Riz Khan - State capitalism vs free market



hello and welcome is the global economic downturn proof that the western-style capitalism has failed countries like China and India practice what's being called state capitalism and they seem to be emerging from the crisis stronger both economically and politically critics of the Western model say that the ongoing financial crisis has highlighted the flaws of capitalism and damaged the reputation of the free market countries that have remained relatively unscathed of those that usually have authoritarian governments pulling the strings behind corporations and financial markets on today's show we look at state capitalism versus free-market capitalism and ask what are the risks and benefits with each and which one will dominate the future global economy you can join the conversation by calling into the show with your questions or comments you can also send us an e SMS or an email with me in the studio today is in Bremer the president of Eurasia group a leading global political risk research and consulting firm his new book is called the end of the free market who wins the war between States and corporations in it he examines the emergence of state capitalist nations and the relationship and potential threat to free market economies in could tell you on the show it's good to see you guys it's a pleasure now let's start by defining state capitalism I know you more or less of sort of coined the phrase for the book though you say it dates back you know a couple of centuries and although the idea of it dates back a couple centuries – I guess the German social democracy system is it yes and and mercantilism in general as we saw emerging out of Europe but of course this is a bit different we're talking about authoritarian states that in many cases come out of the centrally planned economic framework recognizing and globalization that their populations have a lot more say a lot more sophisticated and they want growth and so they're using the tools of the market whether it's corporations or whether it's institutional investments so sovereign wealth funds state-owned enterprises privately owned national corporations all of which are basically using the markets for ultimately political purposes I'm going to describe some of the things you you've said about the particular trades now you talk about three particular traits to state capitalist and we can go through these now one of the first traits were the first trade perhaps state dominates market by owning major corporations as you say in industries that compete internationally another trait state capitalist see markets as tools that serve national interests you are mentioning that and not as ii cannot not as economic opportunities for individuals thirdly state capitalists used market to extend their own political power both domestically and internationally so let's examine these sort of individually you've touched on them there but in the first instance how do these major corporations and companies that the state owns differ from nationalized industry different nationalized industry in the sense that you know if if it's a if it's if it's basically under the auspices of the government it's in some ways almost like a nationalized industry track so in what way is it is it disguised is that the idea well sure and again you have the fact that you are a corporation in a state capital society in the absence of rule of law where the state is the principal actor makes a very big difference so if you think about the google problems they experienced in in china they weren't fighting against the state-owned enterprise they were fighting against Baidu which was a privately held company but it was a privately held company that was preferred by the Chinese state in the absence of rule of law and so from the perspective of Google it didn't really matter that that is the nature of state capitalist and in what way can those de capitalists influence markets and what way can they really affect the markets I mean beyond their own borders well they can they do it both domestically and internationally I mean if you think about Afghanistan so just recently we had this big New York Times piece of trillion dollars of resources underneath the ground in Afghanistan and a lot of people are saying well that's a good reason for the United States to stay because you know they're gonna have access to all this stuff well the only major investments happen in Afghanistan so far one hundred fifty million dollars in copper coming from China know it's behind schedule but why China well because if a Chinese company is making an investment the Chinese government along with them is actually providing direct industrial support they can build out the infrastructure in the rest the US doesn't have that sort of industrial policy frankly none of the Western fellip states do we had an interesting email that came in we had a few that came in for you but this one's from Pakistan from Muhammad Husain who says is corruption more prevalent in state-controlled capitalism or free-market capitalism look I think corruption is prevalent in all sorts of countries there's corruption the United States this corruption and Russia certainly Russia's though some of the one of the worst of the state capital of states and there are many times that we've seen a lot of endemic and institutionalized corruption in developed countries having said that in a country like the United States you have a level of transparency you have much more open media that isn't controlled by the state the stuff gets out and lawyers you have rule of law if you have a problem in the United States ultimately folks are going to get litigious sometimes they're over looted you have a problem in Russia or in China don't bother getting your lawyers you fix that problem with the state or you're out of the country so you know on balance we have to recognize the difference of transparence in rule of law is a meaningful one now it's interesting in your book you focus on a number of nations and and and groupings of nations and you put a lot of focus on China that's that's a very heavy theme in the book and you say in the book China