Nationalizing YPF in Argentina

Aljazeera English's Counting the Cost just over a year ago did a program whose first part is devoted to the nationalization of Argentine oil company YPF, Argentina's president vs capitalism 04/21/2012, which takes a skeptical view of the action:

They have an accompanying article, Argentina's president vs capitalism 04/27/2013. Nationalizing YPF certainly meant the state taking more control and responsibility and prioritizing Argentina's interest in developing their oil and natural gas reserves over the profit maximization of that single company, which had previously been the subsidiary of a Spanish firm, Repsol. As the article reports:

Argentina accuses Repsol of driving down production at YPF and taking 90 per cent of the company's profits.

But could this drama have a lot more to do with Fernandez falling out with Argentina's billionaire Eskenazi family? Through the family's Peterson Group it owns 25 per cent of YPF.

Nestor Kirchner, Fernandez's late husband, helped the Eskenazis buy the stake - although it was Repsol that loaned the money.

YPF is now state-owned but is not run as though it were a government agency. It remains a separate business that will need to generate a profit. Calling it "state capitalism" would be more meaningful that saying it was "vs. capitalism." State ownership of the leading oil firms of major oil-producing countries is common among a variety of governments, including China, Mexico, Norway, Russia, Saudi Arabia and Venezuela. I wrote a series of posts last year about a series of articles in The Economist on state capitalism, including one on state-owned oil companies.

Tags: argentina, state capitalism, ypf

State capitalism (8 of 8): a shaky ideological approach

"[S]tate capitalism is the most formidable foe that liberal capitalism has faced so far." - from The visible hand, the introductory article to The Economist's series of special report articles on what they call "state capitalism" in their 01/21/2012 edition.

A further article in the same issue but not included in the "special report" series, is also adorned with the same image of Lenin that appears on the cover, Emerging-market multinationals: The rise of state capitalism.

Does The Economist think that Lenin promoted "state capitalism"? Or only Lenin with a cigar wrapped with a dollar sign?

This series has quite a bit of interesting business reporting about state owned firms that are playing a large role in the world economy today. Unfortunately, that reporting is packaged with a clumsy ideological construct about "state capitalism", complete with one of the dumbest propaganda phrases I've encountered lately: the Axis of State Capitalism. You have to work to come up with a groaner like that. One that is so bad that it's not even in competition for a so-bad-it's-good status.

The Economist suggests that shock-therapy privatization of state-owned enterprises in Russia in the 1990s may have had some of those unanticiated consequences conservatives are always warning about when it comes to any public program that might benefit ordinary people:

State capitalism’s supporters argue that it can provide stability as well as growth. Russia's wild privatisation under Boris Yeltsin in the 1990s alarmed many emerging countries and encouraged the view that governments can mitigate the strains that capitalism and globalisation cause by providing not just the hard infrastructure of roads and bridges but also the soft infrastructure of flagship corporations.

As I noted in the first post in this series, The Economist's definition of "state capitalism" is vague, and basically seems to refer to any company substantially backed by its home government in ways that are not typical in the US or Britain.

Here the editors state their ideological preference clearly:

Both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private investors.

The idea of a state-owned company or public organization of any kind producing more optimal results than a private corporation just doesn't fit into the model of neoliberalism. And if it is working better, there must be something wrong, even if it's only opportunity costs:

Yet a close look at the model shows its weaknesses. When the government favours one lot of companies, the others suffer. In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billion — more than China's 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better by private companies. Studies show that state companies use capital less efficiently than private ones, and grow more slowly. In many countries the coddled state giants are pouring money into fancy towers at a time when entrepreneurs are struggling to raise capital. [my emphasis]

Gosh,a giant oil company makes huge profits. That could never happen in the Free Market!

Now, China Mobile might be the least efficient organization on the whole planet for all I know. But the fact that it in 2009 it made "more than China's 500 most profitable private companies combined" in itself doesn't really tell us anything about how efficient or effective it is, or what kind of overall results the arrangement favors. In fact, this article notes that "the world's ten biggest oil-and-gas firms, measured by reserves, are all state-owned." And "fancy towers" have also been known to spring up, along with with huge numbers of apartment and condo developments, in real estate booms in good old Free Market countries like the US and Britain.

