The New Concert of Powers
How to Prevent Catastrophe and Promote Stability in a Multipolar World
Greg Lawson: The term "state capitalism" seems to have a faint odor of fascism associated with it, at least to the extent that the state intervenes substantially in the marketplace but without eliminating private enterprise and profit seeking, as under socialistic thinking. Do you agree?
Also, do you envision a scenario where state capitalism may supplant free-market capitalism on a long-term basis in the developed world?
A: State capitalism does not have fascism's ideological component. The governments that practice it are attempting to "manage" the performance of markets for long-term political survival and, in some cases, personal gain -- not to promote an abstract ideal. And unlike fascism, state capitalism isn't centered on a cult of personality. The elite that drives Chinese Communist Party policymaking is made up of talented and capable technocrats who would not have impressed Benito Mussolini with their personal magnetism.
I think it's highly unlikely that state capitalism will ever replace the free-market variety in the developed world. Faith in the ability of markets to value assets and allocate resources is philosophically well entrenched in Australia, Canada, Europe, Japan, and the United States -- despite fluctuations in levels of market regulation and state intervention at particular moments and in particular sectors. I believe it would take a genuine political and economic catastrophe -- a global pandemic that kills millions, a terrorist attack carried out with weapons of mass destruction on a major Western city, a war in the Middle East that pushes oil prices to staggering new heights -- to force a fundamental long-term rethink within the developed world about the proper role of government in economic activity. I don't believe that the current crisis in Europe and the United States will rise anywhere close to that level. The core objective of government interventionism in the West right now is to restore the free market to health, not replace it.
Iain Marlow: Many on the left have decried government bank bailouts as a huge waste of money resulting from the interdependent social relationships between the upper echelons of political and financial decision-makers. News organizations have revealed that some of this money was either unmonitored when it arrived at banks or was distributed by state officials with past and serious ties to financial organizations that have benefited.
Some, notably Naomi Klein, have suggested bailouts for the average American/Canadian/Briton. How would such a scheme work, and what would be its pros and cons?
A: I believe that the Obama administration faced an immediate challenge that had to be met quickly to prevent a very bad problem from becoming much, much worse. In short, it had to ensure that the banking system's heart continued to beat. The risk of system-wide failure presented a broad range of bad options. Whether the Obama team has handled this problem skillfully will only become clear with the passage of time.
As you rightly point out, the problems created by the social relationships that bind political and business elites are not unique to the developing world. But state-capitalist countries usually lack independent judiciaries to enforce the rule of law and independent media to investigate these ties and report on them.
As for the bailouts, I'm a believer in investing in the provision of public goods, particularly when it comes to infrastructure. There has been a worrying level of decay in recent years in a lot of basic infrastructure in the United States -- schools, energy, roads, bridges, ports, airports, etc. This was a problem for the country's longer-term growth trajectory even before the current meltdown began. To invest in these things is to invest in individual citizens. Is the new administration doing enough in this area? Probably not, though I concede that it is probably too soon to tell.
Hamish Stevenson: Are the Western sovereign-wealth funds (SWFs) you mention -- Norway's Government Pension Fund and the California Public Employees' Retirement System (CalPERS) -- really that different from those of non-Western countries such as Saudi Arabia and China? Is it possible that we Western observers are mistakenly characterizing them as much more government controlled than they actually are? Is there any evidence that SWFs often make independent decisions that may in fact contravene the wishes of the government?
A: There is no question that the difference between Norway's Government Pension Fund and a Chinese or Gulf-state SWF is a matter of degree. But differences in degrees of transparency and the quality of governance between the funds based in liberal democracies and those found in more authoritarian states are too significant to ignore. It is easier to overlook these differences when the global economy is growing and international investment is steadily expanding. When times are good, emerging market-based funds operate more like Western portfolio managers. But with the global downturn, we're seeing changes inside many of these SWFs. CalPERS will have the same performance metrics and level of openness this year than it had last year. That is not true for some of the more opaque emerging-market-based funds that operate within relatively closed political systems. When funds based in Norway or California make political calls -- whether to invest in or divest from a certain country, for example -- we know about it because they report their decisions publicly. That is often not the case for funds based in China or the United Arab Emirates.
Jillian Fishman: Sovereign-wealth funds offer a profitable opportunity for the home state yet present a potential security risk to the host. How do you see these funds emerging from the financial crisis, and do you envision a coherent effort to regulate them?
A: There will be calls for tighter regulation of these funds, particularly within countries that value transparency. But compliance and enforcement will be spotty at best. We can expect the Chinese and Gulf-state economies to emerge first and strongest from the global slowdown. And when they do, they'll have the same advantages they enjoyed before the crisis began. It won't be in their interest to accept deeper scrutiny of how they manage their economies or their national champions. They will have all the leverage they need to pursue business as usual.
This is why the G-20 is liable to prove dysfunctional for all but the most pressing international problems. It is not simply that there are more seats at the table and more opinions to be accommodated. It is that some of the new stakeholders around that table hold fundamentally different views than G-7 leaders on the proper role of government in an economy and the fairest and most efficient means of regulating international trade and investment flows.
