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StateCapitalismMarket-MaximizingGovernmentInterventionism

Today’sDiscussion•Housekeeping•BriefReview•StateCapitalism•Corporatism•EastAsianNICs•BRICEconomies•TheFutureofChina

HOUSEKEEPING

POLS380DebateTeams Spring2019

JoeyAbeyta JulianaAlmario DanielaCamacho Teriq Canales Ahnyte Cervantes OliviaCheung Christopher Duck CourtneyDunn

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OliverThiel CanaanVelez

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KortneyYoung

TEAMMK?

MorganKern

Lady’sChoice?

BRIEFREVIEW

OurStorySoFar…

Smith Ricardo

CLASSICALLIBERALISM

List

MERCANTILISM

Marx

MARXISM

Engels

MODERNIZATIONTHEORIES

Weber Rustow

ANTI-COLONIALISM&DEPENDENCYTHEORY

Lenin GunderFrank

KEYNESIANISM

Keynes

NEOLIBERALISM

Hayek Friedman

STATECAPITALISM

Bremmer O’Neill

4-7

TypesofEconomicSystems

TypesofEconomicSystems

Government owns most or allresources.

Command Mixed Market

Government and privateownership of economic

resources mixed in varyingproportion.

Mostly private (individualor business) ownership of

resources.

Bias towardentrepreneurial innovation.

Applies the invisible hand,laissez-faire, property rights,

and individualism.

Philosophical Anchor:Capitalism

Goal of balancing economicefficiency but protecting againstthe excesses of greed and self-

interest.

Philosophical Anchor:Socialism

Bias toward large-scale, capital-intensive

production.

Applies the visible hand ofthe state, central

planning, and collectivism.

Philosophical Anchor:Communism

Types of Economic Systems

TheRoadtoSerfdom (1944)• Advocatedlibertyandpurefreemarketcapitalismbecauseofthehazardsofexcessivegovernmentcontrol:

FriedrichAugustVonHayekwasafollowerofLudwigVonMises,andthefatherofmoderneconomicliberalism.

• Stifling of market incentives

• Excessive central control

• Loss of political freedoms

ChicagoSchoolofEconomics

•PublicSectorAusterity• EconomicLiberalization• IndustrialRestructuring

ChicagoBoy:MiltonFriedman

TheDownsideofReaganomics

•Riseinunemploymentinearly1980s

•Massivefiscaldeficits• StrongerdollarandmoreconsumptionleadstoexplosionofU.S.foreigndebt

•Developingworldexperienceddebtcrisis

Reagan

• RonaldReaganandMargaretThatcher

•1981U.S.legalizesinternationalbanking

•1984¥/$agreementliberalizesJapaneseinvestment

•1986LondonStockExchangeacceptsforeignsecuritiesdeals

UnleashingInternationalCapital

STATECAPITALISM

WhoisIanBremmer?•PoliticalscientistwhofoundedtheEurasiaGroup,aninternationalconsultancy

•Authorof“StateCapitalismComesofAge,”inForeignAffairs (May/June2009)

IanBremmer

Whatis“StateCapitalism”?AccordingtoBremmer,statecapitalismis“asysteminwhichthestatefunctionsastheleadingeconomicactorandusesmarketsprimarilyforpoliticalgain.”

Whatis“StateCapitalism”?“Statecapitalismhasfourprimaryactors:nationaloilcorporations,state-ownedenterprises,privatelyownednationalchampions,andsovereignwealthfunds(SWFs).”

FormsofStateCapitalism• Inanefforttomanageeconomicgrowth,manygovernmentsattemptto:•promotecertainindustriestoencourageeconomicdevelopment

•developcertainnationalcompaniesintogloballeaders•Restrictcompetitionfromforeigncompaniesinstrategicindustries

•Create“sovereignwealthfunds”(SWFs)tomanagecapitalaccumulationinkeyindustries

WhereIsStateCapitalismHappening?•Bremmer worriesthatrelianceonstatecapitalismisincreasing:

• Developingeconomiesaroundtheworldhaveincreasinglyreliedonstateinterventioninthemarket.

• Intheaftermathofthe2008-09financialcrisis,Westerngovernments,includingtheUnitedStates,reliedheavilyonstateinterventioninthemarket.

GlobalDistributionofEconomicFreedom

4-18

TheProblemwithStateCapitalismAccordingtoBremmer,theproblemwithstatecapitalismisthat:

• Thegovernmentexplicitlymanipulatesmarketoutcomesforpoliticalpurposes

• Governmentinterventionexposesprivatecompaniestounfaircompetitionandhighercosts

• Consumersfacehigherpricesandmarketinnovationsuffers

• Cronyismleadstocorruptionandeconomicinefficiencies.

