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July 21, 2010updated 10 Jan 2016 3:56pm

Free the Markets!

By Spear's

State capitalism as practised by China, Russia and Saudi Arabia will bring free markets to ruin, says Ian Bremmer. It’s lucky, say Josh Spero, that he has the ear of the West’s most powerful politicians
– and lesson – of the financial crisis was that an American administration which made the free market its idol ended up nationalising banks, mortgage companies and insurance firms, and guaranteeing every other bank implicitly. The chaos after Lehman’s collapse was the free market in action, and it was not welcome, so you’d be forgiven for thinking that when Ian Bremmer wrote The End of the Free Market, he had chiefly that in mind.

But he intended a very different threat: state capitalism. This is where ‘the state is the principal economic actor’, combining the techniques and opportunities of the free market with the muscle and intentions of a centrally-planned economy, absorbing commodities and utilities and companies globally to maintain success and stability at home.

Countries like China, Russia and Saudi Arabia are using their natural resources, state-owned companies and sovereign wealth funds for their own political ends. This is key to understanding state capitalism, says Bremmer: ‘You want to maximise economic growth, but only so far as it supports political power. If it doesn’t, then politics trumps it.’

He knows whereof he speaks. As president of the Eurasia Group, which carries out research into global political risk, he has seen all the key countries up close, yet has also stood back and observed the macro trends carrying us on into a future where state capitalism looms larger than ever. Their Global Political Risk Index was unique when it started, and his PhD in political science can’t hurt. For Google’s Vint Cerf and Sallie Krawcheck of Bank of America to sit on Eurasia’s advisory board suggests the importance of Bremmer’s work and the influence it has.

Given the fine mess free markets have made over the past few years, an experiment with state capitalism seems almost appealing: no financial wizards, no rabid speculators. The book rebuts this by explaining how state capitalism strangles competition, innovation and zero-plus growth; you can start with the state controlling heavy industry, Bremmer says, but services and advanced technology ‘are precisely the areas where you need innovation, you need entrepreneurship, you need to loosen it up, and the state doesn’t want to do that,’ Bremmer says.

Nevertheless, there is currently a place for state capitalism – at least at the moment: ‘If you were to put a true free market in China today, the country would fall apart and that is bad for the US, for Germany, for Great Britain.’ Any transition will have to be gradual, and Bremmer provides the analogy of gifting Iraq with democracy. The thorny moral extension of this is that any support for state capitalism is frequently support for authoritarian regimes with interesting records on human rights, and indeed companies like Google have found they can’t do right by both their shareholders and their consciences.

We meet over breakfast at the Crowne Plaza in St James’s, which offers the driest croissants outside of a sawdust factory, and later that day Bremmer is going to meet with George Osborne, who gave a quote for the back cover of The End of the Free Market: ‘A powerful analysis of the new emerging world by an author who is always full of insights.’ That was when Osborne was merely shadow chancellor; now he actually has to deal with the Chinese central bank and the failing British companies desperate for Chinese investment, it seems unlikely that he will preach Bremmer’s gospel as forcefully.

That gets to the heart of the problem with The End of the Free Market: it is ambitious, and persuasively so, but when Bremmer suggests remedies (maintain free flows of trade, investment and immigrants; increase hard power; entangle China in mutually-beneficial bonds), he is talking to politicians who rarely look at the long term and CEOs who cannot afford to anger China, or Russia, or the Saudis. The game is already so dominated by state capitalists that a few pieces moved against them will hardly be noticeable.

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What will Bremmer tell Osborne then? ‘I think the best defence is a good offence. You don’t want to go down the protectionist route, the trade war route. What you want to do is find the countries where they are actually supporting the rules that allow Western multinationals to flourish and support free trade.’ This sounds an awful lot like trading blocs. He will also talk up India, a democracy with demographic and entrepreneurial potentials, ‘the same basic rule set, the same basic values’, and how the West should invest in it, implicitly pulling it into its bloc, rather than letting the Chinese have at it.