Also, the way they make the argument there, the supposed costs to those struggling entrepreneurs are speculative opportunity costs. Only a real comparison to a similar economy with different ownership patters of large companies could provide some reasonable measure of what those are.

This summary article doesn't offer much beyond dogmatic statements of neoliberal truisms:

Rising powers have always used the state to kick-start growth: think of Japan and South Korea in the 1950s or Germany in the 1870s or even the United States after the war of independence. But these countries have, over time, invariably found that the system has limits. The Chinese of all people should understand that the best way to learn from history is to look at its long sweep.

If you scratch even a little bit underneath the Grand History declaration there, you're likely to find yourself asking, "what the ...?" Gosh, I never realized that the United States in the 1780s and 1790s was setting up state-owned enterprises all over the place. Does this mean that our sacred Founding Fathers were, (gulp!) socialists?!? Don't tell Newt Gingrich or Papa Doc Paul. It's likely to cause aneurisms or something.

But then if Communist China is state capitalist because they have state owned enterprise, then what's a socialist? Neoliberalism can be quite a head trip.

Tags: state capitalism

"State capitalism" (7 of 8): In which we learn of the inevitable defeat of the Axis of State Capitalism

The war between the United Nations of Neoliberalism and the Axis of State Capitalism wouldn't be the replay of the Cold War melodrama that the authors of The Economist's series of articles on state capitalism want it to be if we weren't promised the inevitable victory of Our Side. After a long, difficult struggle, of course.

I have to say that "Axis of State Capitalism" strikes me as one of the dumbest slogans I've ever seen. But I suppose dumber ones have caught on. Like "death tax".

And that's what we get in The long view: And the winner is...

Of course, the labor movement is on the side of the New Axis. Along with the occasional Silicon Valley hippie:

Is state capitalism the wave of the future, or is it simply one in a long line of state-sponsored failures? Some commentators have seized on the riots in Russia in December as evidence that it is already on its way out. Others point to the continuing problems with global capitalism, arguing that the state variety is winning the war of ideas. Andy Stern, a former boss [sic] of the powerful Service Employees International Union, argues that China's economic model is superior to America's and quotes Andy Grove, the founder of Intel: "Our fundamental economic belief is that the free market is the best of all economic systems - the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modi fication that is even better."

And we have a Defining Battle of the Century! (I think these writers must be watching too many sword-and-sorcerer movies or something.)

The defi ning battle of the 21st century will be not between capitalism and socialism but between diff erent versions of capitalism. And since state capitalism is likely to be around for some time yet, Western investors, managers and policymakers need to start thinking more seriously about how to deal with it.

Yes, supposedly serious business magazines spend time concocted third-rate historical melodramas like this. Of course, in Cold War 2.0 there are potential Fifth Columnists, too. Like - try to guess - the French!

Western policymakers face even more diffi cult decisions than businesspeople. They will fi nd their voices diluted as China and other state-capitalist countries play a more active role in multilateral institutions. And the rise of state capitalism in the East may encourage imitation in the West. The European Commission's directorate for enterprise and industry has mused on the need to create European champions to fight "unfair competition" from overseas. Nicolas Sarkozy, the French president, has created a French sovereign-wealth fund. Alexandre de Juniac, as chief of state to Christine Lagarde, then France’s finance minister, ascribed his country’s renewed enthusiasm for dirigisme to China's infl uence. Japan’s Ministry of Economy, Trade and Industry in 2010 named the rise of state capitalism as one of the drivers of a newly interventionist industrial strategy. Worse, the rise of state capitalism in the East may encourage a trade war as liberal countries attack subsidies and state-capitalist countries retaliate.

