will become ever more totalitarian – simply to survive. Western Capitalism is in its self-inflicted death throes. What takes its place will, more than not, resemble the model China is using.

That doesn’t say China’s model is better. It simply says it works in a fashion, while the traditional Western model no longer does. If the West had time – maybe it could fix itself. But there isn’t sufficient time, for the electorate is restless, massively spoiled, and impatient. And democratic governments are frightened, deeply concerned for their national security, and incredibly tempted by the greed for what an increasing measure of totalitarianism can bring them.

Those who realize the truth of the above tend to flock to the conservative candidates as a “solution”, but conservative leaders have done just as much (if not more) to bring the West to the very precipice of a forfeiture of democracy as liberal leaders have. Disappointments in any/all leaders will only fuel the catastrophic crackup that is coming for the West.

Posted by NukerDoggie | Report as abusive

I didn’t vote for the federal government to bail out the Wall Street Casinos using my taxes. Did you?

Does the United States operate under free markets and capitalism or crony capitalism?

Why is most of the legalese in the bills enacted by Congress written by lobbyists? “Reform bills” quickly turn back into support and subsidies for the rich and super rich.

This article is the epitome of naïveté. The Tenth Percenters in their mandate to preserve their capital with guaranteed ten percent returns have been ruling the United States for decades.

Posted by ptiffany | Report as abusive

Hats off to NukerDoggie and ptiffany. They have it right.

Posted by aeci | Report as abusive

There is apparent need for some controls in US. But not the China model’s type or scope. For example a decline in export industries unless they balance imports at some time one get too much debt. Taxes on non-export investments should improve that, but we may have problems with some trading partners (the sources of excess imports) which we can drop.

Banks that operate by the profit motive have been the source of economic bubbles for 500 years. If they got paid for taking and processing loan application and approving of disapproving them according to current Fed rules and quotas but the Fed held the loans. They would have no interest in financing bubbles. Then the pro real estate bubble politicians would have to be watched. Obviously it does not serve the economy well to have residential real estate priced higher than need to get adequate housing. There are other investment needs in economy besides housing. Giving fixed loans to people with unstable low income does help them. As does losing up people with real estate they do not have the income skill keep up.

Posted by SamuelReich | Report as abusive

it was rather feeble to yoke totalitarian communist china with the concept of “state capitalism”

ass and ox stuff

communist china is myanmar on the grand scale

Posted by scythe | Report as abusive

Go Bo!

Posted by WeWereWallSt | Report as abusive

All Governments have humans ergo all governments have corruption. All governments exist on Earth ergo all governments are victim to chance and circumstance. The only major difference to the individual is choice. I’ll take a disability check in the American ghetto over rice & beans and 10 hr days anytime. The average American poor has a living space 3-4 times the size of a European or Asian “middle class”…and a cell phone, tv, auto, and a good chance at A/C and cable… Sell crazy somewhere else.

Posted by Farkel44 | Report as abusive

I’ve lived and worked in several “planned economies”. “…appears to be producing impressive results”, for whom? “…state capitalism’s appeal…” for whom? “…state managed capitalism appears to be triumphant.” for whom? “State capitalism’s greatest weakness lies in its intolerance of “creative destruction,””…yes, but it goes beyond that. The greatest weakness of a large, powerful central authority is that eventually the fountain of individual human expression, creativity, progress, and achievement is dried up. France is a good, close-to-home example.

Posted by sarkozyrocks | Report as abusive

‘History shows that over time state officials never value assets and allocate resources as efficiently as market forces can.’

So state officials aren’t as effective as market forces.

May I humbly add the UK Government and the Bank of England to the list too. Both Govt and Bank appear to believe that they know best.

Posted by DR9WX | Report as abusive

Yes, let’s continue the pretense the US is not involved, that’s the ticket.

Posted by amibovvered | Report as abusive