This content is from: Portfolio
The End of the Free Market
Ian Bremmer explains why free markets are necessary for global economic recovery.
Excerpted from The End of the Free Market: Who Wins the War Between States and Corporations?
The fall of communism did not mark the triumph of free-market capitalism because it did not put an end to authoritarian government. In fact, in the first decade of the 21st century, public wealth, public investment, and public ownership have made a stunning comeback. The Chinese and Russian governments in particular have learned to compete internationally by embracing market-driven capitalism. But they know that if they leave it entirely to market forces to decide winners and losers from economic growth, they risk enabling those who might use that wealth to challenge their political power. Certain that command economies are doomed to fail but fearful that truly free markets will spin beyond their control, these and other authoritarian governments have invented something new: state capitalism.
Using this system, governments dominate key domestic economic sectors. They use state-owned and politically loyal privately owned companies to intervene in global markets for energy, aviation, shipping, power generation, arms production, telecommunications, metals, minerals, petrochemicals, and other industries. The oil companies they own now control more than three quarters of the worlds crude-oil reserves. These governments also control enormous investment vehicles known as sovereign wealth funds that have become vitally important sources of capital. In each case, the state is using markets to create wealth that can be directed as political officials see fit. And in each case, the ultimate motive is not economic (maximizing growth) but political (maximizing the states power and the leaderships chances of survival).
The main characters in this story are the men who rule China, Russia, and the Arab monarchies of the Persian Gulf, but the apparent success of this new model has attracted imitators throughout much of the developing world.
State-capitalist governments are much more susceptible than free-market democracies to the use of various forms of protectionism, for several reasons. First, the elected leaders of free-market countries know that private-sector firms depend on international trade relationships and have the political influence and financial clout to defend their interests. Companies that have benefited most from globalization, especially those that import large quantities of production material and equipment or have supply chains that extend across multiple countries, tend to lobby against protectionism.
In state-capitalist countries, private firms often find themselves squeezed between a government that dominates key economic sectors and the relatively stronger and better connected state-owned companies and privately owned national champions that have a clear interest in protecting the status quo. In addition, the supply chains of state-owned and state-favored companies tend to cross fewer international borders, in part because their governments use them to create work for domestic suppliers. Theyre more likely to seek the protectionist advantages their government can provide because theyre competing with established multinational companies with access to more sophisticated technologies, more and better management experience, established client contacts, and much greater experience in developing, branding, and marketing their products.
Third, state-capitalist governments can afford to be more secretive than free-market democracies and are better able to disguise subtle forms of protectionism. In Washington, the debate over the Buy American provision in the stimulus package played out under klieg lights in congressional hearing rooms. Lobbyists debated the plans merits on cable television, and anyone with an Internet connection could read the text of the various versions of the provision under discussion. A company seeking legal remedy against this or that aspect of the legislation could count on a fair hearing in court. Authoritarian state-capitalist governments exercise enormous influence over how their plans are implemented, how they are legally interpreted, and how theyre portrayed by domestic media. Their citizens have much less access to information about what government is up to. In effect, the state referees the game, controls many of the biggest players, pressures the others, and directs the TV coverage to ensure that fans at home feel a surge of national pride from the winning teams accomplishments.
Many protectionist weapons are familiar. To shelter domestic producers from foreign competition, governments can impose import quotas and tariffs. They can provide local exporters with subsidies or loan guarantees. But there are more subtle ways of tilting the playing field. The state can require licenses that apply mainly to imported goods, limit imports to a small number of ports of entry, impose impossible-to-meet health or safety standards on particular imports, or block them on environmental grounds. It can direct local banks to favor domestic over foreign borrowers. It can move money through state-owned banks to hide subsidies for exporters. Or a government can simply refuse to enforce existing laws and regulations. For those who believe that trade and investment spur competition and innovation, generating new wealth that cant be created in any other way, protectionism undermines the ability of free markets to produce a general prosperity.
In addition, multinational companies find themselves competing throughout the developing world with state-owned companies and national champions armed with substantial financial and political support from their government.
To survive and thrive in the new order, they must adapt to compete. Though state players backed by generous government subsidies and their governments political clout own more than 75 percent of the worlds crude oil reserves, multinationals continue to invest heavily in areas where they still have a competitive edge. In many ways, ExxonMobil has gradually become a technology and services firm as well as an oil company. The company has the experience and talent to manage complex projects more efficiently and at lower cost than its state-owned rivals. This allows it to remain indispensable to many energy development projects and to partner with some of their state-run rivals.
The principle is the same outside the energy sector. Privately owned firms are more likely than their state-owned competitors to successfully adapt their business models as market circumstances change, and theyre better at finding creative new ways to market their products. They tend to outperform in sectors that depend on personal relationships, advertising, marketing, and consulting. In short, private companies can extend their comparative advantages in every area in which entrepreneurs outperform political bureaucrats.
The governments of free market democracies can use this same principle to meet the state capitalist challenge. U.S. companies will continue to need long-term access to labor, capital, and consumer markets within state-capitalist countries. To secure as much of that access as possible, they need state-capitalist governments to depend on U.S. trade and investment. This is why U.S. policymakers should move to restore trade promotion, particularly with state-capitalist governments, as a core foreign-policy principle. Like trade, foreign investment has played a crucial role in the expansion of the global economy of the past several years. Just as U.S. lawmakers can resist the populist temptations of trade protectionism, they can refuse to allow popular paranoia to block valuable foreign investment in U.S. assets.
In addition, globalization draws its power to create wealth from the cross-border flow not only of goods and services but of people. Immigration has always been a hot topic in the United States for reasons political, cultural, and ideological, but wave after wave of migrants over more than two centuries have helped power American prosperity. America should continue to welcome immigrants willing to earn citizenship and eager to work for a better life--those trying to escape poverty, but also skilled workers, entrepreneurs, inventors, scientists, and engineers who come from every region of the world in search of opportunity.
In addition, just as ExxonMobil survives in a world increasingly dominated by state-owned energy giants by cultivating its comparative technological advantages, the U.S. government can extend its singular international influence for decades by working to preserve the countrys military power. Polling suggests that the election of Barack Obama has generated more positive attitudes toward America and American culture in dozens of countries. But over the next several years, it is hard power that will ensure that the United States remains an essential component of the worlds political and economic stability, whatever the power of state capitalism to undermine American influence in other areas.
In short, the strength and durability of economic recovery will depend on the willingness of those who believe in free markets to learn from the failures that triggered a crisis, to practice the kind of capitalism they preach, and to renew their commitment to the principles that have helped them prosper.
Excerpted from The End of the Free Market: Who Wins the War Between States and Corporations? By Ian Bremmer by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Ian Bremmer, 2010.