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In January 2012, the Economist published a provocative special report on State capitalism, which, according to the magazine, is a model that “tries to meld the powers of the State with the powers of capitalism.” Since then, the issue has gained attention around the world and has contributed to the debate on the recent economic crisis and the models of economic development.
The growing clout of the emerging economies on the world stage and their resilience to the financial crisis are, however, the drivers of the buzz that has been generated around ‘state capitalism’.Contrary to ‘state intervention’ often seen in several developing countries, ‘state capitalism’, according to the magazine, makes use of market instruments and methods to reach its goals. The report justifies its focus on the recent experiences in emerging countries, especially that in China, because “it reflects the future rather than the past”.
State capitalism manifests in several ways and it can be complex as well as sophisticated, such as the public policies aimed at supporting the private South-Korean conglomerates, or the setting up of sovereign wealth funds from Asia and Gulf States with growing influence on capital markets and investments.
There can however be no overlooking the fact that ‘State capitalism’ in emerging countries is mirrored by equally aggressive ‘State intervention’ in the economy in developed countries. The Norwegian State-owned oil company, Statoil, and American and European policies for subsidies in the agricultural sector are familiar examples.
The very large-scale, unprecedented government interventions in the economies of countries at the epicentre of the financial crisis via quantitative easing, bailouts, and other measures have brought about massive repercussions in the allocation of resources and the formation of prices not only on a domestic level, but also internationally. Several other interventionist policies were put in place more recently, such as the reinstatement of the ‘Buy American’ Act by President Obama, the very aggressive Swiss intervention in the exchange rate, and the recently introduced new Japanese economic policy, the “Abenomics”, in reference to prime minister Shinzo Abe, which seeks to undervalue the yen to boost exports.Such interventions in the developed economies, many of which are opportunistic, are especially intrusive due to the size of these economies and the fact that their currencies are an international store of value, creating and worsening international macroeconomic imbalances, besides affecting the already highly asymmetric conditions of competition.
Indeed, these policies have been impacting the production mix and the external accounts of several developing and emerging countries. In Brazil, for example, the exchange rate appreciated extensively and the import penetration increased rapidly, thus driving the government to raise the IOF, a tax levied on financial foreign operations aiming at reducing the level of speculative inflow of foreign currency into the country.
Experiences with different hues of ‘State capitalism’ suggest there is a common tension, of varying levels, between pragmatism and ideology.
Using ‘State capitalism’ policies seems to be becoming popular around the world as the economic crisis and uncertainties grow. The failure of the ultra-liberal economic policies, such as some employed by the United States prior to the crisis, and China’s State capitalism, help us understand why one of the likely legacies of the financial crisis for politicians is the lesson that governments should not limit their role in the economy.
While the attractiveness of State capitalism is understandable within the context of economic crisis, its multiplication on a global scale has harmful implications. In fact, it seems to be highly unlikely that many countries will, simultaneously, benefit from State capitalism owing not only to the fallacy of composition, but also to the negative externalities brought on by them, which tend to upset the economic system, encourage trade and currency wars and raise political tensions between countries.For these reasons, making these policies popular will likely hinder the recovery of the world economy. It also raises questions on making the choice between national interests and international commitments, such as those made by the G20, with implications for the credibility of the multilateral system. If, in the short term, State capitalism policies are attractive as a policy tool, in the medium and long term everybody is likely to be worse off, especially developing countries and those that embrace and follow more open policies.
To mitigate the proliferation of State capitalism and its potential risks to the world economy, and to trade in particular, renewed support to the multilateral trade and more transparent rules on currency manipulation will be critical.
The recent election of Mr Roberto Azevedo to the World Trade Organisation reignited the hopes that the Doha Round can still provide the world with a reasonable and fair trade agreement. But that won’t be easy, especially under the current uncertainties of the global economy and the prolonged crisis in the Eurozone.
Large economies, especially the United States, the European Union, China, and Japan, will also have to acknowledge the interdependence of national micro and macroeconomic policies and their impacts on other economies, especially the developing nations. It will also be necessary to double the efforts in coordinating policies and managing conflicting interests.