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06/26/2009

The Changing Global Landscape

In reviewing an essay by Ian Bremmer, President of Eurasia Group, in the May/June issue of Foreign Affairs, columnist George Will was reminded of an anecdote. 

“From Oct. 18 to Dec. 3, 1961, 116,000 people visited New York’s Museum of Modern Art before anyone noticed that Henri Matisse’s painting ‘Le Bateau’ had been hung upside down. Modernity is supposed to ‘transgress’ standards of the traditional, which is why Paul Hindemith, while rehearsing one of his dissonant orchestral compositions, said to the musicians, ‘No, no, gentlemen – even though it sounds wrong, it’s still not right.’” [Washington Post] 

Bremmer’s piece is titled “State Capitalism Comes of Age: The End of the Free Market?” It’s about the blurring of the lines between public and private sectors. 

Twenty years ago, with the breakup of the Soviet Union, the Kremlin embraced the Western economic model. “The young governments of the former Soviet republics and satellites championed the West’s political values and began joining its alliances.  Meanwhile, in China, liberal market reforms that had been launched a decade before began to breathe new life into the Chinese Communist Party. Emerging-market powers, such as Brazil, India, Indonesia, South Africa, and Turkey, began deregulating their dormant economies and empowering domestic free enterprise. Across Western Europe, waves of privatization washed away state management of many companies and sectors. Trade volumes swelled. The globalization of consumer choice and supply chains, of capital flows and foreign direct investment, of technology and innovation strengthened these trends still further.” 

But as Ian Bremmer writes, the times have changed. Free-market capitalism is being replaced by state capitalism, “a system in which the state functions as the leading economic actor and uses markets primarily for political gain.” [Ed. emphasis mine] 

In the old days, economic decisions made in the Soviet Union and China had little impact on Western markets. But today, champions of free trade and open markets have to defend themselves “to an increasingly skeptical international audience.” 

“(The) rise of state capitalism has introduced massive inefficiencies into global markets and injected populist politics into economic decision-making.” 

There are four principal actors: national oil corporations, state-owned enterprises, privately owned national champions, and sovereign wealth funds. 

Ah yes, “big oil.” Bremmer notes: 

“(Most) Americans think first of multi-national corporations such as BP, Chevron, ExxonMobil, Shell, or Total. But the 13 largest oil companies in the world, measured by their reserves, are owned and operated by governments – companies such as Saudi Arabia’s Saudi Aramco; the National Iranian Oil Company; Petroleos de Venezuela, S.A.; Russia’s Gazprom and Rosneft; the China National Petroleum Corporation; Malaysia’s Petronas; and Brazil’s Petrobras. State-owned companies such as these control more than 75% of global oil reserves and production. Some governments, on discovering the leverage that comes with state dominance of energy resources, have expanded their reach over other so-called strategic assets. Privately owned multinationals now produce just ten percent of the world’s oil and hold just three percent of its reserves. And in much of the world, they must now manage relations with governments that own and operate their larger and better-funded commercial rivals…. 

“A more recent trend has complicated this phenomenon. In some developing countries, large companies that remain in private hands rely on government patronage in the form of credit, contracts, and subsidies. These privately owned but government-favored national champions get breaks from the government, which sees them as a means of competing with purely commercial foreign rivals, and they are thus able to carve out a dominant role in the domestic economy and in export markets. In turn, these companies use their clout with their governments to gobble up smaller domestic rivals, reinforcing the companies’ strength as pillars of state capitalism.” 

Ian Bremmer discusses the different waves of capitalism including the rise of developing countries and the power of sovereign wealth funds, as well one including direct intervention into economies. “In the United States, lawmakers have intervened in the economy despite the public’s historic mistrust of government and its faith in private enterprise….In Europe, a history of statism and social democracy makes nationalization and bailouts more politically palatable.” 

One result of the new state capitalism is that New York City is no longer the world’s financial capital, Washington is. “A similar shift of economic responsibility is taking place throughout the world: from Shanghai to Beijing, from Dubai to Abu Dhabi, from Sydney to Canberra, from Sao Paulo to Brasilia…And in London, Moscow, and Paris, where finance and politics coexist, there is the same shift occurring toward government.” 

