State Capitalism: The New Economic Norm?

April 8, 2019

Governments across the world are caving into the temptation to drastically intervene in their economies. While the U.S. economy continues to boom, many regions of the world are beginning to experience an economic slowdown. World trade volume recently performed its worst since 2009, and officials find themselves slashing their forecasts for global growth. In light of the economic squeeze and exacerbated by China’s expanding economic influence, many European leaders are toying with the idea of partially replacing their free market systems with more state-oriented policies. Nations such as Germany are proposing to directly invest in certain industries, hoping that cooperation between the state and businesses will facilitate economic prosperity.

Europe’s proposed shift away from free markets and toward state-directed investment is one signal of the rise of state capitalism. This economic system is one in which governments hold massive control over an economy through ownership, management, or pecuniary backing of strategic businesses or industries. China is a perfect example, as its government owns many large businesses and provides subsidies and loans to industries while protecting certain markets. One of China’s central policies, Made in China 2025, is a state-run initiative aimed at transforming China into a global tech superpower. The United States, on the other hand, largely places free markets and open competition as the primary force behind the success or failure of a business.

Although the differences between these dual systems may appear trivial at first glance, state capitalism carries enormous political and economic risks. Ian Bremmer, the president and founder of a political risk consultancy called Eurasia Group, highlights the political dangers of state capitalism due to its centralization of economic decision making. He claims that this “form of bureaucratically engineered capitalism” allows the state to dominate “markets primarily for political gain,” as leaders in nations with emerging markets, such as in Russia and China, view public wealth, investment, and enterprise as “the surest path toward politically sustainable economic development.” Long-term state control of an economy also breeds corruption and authoritarianism, as manifested by Russia, China, and Venezuela, and the result is an abuse of civil rights and individual freedoms.

State capitalism also poses tremendous economic threats. Although the United States is allies with several state capitalist nations that are currently democratic, the proclivity toward authoritarianism remains, and the possibility of severe economic damage is high. Bremmer mentions how interventionism and protectionism are the largest economic threats of state capitalism, and he notes how American protectionism in the 1930s turned the Great Depression into a global economic war. State companies also use capital less efficiently, grow more slowly, discourage investment, and disincentivize free and fair trade.

As state capitalism continues to rise, the United States and other nations should recognize the perils associated with it and uphold their commitment to a free market system. Although state capitalism may be a tempting model for economic development, its political and economic repercussions far outweigh potential benefits. Even though the free market may eventually prevail, as Ian Bremmer believes, one should not overlook the growing ideological preference for state capitalism and the perversion which it brings.