The End of the Free Market
Table of Contents
Title Page
Copyright Page
Introduction
CHAPTER ONE - The Rise of a New System
CHAPTER TWO - A Brief History of Capitalism
CHAPTER THREE - State Capitalism: What It Is and How It Happened
CHAPTER FOUR - State Capitalism Around the World
CHAPTER FIVE - The Challenge
CHAPTER SIX - Meeting the Challenge
Acknowledgements
NOTES
INDEX
ALSO BY IAN BREMMER
The Fat Tail: The Power of Political Knowledge for Strategic Investing
(with Preston Keat)
The J Curve: A New Way to Understand Why Nations Rise and Fall
Managing Strategic Surprise: Lessons from Risk Management and Risk Assessment
(with Paul Bracken and David Gordon)
New States, New Politics: Building the Post-Soviet Nations (with Raymond Taras)
Nations and Politics in the Soviet Successor States (with Raymond Taras)
Soviet Nationalities Problems (with Norman Naimark)
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Bremmer, Ian, 1969-
The end of the free market : who wins the war between states and corporations? / Ian Bremmer.
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eISBN : 978-1-101-42945-7
1. Communist countries—Economic policy. 2. Capitalism—Communist countries. 3. Capitalism—Developing
countries. 4. Government ownership—Communist countries. 5. Government ownership—Developing
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INTRODUCTION
One Friday afternoon in May 2009, I got an e-mail inviting me to join a small group of economists and scholars “to exchange ideas and opinions on the current financial crisis” with China’s Vice Foreign Minister He Yafei. Seven days later, I found myself in a conference room at the Chinese Consulate on Twelfth Avenue in Manhattan, seated directly across from a tall, friendly Chinese diplomat in a well-tailored black suit. Following formal words of welcome delivered in lightly accented English, the smiling vice minister began the meeting with a question: “Now that the free market has failed,” he asked, “what do you think is the proper role for the state in the economy?”
His words hung in the air a moment. His mischievously matter-of-fact tone and the enormousness of his assumption almost drew a laugh from me. I caught myself in time, though I doubt my amusement would have offended him. His warmth was genuine, but the question was a serious one—and a quick glance at the headlines offered him plenty of corroborating evidence. For economists, signs of an impending meltdown had begun to accumulate in 2007, but the announcement on September 15, 2008, that the investment bank Lehman Brothers had filed for Chapter 11 bankruptcy protection ensured that the historic scale of the financial crisis could no longer be ignored. Within days, political officials in Washington had assumed responsibility for decisions normally made by markets in New York, a momentous shift in economic and financial power from America’s capital of finance to its capital of politics. On October 3, President George W. Bush signed the Emergency Economic Stabilization Act of 2008, creating the $700 billion Troubled Asset Relief Program. Evidence appeared that global recession had taken hold. As debate intensified over a stimulus package in early 2009, a new president, Barack Obama, warned that if Washington didn’t move quickly, America faced a catastrophe. Lawmakers answered the call with a $787 billion rescue plan.
He Yafei waited patiently for an answer. “Banks have clearly failed to regulate themselves, but that doesn’t demand that government permanently dominate the economy,” I responded. “Though I can see why political leaders might like the idea,” I thought to myself. Robert Hormats of Goldman Sachs, Don Hanna of Citigroup, economist Nouriel Roubini, and others added their views to the mix. Over the next ninety minutes, my American colleagues and I made our case, and Mr. He made his. Each side scored points, and we found some common ground. But as the meeting ended, it was clear we had argued the respective merits of two fundamentally incompatible sets of political and economic principles.
In meetings of much greater consequence now taking place around the world, this inability to agree on the proper role for the state in the performance of markets will change the way we live. The most obvious example comes from the transition from an international bargaining table dominated by heads of state of the G7 group of industrialized nations—all of them champions of free-market capitalism—toward a G20 model that acknowledges the need to allow relative free-market skeptics like China, Russia, Saudi Arabia, India, and others to join the conversation. By fall 2008, the G7 had become an irrelevant institution. The financial crisis made clear that no international body that includes Canada and Italy but excludes China and India can offer credible solutions to today’s most pressing transnational problems. In November, with financial panic taking hold in many parts of the world, G20 leaders met in Washington to hash out a workable emergency response. They met again in London in April 2009 to continue to try to negotiate. Today we’re living in a G20 world, and when leaders of free-market democracies diagnose what ails the global economy and prescribe their respective remedies, they now face the skeptical smile of He Yafei—and of all those across the table who believe that the free market has failed and that the state should play the leading role in national economic performance. That’s an enormous problem, one th
at will pose important challenges for the next several decades.