You also have the issue of confidence, as in the global financial crisis has undermined confidence in the free-market model. As Ian Bremmer notes, “(The) governments of China, Russia, and other states have compelling reasons to blame American-style capitalism for the slowdown. Doing so allows them to avoid responsibility for rising unemployment and falling productivity in their own countries and to defend their commitment to state capitalism, which began long before the onset of the current crisis.” 

“In response, U.S. policymakers must try to sell the value of free markets, even though this is a difficult moment to do so. If Washington turns protectionist and keeps a heavy hand on economic activity for too long, governments and citizens around the world will respond in kind. The stakes are high, because the large-scale injection of populist politics into international commerce and investment will obstruct efforts to revitalize global commerce and reduce future growth. Protectionism begets protectionism, and subsidies beget subsidies.” 

Further, on the issue of globalization, more and more Americans believe it negatively impacts their job prospects, “depresses their wages, and exposes U.S. consumers to shoddy foreign products. By 2012, there is likely to be at least one major U.S. presidential candidate who stands on a neo-isolationist, ‘Buy American’ platform.” 

In conclusion: 

“Whether free-market capitalism will remain a viable long-term alternative will depend in large measure on what U.S. policymakers do next. Success will depend not just on making good economic policy calls but also on continuing to make the overall U.S. brand compelling. Washington must preserve the United States’ huge comparative advantages in hard power – an area in which the United States still outspends China ten to one and outspends all the other states of the world put together – and soft power, which the Obama administration has, so far, improved by enhancing the United States’ image worldwide. 

“State capitalism will not disappear anytime soon. Throwing up walls meant to deny access to U.S. markets will not change that. Instead, profiting from commercial relations with state capitalist countries is in the United States’ near-term economic interests. For the sake of the United States’ and the world economy’s long-term prospects, defending the free market remains an indispensable policy. And there is no substitute for leading by example in promoting free trade, foreign investment, transparency, and open markets, in order to ensure that the free market remains the most powerful and durable alternative to state capitalism.” 

Wall Street History returns next week.
 
Brian Trumbore



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Wall Street History

06/26/2009

The Changing Global Landscape

In reviewing an essay by Ian Bremmer, President of Eurasia Group, in the May/June issue of Foreign Affairs, columnist George Will was reminded of an anecdote. 

“From Oct. 18 to Dec. 3, 1961, 116,000 people visited New York’s Museum of Modern Art before anyone noticed that Henri Matisse’s painting ‘Le Bateau’ had been hung upside down. Modernity is supposed to ‘transgress’ standards of the traditional, which is why Paul Hindemith, while rehearsing one of his dissonant orchestral compositions, said to the musicians, ‘No, no, gentlemen – even though it sounds wrong, it’s still not right.’” [Washington Post] 

Bremmer’s piece is titled “State Capitalism Comes of Age: The End of the Free Market?” It’s about the blurring of the lines between public and private sectors. 

Twenty years ago, with the breakup of the Soviet Union, the Kremlin embraced the Western economic model. “The young governments of the former Soviet republics and satellites championed the West’s political values and began joining its alliances.  Meanwhile, in China, liberal market reforms that had been launched a decade before began to breathe new life into the Chinese Communist Party. Emerging-market powers, such as Brazil, India, Indonesia, South Africa, and Turkey, began deregulating their dormant economies and empowering domestic free enterprise. Across Western Europe, waves of privatization washed away state management of many companies and sectors. Trade volumes swelled. The globalization of consumer choice and supply chains, of capital flows and foreign direct investment, of technology and innovation strengthened these trends still further.” 

But as Ian Bremmer writes, the times have changed. Free-market capitalism is being replaced by state capitalism, “a system in which the state functions as the leading economic actor and uses markets primarily for political gain.” [Ed. emphasis mine] 

In the old days, economic decisions made in the Soviet Union and China had little impact on Western markets. But today, champions of free trade and open markets have to defend themselves “to an increasingly skeptical international audience.” 

“(The) rise of state capitalism has introduced massive inefficiencies into global markets and injected populist politics into economic decision-making.” 

There are four principal actors: national oil corporations, state-owned enterprises, privately owned national champions, and sovereign wealth funds. 

