Tuesday 27 March 2012

State Capitalism: A Viable Alternative?

Seems We Should Have Stuck With The NEP*: The judicious mixture of state guidance and market dynamism has produced a prodigious measure of economic success in the Peoples Republic of China - providing an alternative model to the hitherto unchallengeable prescriptions of neoliberalism.

A COUPLE OF MONTHS AGO, The Economist magazine invited two men, Aldo Musacchio, an economist; and Ian Bremmer, an international investment banker; to debate the motion: “This House believes that state capitalism is a viable alternative to liberal capitalism.” Not surprisingly, given The Economist’s readership, the motion was lost.  What was surprising about the exchange, however, is that it happened at all.

Since the collapse of the Soviet Union in 1991, it has been the unwavering position of the Right that there are no viable alternatives to liberal capitalism. Indeed, in 1992, one American writer, Francis Fukuyama, went so far as to declare “The End of History”. According to Mr Fukuyama, liberal capitalism and democracy had won the great contest of ideas. From here on out, this is as good as it gets.

Silly man. History was not to be sent from the field quite so easily. Osama Bin Laden, two major wars in the Middle East, and the most serious financial crisis since the Wall Street Crash of 1929, will likely keep the historians busy for a few years yet.

The Economist’s “State Capitalism” is a good example of History’s ability to keep on surprising. The disciples of neoliberal economic theory may have celebrated the demise of the state-controlled economies of Eastern Europe and Russia, but their hopes of cheering-on a similar capitalist triumph in the People’s Republic of China were altogether misplaced.

The Communist Party of China may have conceded a large amount of economic space to the free market, and welcomed the dynamism and innovation unleashed by the capitalist mode of economic organisation, but that welcome went only so far. The Chinese state still dominated the Chinese economy. Capitalism had space – but it was limited. Chinese politics still dominated Chinese economics.

Even more important, the Chinese government’s central economic planning, its ability to “pick winners”, and its hands-on political management of economic affairs proved to be a highly successful formula for achieving unprecedented levels of economic growth. In short, Chinese State Capitalism worked.

It wasn’t very long before other countries started to take notice. The Chinese model made a deep impression on the rulers of those countries that had been caught up in the Asian Economic Crisis of 1998. Russia’s Vladimir Putin, tidying-up after the wild-west capitalism of his predecessor’s unregulated kleptocracy, was similarly impressed. The Brazilians, too, found much to admire in the “guided capitalism” of the Chinese. Petrobras, the big oil exploration company currently licenced to search for hydrocarbons off New Zealand’s north-east coast, is owned by the Brazilian state.

It is even possible that the success of the state capitalist model in the fastest growing regions of the world has made some impression on the National Government of New Zealand. Twenty years ago a National-led government would have scorned the very notion of “partially” privatising state assets. Given the opportunity, it would have sold-off the lot. Mr Key’s government, however, clearly sees merit in retaining a majority shareholding in these public enterprises. Let private shareholders inject them with the market’s dynamism, innovation and  discipline, but then make sure the state appropriates at least half of the rising profits.

And, looking back ten years or so, didn’t the New Zealand state play mid-wife to this country’s biggest money-earner? Yes, on paper Fonterra is an independent, producer-owned co-operative, but in reality it’s a massive economic entity that operates under the legal and political protection of the New Zealand government: a Petrobras of milk. And what are we to make of Stephen Joyce’s new “super-ministry” of Business Innovation & Employment? Doesn’t it suggest a much more “state-guided” approach to capitalism? Isn’t Mr Joyce beginning to grasp what so many of the politicians who came before him were forced to acknowledge: that New Zealand’s market is too small to ever be entirely “free”?

The private investment model has been tested to destruction in New Zealand – mostly with the life-savings of “Mum and Dad” investors. The bail-out of South Canterbury Finance, allowing for New Zealand’s size, was bigger than the US Government’s rescue of Fannies Mae and Mac.