How did we get here? Didn’t the end of the Cold War signal the final victory of free-market capitalism? On December 25, 1991, a dazed Mikhail Gorbachev looked deeply into the lens of a single television camera and told his people that they were living in a new world. Proud that he had helped guide the Soviet people “toward the market economy,” he resigned as Soviet president, shuffled the papers before him, and waited for aides to signal that he was off the air. Six days later, the Soviet Union went out of business. Within three weeks, Chinese leader Deng Xiaoping had embarked on his famous “southern tour,” which created new momentum behind free-market reform in China. Within a year, even Fidel Castro had accepted the need for a little capitalist experimentation. Former Warsaw Pact states began the march toward membership in NATO and the European Union. Free-market capitalism looked to have permanently carried the day.
But as Russians discovered the hard way over the course of the 1990s, it’s a long step from a command economy to free-market capitalism. The successor to a state that had once determined which products would be produced in what quantities and how much buyers would pay for them found itself managing the largest estate sale in history. Clever (and sometimes ruthless) business moguls acquired enough overnight wealth to cast doubt on the question of who really ruled Russia. Ordinary citizens, scrambling to adapt and survive, saw a level of corruption, confusion, and chaos they had never imagined. This was not the sort of “mixed capitalism” found today in the United States or in Europe. This was a brand of laissez-faire, anything-goes capitalism in which markets were regulated by those with the most to gain from exploiting them. Little wonder, then, that as Boris Yeltsin prepared for retirement in 1999, public demand grew sharply across Russia for a return to “law and order.” Military and security officials led by a former KGB lieutenant colonel named Vladimir Putin stood ready to answer the call.
This is not simply Russia’s story. The fall of communism did not mark the triumph of free-market capitalism because it did not put an end to authoritarian government. Chinese state officials watched the Soviet collapse and Russia’s upheaval as if their survival depended on it, and they learned some important lessons. First, they recognized that if the Chinese Communist Party failed to generate prosperity for China’s people, its days were numbered. Second, they accepted that the state can’t simply mandate lasting economic growth. Only by releasing the entrepreneurial energies and innovation within its vast population could China thrive and the party survive. In short, China needed to embrace markets. Third, they saw that once this growth potential was unleashed, the party could only protect its monopoly hold on political power by ensuring that the state controlled as large a share as possible of the wealth that markets generate.
Nor is this simply China’s story. Authoritarian governments everywhere have learned to compete internationally by embracing market-driven capitalism. But if they leave it entirely to market forces to decide winners and losers from economic growth, they risk enabling those who might use that wealth to challenge their political power. Certain that command economies are doomed to fail but fearful that truly free markets will spin beyond their control, authoritarians have invented something new: state capitalism. In this system, governments use various kinds of state-owned companies to manage the exploitation of resources that they consider the state’s crown jewels and to create and maintain large numbers of jobs. They use select privately owned companies to dominate certain economic sectors. They use so-called sovereign wealth funds to invest their extra cash in ways that maximize the state’s profits. In all three cases, the state is using markets to create wealth that can be directed as political officials see fit. And in all three cases, the ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival). This is a form of capitalism but one in which the state acts as the dominant economic player and uses markets primarily for political gain.
To illustrate the differences between a Soviet-style command economy and these various forms of capitalism, imagine a football game or soccer match. Command economics is a game in which the state tries to predetermine the final score by ensuring that all players, referees, and spectators faithfully perform their pre-assigned roles. It’s more a pageant than a sport. Post-Soviet Russian-style laissez-faire capitalism is a blood sport with few rules and referees who represent the competing interests of the spectators who wagered most on the outcome. The strongest dominate, and everyone else loses. Free-market capitalism is a game with referees who exist only to ensure proper enforcement of recognized rules and with players involved in genuine competition. Government’s only role is to ensure that the rules are written effectively and fairly. It’s an ideal, one to which most U.S. and European policy makers aspire. State capitalism is a match in which government controls most of the referees and enough of the players to improve its chances of determining the game’s outcome. Spectators profit from some limited level of genuine competition, but the state rigs the game to ensure that favored players have what they need to score the vast majority of points on its behalf.