And the new players will be focused on solving domestic, not international, problems. The Chinese government will use state-capitalist tools to strengthen Chinese companies at the expense of foreign competitors. It will continue to create jobs via large-scale state investment in infrastructure projects and try to shift the country's growth model from one based on exports to one that depends more heavily on domestic consumption. The United Arab Emirates' central government will focus on restoring relations between Abu Dhabi on the one hand and Dubai and the smaller emirates on the other.
On the question of security risks, this problem is not new for either the would-be investors or the governments in question. Over time, fund managers have become more sensitive to the security anxieties of foreign negotiating partners and more willing to avoid some potential projects altogether. Host state governments have found creative ways of working around these problems.
Ferenc Koncz: How can private enterprises, dealing with highly sophisticated knowledge bases unknown to the average citizen, convince those citizens of their trustworthiness? And how can capitalism attenuate the natural tendency of those in the know to play upon the "bubble and burst" phenomenon, which during the "burst phase" hurts those who are unaware and unprotected?
A: Viewed from a broader perspective, I'm not convinced that bubbles are such a bad thing for investment growth and technological innovation. There are more losers than winners when the bubble finally bursts, but many of the broader benefits last longer than we realize. The dot-com industry, for example, did not pop with the investment bubble.
As for the trust issue, private enterprises have clearly lost a lot of credibility over the past several months. But it is less important to trust them than to (intelligently) regulate them, since the leaderships of these companies have very different sets of incentives than the average citizen does. We will always be looking for the proper balance between freedom and regulation for private-sector firms. No one wants pointlessly onerous restrictions on the ability of firms to innovate toward greater efficiency and profitability. But governments will always have a role to play in protecting consumers by safeguarding market competition and ensuring that the creation of cost-generating externalities always comes with an appropriate price tag.
In other words, the fundamental things (still) apply as time goes by -- and there is no quick fix to be had.
Aparicio Caicedo: You only mention China, Mexico, Russia, and a few others as historic examples of state capitalism. Do you think that the economic history of the United States is also an example of state capitalism: the massive military-expense budget and all the money spent by the Pentagon on companies such as General Electric, Boeing, Lockheed Martin, among others?
A: No, the U.S. government has traditionally been more involved in some sectors than others. But that is not state capitalism. Consider the history of the U.S. oil sector. Crude oil has been a strategically vital resource for the United States for many decades. Yet, though the U.S. government exerted heavy political influence to try to jumpstart construction on the Baku-Tbilisi-Ceyhan pipeline from the Caspian Sea to Turkey, oil companies took a very long time to invest in it because the U.S. government offered little in the way of tangible subsidy. Compare that with China's international investment strategy in access to key commodities.
Casey Squires: In your opinion, will state capitalism, rather than being a mechanism to fix the current crisis, take a permanent role in U.S. government?
A: No, I don't think so. George Will apparently disagrees with me on this particular point, as he noted in a recent column intended as a response to my article in Foreign Affairs. But I don't see durable political support for a move toward state capitalism anywhere in the United States. The business community still writes the checks that float many a politician's campaign. Senior members of President Obama's economic team understand that they are vulnerable to charges of creeping socialism, warranted or not, and even supporters of Obama policy among the general public appear to expect the government to cease intervening in banks and other financial institutions once confidence is restored in their ability to withstand severe stress.
In short, I think it will take a much, much larger shock than the current recession has so far generated to fundamentally undermine America's faith in the power of free markets to create long-term prosperity.
Carl Rollin: Is it possible that the Obama administration plans to make company takeovers, such as those of General Motors and Chrysler, permanent?
A: The administration has proven willing to reorganize a failing company and sack a CEO. But it has also demonstrated that it prefers to rely on market-based solutions wherever possible. To rid banks of toxic assets the administration embraced a market-based approach rather than nationalization. And its solution for Chrysler -- while painful to debt holders -- was to merge it with another market player and to remain relatively hands off. Beyond some "sacrificial CEOs," I see little reason to believe that the administration will inject itself into active management of either banks or automakers. And if the economy stabilizes over the next several months, as most expect, we may already have seen the high-water mark of government intervention in the management of private enterprises.
Joshua Bishop: What do you think of the Chinese model of capitalism, and do you think it is sustainable? Are there aspects of the Chinese model that the United States should mimic or avoid? Do you think that one aspect of the U.S. economic decline is due to its lack of infrastructural investment (i.e., in alternative fuels, such as hydrogen fuel cells, and other technologies)?
A: This is a critical question for Asia, for the United States, and for the entire global economy. I think that state capitalism is ultimately unsustainable in China. A government that micromanages economic life can take enormous credit when it helps generate three decades of nine percent annual growth. But when things begin to slow and the pace of economic expansion can no longer match the pace of rising public expectations, the leadership will have to shoulder a lot of the blame. When the gap between rich and poor reaches a tipping point, when go-go growth produces a true ecological disaster, whatever the turning point, the party will have to take the lion's share of responsibility. But these chickens won't be coming home to roost in the next couple of years. This is probably a much longer-term management challenge for the leadership -- though one much larger than any it has yet faced.
