x Abu Dhabi, UAEWednesday 26 July 2017

The wealth of nations

World State capitalism offers the developing world growth without democracy. Joshua Kurlantzick wonders whether the West can still compete.

Singapore Airlines, whose majority shareholder is a government investment fund, has expanded while private western carriers face bankruptcy.
Singapore Airlines, whose majority shareholder is a government investment fund, has expanded while private western carriers face bankruptcy.

State capitalism offers the developing world growth without democracy. Joshua Kurlantzick wonders whether the West can still compete.


With the global financial crisis deepening by the day and fears of a second Great Depression growing more serious, even the most committed free-market states have intervened to prop up private firms. The US Federal Reserve has made loans to American companies, citing emergency powers last used in the 1930s, while the British government has launched a multibillion dollar plan to partially nationalise the banking sector.

But these Western nations have come late to the party: they are, if inadvertently, following the lead of developing countries that have achieved impressive growth without embracing the free market. In the past decade, a group of mostly non-democratic states - China, Russia, Venezuela, and a number of Gulf nations - have transformed themselves into major players in global business and finance by providing substantial government support to strategic domestic industries. Several of these states have amassed massive pools of capital in the process - indeed, their purchases of US treasuries and other agency debt essentially underwrote the American home-buying binge.

The success of "state capitalism" - a capitalist economy run with a high degree of state control - has made it a model for states across the developing world, and even the Western powers may now be wondering whether their brand of capitalism will triumph after all. The rise of authoritarian capitalist states like China and Russia as challengers to American hard and soft power has fostered anxiety in some Western circles. In the United States, thinkers like the prominent neoconservative Robert Kagan believe that the authoritarian capitalists might prove the first real threat to the West since the end of the Soviet Union. And, as Kagan notes in his most recent book The Return of History and the End of Dreams, the authoritarian capitalists may well prove that the "end of history" - the supposed democratic peace that was to emerge after 1989 - was just an academic fallacy.

It is China that has led the way, engineering massive economic growth without opening up its political system. China, which has built the greatest economic boom in modern history - with annual growth rates around 10 per cent for most of the last 30 years - has achieved what the Soviet Union could not. It has shown an alternative to the Western democratic liberal capitalism that has dominated the globe since the Second World War.

Beijing has slowly and steadily opened the economy, keeping some state dominance of leading industries like resources and telecommunications, while maintaining tight political control, which ensures none of the messiness of democracy. Using state tools like soft loans and forced mergers, it has built globally competitive giants in several of these industries, like the telecoms powerhouse Huawei, which provides mobile phone and other communications service throughout Asia, Africa and other continents - and which has grown big enough to buy Western rivals. (Huawei attempted to buy the American company 3Com before the US Congress scuttled the deal over national security concerns.)

But China, unlike the Soviet Bloc nations, is happy to participate in global trade, and it has unleashed its giant firms on the world. At home, Chinese are allowed to participate in the free market, though the Party maintains intimate links with business leaders. Beijing has invited foreign direct investment - while ensuring that foreign investors are not able to control key firms in strategic industries. The foreign investors also transfer technology and knowledge to their Chinese partners.

At the same time, the Chinese state has firmly kept the middle classes, which have been the bridgeheads of democracy elsewhere, from pushing for political change. Benefits - from Party membership to social welfare - are lavished on the urban middle class while fervent appeals to nationalism keep young urbanites loyal to the state. The government plays on the fear of the middle classes with a steady drumbeat of dire warnings that hundreds of millions of poor peasants from China's dying farms would swarm into the rich cities if the state became a democracy.

These warnings do have some validity: the stark income inequality that divides the urban east coast from the rural hinterlands resembles the social stratification of Latin America, hardly what one expects from a still nominally "communist" state. On one trip to China, I flew into Shanghai, where per capita GDP now tops $7,000 (Dh26,000), and spent an evening at dinner in a vast, dimly-lit, trendy Japanese restaurant. Two days later, I was driving through the arid, barren central province of Gansu, where per capita GDP stands below $1,000, and meeting farmers lucky to make one tenth that.

