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The End of the Free Market: Who Wins the War Between States and Corporations? Paperback – September 27, 2011
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In this Amazon exclusive, we brought together authors Nouriel Roubini and Ian Bremmer and asked them to interview each other.
Nouriel Roubini is a professor of economics at New York University's Stern School of Business. He has extensive senior policy experience in the federal government, having served from 1998 to 2000 in the White House and the U.S. Treasury. He is the founder and chairman of RGE Monitor (rgemonitor.com), an economic and financial consulting firm, regularly attends and presents his views at the World Economic Forum at Davos and other international forums, and is an adviser to cental bankers around the world. He is the author of Crisis Economics and Bailouts or Bail-Ins. Read on to see Nouriel Roubini's questions for Ian Bremmer, or turn the tables to see what Bremmer asked Roubini.
Roubini: Your book [The End of the Free Market: Who Wins the War Between States and Corporations?] suggests that an old trend, what you call state capitalism, has become much more important. What happened to change things?
Bremmer: Over the past 18 months, the Western financial crisis and the global recession have accelerated the inevitable transition from a G7 to a G20 world. That’s not just a matter of more states at the bargaining table. It’s not just about having to herd more cats to get things done on the international stage. It’s about herding cats together with other animals that don’t really like cats. And that’s not really herding.
The G7 world was one where everyone that mattered for growth in the global economy accepted the assumption that prosperity depended on rule of law, independent courts, transparency and a free media—and in the value of free market capitalism. In that world, multinational corporations are the principle economic heavyweights. This consensus has provided the engine driving globalization for the past 40 years.
The sun has set on that world. The country that has emerged strongest and fastest from the global slowdown is one that does not accept the idea that a regulated free market economy is crucial for sustainable economic growth. China’s success has persuaded authoritarians around the world that they really can have explosive growth without undermining their monopoly hold on domestic political power. China has enjoyed double-digit growth for thirty years without freedom of speech, without well-established economic rules of the road, without judges that can ignore political pressure, without credible property rights—without democracy. And the events of the past 18 months have made China more important that ever for the future of global economic growth. This is a big change with enormous implications that we had better start thinking through.
Roubini: The term state capitalism means different things to different people. How do you explain it today?
Bremmer: I’m writing about a system in which the state uses the power of markets primarily for political gain. A country’s political leaders know that command economies will eventually fail, but they’re afraid that if they allow space for markets that are truly free, they’ll lose control of how wealth is generated. They could end up empowering others who will use markets to generate revenue that can then be used to challenge the government’s authority to dominate the country’s political life. So they use national oil companies, other state-owned enterprises, privately owned but politically loyal national champion companies, and sovereign wealth funds to exercise as much control as possible over the creation of wealth within the country’s borders. And they send these companies and investment fund abroad to secure deals that increase the state’s political and geopolitical leverage in a variety of ways.
This system is fundamentally incompatible with a free market system.
Roubini: Creating friction between the state capitalists and other governments. To say nothing of privately owned companies.
Bremmer: Exactly, yes. In a free market system, multinational corporations are looking to maximize profits. In markets that are not intelligently regulated, and we’ve seen this in the United States, they're looking to maximize short-term gains at the expense of sustainable, long-term growth for their shareholders or for their own compensation. The past two years have reminded us of the sometime excesses of free market capitalism.
In a state capitalist system-- the principle economic actors are looking first to achieve political goals. Profits are subordinate to that goal. In other words, if profits serve the state’s interests, they’ll pursue profits. But if the state needs a state-owned oil company to pay through the nose to lock up long-term supplies to the oil, gas, metals and minerals needed to secure the long-term growth that keeps workers in their jobs, off the streets, and the political leaders in power, profits and efficiency can become political liabilities and these companies will pay whatever it takes to get what their political patrons want.
But the state-owned companies are competing with multinationals that won’t overpay, that can’t overpay. Here, the injection of politics into market activity distorts the outcome—in this case by raising the price that we all pay for energy and other commodities.
Roubini: When you mention the state capitalist countries, which ones do you specifically have in mind?
Bremmer: We find state capitalist powers among the Arab monarchies of the Persian Gulf-- Saudi Arabia and the United Arab Emirates are the most important. You see this trend, of course, in Putin’s Russia. There are other examples of countries that mix free market with state capitalist policies. But we wouldn’t be talking about state capitalism as game-changer for international politics and the global economy if it weren’t for China, now the world’s second largest economy and its fastest growing major marketplace.