Yes, those pinko Europeans, who are currently jamming austerity economics that Herbert Hoover would have found too draconian down the throats of the entire EU during a serious depression - they're ready to copy the Chinese model. Or the Russian's, or Brazil's, or somebody's in the Axis of SC. Menaces to the true faith of neoliberalism lurk all across the landscape.

But our 21st century Churchills know that the neoliberal faith can never fail, it can only be failed:

But state capitalism's biggest failure is to do with liberty. By turning companies into organs of the government, state capitalism simultaneously concentrates power and corrupts it. It introduces commercial criteria into political decisions and political decisions into commercial ones. And it removes an essential layer of scrutiny from central government. Robert Lowe, one of the great Victorian architects of the modern business corporation, described businesses as little republics that operate as checks and balances on the power of the big republic of government. When the little republics and the big republic are one and the same, liberty is fatally weakened.

Montesquieu's separation of powers in the age of Citizen's United: corporations protect Liberty through the checks and balances of corporate personhood. Awesome. I can see Willard Romney out there on the barricades, leading the charge.

Tags: state capitalism

"State capitalism" (6 of 8): an Axis of State Capitalism? Are you kidding me?

Going abroad: The world in their hands, one of The Economist's special report articles on "state capitalism" focuses heavily on China and its increasing economic presence in the world. And it suggests that the use of "state capitalism" in this report is an attempt to establish some kind of economic framework in which the Good Side of neoliberal countries can be faced off against the Bad Side of "state capitalists".

But it's striking in this whole series that China plays such a large role, but they don't bother to deal with the fact that their lead "state capitalist" country is a Communist country in their own proclaimed self-understanding. They don't bother to deal with what seems like an obvious, uh, contradiction, if you'll forgive the Hegelian expression.

Now maybe China calls itself Communist but really has restored capitalism under the guise of a Communist regime. Actually, in the ferocious ideological debates between China and the Soviet Union in the 1960s and into the 1970s, Chinese Communists actually argued that the Soviet Union had restored capitalism. That would be one way for the authors to explain how an officially Communist country could be what they see as an increasingly prominent and successful (state) capitalist power. But they don't even try to make the argument.

This is a little bit sad. They propose the concept of, yes, an Axis of State Capitalism. But you get the impression that the writers either weren't convinced or just insisted that the editors not make such a stark ideological construction in the piece:

This "axis of state capitalism" is gaining an ideological edge as the emerging world goes from strength to strength, America pulls in its horns, Europe implodes and the G20 takes over from the G7. Politicians across the region feel sure they have a formula that can combine economic dynamism with order, taking in the best of capitalism (those sleek modern corporations and clever wealth funds) without unleashing the havoc that devastated Russia in the 1990s and threatened to consume America in 2007-08. Proponents of this ideology revere Lee Kuan Yew as a founding father, see America as a wounded giant and dismiss Europe as self-indulgent and lazy. But they also admire Silicon Valley and Google, MIT and General Electric, Harvard Business School and McKinsey. ...

Xenophobia plays a part, but state capitalism is also fin ding it hard to evangelise. Indeed, many state capitalists are in denial about it. Mr Putin pooh-poohs the whole idea. If we concentrate on certain resources, we do it only to support the industry until the companies stand fi rmly, he insists. The Chinese argue that their free-trading credentials are as good as those of any other WTO members. [my emphasis]

Good grief! I could write a much better pitch for their case, and I don't even buy their perspective. In fact, I think their whole concept of "state capitalism" is hopelessly squishy. Couldn't they have found a kid from a high school debate club somewhere to help them sharpen their argument? The Axis of State Capitalism? That's like something Politico would come up with and make Charlie Pierce want to drink antifreeze.

But the part about Russia is intriguing, though not in the way the article emphasizes. This piece also reports, "The power of the axis is easily exaggerated. The Russians resent the fact that their former junior partner in the communist enterprise, China, has become so successful." It's a reality of the past 20 years: the adoption of capitalism in Russia set back that country's level of prosperity and economic power in significant ways. This is something that is still largely overlooked in the framework of Cold War triumphalism.