Financial analyst, Brian Gaynor, speaking recently to Werewolf editor, Gordon Campbell, confirmed that “the government is the only significant domestic source of risk capital” and that any escape from New Zealand’s current situation “will have to be state-led”.  But, there’s a catch. Says Mr Gaynor: “there would be huge opposition to it.”

And therein lies the problem. Like the readers of The Economist, New Zealand businessmen and politicians simply will not abandon their faith in the Liberal Capitalist ideal. It says a great deal about how fundamentally the New Zealand character’s been changed by its 1980s conversion to neoliberalism. That State Capitalism: the pragmatic capitalism which built New Zealand; the capitalism that works; remains beyond the purview of its politics.

* NEP. After the extremes of "War Communism" (1918-21) had brought the Russian economy to near collapse, the Bolshevik Government was forced to allow the reintroduction of a limited number of market mechanisms. This "New Economic Policy" (1921-28) or NEP proved remarkably successful; economic growth resumed and living standards, especially among the hard-pressed peasantry, rose dramatically.

This essay was originally published in The Press of Tuesday, 27 March 2012.


Mark Wilson said...

I am sorry but if you believe that Chinese state capitalism "works" then you haven't spoken to the Chinese. There is no one of wealth in China (and thats about 300 million people) who is not looking for ways to export capital bfore China blows. And with 1 billion have nots that will be sooner rather than later.

And state capitalism works in the same way communism works - massive repression and corruption.

No way will it work.

Brendan McNeill said...


Based upon this article, you would be a fan of Robert Muldoon's "Think Big" state capitalist projects.

I wonder if you were so enthusiastic about them at the time?

To be fair, our ideas evolve as we get older and hopefully wiser.

That said, if we are reliant upon our Politicians and Bureaucrats to 'pick winners' in the commercial sector, and then to invest tax payer money in them in the hope of a commercial return, then all hope is lost.

China has a seeming unending source of cheap labour and a ready market for their manufactured goods in the west. What their communist leaders have allowed to take place by way of free enterprise is simply market based common sense.

However, they face some demographic and inequality challenges ahead that make ours look like a utopian dream. How this will play out for them is far from certain.

Let's not pretend that Governments can make wiser commercial choices than those who live or die by their personal investments and commercial decisions.

Under our State capitalism experiment, I can remember wage and price freezes, 20% plus interest rates on our house mortgage, and an exchange rate that was unsustainable.

We have very short memories indeed, if we want to go back down that path.

Anonymous said...

This is more like it.

Good work, Chris.

Chris Trotter said...

To: Mark Wilson & Brendan

Once again, gentlemen, your lack of knowledge forces you back on to your ideological reflexes.

State-guided capitalism has been the prime driver of economic development in states as varied as Bismarckian Germany, Lincoln's USA and Pitt's Great Britain. As well, of course, as the economic default setting for Britain's colonies in New Zealand, Australia and Canada.

And, dear me, Mark. If you really believe that roughly 1 in 3 Chinese fall into the "wealthy" category, then you are more than usually deluded.

Both of you need to learn the difference between the variety of state capitalism the "Economist" was debating and the authoritarian political regimes with which it is often - but not always - associated.

And, yes, Brendan. Since Rob's "Think Big" projects borrowed shamelessly from the ideas of Bill Sutch, I was very much in favour of them.

Anon. Y. Mouse said...

Exactly Chris.

I well remember the 'Think Big' projects and given the opportunity they would have paid off. The ideas was to make NZ self-sufficient.

Again there is the mistake that China and even Russia et al were "Communist" They were not, they were and China still is, Fascist.
People need to know and understand the difference.

SA said...

Tony Cliff will be rolling in his grave.

Chris Trotter said...

No, Anon-Y-Mouse, the People's Republic under Mao Zedong was a radical socialist totalitarian regime.

There are many excellent books about Fascism, try reading a few of them. Oh, and if you were wondering, Jonah Goldburg's isn't one of them.

Anonymous said...

