Is There Any Hope For Capitalism?

Eurasia Group’s Ian Bremmer sounds optimistic in his recent interview with Institutional Investor.

Suning To Boost China Stores 34%

Customers shop for electric heaters at a Suning Appliance Co. store in Beijing, China, on Wednesday, Jan. 6, 2010. Suning, China’s biggest electronics retailer by market value, plans to increase stores by about 34 percent this year because it expects consumer spending to surge in the world’s fastest-growing major economy. Photographer: Nelson Ching/Bloomberg

Nelson Ching/Bloomberg

As president of Eurasia Group, a global risk-consulting firm that he founded in 1998, Ian Bremmer has to keep alert for developments that could shake the markets, like the upcoming Brazilian elections or the rising influence of Al Qaeda in Yemen. But the biggest risk of all is probably the one he writes about in a new book — the risk that China will eclipse U.S.-style capitalism for years to come.

If you just read his book The End of the Free Market: Who Wins the War between States and Corporations?, published this spring and hovering at a quite respectable “best seller” ranking of 15,000 on in late August, you might want to put all your money into Chinese, Russian, Mexican and Brazilian state-run companies (especially in the natural resources sector).

Luckily, Bremmer was a bit more optimistic in a recent interview with Institutional Investor. The successful state-capitalist regimes like China “have all taken advantage of accidents of geography,” he explains. “They have cheap stuff under or on their territory that they can squeeze with inefficient state systems, [such as oil or low-cost labor]. None of those things are forever.”

By contrast, Bremmer continues, a well-regulated free market system has advantages in areas “that require entrepreneurship and a lot of cross-sectoral and interdisciplinary collaboration,” including genomics, biogenetics, and chip-making. “If you don’t have intellectual property protection, who’s going to want to develop [these industries] in your country?” he asks rhetorically.

Ah, but there’s the catch: a well-regulated free market system. Listen up, Glenn Beck: Bremmer — who makes his living via Wall Street and capitalism, after all — says that the new U.S. financial regulatory reform is just “a couple of baby steps” that have “not gone near far enough.” Without strong government regulation and transparency, “risk-taking behavior will lead to much bigger bubbles and blow-ups.”

Not only that, but Bremmer would like to see Washington invest more in infrastructure, education and technology and “steer effective coordination of companies that need it.” Would that be — gulp — industrial policy? Yup. However, “there’s a difference between industrial policy and effective regulation, and the state actually owning companies,” as China, Russia, Mexico, and other state-capitalist nations do, he points out.

Even if the West does all of this right — better regulation, investment, industrial policy — Bremmer warns, Chinese-style state capitalism will continue to be on the rise for “10 years minimum, and probably longer.” In part, that’s because “coming out of the global crisis, these countries are doing better.”

Unfortunately, too few of Eurasia Group’s 300-plus clients, including big banks, hedge funds, other institutional investors, multinational corporations and Western governments, are listening. “These are long-term trends,” Bremmer says resignedly. “If you only care about the next quarter, then shipping all your technology to China might look like a good bet.”

Fran Hawthorne is the author of the award-winning “Pension Dumping: The Reasons, the Wreckage, the Stakes for Wall Street” (Bloomberg Press) and “Inside the FDA: The Business and Politics behind the Drugs We Take and the Food We Eat” (John Wiley & Sons). She writes regularly about finance, health care and business ethics.