This is funny, in a rather pitiful sort of way. This article laments the lack of polarization that they recall from the Good Old Days of the struggle against the Communist Menace: "State capitalism may not turn into a popular movement, in the way that communism and socialism did, but it nevertheless confronts Western policymakers with some diffi cult questions." Sorry that the Axis of State Capitalism just isn't scary enough. Maybe you can fulminate over the All Powerful Islamic Menace instead.

Tags: state capitalism

"State capitalism" (5 of 8): mixed results?

The state has a limited role in the neoliberal doctrine. Even the basic functions of military and policing are being increasingly privatized, though strong government in defense of corporate stability and the comfort of the one-percenters is still consider a noble function of government. At most, the neoliberal faith sees a role for affirmative government in providing infrastructure, trained workers, subsidies for developing but as-yet-unprofitable technologies.

That's the subtext of this entry into The Economist's special report articles on "state capitalism", Mixed bag: SOEs are good at infrastructure projects, not so good at innovation 01/21/2012 issue.

"For many Chinese people high-speed trains are becoming a normal convenience," it says, meaning higher speeds than are standard in western Europe or (it goes without saying) the United States. But here we have to give the authors' neoliberalism some credit. They weave an argument that a medieval theologian would appreciate:

A balanced assessment of state capitalism has to allow for three caveats. The first is that there is no clear dividing line between state-owned and private companies. "Private" champions such as Huawei, the telecoms giant, have repeatedly been given government help. This makes it hard to produce precise calculations about the productivity of the two sectors. Second, ownership is not the only thing in play. Some of the problems, and the successes, of state capitalism have more to do with rapid development than with state ownership. Third, everything depends on context. It is quite possible for state capitalism to work well in some areas (eg, infrastructure) and badly in others (eg, consumer goods). It is also possible for it to boost growth at one stage of development and impede it at another.

So, government is still good for some things, like making the trains run on time. But for the creative stuff that makes lots of money, only private businesses can do that right. Or rather, private businesses do it the best. Or in a way that makes more money for private investors. Or something.

Yet the odds on any of these efforts succeeding are low. Governments are good at providing the seedcorn for innovation: America’s, for instance, provided some of the funding for Stanford University and even helped to found the first venture-capital company. But they are bad at turning seedcorn into bread. Josh Lerner, of Harvard Business School, describes state-sponsored innovation as a boulevard of broken dreams , a term more often applied to the entertainment industry. Malaysia's $150m BioValley, which opened in 2005, is now known as the "Valley of the Bio Ghosts" . Dubai has produced more red ink than new products. ...

There is striking evidence that state-owned companies are not only less innovative but also less productive than their private competitors. The Beijing-based Unirule Institute of Economics argues that, allowing for all the hidden subsidies such as free land, the average real return on equity for state-owned companies between 2001 and 2009 was -1.47%. Older studies suggest that productivity decreases with every step away from 100% private to 100% state-owned. An OECD paper in 2005 noted that the total factor productivity of private companies is twice that of state companies. And a study by the McKinsey Global Institute in the same year found that companies in which the state holds a minority stake are 70% more productive than wholly state-owned ones.

But this doesn't shed much light on why this should be so. For that matter, it's not even clear from this piece why it should be that the state is better at infrastructure than at innovation. And even the terms of the comparison leave a lot to be desired: just what kind of "innovation" do they mean? Certainly, some of the most important scientific discoveries that lead to commercial applications are developed in public universities - although most people would probably be surprised to hear how little direct state appropriations fund state universities these days. Ten percent is not unusual.

And it was the Pentagon that famously developed the Internet. In the US, our advocates for the magic of the Private Sector tend to exempt the Pentagon for the mystical curse they seem to think lays upon all the rest of the governmental functions. And maybe the Federal Reserve. But the Internet, I would say, was quite a significant innovation.

But it's also obvious that the authors of this piece are a bit nervous over their sweeping conclusions. Because after citing those studies just mentioned about much lower productivity in state companies, they go on to note:

But poor productivity has not stopped them from making lots of money. In 2009 just two Chinese state-owned companies China Mobile and China National Petroleum Corporation made more profits ($33 billion) than China's 500 most profitable private companies combined.