Roubini: The End of the Free Market is a provocative title. Are you trying to out-Doom me?
Bremmer: You know I wouldn’t do that. But you have to admit, it’s not an exaggeration. It’s not that I think the United States is going to throw away its free market principles. It's not about President Obama being some kind of socialist. Washington will tighten the regulation of financial markets in coming months, and some people won’t like that. Americans will not lose their faith in the power of free market capitalism to generate prosperity. But that can’t be said for the rest of the world.
The global economic system is no longer driven by consensus around these values. There are now competing forms of capitalism. You used the word friction. That’s exactly the right word. Friction, competition, even conflict. There will be winners and losers, and the world’s political and business leaders better begin to try to sort out who those winners and losers will be.
Roubini: Do you mean that state capitalists will be winners and those who bank on free markets will lose?
Bremmer: Not necessarily. We’re going to see governments around the world that no longer feel bound to follow the Western rulebook of decades past. We’ll see multinational corporations struggling to adapt, because foreign investment will become much less predictable and much more complicated. And the backing they get from their home governments won’t carry as much weight.
Yet, some of them will be more successful than others at learning to compete on a playing field that isn’t level. There are very good reasons to doubt that the state capitalists will have staying power. But for now, they have lots of new clout and plenty of advantages. Over the next five, ten, twenty years, state capitalist governments and the companies and institutions they empower will be a serious—and global--force to be reckoned with.
The threat for Americans is that all this is happening at a moment when people are struggling, and their elected leaders have every incentive to respond to that fear and anger with promises to throw up walls meant to protect them from all these changes. Americans have always prided themselves on tearing down walls, not building them. State capitalism and American populism will put that faith to the test.
Roubini: Were you tempted to call your book The End of Globalization?
Bremmer: No, this isn’t the end of globalization. It is the end of globalization’s singular, overriding power to shape our lives and the future of the global economy. Globalization depends on access to global consumer markets, capital markets, and labor markets. State capitalism compromises all three. Globalization still matters, and it will continue to matter for the foreseeable future. But it is no longer the fundamental driver of growth in a global economy that looks increasingly toward China for the next expansion.
(Photo of Nouriel Roubini © RGE Monitor) --This text refers to the Hardcover edition.
From Publishers Weekly
The power of the state is back, announces Bremmer (The Fat Tail), president of the Eurasia Group, in this sobering examination of the threat the emerging powers of China, Russia, and Saudi Arabia pose to the free market. The book presents a whirlwind history of capitalism from mercantilism through the end of the cold war to the ascendancy of state capitalism, a political and economic arrangement in which states exert their influence over markets and big business to serve their own interests. Bremmer provides informative case studies of economies with varying degrees of state control: Algeria's authoritarian regime, Mexico's relatively open and democratic system, and China, the leading practitioner of state capitalism, in which Beijing has assumed only more economic power in the wake of the financial crisis. He weighs how free market economies can compete and concludes on a hopeful note, laying out a powerful case for the superiority of regulated free markets above state capitalism and a clear prescription for how the U.S. can defend its competitive advantage in the future. (May)
Copyright © Reed Business Information, a division of Reed Elsevier Inc. All rights reserved. --This text refers to the Hardcover edition.
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Bremmer is hardly the first to make such an observation. Indeed, the story he tells is for the most part one familiar, at least in parts, to anyone who picks up a newspaper. He focuses on the remarkable transformation in economic fortunes China has managed without great alterations in political system. This state capitalism, he argues, is not confined to China, and indeed looks likely to spread following the chaos of the Great Recession and its apparent discrediting of Western free market capitalism. However, state capitalism is not an ideological movement like communism, fascism, or even free market democracy. The states that practice it are as diverse as the United Arab Emirates, South Africa, China, and Russia, and they do so in markedly different ways, to different degrees, and with different governing ideologies. What they all share is a commitment to preserving political stability, and a conviction that the key to doing so is the calculated use of free-market tools.