Ah yes, “big oil.” Bremmer notes: 

“(Most) Americans think first of multi-national corporations such as BP, Chevron, ExxonMobil, Shell, or Total. But the 13 largest oil companies in the world, measured by their reserves, are owned and operated by governments – companies such as Saudi Arabia’s Saudi Aramco; the National Iranian Oil Company; Petroleos de Venezuela, S.A.; Russia’s Gazprom and Rosneft; the China National Petroleum Corporation; Malaysia’s Petronas; and Brazil’s Petrobras. State-owned companies such as these control more than 75% of global oil reserves and production. Some governments, on discovering the leverage that comes with state dominance of energy resources, have expanded their reach over other so-called strategic assets. Privately owned multinationals now produce just ten percent of the world’s oil and hold just three percent of its reserves. And in much of the world, they must now manage relations with governments that own and operate their larger and better-funded commercial rivals…. 

“A more recent trend has complicated this phenomenon. In some developing countries, large companies that remain in private hands rely on government patronage in the form of credit, contracts, and subsidies. These privately owned but government-favored national champions get breaks from the government, which sees them as a means of competing with purely commercial foreign rivals, and they are thus able to carve out a dominant role in the domestic economy and in export markets. In turn, these companies use their clout with their governments to gobble up smaller domestic rivals, reinforcing the companies’ strength as pillars of state capitalism.” 

Ian Bremmer discusses the different waves of capitalism including the rise of developing countries and the power of sovereign wealth funds, as well one including direct intervention into economies. “In the United States, lawmakers have intervened in the economy despite the public’s historic mistrust of government and its faith in private enterprise….In Europe, a history of statism and social democracy makes nationalization and bailouts more politically palatable.” 

One result of the new state capitalism is that New York City is no longer the world’s financial capital, Washington is. “A similar shift of economic responsibility is taking place throughout the world: from Shanghai to Beijing, from Dubai to Abu Dhabi, from Sydney to Canberra, from Sao Paulo to Brasilia…And in London, Moscow, and Paris, where finance and politics coexist, there is the same shift occurring toward government.” 

You also have the issue of confidence, as in the global financial crisis has undermined confidence in the free-market model. As Ian Bremmer notes, “(The) governments of China, Russia, and other states have compelling reasons to blame American-style capitalism for the slowdown. Doing so allows them to avoid responsibility for rising unemployment and falling productivity in their own countries and to defend their commitment to state capitalism, which began long before the onset of the current crisis.” 

“In response, U.S. policymakers must try to sell the value of free markets, even though this is a difficult moment to do so. If Washington turns protectionist and keeps a heavy hand on economic activity for too long, governments and citizens around the world will respond in kind. The stakes are high, because the large-scale injection of populist politics into international commerce and investment will obstruct efforts to revitalize global commerce and reduce future growth. Protectionism begets protectionism, and subsidies beget subsidies.” 

Further, on the issue of globalization, more and more Americans believe it negatively impacts their job prospects, “depresses their wages, and exposes U.S. consumers to shoddy foreign products. By 2012, there is likely to be at least one major U.S. presidential candidate who stands on a neo-isolationist, ‘Buy American’ platform.” 

In conclusion: 

“Whether free-market capitalism will remain a viable long-term alternative will depend in large measure on what U.S. policymakers do next. Success will depend not just on making good economic policy calls but also on continuing to make the overall U.S. brand compelling. Washington must preserve the United States’ huge comparative advantages in hard power – an area in which the United States still outspends China ten to one and outspends all the other states of the world put together – and soft power, which the Obama administration has, so far, improved by enhancing the United States’ image worldwide. 

“State capitalism will not disappear anytime soon. Throwing up walls meant to deny access to U.S. markets will not change that. Instead, profiting from commercial relations with state capitalist countries is in the United States’ near-term economic interests. For the sake of the United States’ and the world economy’s long-term prospects, defending the free market remains an indispensable policy. And there is no substitute for leading by example in promoting free trade, foreign investment, transparency, and open markets, in order to ensure that the free market remains the most powerful and durable alternative to state capitalism.” 

Wall Street History returns next week.
 
Brian Trumbore