Market Capitalism, State-Style.

Ma, Ying

IAN BREMMER. The End of the Free Market: Who Wins the War Between States and Corporations? PORTFOLIO. 240 PAGES. $26.95.

IAN BREMMER BELIEVES that the free market is worth defending. Though market capitalism has taken a severe beating in the recent global financial crisis, he insists that it remains the best model for creating wealth, promoting growth, and delivering prosperity worldwide. Yet, as he explains in his new book, The End of the Free Market, market capitalism now faces a major threat from within capitalism itself.

That threat is state capitalism, and around the world it appears to be the new fad. Its adherents range from powerful former communist countries like Russia and China, to Arab monarchies of the Persian Gulf, such as Saudi Arabia and the United Arab Emirates, to energy-rich authoritarian states like Iran and Venezuela. Democracies such as India and Mexico showcase elements of state capitalism too, and vibrant emerging markets such as Brazil flirt with it.

The governments may be different, but the underlying logic is the same. According to The End of the Free Market, state capitalism is a system in which the government acts "as the dominant economic player and uses markets primarily for political gain. The ultimate motive is not economic (maximizing growth) but political (maximizing the state's power and the leadership's chances of survival)."

State presence in the economy, however, does not automatically make a country state capitalist. After all, the global financial crisis that began in 2008 has made clear that even market capitalist governments, under dire circumstances, will not hesitate to carry out massive interventions in their economies. The distinction between them and state capitalists, says Bremmer, is that the latter see government intervention not as a "temporary series of steps meant to rebuild a shattered economy or to jump-start an economy out of recession" but as a "strategic long-term policy choice." For state capitalists, markets function "primarily as a tool that serves national interests, or at least those of ruling elites, rather than as an engine of opportunity for the individual."

Unfortunately for market capitalism, the great crash of 2008 has greatly burnished state capitalism's credentials. As the excess of unfettered capitalism wreaked havoc and chaos worldwide, the free market lost much respectability, and the United States, the source of the financial crisis and the market's most vocal champion, lost a great deal of its global economic swagger.

Nonetheless, state capitalism is not the way to go, according to The End of the Free Market. The book describes the nature and appeal of the state capitalist model, the distortions it creates in the free market, and the challenges it poses to global prosperity. The author exhorts market capitalists to defend their economic model--and its virtues--against the encroachments of an increasingly attractive alternative. To that end, two important possibilities could hinder state capitalism's power grab: political liberalization in state capitalist countries and sustained economic renewal in free-market economies. Yet Bremmer fails to recognize the former and pays insufficient attention to the latter. As such, this book offers a thought-provoking read but paints an incomplete map of the way forward.

SINCE THE END of the Cold War, one authoritarian country after another--from Asia to the Middle East, from Russia to Latin America--has embraced capitalism. The trend took place not because authoritarian rulers believed in free markets or free peoples but because they believed they could keep a leash on both. By the time that President Obama strode into office, state capitalism was proudly holding court in Moscow, Beijing and elsewhere. (1)

The End of the Free Market paints a troubling picture of the current condition of state capitalism. Already, three quarters of global crude oil reserves are owned by national oil companies controlled by state capitalist countries. Privately owned oil companies, like Chevron and BP, produce only ten percent of the world's oil and hold just three percent of its reserves. State-owned oil and gas giants outcompete their privately-owned counterparts by relying on state-backed support to pay above-market prices, or by doing business with repressive regimes that private multinationals avoid. Worse yet, the state capitalist home base may outright deny energy to other countries for thinly veiled political reasons. Russia did exactly that when Gazprom turned off gas supplies to neighboring Ukraine in the winter in 2006 and 2009.

As national oil companies lock up natural resources, another agent of state capitalism, state-owned enterprises (SOES), dominate domestic industries ranging from mining to petrochemicals to telecommunications to steel production. They are complemented by privately-owned entities designated as national champions, which receive from the state heavy subsidies, tax breaks, contracts and low-interest loans. As a result, SOES and national champions can gobble up or compete against foreign competitors, both at home and abroad, with resources and advantages often not available to private companies that do not enjoy state backing.

Meanwhile, a number of state capitalist governments further sharpen their economic edge with yet another tool, sovereign wealth funds. A vast majority of the world's sovereign wealth fund assets are controlled by state capitalist countries such as China, the United Arab Emirates, Saudi Arabia, and Russia. Concerns abound over how the more opaque funds, such as the China Investment Corporation, might make investments based on political rather than financial objectives.

DESPITE SHARING Various common, troubling characteristics, state capitalist countries are not all equal. The End of the Free Market devotes much (perhaps too much) time to identifying countries--ranging from Algeria to South Africa to the Ukraine--that are state capitalist or exhibit state capitalist tendencies. Some of these countries are not that state capitalist while others are not that significant. As Bremmer himself admits, powerful regimes such as Saudi Arabia, Russia, and China ultimately give state capitalism its glow because of their significant global economic clout.