has become the symbol of state capitalism's power and it is China that will determine how long this trend survives and that is that a function of China's economic size or is it its particular model of state capitalism well I mean I think that state cow if you think about all the countries they're succeeding the state capitalist you talk about the South Saudi Arabia in the states of the Gulf you talk about Russia you talk about China all of them do share something which is that they have extraordinary access to natural resources under the ground or on the ground that they can take advantage of could be different types of scarce commodities oil and gas or extraordinary cheap labor so I don't think it's that the model is so fundamentally different but the size of China I mean ultimately the inefficiencies of state capitalism in China are going to take decades to play themselves out and in the interim you have 30 plus years of 10% plus state-directed growth the Beijing Olympics the Shanghai Expo and keep in mind I started my book and I titled my book with this question that I got from the Chinese Vice foreign minister who UFA who starts a conversation with me saying e'en now that the free market has failed last May has failed what do you think the appropriate role of the state in the economy should be I think we need to address that issue as a nation and globally let's let's compare China would say the UAE and Dubai in particular I personally witnessed Dubai sort of growing in in the early to start of the millennium and then suddenly everything seems to turn upside down right what went wrong with something like Dubai where the focus seems to be on growing the nation effectively well yes but of course keep in mind that the big difference between China and Dubai is that so much of Chinese talent is homegrown you look at the engineers that are coming through that system right now we're just being cranked out at world record levels in Dubai everything comes from outside except for a very small group of emirati citizens that often have control but not aren't necessarily enormous ly well-educated don't have the management expertise to actually run these things and so they were very great at marketing themselves and they certainly understood how to talk their book but they didn't have the indigenous capacity to build every sector at the same time looked really good when the world economy is going gangbusters but suddenly when they met problems the brand still looked very solid but they didn't have anything underneath and so who's bailing them out the much more cautious much more stable folks in Abu Dhabi the place that we should have been betting on all along the interesting thing is there's that there are those who might argue that having some kind of benign dictatorship as some see these state capitalists is a good thing because it allows for a solid growth it means people are in line Singapore often Malaysia these kind of kind of countries are often quoted as as nations where if it wasn't for that kind of authoritarian autocratic leadership there wouldn't have been the kind of growth and and sustained development that we have seen I think if it weren't for state capitalism in China you wouldn't have the same level sustained growth but I think what we need to recognize any properly regulated even a properly regulated free market economy and we've had an improperly regulated free mark communist for part a while you still end up with lots and lots of bubbles lots of volatility and people get hurt in state capitalist societies you smooth that out the state by taking on the role of being the principal act in the economy gets rid of those bubbles but the expenses that it pushes a bigger bubble farther out so the unsustainability of what China is doing is going to be much worse is a bill to pay from an environmental degradation perspective from a lack of labor productivity perspective from the inability to innovate from an indigenous perspective in terms of the growing fight that we see every day between the United States and multinationals in the West these things are coming but it is the world's biggest bubble and I know what happens with big bubbles as they're as they're growing we all want to get on so let's you know this is this is where I see state capitals move on where does it leave the population do these state capitalist nations or say the model of state capitalism tend to be more favorable to the individual in the individual member of the population as opposed to say the sort of Wild West of a capitalist free free-market capitalism where it's sink or swim look I think in it again in the short term there's no question that because you're avoiding that level of volatility you can certainly show for emerging markets and certain levels of developments very strong levels of growth and I would not be trying to argue that we what we need in right now in China is from the jettison their state capitalist model and bring on a free market system you know it's kind of like Churchill used to say about democracy it's the worst system out there politically except for all the others well a properly regulated free market system may well be the worst system out there except all the others but I know what happens when you impose democracy on a country that has no capacity to deal with it it can be much worse we see this in Afghanistan what happens if you try to impose a regulated free market on a country that has absolutely no capacity to deal with it it would be vastly worse and in the case of China which the United States desperately needs it's a very codependent relationship no matter how you may feel about Beijing and what they're doing no matter what kind of values you may or may not share we need these guys and so we don't want them to fail it's gonna call him from Turkey we've got Turkey on line hey Leo what would you like to ask well I would like to ask do you think is it a better idea to keep gold as a reserve rather than keeping euro or $4 as a reserve currency do you think is it better to keep it gold so that we can avoid fluctuations in the economy and avoid future crisis maybe well I think that you know given the fact that