This book is about the emergence of this new strand of capitalism and how it threatens free markets and the future of the global economy. The main characters are the men who rule China, Russia, and the Arab monarchies of the Persian Gulf. But as we’ll see in some detail, the apparent success of this new model has attracted imitators throughout much of the developing world. It’s the story of how, in the first decade of this new century, public wealth, public investment, and public ownership have made a stunning comeback. Governments dominate key domestic economic sectors. The oil companies they own now control three quarters of the world’s crude-oil reserves. They use state-owned and favored privately owned companies to intervene in global markets for aviation, shipping, power generation, arms production, telecommunications, metals, minerals, petrochemicals, and other industries. They own enormous investment funds that have quickly become vitally important sources of capital.
Chapter one tells the story of how all this happened. Chapter two offers a brief history of capitalism to uncover the roots of the current emerging conflict. Chapter three illustrates how state capitalism works. Chapter four reveals how and why governments in a dozen different countries use it, with special attention on China, Russia, Saudi Arabia, and the United Arab Emirates. Chapter five outlines why state capitalism threatens free markets and the future of the global economy. Chapter six details what those who believe in free-market capitalism can do about it.
CHAPTER ONE
The Rise of a New System
What we may be witnessing is not just the end of the Cold War, or the passing of a particular period of post-war history, but the end of history as such: that is, the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.
—FRANCIS FUKUYAMA , “The End of History”1
In championing globalization as the defining force in international politics and the global economy, we’ve spent the past several years writing obituaries for communism, for dictatorship, and even for the nation-state. Globalization is the single most important thing that governments and corporations could not afford to be wrong about over the past two decades. But on the obituaries, we’re one for three.
Communism is dead—though the Kims of North Korea and Castros of Cuba refuse to bury it. North Korea, with an economy about the size of Warren Buffett’s personal fortune, survives by blackmailing its neighbors with apocalyptic threats. Cuba gets by with a little help from an oil-rich friend in Venezuela. The political leaders of China and Vietnam are communist in name only. Both countries remain police states, but neither government has remained faithful to the Marxist/Leninist/ Maoist principles from which they once drew legitimacy. Until elections in 2009, local communists had enough popular support to scuttle many promarket reforms in India. Venezuela’s
Hugo Chávez and Ecuador’s Rafael Correa brag of their socialist “revolutions,” but neither has gone much beyond nationalization of key industries. In Nicaragua, the Sandinistas’ second shot at power has pushed them to make peace with the private sector. But the clearest sign of communism’s demise came from the international financial crisis and the world’s first truly global recession (2008-2009). Many around the world (fairly or not) blamed the meltdown on American-style free-market capitalism. If the turmoil that these crises generated couldn’t breathe life into the communist corpse, it’s hard to imagine what could. Communism is dead, and there will be no resurrection.
Yet no one can credibly say the same for dictatorship. In 1989, as Eastern Europe’s communist states fell like dominoes and millions of Chinese students mounted a bold challenge to their government, writer Francis Fukuyama penned a provocative essay to support a surprising claim: that “history” had come to an end. He argued that though forms of government would continue to vary from place to place and that some countries had considerable catching up to do, mankind was moving toward consensus on the virtues of liberal democracy. Where authoritarian governments cling to power, the increasingly free flow of goods, services, capital, and labor would generate demand for freedoms of information, assembly, and expression—and for government that derives its powers from the consent of the governed. This was not to be simply the end of communism but eventually of all forms of dictatorship—and, by extension, of organized conflict among states. The essay quickly became the subject of intense debate.
Representative democracy has made considerable progress over the past two decades in the former communist states of Central and Eastern Europe, most of Latin America, in Indonesia, and post-apartheid South Africa. Though militaries still play a prominent role in the domestic politics of Turkey, Thailand, and Pakistan, all three now have popularly elected governments. India has remained the world’s most populous democracy for more than six decades. Democracy has made real progress from Mali and Malawi to Mongolia, from Botswana and Benin to Bhutan. But in China in 1989, demand for democracy careened headlong into a great wall as demonstrations in Tiananmen Square ended in a surge of state-sponsored violence. Today, the country’s 1.4 billion people are freer than they’ve ever been to determine how and where they will live, but they are still not free to directly challenge the ruling party’s monopoly control of domestic political power. In Russia, after the upheaval of the Yeltsin era in the 1990s, Vladimir Putin has consolidated political power in a very few hands. Outside of Iraq and Lebanon, there is little sign that democracy is on the march within any Arab state. In Iran, the heavy-handed state response to the protests that followed the 2009 presidential election demonstrated again the limits of Tehran’s tolerance for pluralism. Add North Korea, Cuba, Burma, Belarus, the five Central Asian republics, and dozens more states. In all these countries, state institutions, courts, and the media are not guardians of individual liberties but instruments of state power.