Hey Chris THERE is no WELFARE in China - how would you lefties live - you may have work for a living for once. Imagine what the Govt could do with the 20 billion it spends on it!

Chris Trotter said...

There he goes again ... do a bit of research, Anonymous@9:03am.

Under Mao Zedong the "Iron Rice Bowl" welfare system, based almost entirely in the workplace (welfare-to-work anyone?) provided cradle-to-grave support for workers and their families.

Since 2004, the Chinese Government has substituted an insurance-based welfare system more recognisable to Westerners, including: unemployment insurance, medical insurance, workplace insurance (ACC-type arrangements) maternity benefits and old-age pensions.

You knee-jerk righties have got to stop believing your own propaganda - it just makes you look stupid.

Olwyn said...

If I put together the substance of your previous post, about Labour Parties losing their mojo, and the claim from Gaynor you use to support this argument, that "the government is the only significant domestic source of risk capital,” what is puzzling is the seeming lack of control over capitalists that governments now have. If Gaynor is right, then they ought to have a lot of control, but they do not act as if they do.

Despite the fact that a number of right wing apologists have been paid by the public purse for their whole working lives, and that many of our so-called capitalists are in fact the highly paid managers of SOEs or similar, they tend to act as if they can pull the plug on the lot of us if they don't get their own way. And governments act as if they believe them. I could throw in there as well those independent capitalists for whom the government provides their most reliable and lucrative contracts.

The hard bit of installing the kind of economy you are suggesting would be getting these state-fattened Atlases to see themselves in perspective.

Anonymous said...

"That said, if we are reliant upon our Politicians and Bureaucrats to 'pick winners' in the commercial sector, and then to invest tax payer money in them in the hope of a commercial return, then all hope is lost."

Rubbish! The south Koreans did this and went from a third world country ravaged by war to a high tech economy in about 30 years.

What the right are asking is for the rest of us to put up with inefficiency and graft just so that a small section of the population can be rich. We desperately need a proper government: one that has a plan for the New Zealand economy and which can support both state owned and private industry to the benefit of the majority.

They could start by amalgamating the power companies and putting an end to lack of investment and price hikes.

Jeremy Bowen said...

I love all this narrowness of mind. It's typically human. There is another alternative and that is to convince through the ballot box and direct action a driver of growth within our own society which is politically harmful to stop, which does no one any real harm, which earns the country both kudos and foreign funds and which the whole population will slowly grasp as their birthright. I call this action 'From Plunder To Wonder In 100 Years'. A long term goal to gradually peel back the destruction of our land incrementally over 100 years using protective fencing and pest control, piece by piece, bit by bit, with no Corporate buy-in, no rich lister buy-in, just a huge record of contributors published 100 years hence. For our childeren's childeren we act, to them we leave our estate, leaving only the essential service of our needs untouched by the nature's hand. The oxen and the cross-cut did so much in 100 years. What can be done by modern people. This sounds far fetched but you have to admit the imagination of the world would sooner or later be grasped by such a bold decision. No one will be actually harmed by this, as the evolution of business and the ways and means of life have the whole century and that is a long time in economic terms my friends. So let's forget about the negativism and theoretics of the flim-flam world of this or that political system, take the one we have now and crib their decision making by insisting on the Plunder To Wonder doctrine. What say you all?

Anonymous said...

Welfare housing system, parallel dynamics, and allegations of corruption

As of 2010, China has officially ordered an end to its welfare housing system; however, according to China Youth Daily, a parallel housing market continues to exist. Government agencies continue to pay less than 20% of market value for real estate, and many officials purportedly misappropriate renovation and housing reform funds for personal gain.

Ask anyone from Tibet if they get chinese welfare - yeah right delivered at the end of a AK 47.

one all.

Anon. Y. Mouse said...

You are right Chris. And I stand corrected.

My apologies for the faux pais.

Victor said...

State capitalism requires an intelligent state.

Do we have one? If not, how do we acquire one?

Victor said...

A further thought.....

It is frequently said that State Capitalism leads to Crony Capitalism.