The point of reference of this whole series is that state-owned business is somehow inferior - less productive, less innovative - than private companies. It's a familiar assumption, and one you're not likely to hear Erin Burnett on CNN challenging. But this series is interesting because it shows that when even writers with what seems to be a strong ideological bent in constructing the stories start grappling with the actual facts of state-owned versus private enterprises, things quickly start looking far more complicated than the inefficient government/brilliant efficient private sector dichotomy which neoliberalism shares with hack "free enterprise" propaganda from Chambers of Commerce over the decades.

Tags: state capitalism

"State capitalism" (4 of 8): Four types, forced uncomfortably together

A choice of models: Theme and variations, another entry in the special report on "state capitalism" in The Economist's 01/21/2012 edition, attempts to make some distinctions among the various types of this economic phenomenon.

This one is quite interesting, not so much for the conclusions it draws, but because it avoids drawing them from the situations it reports. It basically distinguishes among four models: China, Russia, Middle Eastern states and Brazil. The Middle Eastern version they describe under the rubric of "petrostate capitalism". The popular impression of petrostates in the US is that they are notoriously corrupt and have warped economic development, assumption not entirely divorced from reality. But the article includes in that category Dubai, of which they observe, "because they never had much oil to begin with. It now accounts for under 5% of the emirate's GDP." How is a country with oil making up 5% of the GDP a "petrostate"? They seem to be using "petrostate capitalism" more-or-less to refer to the Middle East generally.

These pieces clearly have a strong ideological twist. But in some ways, that makes them all the more provocative. Their nervousness about Brazil is reflected in this summary, under which they include the other three models, as well: "These varieties of state capitalism all have one thing in common: politicians have far more power than they do under liberal capitalism."

But over four years into the current depression, it doesn't seem so heretical to point out the obvious question that comment raises but stops short of posing directly: if a government is genuinely politically democratic, is it really a bad thing that it would have more influence over business and the economy than the US or Britain? A government focused on seriously defending the public interest in the US would have taken a very different approach to the housing bubble that led up to the financial collapse of 2008 than Uncle Alan Greenspan and the Cheney-Bush Administration did.

I'm especially struck by their description of China:

What might be called the party state exercises a degree of control over the economy that is unparalleled in the rest of the state-capitalist world. The party has cells in most big companies in the private as well as the state-owned sector complete with their own offices and files on employees. It controls the appointment of captains of industry and, in the SOEs [state owned enterprises], even corporate dogsbodies. It holds meetings that shadow formal board meetings and often trump their decisions, particularly on staff appointments. It often gets involved in business planning and works with management to control workers’ pay.

The party state exercises power through two institutions: the State-Owned Assets Supervision and Administration Commission (SASAC) and the Communist Party’s Organisation Department. SASAC, which holds shares in the biggest companies, is the world’s largest controlling shareholder and the state-capitalist institution par excellence. It has been spearheading the policy of creating national champions by consolidating and pruning its portfolio: the number of companies under its supervision has declined from 198 in 2003 to 121 today. It has also been implementing the party’s policy of creating a harmonious society by regulating pay. In 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000. High pay in SOEs has been a big source of disharmony.

One of the factors is does not mention but is a major aspect of China's situation is that it doesn't have much of what is known as a "social safety net" in major Western countries. That's one of the main claims of neoliberalism, that all countries need to compete in minimizing wages and workers' rights. But they may have found it too tricky to wedge a discussion of that in the context of China into their clunky "state capitalist" ideological system.

But what is most striking about this is that even though they describe here an approach to the organization of the state and economic life that is based on China's Communist ideology, they just blip right over the obvious question of how it is that a Communist country can be a "state capitalist" one. That would have required coming up with bridges between the gaps in their "state capitalist" ideological construct that would have been difficult and embarrassing. Other articles in the series to be examined in later posts give more of an idea of why they try to avoid this obvious conceptual dilemma.