Other nations have learnt from China, which promotes its model through a range of training courses for officials around the world, as well as through high-level visits for heads of state. Vladimir Putin has copied some of Beijing's strategies, using nationalism as a potent weapon and inculcating young urbanites with intense xenophobia in quasi-fascist youth groups. Middle Eastern autocrats have also turned to the East - looking to China for a model to expand economic growth without ceding political control. Bashar al Assad now talks of his plans to bring the Chinese model to Damascus, while in Tehran pragmatic conservatives have debated how to bring Chinese-style economic reforms to Iran's sclerotic business sector.

Almost across the board, the state capitalists have proven extraordinarily successful. Their government-backed firms have emerged as dominant players in a range of industries, especially those that require global scale, like oil exploration or aviation. It is no accident that as European and American airlines teeter at the edge of bankruptcy, the likes of Singapore Airlines and Emirates, both of which have enjoyed the patronage of their governments, are competing feverishly for new routes.

Of course, the high price of oil has had something to do with this success: the Abu Dhabi Investment Authority is thought to have some $500 billion under management, and some state capitalist nations, like Russia and Venezuela, bankroll firms with profits from oil and gas. But other nations, from China to Singapore, have prospered with scarce natural resources. The model of democratic evolution beloved in the West - in which economic growth and liberal democracy go hand in hand - has not taken hold among the new generation of state capitalists: economic prosperity has not produced internal pressure for political change, and the middle class revolts predicted by democracy advocates have not materialised. In countries like Russia, in fact, precisely the reverse is true: robust growth combined with nationalist sentiment has strangled calls for democracy. Recently the last liberal democratic party in Russia, the Union of Right Forces, essentially gave up, agreeing to merge with the Kremlin's parties.

The arrival of the state capitalists has not only transformed global business. They have transformed global politics as well. By offering an alternative to the West, the state capitalists have diminished the power and authority of Western institutions - even before the financial crisis set in. With China and Russia now available to provide loans and grants, developing nations no longer need follow the free-market dictums of the International Monetary Fund and the World Bank. This is not necessarily a negative development - competition breeds innovation and change. Long left alone, the Bank and the IMF became haughty and complacent; today, they have been forced to really work to get borrower countries' approval. At the same time, the emergence of the state capitalists has prodded the clubs of industrialized nations to begin opening their doors: In the US, senior Washington officials now propose letting China into G8 meetings, an idea unthinkable a decade ago.

A few of the state capitalists have not been afraid to use their war chests to push back against unwelcome democracy promotion: Russia, for example, now funds political consulting organisations and NGOs operating in Central Asia and the Caucuses. These NGOs appear modelled on the democracy promotion organisations of the US, like the National Endowment for Democracy; in reality, they work with established leaders to constrain and shutter local civil society.

Given the rise of the state capitalists, and the scope of the global financial crisis, some Western thinkers see liberal capitalism under great threat. As Azar Gat notes in a prescient essay, The Return of the Authoritarian Great Powers, published in 2007, democratic capitalism is not foreordained to triumph. It may not have been democracy that won the Second World War - it was simple military superiority, not more enlightened governance or economic advantage, that made the difference. "There is no reason to believe the totalitarian capitalist regimes of Nazi Germany and imperial Japan would have proved inferior economically to the democracies had they survived," Gat argues. And during the Cold War, he notes, it was not liberal democracy in general that triumphed, but the United States - a historical anomaly in many ways. And the new state capitalists have far more advantages than the old Soviet Union. "There is a great deal to suggest that such powers have far greater economic and military potential than their communist predecessors did," Gat writes.