But all the signs are that cronyism is alive and thriving in neo-liberal New Zealand.

So what do we have to lose?

Libertyscott said...

Chris, what about the fact that recent stats indicate the Chinese economy has a state sector of around 36% of GDP, which is relatively small compared to most European economies. If this is true (and bearing in mind stats from China can be opaque), then Chinese state capitalism is in fact smaller than the "liberal mixed capitalism" of much of the OECD.

Of course the real issue about state vs private capitalism is around incentives and the quality of decisionmaking.

In China, the goal of economic growth at all costs meant adopting policies that privatised much of the economy en masse, with the inevitable short term pain of closures of poor quality state factories and the like able to be swallowed under a regime of strict media censorship, authoritarian restrictions on dissent and the like.

In liberal democracies, long term decision making is tempered by rent seeking of all the various interests that gain from the state's reallocation of resources through tax, subsidy and regulation. When rents are withdrawn (e.g. end of agricultural subsidies) those who benefited jump up and down far more than the many forced to pay for the benefit of those few.

The price of liberal democracies is slowness of progress to make what are short term painful decisions for long term gain - which is why democracy got circumscribed in the event of total war in the past - and why it is damned hard for them to maintain wars on the scale necessarily to win them now.

China's "model" is accidental, and carries massive inefficiencies and costs coming from endemic corruption, ignorance of property rights, pollution and repression, and debt bubbles particularly in property (and a banking system unable to send the right signals about poor investments - not that it had a monopoly on that). It appears to work because the gains from unleashing the potential of so many people are so great, the losses are diluted and overshadowed by it.

Japan did serious state capitalism, and today is looking lost. There are countless examples of shockingly poor state capitalist investments in the Western world (which continue today) because it is as much about image and quick wins, and it is easy to be generous with other people's money.

Frank said...

"Twenty years ago a National-led government would have scorned the very notion of “partially” privatising state assets. Given the opportunity, it would have sold-off the lot. Mr Key’s government, however, clearly sees merit in retaining a majority shareholding in these public enterprises."

Hmmm, I'm not sure about that, Chris.

I have this nagging suspecion that Key & his mob are offering only 49% of various SOEs for sale because that's all they can get away with.

If they'd gone to the polls stating 100% of Meridian, Genesis, Solid Energy, Air NZ, and Mighty River would be flogging off - they would've been thrashed.

I think their own polling told them that 49% was all that the public would swallow - if that. I doubt that Key's guvmint "sees merit in retaining a majority shareholding in these public enterprises". This is National you're talking about. The only merit they see is how much of their free market dogma they can implement without "spooking the horses"...

Interesting aspect about state capitalism, though. The system has merit, and done well can be incredibly rewarding for a society...

Victor said...


Your argument about 'rents' is not wholly without merit.

However, we currently pay a much larger and more obvious rent in the form of outflows to overseas capital owners.

It is a form of rent remuneration that might yet bankrupt us.

In the meantime, the absence of an effective national investment strategy (aka State Capitalism) prevents us from reducing our dependency on toxic loans from overseas and from future-proofing our economy.

Coquecigrue said...

The point here is not to discuss the quality of the chinese state capitalism, but to try to understand if state capitalism is back as an option. Considering the last two years evolutions, the deployment of protectionist politics and the growing idea of the necessity of a certain amount of planification (ain't the South Korean a perfect example of it ?), it seems Chris is right in his analysis.
And state capitalism, and planification, have NOT been a lefty obsession. May I remind you, talking as usual about what I know best, that France has reached it's economical independence, thanks to the planification of huge technological projects like TGV or *sigh* nuclear power, that went back to the 50's under… Charles de Gaulle. King of lefties ? Ahem.
Without those, we might as well be closest to the Greek or the Spannish situation.
Oh. Wait.
Liberal economists predict that we might as well finish about the same. We haven't had planification politics since 1984 ? (socialists and communists in power. Yes. Gods, I love my country. And, yes, it's irony.)