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.