gold is driven by such amounts of investor fear in psychology and so there are massive swings in the commodity price I think it's vastly more dangerous for certainly for individuals to do that you don't want to take that kind of exposure and I know the Indian government has been moving more their reserves into gold and into hard commodities across the board but still it's at the margins I think we have to recognize that in today's world it is the US dollar as the u.s. is by far the strongest or the least weak of the developed States compared to Japan compared to Europe it's got scale it's got indigenous innovation and the capacity to continue that it's also got favourable demographics so much as the u.s. is perhaps not as good or an attractive abet as it was five years ago even two years ago it still is the bet to make is that been sustained everyone says the dollar shouldn't come to its end at the end of its life well I mean you know and the people also say that it's the Chinese century and I don't understand what that means first of all there aren't centuries anymore and second of all the Chinese as of last month have over 900 billion dollars of US Treasury reserves by their numbers that's the largest that they have ever had now my general view is you know you can listen to a politician say I like watching what they do and if that's where the Chinese are actually making their investments and they're the fastest-growing economy doing pretty rote well right now we might want to listen to that all right lots more questions for you were gonna take a very short break here when we come back we'll discuss what we're all state capitalist nations might play in the future global economy we'll be right back welcome back we're looking at the growing power of state capitalism a term coined to describe the type of controlled capitalism practiced mostly by authoritarian Nations how do they interact with and perhaps threaten free market countries joining me in the studio is Ian Bremmer president of Eurasia group a global political risk consulting firm let's get back to our chat let's just have a quick look at India because for a lot of people India would they say well India doesn't seem to be an authoritarian country I mean the world's biggest democracy yeah so where does it fit into the state capitalist picture but I think it's very very clear that to the extent that India has challenges it doesn't come from the state being too strong it comes from the state being incredibly fragmented and a massive decentralization now it is true there are lots of pressures on India to go into a more state capitalist direction because you know as the country grows and they become more resource intensive they're getting their lunches eaten by the Chinese after the war in Sri Lanka who locked up all of the contracts immediately and a military base the Chinese even though that the Indians had these cultural ties in Africa in Central Asia in all sorts of parts of the regions the Indians are not able to really deal with that and so you know there's gonna be an effort for the Indian government take more control but the their ability to do that given the extraordinary fragmentation the almost surfeit of democracy that exists in the Indian system it means that they're really not going to be moving in that direction very fast well let's get another email question to you this one came in from nourish coach in Kenya who says the global financial meltdown proves that the free market failed to regulate itself thus government control markets will be dominant for years to come as the government tries to avert future crisis crises so what in what way do you see a free market governments being vulnerable to these manipulations of the state capitalism look I think that first of all your questioner asked a very very important point which is that in the last 20 years in the United States there has been a failure the government has taken its eye off the ball now is that a failure of the free market I say no and one of the reasons I say that and he does something fairly controversial but I think it's very clear but if you go and talk to a CEO of a corporation or the head of a major bank and asked them honestly what they want they don't want free markets they're not interested in free markets at all they want subsidies they want monopolies they want to maximize their profit for the short short term for their shareholders and for their own compensation Goldman Sachs BP American corporations throwing technology in China not caring about the long term now does that mean that the free market has failed no it means that in a free market the multinationals are the most important economic players we don't want the government owning those countries but companies but you you do want them actually playing a role in regulating them so that they can to have a level playing field they must compete against each other in internally domestically and internationally and frankly in a bunch of sectors in the United States whether you're talking about financials or oil or others the US has simply dropped the ball in Greenspan is a villain in this story there's no question well you know you mentioned about China being in the century two centuries China century of euro wrote in Angeline Co wrote in to our Facebook page with saying that this century is China century there is no doubt that China's power and influence will grow but state-controlled capitalism perpetuated by its leaders will not be studied as a model of economic success so to what extent is is the is that capitalist state capitalist model viable in the long run in the sense that you know is it much more is it thus any at the moment you say it's reasonably viable but in the long run you feel it's definitely in the long run I think you're free if the free markets end up going down in the long run it will be because we've destroyed them ourselves through protectionism through closing borders through not allowing an immigration I mean the sorts of things that you expect populations to do when they're hurting when they're facing 17.2% unemployment and it takes a very brave leader to stand up for free market principles in the face