Tags: state capitalism

"State capitalism" (3 of 8): state-owned oil companies

State capitalism’s global reach: New masters of the universe article in the special report on "state capitalism" in The Economist's 01/21/2012 edition focuses on multinational corporations with substantial state ownership and backing. This piece defines a core reality and concern, which is that state-owned oil companies are common in the developing world and obviously have real strengths:

The hard core of the state-owned sector are the national oil companies: the 13 giants that control more than three-quarters of the world's oil supplies. Governments continue to keep a heavy hand on this industry. The Chinese state owns 90% of the shares in PetroChina and 80% of those in Sinopec. Even so, the national oil companies are being transformed by the same forces that are transforming the state-owned sector in general.

A few companies preserve the great tradition of state-sponsored incompetence and overmanning. Venezuela’s Petróleos de Venezuela, which is central to the patronage machine of the country’s president, Hugo Chávez, is an obvious example. More surprisingly, so is Mexico’s Pemex, which has successfully resisted numerous attempts to reform it. Malaysia’s Petronas has improved dramatically over the past five years. Saudi Arabia’s Aramco, which controls more than a tenth of the world’s oil and with it the fate of the world economy, is almost as well managed as private-sector oil companies such as Exxon Mobil. The Saudi monarchy has slimmed the company’s workforce, brought in professional managers, contracted out ancillary work and formed alliances with international companies. [my emphasis]

A separate article, A choice of models: Theme and variations, notes that these state oil companies tend to be very influential on their governments:

State-owned energy companies arguably have more influence over energy policy in state-capitalist countries than private energy companies have in liberal countries. Over a drink Russians will happily speculate about whether the Kremlin runs Gazprom or Gazprom runs the Kremlin.

It's nice that the reporter had drinks with people in Russia who he was talking to about Gazprom. But one must wonder whether the use of influence is nearly so one-sided as this brief statement implies. Those naughty state-owned oil companies are even more influential on their governments than the private ones in Britain and the US! Jamie Galbraith once wrote something to the effect that the Cheney-Bush Administration was basically the energy industry invested with state power. Since much of the other reporting talks about ways that the state in these various arrangements has significant effects on these enterprises, that last quoted argument should be treated with caution. No small amount of ideology is likely expressing itself there.

An obvious question suggests itself here. If three-quarters of the world's oil is controlled by "state capitalist" institutions, what are the implications of that fact? Are there particular aspects of the oil business that make it well-suited for state control of the form they mean? What does that structure of the world oil business indicate about the relative benefits of state versus private businesses in this area, and more generally? This series doesn't really address those issues.

This is a peculiar comment at the very end of that piece.

It is possible for a country to have any or all of these institutions in place without being a member of the state capitalist club. Norway boasts the world’s 13th-biggest oil company by revenue, Statoil, and its third-biggest sovereign-wealth fund, the Government Pension Fund, with $560 billion in assets, but requires both of them to behave like regular companies.

Say what? From the Statoil website:

With a holding of 67% the Norwegian state is the main shareholder in Statoil. The owner interest is managed by the Ministry of Petroleum and Energy. The Norwegian state is eager to communicate its expectations to companies in which it has interests, and to communicate to society how the state is to act as owner.

The Norwegian state emphasises that state-owned companies must comply with principles for good corporate governance.

This just further confuses the question of what The Economist actually means by "state capitalism". How is a company 67% owned by the government outside "the state capitalist club"? Well, I guess it's because they have to "behave like regular companies." Although what is it about the way Norway does it that puts them outside  "the state capitalist club" versus how the club members do it is not discussed. So these other companies are state capitalist but not the one that is 67% government owns and whose website tells us, "The Norwegian state is eager to communicate its expectations to companies in which it has interests, and to communicate to society how the state is to act as owner."

Yeah, I'm clueless about how that works, too.