But others are not so sure of the state capitalists' continued success. As my colleague Minxin Pei of the Carnegie Endowment think- tank has pointed out, even with China's effective economic governance, state intervention still fosters a range of self-dealing. According to Pei, corruption may cost China as much as $86 billion per year in lost economic growth, and graft eats up 10 per cent of state spending. For other state capitalists, graft could become endemic, rotting away at success from within. In Venezuela, Hugo Chavez has transformed the state oil company, Petroleos de Venezuela, from an efficient enterprise into a political patronage tool, in the process reducing its operating capacity and hurting the economy. And these are nations with better governance than many; if the state capitalism model is extended to, say Syria or Angola, it could easily devolve from effective management with some graft into graft with no management.

Already the state capitalists, who have grown wealthy by participating in global trade and finance, have become more enmeshed in that system. By virtue of its enormous holdings in US treasury bills, China has been forced to take a larger interest in the global financial crisis, even though Beijing's economy is far more insulated from the meltdown than most. The Chinese leader Hu Jintao has consulted closely with other world leaders about global rescue strategies, a far cry from the go-it-alone xenophobia of past Chinese presidents. In the security realm, too, Beijing has begun to work with the world, co-operating with the US and other nations to help resolve North Korea's nuclear programme and sending envoys to Sudan, where China is the major investor in Khartoum's oil industry, to assist in stopping the conflict in Darfur. Eventually, perhaps, this increasing integration with the world, along with ever greater prosperity at home, will finally spark broader political change in these nations. China at least has begun to realise it cannot insulate itself from the world's problems - just this week rebels killed five Chinese oil workers in Sudan.

Even Kagan admits that China is not necessarily headed for an authoritarian future. As he notes, the unbridled optimism of the early 1990s that the world would soon achieve a global democratic peace proved as false as the unbridled pessimism today that some regions of the world, like the Middle East and China, will never see democracy. But for democracy to triumph worldwide, the democratic states will have to work far harder for success than they could have imagined in the early 1990s. As the state capitalists have shown, there is an alternative developmental model that can make countries rich, and in nations like China and the Gulf States, where much of the middle class fears the unpredictability, anarchy and even militancy that might arrive with true democracy, perhaps getting rich will be enough. And for the governments of these post-democratic states, whose citizens may remain happy so long as economic growth continues, why throw politics wider open?

Left without their trump card - that you need democracy to build your economy - Western nations will have to come up with another tack to convince these nations of the value of freer politics. Perhaps this means Western states, rather than simply proclaiming the wisdom of democratisation, will recommit to the kind of grassroots democracy-building needed in developing nations, like training reporters, activists and trade unionists, or simply repledge themselves to foreign aid (as Barack Obama has done, promising to double America's aid budget under his watch). Perhaps it means righting the global financial crisis, recommitting to open markets - like finally finishing the Doha round of multilateral trade negotiations - and then promoting global growth through freer trade and innovation. Perhaps it simply means becoming more humble about their own societies, admitting that democracy is not necessarily linked to growth (India survived decades as a democracy with little growth, of course) and thinking about what can be learnt from the state capitalists' success.

The US may still be - as Kagan and his allies suggest - the clearest force and best hope to restore democracy's prestige; it is certainly still the world's dominant military power, with American defence spending outpacing Chinese and Russian efforts to channel their economic success into military might. Azar Gat suggests that the US "remains the greatest guarantee that liberal democracy will not be thrown on the defensive and relegated to a vulnerable position on the periphery of the international system." But even the world's most powerful democracy cannot export its creed at will, and today the US struggles to set any example at all.

After the war in Iraq, any American foreign intervention, including democracy promotion, is now seen as suspect; grantees receiving money from organisations like the National Endowment for Democracy now often hide their funders. As the global financial crisis metastasises, Washington seems to have abandoned leadership, allowing European nations to set the agenda. For now, at least, the state capitalists can only be smiling.

Joshua Kurlantzick is a Visiting Scholar at the Carnegie Endowment for International Peace and author of Charm Offensive: How China's Soft Power is Transforming the World.