Ian Bremmer

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.

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.