of that but do I believe that state capitalism works in the long term look we're facing incredible challenges particularly in terms of climate we're facing challenges with nuclear proliferation we're facing challenges in terms of fragmentation of intellectual property rights and other things that are going to make global economic growth rates reduce we know that we in the Ameri as in Europe can't support we won't have the credit we can't buy what we used to so if there are people out there that think capitalism is unsustainable because we can't continue to buy this stuff you've seen nothing until you've seen state capitalism China needs to grow at such greater rates in a much more constrained environment not only to ensure their economic success but to ensure their political survival and over the long term that's the biggest bubble of call you know it's interesting you touch on this new book the the the state capitalist model being copied by some of these developing nations and I wonder to what extent is it any can economic model that's becoming increasingly popular with non-western nations that non Western nations that want to be part of the international system how is it an easy entry for them into the global there's no question that in a g20 world as opposed to a g7 world where there isn't an overarching governance that this that the success of state capitalism successive China in particular gives lots of emerging markets as well as despot in lesser developed States the ability to say aha here's a model but let's be clear the fact that they're using this politically in the same way that some members of the right use what's happening politically they say Obama is a socialist doesn't make it any more real and we're not going to see a Beijing consensus because state capitalism is ultimately a one state solution if Beijing is promoting a solution that supports China and it supports its companies at the expense of other companies when there's competition so unlike a free-market Washington style consensus which you know may only benefit certain sectors of classes but its transnational this is one that really supports one country and you can see client states that are completely dependent on mainland China like Taiwan and we'll see that in Vietnam we'll see it even in countries like Indonesia maybe even Australia but you won't see the Indians or the Russians or the Brazilians suddenly saying AHA we want the Chinese model because frankly more statism in those countries will bring them into greater competition with China let's get a call him from Pennsylvania here in the USA ray go ahead please now ray you that I guess we have a regular back to move again let me get another a question here that we can sorry a question quote from your book where you you talked about China's expanding role now with that expanding role you right in the end it is much more likely that the Chinese leadership will have to reconsider core assumptions about government's role in the economy than that the leaders in the United States will retreat fundamentally from free-market principles saying basically free markets going to one that keeps its head above water where when would you expect to see cracks in the system in the state that the capitalist system well I think you and I were talking and break about Dubai and the fact that because Dubai had very little propping them up except another you know emirate Abu Dhabi it cracked much more quickly Venezuela needs $85 oil or they start running a deficit it's gonna crack much more quickly in China with 1.3 billion people I mean you're starting to see major demonstrations in Foxconn and other industries that are on the coast where they're making $5,000 per capita but the interior of that vast country is still completely underdeveloped and the banquet everybody it's yes and so in the United States the fact that in the last two years the free market has taken such a hit gives the Chinese government a much greater run-up I mean the let's face it the average Chinese is much happier with their government today than the average American is with the American government and so this is not a 1 or 2 even a 5 year issue for me it's much more 10 years plus well let's get right back in from Pennsylvania ray go ahead yep go ahead please and I follow the Iranian economy closely and in regards to the state capitalism one monk brand of it is the what's happening inside Iran now which is very corrupt actually it's the Revolutionary Court and the government controlling major sectors of the economy but the dilemma facing the Western governments right now in terms of the embargo is that if you boycott such an economy would you hurt the ordinary average Iranian citizen or would you be hurting these I would say the Mafia power we've got about forgot about 45 seconds let's get in a chance to we've just had the fourth Security Council resolution and this time something different happened Brazil in the Western Hemisphere and America's NATO ally Turkey against the US voted with Iran in opposing those sanctions the rise of state capitalism and the fragmentation of global governance in the g20 means that countries like Iran increasingly have other options and that means that whether or not you think that sanctions are effective they're increasingly going to be very very difficult to actually implement in thank you very much for discussing this I have a whole list of questions we haven't had times that hopefully we'll get you back and talk more about this it's my pleasure my Elizabeth thank you very much thank you for being with us now you can watch podcasts of the show on iTunes this week we're featuring a discussion with Afghanistan's former finance minister and presidential candidate Ashraf Ghani on the recent Kabul conference and how Afghanistan can move forward on the next show Kenyans are preparing to vote on a new constitution but how will the referendum help to bring the country together or could it lead to further divisions and possibly more violence be sure to tune in for that and send in your questions until then for me and the team good bye we'll see you next time




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