The state, capitalism and development

State-guided development is here to stay in much of the developing world, which means we need a more sophisticated dialogue concerning its relationship with the market

Matthew Bishop
Matthew Bishop

Early last year, The Economist published a special report on ‘The Rise of State Capitalism’. The report detailed the ambiguous implications of the predominance of state-owned firms within the political economies of fast-growing developing countries.  It recognised the appeal of state capitalism in the context of the implosion of the neoliberal growth model in the Anglo-sphere, with state capitalist alternatives acting as a driver of young firms and industries.

Yet the report lamented that ‘state giants soak up capital and talent that might have been used better by private companies’. It also stressed that big developing countries should begin ‘unwinding their huge holdings in favoured companies’ in order to ensure their own competitiveness, maintain the stability of ‘fair’ trade in the global trading system and force firms to compete ‘without the crutch of state support’.

There are three problems with this argument.

One relates to the picture with which The Economist chose to illustrate the report and the front cover of the magazine: a menacing image of Lenin drenched in red. This is actually rather revealing, as it demonstrates the mind-set of many in the neoliberal establishment for whom any discussion of the state conjures up horrific and dystopian futures of gulags, tractor factories and economic dysfunction.

Another is reflected in the implied assumption that state involvement in the economy is, and should only ever be, a temporary fix to get industries moving and build capacity, after which the private sector should take over and weave its innovative magic.

Yet another involves the disingenuousness of the way these ideas are portrayed: for neoliberals have seldom suggested that state-led industrialisation is beneficial in the early stages of development. At best, they are recent – and still reluctant – converts to this idea. They have generally sought to force developing countries across the board, whatever their levels of development, to see the supposed logic of liberalisation and privatisation, decimating nascent firms and industries in the process.

Fast-developing countries today are understandably loath to listen to lectures from the high priests of free-market fundamentalism.

Even if we engage with The Economist’s argument on its own terms, it is easy to see why many countries reject the supposed logic of a private-sector-led approach to development.

First, Western growth rates since the shift away from a mixed-economy model in the 1970s have been almost uniformly disappointing.  Today, they remain debilitatingly weak and contrast unfavourably with both post-war expansion in the West itself (where state intervention was far more prevalent) and the blistering growth rates recorded throughout Asia and much of Latin America in recent times.

Second, why does it matter if state-owned entities ‘soak up capital and talent’? Why would the private sector necessarily use them any better? Take the UK: the spectacular misallocation of human and finance capital which preceded the crash saw huge numbers of highly-qualified people and untold trillions flood into the City.  The results? Massive opportunity costs in terms of a skewed and unbalanced economy, genuinely productive investment foregone elsewhere, a bill for £1 trillion and a subsequent and still-unfolding social catastrophe.

Third, this is all exacerbated by a model in which the private sector alone is wholly unable to take on the kind of risk which leads to long-term investment in growth industries. So, the perverse situation endures today where the Royal Bank of Scotland offers credit cards at 17.9% (more than 35 times the base rate), while small and medium-sized firms are starved of cheap credit for productive investment.  Moreover, when the company – which would not exist without huge public subsidy – continues to make enormous losses, plenty of liquidity apparently remains available to be channelled into staggering bonus payments for rent-seeking elites.

In short, it is no wonder that the strong state is here to stay in much of the developing world. It has delivered dramatic levels of growth, often produced extremely dynamic firms and industries, and has a record, which is arguably much better, or at least no worse, than free-market capitalism, of shepherding capital to the right places.  To give one example: in barely five years, China has constructed 10,000km of high-speed railway; in the UK, the 192km ‘HS2’ will not be ready for another two decades. And you can be pretty sure that, as ever, the profits of the project will be privatised and the risks socialised.

State capitalism is not about a struggle between socialism/communism and a (mythical) free market. The clue is in the name: it is about finding an appropriate mix between states and markets. The two are interdependent, and when either fails the other should be utilised to correct the imbalance and restore growth.

It therefore has little to do with overthrowing capitalism (which Lenin wished for). It is rather more about ‘governing the market’ (to use Robert Wade’s words) to ensure that the right kinds of developmental outcomes are engendered by policy.

This is something about which The Economist should have been acutely aware.  Its special report would have been far better illustrated with a picture of the early US President and ‘Founding Father’, Alexander Hamilton, or the German political economist, Friedrich List, both of whom appreciated the limits and ambiguities of markets and the importance of targeted state intervention.

We should be cautious indeed about absorbing too easily such nakedly ideological journalism.  As Giovanni Arrighi recounts in his book Adam Smith in Beijing, just as the disastrous IMF ‘shock therapy’ experiments got underway in Russia in the 1990s, The Economist argued loudly that China’s transformative growth would falter if it did not copy the Russian example and abandon its state-led approach in favour of its own version of rapid privatisation, liberalisation and deregulation.

Well, we all know how that turned out.