No, what distinguishes The End of the Free Market is not the novelty of its narrative. Rather, Bremmer's work is elevated above its often commonplace assertions by the clarity, confidence, and efficiency with which it is told. Bremmer has a knack for eloquently summarizing major economic and political trends in a remarkably short space; late in the book, for example, he encapsulates in an eight-line aside the reasoning behind modern economist's assertion that markets, not foreign aid, are the key to raising living standards in the developing world. This skill is equally evident on subjects that lie closer to his subject matter: A particularly strong instance is pages 135-136, in which he describes why Chinese national oil companies represent such a serious threat to any attempt by the West to punish tyrannical but oil-rich regimes. And while at times the rapid-fire introduction of new information can be dizzying, the sort of pithy analysis described above makes The End of the Free Market an excellent and compact analysis of the shifting and various realities of global politics.
What it is not, however, is an especially strong policy manual. While Bremmer has a central theme, and he focuses on that theme with an admirable intensity, he is reluctant to go further and graduate a theme into a thesis. It is often unclear, for example, whether state capitalism really represents a threat to true free-market capitalism. On the one hand, he at times argues that state capitalism, like socialism, communism, and fascism, will inevitably collapse in the face of the superior efficiency and innovation that truly free markets deliver. But if free markets have such inherent superiority, why is it necessary that free market defenders such as the United States and the European Union preach its gospel as aggressively as he counsels? Elsewhere, Bremmer has made it clear that he thinks state capitalism can be beneficial only in countries which are highly underdeveloped relative to their true potential, at which point its weaknesses will become clear; one wishes he had been similarly clear here (see "Planet Money Deep Read: Ian Bremmer," the June 2, 2010 episode of the excellent Planet Money economics podcast). And while few economists would argue with his conclusion that free market economies must guard carefully against protectionism, a policymaker might wonder what exactly, beyond keeping trade barriers low and talking up the virtues of a liberal economy, Bremmer would ask them to do.
Not only does The End of the Free Market lack serious policy prescriptions for the advanced economies, it is also missing an economic theory for the developing world. While he clearly believes that freer markets do more to lift people out of poverty and spur innovation and investment, Bremmer is not clear how one might introduce such an economic system into a country lacking transparent and effective government institutions and a history of free markets. If the Western mixed economy is superior, why is it that countries which have attempted to import it whole-cloth (Russia and South Africa in the 1990s, for instance) have faltered even as politically managed state capitalist countries have thrived (China since the 1970s, Russia since the 2000s)? These are failures Bremmer acknowledges, but does not fully explain. And while the challenges are indeed large (creating the institutions and mores upon which liberalism depends is notoriously time-consuming and difficult), it is difficult to see why anyone seeking to guide an economy through liberalization would choose Western, market-based democracy over Chinese, market-exploiting stable autocracy.
And yet, despite its lack of clear policy solutions and occasionally derivative character, The End of the Free Market is well worth reading. In particular, Bremmer makes a strong case that the broad geopolitical theories of the 1990s and early 2000s are well and truly dead. We are not entering the End of History predicted by Francis Fukuyama in which liberal democracy is the only ideology left standing; nor Samuel Huntington's Clash of Civilizations between allied cultural and religious powers; and though Thomas Friedman is right that The World is Flat, he is wrong to conclude that this means cross-border ties will soon trump the nation state.
Rather, Bremmer draws on the insights of these and other theorists to posit that, while we are indeed leaving an era of overt hostility between states, we are entering a new era of a long economic struggle between those who truly believe in free markets, and those who merely utilize them. He is right to point out that, if genuinely free market states give in to the temptations of state capitalism, we will witness a startling decline in our ability innovate our way out of our increasingly complex environmental and economic problems. That he does so in a way that his work shines a light on the linkages and similarities among such economically and politically diverse states as China, Mexico, and India, and prepares the reader for the most economically important trend of the next decade, makes The End of the Free Market look not only interesting but vital.
Bremmer grounds his opening argument in the debate about Fukuyama's End of History ideas. Contrary to popular opinion at the time, he claims that only one of the three predictions made by proponents of globalism like Fukuyama came true; communism would die, dictatorships would be replaced by democracies, and nation-states would become obsolete. Only communism died. He counters that although principles of liberal democracy such as elections have been adopted around the world, they are hardly fair or even democratic. New means of communication through the internet, instead of being subversive have been co-opted by the state propaganda network to strengthen authoritarian regimes. Massive companies with GDPs bigger than most countries were seen as another indicator of obsolete nation-states in the face of globalism, but have been hard-pressed to compete with state-run or state-favored companies. The failure of communism convinced many people that state-directed economies could not produce prosperity. Indeed, the massive trade growth, tariff reductions, and business expansion after the fall of the Soviet Union seemed to prove this. However, the recent arrival of multiple large companies from BRIC countries, usually state-controlled oil and gas like Gazprom and Petro China have contradicted this popular idea. Bremmer even points to the massive bailouts from both the United States and European countries for their own economies as proof that worldwide governments are controlling more of their economies.