Tags: state capitalism

"State capitalism" (2 of 8): an ideological history, not to be confused with a history of ideology

In Something old, something new: A brief history of state capitalism The Economist 01/21/2012, the editors show just how ideological and historically vacuous their concept of "state capitalism" is. The piece is part of their special report on "state capitalism".

In September 1789 George Washington appointed Alexander Hamilton as America’s first ever treasury secretary. Two years later Hamilton presented Congress with a "Report on Manufactures", his plan to get the young country's economy going and provide the underpinnings for its hard-fought independence. Hamilton had no time for Adam Smith's ideas about the hidden hand. America needed to protect its infant industries with tariffs if it wanted to see them grow up.

So what they call "state capitalism" includes standard protectionist measures the United States applied in the early decades of the Republic? This is like a joke. But they're serious.

They then jump to the 20th century and list three different brands of capitalism: Singapore, China and post-Communist Russia. Their description of the latter is particularly striking:

The final event [after Singapore's and China's adoption of "state capitalism"] was the collapse of Soviet communism. This was initially seen as one of the great triumphs of liberalism, but it soon unleashed dark forces. Communist apparatchiks-turned-oligarchs grabbed chunks of the economy. Between 1990 and 1995 the country's GDP dropped by a third. Male life expectancy shrank from 64 to 58. Once-captive nations broke away. In 1998 the country defaulted on its debts.

The post-Soviet disaster created a craving for order. Vladimir Putin, then Russia's president, reasserted direct state control over "strategic" industries and brought the remaining private-sector oligarchs to heel. But just as important as the backlash in Russia was the one in China. The collapse of the Soviet Union confirmed the Chinese Communist Party's deepest fear: that the end of party rule would mean the breakdown of order. The only safe way forward was a judicious mixture of private enterprise and state capitalism. [my emphasis]

They present "state capitalism" as a negative thing. But this explanation is practically a confession of the all-too-obvious failure of neoliberal prescriptions in Russia makes it clear why Russians would have wanted to seek an alternative. It also explains in part why polls show so many Russians looking back at the fall of the Soviet Union as a very bad thing.

But the main thing this article shows about their notion of "state capitalism" is that it's more a general criticism of everything that doesn't fit into the current ideal framework of neoliberalism. Even Alexander Hamilton.

Tags: state capitalism

"State capitalism" (1 of 8): a meaningful concept or a shaky ideological construct?

The conservative-leaning British magazine The Economist recently featured on its 01/2102102 cover Vladimir Ilyich Ulyanov, better known to history as Lenin:

As I've noted before, I'm skeptical when business publications do this kind of publicity for an article, or in this case numerous articles on the topic of "state capitalism". It's almost a sure sign that the readers are being offered some heavily propaganda-laden content.

And that's the case here, as well. The visible hand article frames the special report series of piece on state capitalism with this opening paragraph to serve as a warning that once you start questioning the gods of the Free Market, you'll be a Commie in no time!

Beatrice Webb grew up as a fervent believer in free markets and limited government. Her father was a self-made railway tycoon and her mother an ardent free-trader. One of her family's closest friends was Herbert Spencer, the leading philosopher of Victorian liberalism. Spencer took a shine to young Beatrice and treated her to lectures on the magic of the market, the survival of the fittest and the evils of the state. But as Beatrice grew up she began to have doubts. Why should the state not intervene in the market to order children out of chimneys and into schools, or to provide sustenance for the hungry and unemployed or to rescue failing industries? In due course Beatrice became one of the leading architects of the welfare state—and a leading apologist for Soviet communism.

Well, let's give The Economist credit for being marginally more subtle than Newt Gingrich or Ron "Papa Doc" Paul.