In the 20th century, Arab states demonstrated through oil embargoes their willingness to wield rich oil supplies as a political weapon. In the 21st century, the rising power of China and Russia has given state capitalism much of its new shine. Both former communist regimes have built viable and sizable economies. Though they give no thought to a return to the socialist, command policies of the past, leaders in Moscow and Beijing show every interest in keeping a leash on their respective economies in order to maintain a monopoly on political power.

Of course, no country can rival China as the granddaddy of state capitalism today. Since it embraced market reforms three decades ago, the country has drastically expanded its economy and offered its people improved living standards that were previously unimaginable. China's explosive growth makes the case that state capitalism not only works but can work miracles. As the country emerges from the global financial crisis relatively unscathed, the aura of its state capitalism has only intensified.

Beijing, for its part, has not been hesitant to tout the success of its political-economic model. In May 2009, China's vice foreign minister, He Yafei, asked Bremmer and a small group of economists and scholars, "Now that the free market has failed, what do you think is the proper role for the state in the economy?" In many ways, China had already formulated its own answer. At the height of the financial crisis in 2008, Chinese Premier Wen Jiabao explained on CNN'S Fareed Zakaria GPS that China's resounding economic success came from the important thought that "socialism can also practice market economy" and that the formulation of China's economic policy "give[s] full play to the basic role of market forces in allocating resources under the macroeconomic guidance and regulation of the government."

Within China, the national government takes a much less polite, or subtle, approach. As Willy Lam has written in the Jamestown Foundation's China Brief, in the wake of the financial crisis Beijing made the exaltation of the China model the theme of a nationwide ideological campaign. The campaign lauded the government's wisdom of balancing "between growth and stability--and between market initiatives and state control." The point was to emphasize the virtues of a model that can serve as "an antidote to the kind of unbridled capitalism that underpins the financial woes in the Western world."

BREMMER IS NOT the only one who has noticed the rising power of autocratic regimes that have embraced state capitalism. He is, however, one of the few who argues that economic freedom is worth defending for its own sake.

Often, when noneconomist policy types talk about the rising economic influence of China or Russia, they prefer to discuss this phenomenon's ramifications for democracy or power politics or its offensiveness to political freedom. Some scholars, like Robert Kagan of the Carnegie Endowment for International Peace, prefer to think of China and Russia as part of an "informal league of dictators" that challenges a U.S.-led world order and opposes U.S. priorities like preventing a nuclear Iran. Others, like certain unimaginative neoconservatives and left-wing activists, see the promotion of global trade and business with nondemocratic regimes as inherently unjustified when it conflicts in any way with human rights.

For these observers, the free market is merely a sidekick in the game of power or the pursuit of universal political freedom. While the protection of U.S. power and the promotion of American ideals have a central place in U.S. foreign policy, policymakers and analysts who mouth foreign policy priorities often overlook the fact that the free market--and the economic freedom that it ensures--undergirds U.S. power and ideals, and is worth defending for its own sake.

The End of the Free Market provides precisely that defense. In fact, the book is animated by the belief that state capitalism's biggest threat is the affront to market capitalism. As Bremmer points out, state capitalism practitioners, who are mainly autocratic, could decide to disrupt the global market when politically necessary or convenient, whether by thwarting foreign competition or fostering heavy protectionism. Instead of letting markets create greater wealth and prosperity for all, state capitalism fosters a world in which "politics trumps efficiency, entrepreneurship and innovation."

To some extent, this is already happening. For example, China suspended the export of rare earth minerals to Japan for two months in late 2010 as a result of a dispute over islands claimed by both countries. China mines 95 percent of the world's rare earth minerals, which are crucial for the manufacturing of high-tech products such as iPhones, wind turbines, and hybrid gasoline-electric cars. Though it is certainly not alone, Beijing has said loud and clear that it will not hesitate to use trade as a political weapon.

To counter the negative global effect of state capitalism, Bremmer warns first and foremost against protectionism. Practitioners of market capitalism should allow the market to do what it does best: offer a free and open place for global competition. This means keeping the door open to trade, foreign investment, and immigration, even if state capitalist countries refuse to do the same or populist sentiments demand otherwise. After all, those who wish to defend the free market would do well to uphold market principles.

Bremmer also recommends that the United States continue to invest in hard power. Nothing will safeguard the free flow of goods around the world, especially oil and gas supplies, better than the preeminence of U.S. military power.

These and Bremmer's other recommendations make plenty of sense. He forgets, however, that the future of the free market depends not just on how free-market countries and state capitalist countries interact with each other but also on what they do internally. In that regard, political liberalization in state capitalist countries and sustained economic renewal in free-market economies could thwart or even end the influence of state capitalism.