Exploring the roots of state capitalism, Bremmer identifies a historical connection to mercantilism. He defines the United States and Western Europe as "mixed" capitalist economies, they manage common goods like education, welfare, and national defense, but are reliant on the market to generate both prosperity and ideas. In state capitalism, the idea of common goods extends to state-sanctioned companies and resources, but Bremmer insists that state capitalism is not simply "repackaged communism." Instead, he defines it as "a form of bureaucratically engineered capitalism particular to each government that practices it. It's a system in which the state dominates markets primarily for political gain." With a few reservations, Bremmer prefers to compare state capitalism to mercantilism which he calls "economic nationalism for the purpose of building a wealthy and powerful state." Like mercantilist states, they actively sought access or markets to resources and were obsessed with a positive trade surplus. Using China as an example, during the recession it curbed imports by subsidizing the manufacturing industry and hoarding foreign currencies to regulate the yuan. He is careful to clarify the many differences between the two systems, namely the false assumptions of finite wealth and fixed economies, though an argument could be made about the growing scarcity of natural resources. Because government behavior often uses a combination of free market and state capitalism to achieve their ends, Bremer insists that labeling countries state capitalist or free-market is problematic. He uses a scale to determine that countries like the United States and Japan are mostly free-market, but have recently been pushed left by the recession. Overall, he concludes that most countries have shifted towards free market capitalism in the last 20 years. In identifying state capitalists, he points to China and Russia as the most important examples or the reason "why we talk about state capitalism" but also goes into great detail discussing many countries who have adopted degrees of state capitalism. He identifies four distinctive elements in the state capitalist model; national oil companies, state-owned enterprises, privately-owned national companies, and sovereign wealth funds. For each of the countries listed in his book, he explores to what degree these countries use "oil, gas, and other commodities as political tools and strategic assets," or resource nationalism.
Overall, Bremmer sees the threat of state capitalism being overcome by the forces of free market capitalism. Unlike other pundits who worry that foreign countries like China and Russia can threaten the United States by calling in all their debts, Bremmer insists that a more likely scenario would be a refusal to extend further credit to the U.S. government. The recession also hurt the cause of free markets by convincing many state capitalist leaders that connections to the free market were hazardous. Furthermore, the recession showed that the G8 was not representational and that the G20 was too big to build consensus. Nevertheless, Bremmer insists that creative destruction can fuel future growth and that governments do occasionally relinquish control. He claims that state capitalist governments are fundamentally unstable and inefficient because they lack popular appeal and allocate resources based on what pleases the public rather than helps the economy. He dismisses any substantial military threat to U.S. power, but focuses on global shortages of key resources due to inefficient administration and an emphasis on growth. These governments also offer no-strings attached aid to repressive governments in order to secure resource concessions, but have difficulty aligning other interests because they lack a unifying ideology. He encourages the United States to continue investing in a strong military because as a public good it reduces arms races and escalating conflicts. He also advocates Americans to resist the urge to ban foreign investment or immigration and instead "Buy Chinese." He insists that China has explosive economic potential and by deepening ties with China, the United State not only benefits financially but could also apply gradual pressure to reform their markets and ensure that any politically motivated Chinese maneuver would be insured by a policy of "mutually assured economic destruction."
The End of the Free Market offers a coherent and succinct analysis of the current political dynamic. Bremmer is one of the first scholars to adequately treat the effects of the recession on geopolitics. He also offers compelling criticism of the state capitalist model and its profoundly short-sighted political potential versus the productive potential of a free market system. However, in retrospect some of his criticisms of state capitalism do not sound so critical. With good reason, he repeatedly claims that state capitalism is inherently inefficient, yet the Chinese economy continues to grow at 10% a year. Additionally, his discussion on sovereign wealth funds does a better job of selling the policy than repudiating it. His characterization of new means of communication being used by the government to control populations does not also consider the revolutionary impact that these new forms of communication have on government resistance. The recent events of the Arab Spring demonstrate just how powerful social media, smart phones, and the internet have been to protesters. If anything, several governments in the Middle East tried limiting internet access to prevent further protests.
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