The source of the distress is something that is happening in the real world but isn't compatible with neoliberalism, the True Faith of what we call "globalization" and with what became known in the 1980s as the Washington Consensus for deregulation, maximum freedom for financial speculators, and sell-offs of state-owned enterprises, often under financial coercion from the International Monetary Fund (IMF) and the World Bank:

State companies make up 80% of the value of the stockmarket [sic] in China, 62% in Russia and 38% in Brazil (see chart). They accounted for one-third of the emerging world’s foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular acquisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world's ten biggest companies by revenue, against only two European ones (see chart). Add the exploits of sovereign-wealth funds to the ledger, and it begins to look as if liberal capitalism is in wholesale retreat: New York’s Chrysler Building (or 90% of it anyway) has fallen to Abu Dhabi and Manchester City football club to Qatar. The Chinese have a phrase for it: "The state advances while the private sector retreats." This is now happening on a global scale.

The charts to which that paragraph refers are at the link.

Here, I won't try to sketch out the checkered history of the concept of "state capitalism". The Economist isn't going for academic rigor in its definitions. It's pointing out that state enterprises are actually serious players in the world economic systems and are out-competing some of the supposedly superior private enterprises.

The Economist warns the champions of the Free Market that there are still dragons to be slain:

This special report will cast a sceptical eye on state capitalism. It will raise doubts about the system’s ability to capitalise on its successes when it wants to innovate rather than just catch up, and to correct itself if it takes a wrong turn. Managing the system’s contradictions when the economy is growing rapidly is one thing; doing so when it hits a rough patch quite another. And state capitalism is plagued by cronyism and corruption.

Croneyism and corruption? Oh, Miss Mellie, bring me mah smelling salts, ah thank ah'm gonna faint dead away! Why, ah never heard of such things in our nice American Free Market!!

It's actually a little surprising that The Economist's editors would be writing something like that as thought it's still the middle of the tech boom in 1999 or something.

But the report will also argue that state capitalism is the most formidable foe that liberal capitalism has faced so far. State capitalists are wrong to claim that they combine the best of both worlds, but they have learned how to avoid some of the pitfalls of earlier state-sponsored growth. And they are flourishing in the dynamic markets of the emerging world, which have been growing at an average of 5.5% a year against the rich world’s 1.6% over the past few years and are likely to account for half the world's GDP by 2020.

State capitalism increasingly looks like the coming trend. The Brazilian government has forced the departure of the boss of Vale, a mining giant, for being too independent-minded. The French government has set up a sovereign-wealth fund. The South African government is talking openly about nationalising companies and creating national champions. And young economists in the World Bank and other multilateral institutions have begun to discuss embracing a new industrial policy. [my emphasis]

In other words, not only is the neoliberal model of the ideal world not theoretically the only alternative. There are also real existing alternatives, for better or worse. The editors of The Economist clearly think it's for the worse.

That introductory article also casts "state capitalism" as involving "authoritarian" government:

Today’s state capitalism also represents a significant advance on its predecessors in several respects. First, it is developing on a much wider scale: China alone accounts for a fifth of the world’s population. Second, it is coming together much more quickly: China and Russia have developed their formula for state capitalism only in the past decade. And third, it has far more sophisticated tools at its disposal. The modern state is more powerful than anything that has gone before: for example, the Chinese Communist Party holds files on vast numbers of its citizens. It is also far better at using capitalist tools to achieve its desired ends. Instead of handing industries to bureaucrats or cronies, it turns them into companies run by professional managers.

This is an interesting ideological convolution. They are clearly working from something like a Cold War template. But because in the neoliberal thought world, China is a kind of honorary capitalist country, despite its Communist government, they obviously put some effort into wordsmithing around any embarrassing suggestion that anything about China's Communist ideology might have something to do with their economic performance, e.g., their use of capital controls.

In my mind, a public company (one who's ownership is based in stock) that is majority owned by a government is still a company organized on a capitalist basis. Even if a government owns all or most of the stock, it can still be sold on the stock market and the ownership could change hands. A "pure" public company, one owned by the state but not capitalized by stocks that could be sold on the market, is more straightforwardly a public enterprise. But it can also be organized with various degrees of independence like the Federal Reserve or self-financing like the US Postal Service.

But The Economist seems to be using the term "state capitalism" in a much more polemical and vaguely-defined sense.

In the next posts in this series, I'll look at other articles in the special report on "state capitalism".

Tags: state capitalism