Although The End of the Free Market makes it abundantly clear that state capitalism finds itself most at home in autocracies, the book refuses to take the next logical step: Acknowledge that peaceful liberalization or democratization of autocracies could lead to an unraveling of the state capitalist system that they run. Though democratic regimes are not immune to elements of state capitalism and the absence of democracy does not prevent the formation of a free-market economy, liberal democracy and its attributes--the rule of law, fair elections, civil society, free press, and other checks on state power--make it difficult for state capitalism to take root. Autocrats, on the other hand, can intervene in their economies with far greater latitude.

As such, internal political reforms can play a big role in undermining or changing the authoritarian nature of regimes as well as the state capitalism that they practice. This does not mean that the United States should forcibly, surreptitiously, or carelessly try to democratize state capitalist autocracies, or act as if freedom would materialize as long as the United States mouths it fervently enough. Rather, it means that pursuing wise and workable efforts to promote political freedom in politically unfree countries could pay dividends for economic freedom. Unfortunately, this is something that The End of the Free Market does not recognize.

Of course, state capitalist autocracies could survive for a long, long time without succumbing to internal or external pressures for political liberalization. This makes it all the more useful to keep in mind another important element that Bremmer glosses over in his prognosis: It matters whether leading free-market economies like the United States can get their economic groove back.

If the dynamism of China's economy has done more than anything else to enhance state capitalism's luster, then a return to growth, vibrancy, and innovation in the American economy will be an unambiguous indication of market capitalism's dominance. The United States cannot force state capitalist countries down a more liberal or enlightened political path, but it can do a whole lot to make sure that its own economic system is sound and its private sector is competitive. Bremmer agrees, but then avoids saying much about this country's heated internal debate about how best to move forward economically.

Bremmer argues that President Obama is not a state capitalist but ignores the implications of Obama's policies: higher tax burdens, more intrusive government regulations, higher costs for doing business, and grander ambitions to fund programs that the United States cannot afford. To emerge victorious from the global financial crisis, America will have to choose between Obama's vision and one that favors a freer marketplace and more responsible spending habits. The 2010 sovereign debt crises that hit Europe offer a fine example of the dreadful future in store for the United States should it continue down the path, as charted by President Obama and many in his political party, that favors chronic lack of fiscal discipline and crushing deficits.

To his credit, Bremmer urges Democrats, who tend to prefer a greater role for government intervention in the economy, to speak up for free markets, but the problem requires much more than political rhetoric. The choice between Obama's vision and small, limited government is not just one that snotty East Coast liberal elites regularly dismiss as the paranoia of Tea Party activists who need an excuse to vent their racism against America's first black president. It has a whole lot to do with the battle between the free market and state capitalism, too. As it turns out, those in America who advocate unprecedented new powers for the U.S. government to regulate the private sector and direct private initiatives are also the very people who have taken to ogling state capitalism.

As a presidential candidate, Obama tipped his hat to Chinese state capitalism when he bemoaned the crumbling infrastructure of his home country and noted that China's state-directed infrastructure spending has produced ports, trains, and airports that were "vastly the superior" to those in America. When Senator John Kerry introduced comprehensive climate change legislation in May 2010, he exhorted the U.S. government to heavily subsidize green technology in part because "The Chinese aren't waiting around" and have "surpassed us in renewable energy investment."

Those who are predisposed to worshipping government intervention in the economy see state capitalism, especially as successfully practiced by China, as overflowing with authoritarian chic. (2) These big-government types, like Obama and his allies, would not dare to turn the United States into a state capitalist country, but as the Chinese economy hums along with three decades of explosive growth under its belt and emerges relatively unscathed from the global financial crisis, they increasingly believe that the U.S. must adopt certain Chinese, or state capitalist, characteristics to be competitive in the 21st century.

That certainly is not what Bremmer supports. Unlike big government types, he believes that state capitalism is "burdened by ... shortsighted, short-term thinking, especially when powerful players within the system have their own set of incentives for earning short-term rewards." In the long term, he is confident that the free-market system will prevail because "virtually all people value an opportunity to create prosperity for themselves and for their families and because free markets have proven again and again that they can empower virtually anyone." Unfortunately, though, Bremmer fails to adequately acknowledge in his book that the choices the United States makes could induce or impede economic recovery, which would ensure or erode the dominance of the free market model in the world.

Stagnant growth, bloated government, out of control deficits, uncompetitive businesses--all have resulted from the policies of President Obama, who Bremmer defends as a market capitalist. Though the president has maligned the free market less since the American people roundly rebuked him and his political party in the midterm congressional elections of 2010, it remains unclear whether he will in fact change course. Unless he does, or is forced to do so by the new Congress, his policies could do a whole lot to make the title of Bremmer's book a more imminent reality.

(1.) For an in-depth discussion of the appeal of authoritarian countries that pursue economic liberalization while shunning political reform, see Ying Ma, "The Fate of the Freedom Agenda," Wall Street Journal Asia (August 1-2, 2008).

(2.) For a discussion about the ogling of Chinese authoritarian chic in America's climate change debate, see Ying Ma, "China's View of Climate Change," Policy Review 161 (June & July 2010).

Ying Ma is a visiting fellow at the Hoover Institution.