TheProblemwithStateCapitalismAccordingtoBremmer,theproblemwithstatecapitalismisthat:

• Thegovernmentexplicitlymanipulatesmarketoutcomesforpoliticalpurposes

• Governmentinterventionexposesprivatecompaniestounfaircompetitionandhighercosts

• Consumersfacehigherpricesandmarketinnovationsuffers

• Cronyismleadstocorruptionandeconomicinefficiencies.

TheProblemwithStateCapitalismAccordingtoBremmer,theproblemwithstatecapitalismisthat:

• Thegovernmentexplicitlymanipulatesmarketoutcomesforpoliticalpurposes

• Governmentinterventionexposesprivatecompaniestounfaircompetitionandhighercosts

• Consumersfacehigherpricesandmarketinnovationsuffers

• Cronyismleadstocorruptionandeconomicinefficiencies.

TheProblemwithStateCapitalismAccordingtoBremmer,theproblemwithstatecapitalismisthat:

• Thegovernmentexplicitlymanipulatesmarketoutcomesforpoliticalpurposes

• Governmentinterventionexposesprivatecompaniestounfaircompetitionandhighercosts

• Consumersfacehigherpricesandmarketinnovationsuffers

• Cronyismleadstocorruptionandeconomicinefficiencies.

TheProblemwithStateCapitalism• “Oneessentialfeatureofstatecapitalismistheexistenceofclosetiesbindingtogetherthosewhogovernacountryandthosewhorunitsenterprises.”

VladimirPutinandRussianoligarchOlegDeripaska.In January2019,theTrumpadministrationofficiallyliftedsanctionsonDeripaska’sbusinesses(EN+GroupPlcandEuroSibEnergo JSC) (GettyImages).

GettoKnowtheRussianOligarchsOlegVladimirovichDeripaska isthefounderofBasicElement,oneofRussia'slargestindustrialgroups,andhasclosetiestoPutin.

Emin Araz oghlu Agalarov,isanAzerbaijani-RussiansingerandheirofAmas Agalarov,a

Russianbusinessman.

YevgenyViktorovich Prigozhin isaRussianbusinessman whohasnumerousrestaurantsand

cateringbusinessesthathavehosteddinnerswhichVladimirPutinattendedwithforeigndignitaries.

http://time.com/5401645/putins-oligarchs/

Amas Agalarov

Viktor Felixovich Vekselberg is a Ukrainian-born Russian businessman, and the owner and president of RenovaGroup, a Russian conglomerate. His fortune is estimated at $13.6 billion.

GettoKnowtheRussianOligarchs

http://time.com/5401645/putins-oligarchs/

ISSTATECAPITALISMREALLYATHING?

CritiquingtheIdeaofStateCapitalism“itisanunhelpfuloversimplificationtodividetheworldinto‘marketcapitalist’and‘statecapitalist’camps.Therealityisthatmostcountriesarearrangedalongaspectrumwhereboththeintentandtheextentofstateinterventionintheeconomyvary.”

ProfessorNiallFergusonProfessorofHistoryatHarvard/Seniorresearchfellow,JesusCollege,Oxford/Seniorfellow,HooverInstitution,StanfordUniversity

TheScandinavianModelIn1938,Sweden’sgovernment,employerassociation,andtradeunionsnegotiatedtheSaltsjobadenAgreement,whichledtocentralizedcollectivebargainingatthenationallevel.

Grand Hotel Saltsjöbaden in Saltsjöbaden, where the treaty was signed.

Norway’sSovereignWealthFundNorway’s$1TrillionGovernmentPensionFund,alsoknownastheNorwegianOilFund,wasestablishedin1990toinvestthesurplusrevenuesoftheNorwegianpetroleumsector.

IftheNorweguan fundhadbeenacountry,itwouldranksomewhereaheadofMexicoandbehindIndonesiaintermsofgrossdomesticproduct.InSeptember2017itwasworth$192,307perNorwegiancitizen.

Asia’sPolitical&BusinessMonopolies•PoliticalMonopolies:Developmentof�irontriangles�:electedofficials,bureaucrats,andindustry

•BusinessMonopolies:JapaneseandKoreanindustrialgroups(zaibatsu,chaebols)

Political scientist Chalmers Johnson described how MITI (Ministry of International Trade and Industry, MITI) told companies what to make; subsidized loans, promoted worker training; encouraged corporate mergers and bankruptcy, and restricted imports (protecting domestic market) through informal means. Political corruption led to major bank failures and loss of investment capital that contributed to a prolonged financial crisis in the 1990s.