If there is a single aspect of the Chinese model Washington would do well to emulate, it's greater investment in public infrastructure and education. We are seeing some of this from the new administration, but the United States will need a sustained, longer-term commitment to investment in communications, transportation, and education infrastructure.
Leslie Dix: Does state capitalism work better in countries with large populations than small ones? Also, to what extent were John Howard and George W. Bush state capitalists?
A: I think it works much better in small countries. More to the point, it works much better in small, extremely wealthy countries. Think Singapore. It is awfully hard to micromanage an economy that must create enough jobs, provide enough opportunities, and maintain a social safety net for 1.3 billion people. That is all the more reason to credit the Chinese leadership for what it has already accomplished. But this is why I think state capitalism will be very difficult for the Chinese to sustain over the longer term.
As for George W. Bush and John Howard, their detractors have called them many names -- including a few so profane I don't even know what they mean -- but "state capitalist" is not among them. Whatever else one might say about them, they are leaders who believe in the power of free markets to spur growth. Bush can certainly be charged with increasing the size of government and of helping Congress spend far beyond the country's means, but I can't think of anyone within his administration who believed that American banks and automakers would be better off if they were run by political bureaucrats. Nor was it a team filled with champions of tighter regulation.
Nick Greenfield: Rumors this fall of hedge-fund collusion in the "shorting of Iceland" served to highlight the financial vulnerability of small states. Meanwhile, recent incidents of cyber warfare demonstrated the similar vulnerability of small states' technical infrastructure. What effects do you expect either or both of these trends to have in reshaping small states' relationships with their larger neighborhood rivals?
A: The U.S.-dominated international order of the past two decades is steadily giving way to a world in which no state is prepared to accept the burdens that come with a global leadership role. Public appetite in America for global policeman-type responsibilities has decreased still further with the onset of recession -- and the European Union, China, Russia, and others are unwilling to set aside a focus on local challenges to try to fill this growing vacuum. This means that large states will take greater interest in the countries along their borders and less interest in devoting resources to multilateral solutions for intractable international problems.
That is bad news for states like Ukraine, Georgia, and Latvia, which have already had their share of recent run-ins with Moscow. It is also bad news for anyone who will be impacted by climate change and dependence on fossil fuels.
But the cyber-warfare issue is also a major potential problem for U.S.-Chinese relations. The White House is now preparing to appoint a "cyber-security czar," an official who will have the ear of the president and no doubt use it to raise some pretty uncomfortable issues regarding emerging threats from China. As this becomes a recurring theme in bilateral conversations, it's virtually certain to generate friction.
Robert Lynch: To keep free-market capitalism alive, you write, "Washington must preserve the United States' huge comparative advantages in hard power -- an area in which the United States still outspends China ten to one and outspends all the other states of the world put together -- and soft power, which the Obama administration has, so far, improved by enhancing the United States' image worldwide." Why does sustaining an economic system require spending so much money on defense? Can't the United States just lead by economic example and scale back its global military commitments?
A: U.S. hard power is a comparative advantage with staying power. As we have all heard many times, the United States spends more on its military capacity than every other nation in the world combined. Even if Washington scales back military spending to reduce waste, it will hold a dominant military position for years to come, because it will take decades (at least) before other governments can even begin to afford to challenge U.S. preeminence -- assuming that any of them want to accept the burdens that come with that kind of investment.
That matters because U.S. military strength can help Washington continue to provide some important global public goods. For example, governments all over the world will work in coming years to reduce dependence on oil and gas. But the transition toward a more diversified energy mix will take decades. In the meantime, energy supplies will continue to come from potentially unstable parts of the world: the Middle East, the Caspian Sea basin, and West Africa. With the world's only global naval presence, America can safeguard the free flow of this oil and gas, helping to ensure that U.S. leadership remains indispensable. State capitalist or not, China needs to guarantee that the Strait of Hormuz remains open. It can do this via staggeringly large investment over several decades in its own naval capacity. Or it can let the United States spend the money, do the heavy lifting, and accept the risks in exchange for cooperation in other areas -- and a healthy degree of dependence.
Avi Ben-Gidon: You seem to suggest that in many countries the recent state intervention in the economy will be permanent. Why is that so? To the contrary, might they just be temporary, emergency forays? Isn't it conceivable that, as the global economy rebounds, governments might revert to the laissez-faire policies that have proven so successful?
A: Nothing is permanent. And in the United States, I have written quite the opposite. G-7 governments will rebound. When they do, they won't return (at least in the near term) to the mistakes of underregulated markets. In fact, the pendulum will probably swing toward overregulation. But for state-capitalist governments, the recession will not encourage them to play a less active economic role or to place greater faith in Western-style, free-market capitalism. On the contrary, in many state-capitalist countries, we've already seen public officials use the global recession to indict American-style laissez-faire economics and to vindicate the notion of benign state intervention.
In short, there will be competition over these ideas -- not within states, but among them. The G-20 will prove a contentious forum as each member government puts its own interpretation on the causes of the financial crisis and offers its own solution to ensure that it doesn't happen again.
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