BREMMER IS FAR from an ideologue, even if his theory about state capitalism creating a worse, longer-term bubble by avoiding boom-and-bust for perpetual consistent growth – one of its chief deficiencies – has some years yet to come through. ‘This book talks about why it is bad when states capture corporations. It is equally problematic when corporations capture states, and one can make the argument very strongly that in the last twenty years, in America, in many sectors, the state has been captured by corporations. That is not a free market.’ Proper regulation – starting with Obama’s recent financial institutions bill, but to be followed over the next few years with more – is key.

Nor should every sector participate in the free market: ‘Look, I think you are going to have to ring-fence truly secure technologies,’ such as cyber-security. ‘Despite the free market system, Lockheed Martin was never a global company: it was selling its best stuff to the US, the Brits, slightly worse stuff to the Israelis, the Turks. But it wasn’t selling to the Soviets.’

Bremmer foresees ‘a growing military-technological-industrial complex’, where the only way the state can combat state-supported espionage is by absorbing its defenders (or at least protecting them), which in turn will prevent them from benefiting from globalisation. So while East and West protect their companies, we will see a cyber Cold War? ‘I think that it is already starting to happen.’

If we are to see a new Cold War, then we have witnessed the first Trojan horses: Barclays sold a large stake to the Qataris in 2008, who also bought Harrods (not of strategic security importance, admittedly); China owns much of Africa’s natural resources; Dubai Ports World tried to buy the management leases to six major ports in America; Russia has its hand on the throat of vital gas pipelines to Europe.

Counterintuitively, these might actually be working against state capitalism, Bremmer suggests: ‘We want them to buy more Western stuff, we want them to buy more investments in the West and have more exposure to US Treasuries, because they will have skin in the game. The more skin they have in the game, the harder it is for them if we fail.’

It is not failure which is most worrying in this scenario: it is the thought that Western companies might become vassals for Chinese aims, banks lending to African entrepreneurs, for example, who are producing things with Chinese-owned resources to be sold to the rest of the world. In this scheme, Western companies are the handmaidens of the East, and the East controls the supply and financing.

Surely it is insidious, letting state capitalists stick their tentacles into the free market like that? Not necessarily: buying Western companies can mean imbibing Western management styles, which (theoretically) run dynamically, rather than deferentially in a rigid hierarchy. ‘If you actually open up the competition, the Western system is more insidious because it works better. I am prepared to accept the fact that the Chinese will probably try and direct certain banks to do certain things, but in return Western corporations are going to be affecting the management structures, the operating principle, the transparency of Chinese firms. That is more powerful.’

In the long run, Bremmer seems hopeful that free markets will win out; the alternative is unpalatable: ‘Either they will start to move back towards a free market model, allowing the rule of law and the IP rights and the more innovative management structures that will bring them more into the Western economy, or they will entrench and they will repress and they will use patriotism and xenophobia to blame the West. Now, I don’t know which of these they are going to do, but I know that the latter is much more likely if the West is moving into a protectionist phase.’

The long run is ever getting shorter. Jim O’Neill’s original forecast that China would overtake the US economy in GDP by 2041 was reduced to 2027 last November, while PwC, grabbing some headlines for itself, predicted 2020 in January. Bremmer doesn’t buy this: ‘When we want to talk about the US vs China, you are right, America is in a comparative decline compared to ten years ago, even two years ago, but let’s not kid ourselves that that means we suddenly want to put our chips on China. We wouldn’t do that.’ Indeed, even if Chinese GDP does reach $21 trillion in 2027, its per capita GDP will still be a fraction of America’s.

Many businessmen are learning Mandarin and moving their headquarters to Hong Kong, not-so-tacit acknowledgements of how they see the world developing over the next decades. While Ian Bremmer would not scorn them, he rails against the abject submission the West seems headed for, our own mistakes trapping us inexorably. If Bremmer’s words into the ears of powerful people have any effect, perhaps this might be slowed. But then again, considering the reality of the situation, perhaps not. At least it’s nice to know our Chancellor is getting good advice.

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