SouthKorea,HongKong,Singapore,andTaiwanbecameknownasthefour“AsianTigers"

EastAsianNewlyIndustrializedCountries(NICs)

AfterWWII,newlyindustrializedcountries(NICs)inEastAsiadevelopedrapidlythroughastrategyofexport-led

industrialization.Severalconditionsprovedhelpful:

• Growinginternationaleconomy• StrongdollarandclosetiestotheUnitedStates• Strongautonomousstatesandbureaucraticagencies

• Closegovernment-businesscoordination• Nounionsorlandedelite

ResultsofExportOrientedGrowth•6-8%GDPgrowthrates• Shifttomanufacturing,• Lowunemployment• Lowinflation•Highrateofurbanization

• Strongpovertyreduction

O’NEILL’sBRICs

StateDrivenDevelopmentAnumberofcontemporaryexamples—notablyBrazil,Russia,India,andChina—illustratethepowerfulrolethatstatescanplayinpromotingdevelopment.

TheBRICSIdeaGoldmanSachschiefeconomistJimO’Neillwroteapaperin2001arguingthatBrazil,Russia,India,andChinaweretheemergingsuperstarsmostlikelytodominatethe21stcenturyeconomy.SouthAfricawasaddedin2010.

Inhisessay“BuildingbetterglobaleconomicBRICs.,”O’NeillpredictedbigdevelopmentsforthefourBRICcountries.

TheBRICS

Takentogether, thesefivecountries cover40percentoftheworld’spopulationandmorethan25percentoftheworld’sland,andacombinedGDPof$16trillionin2015.

Between1990to2014,thesecountrieswentfromaccountingfor11%oftheworld’sGDPtoalmost20%.

http://time.com/4923837/brics-summit-xiamen-mixed-fortunes/

In2014,thecombinedcurrencyreservesof

thegroupingstoodatabout$4trillion,75percentofworld’scurrencyreserves.

TheBRICScountriesfeaturealargelystate-drivendevelopmentmodel,withanemphasisoneitherextractiveenterprisesorexport-orientedgrowth.

TheBRICS

THEROLEOFBRICSINTHEDEVELOPINGWORLD(2012)

BRICSForeignDirectInvestmentFlows

THEROLEOFBRICSINTHEDEVELOPINGWORLD(2012)

Thefivenations,withajointestimatedGDPof$16tn,setuptheirowndevelopmentbankinparalleltotheUS-dominatedIMFandWorldBankandholdsummitsrivallingtheG7forum.

WaningEnthusiasmforBRICSGlobalenthusiasmovertheBRICShasdiminishedinrecentyears,partlyduetohardlinepoliticaltendenciesandeconomicheadwindsfallingglobaldemandandloweroilandcommodityprices GoldmanSachsshutdownitsBRICinvestmentfundinlate2015

afteritsassetsplungedinvalueby88%fromtheir2010highpoint.

CracksintheBRICS

TheBRICSLackSynergy• BRICSareverydifferentincultureandideology

• BRICSlacksharedeconomicinterestsandobjectives

• BRICScompeteinseveralmarkets(e.g.,clothing,aircraft,militaryequipment)

• BRISgenerallydon’tcomparetoChina’sroleinglobaltrade

BRICSLosingSteam?• WhileChinaandIndiacontinuetothrive,Brazil,Russia,

andSouthAfricahavenot.

THECHINAMODEL

Mao’sChina• OnOctober1,1949,MaoZedongfoundedthePeople'sRepublicofChina(P.R.C.).

• In1953-58,Maoistgovernmentinitiateda5-yearplansfocusedonindustrialexpansion(agriculturelanguished).

• In1958-62,the“GreatLeapForward”focusedoncreatingagriculturalcommunes.

Mao’sChina• Discreditedbyeconomicfailures,Maowasbrieflysucceededaspresident byLiuShaoqi from1959-68.

• Maograduallyreassertedpowerandfrom1966-76,the”CulturalRevolution”soughttopurgebothtraditionalandcapitalistelementstore-establishMaoismasthedominantideologyofChina.

AfterMao• Afterhisdeathin1976,agroupofreformerswithintheCommunistPartyledbyDengXiaopinggraduallyendedandcondemnedtheCulturalRevolution

• Neweconomicreformsintroducedin1978advocatedanewmodelofsocialism“withChinesecharacteristics”

DengXiaopingwithCarterin1979

ChinaToday• From1990-2015,China’sshareofglobalmanufacturingoutputincreasedfrom>3%toabout25%.

• Inrecentyears,Chinahasbecometheworld’s2ndlargesteconomybyGDPandispoisedtosurpasstheUnitedStatesinthenextdecade.

WorldEconomiesbyGDP

WorldEconomiesbyGDP

TheRoleofPopulation

51

ConcludingThoughts•OfficeHours•Powerpoints•ConcludingQuote:�Thebiggertheworldeconomy,themoreimportantitssmallestplayers.�

• JohnNaisbittGlobalParadox