JUNE 29, 2016
While ships deliberately ramming one another in open water is an alarming enough occurrence, the competition in the South China Sea took perhaps an even more troubling turn in early 2016. On January 16, the China National Offshore Oil Company — a state-owned enterprise (SOE) — moved an oil rig into position in waters claimed by both China and Vietnam and began operations. The resulting diplomatic firestorm reflected not only rising tensions, but also a clear escalation on the part of the Chinese government with their willingness to use the SOEs as a weapon. This was a disturbing occurrence that is growing ever more likely. The usage of SOEs as offensive instruments of geopolitical conflict must be challenged, and the best way to do so is by doubling down on policies that incubate commercial innovation.
It is debatable whether China seeks a peaceful rise as a peer in the community of nations or represents a challenger hungry for hegemony. Yet the structures and behaviors underpinning international order for the past two-plus decades are certainly being challenged in an unprecedented fashion. China and other countries are manipulating their state capitalist economic systems in ways anathema to the free market traditions more common to the globalized landscape. State capitalism and the SOEs it breeds provide a decidedly attractive model, especially for authoritarian countries, but lack one necessary ingredient for long-term success: accountability. Currently SOEs are neither accountable to employees, shareholders, the law, nor (perhaps most importantly) the market.
For instance, China’s interest in indigenous innovation and desire to become a global science and technology power by 2020 will inevitably disappoint as a consequence of its enduring system of unaccountable ‘socialism with Chinese characteristics.’ Without the governance structures inherent to accountable governments and organizations, state capitalist countries and corporations will fail to satisfy the potential of individual entrepreneurship. As such, they handicap themselves in the long-term race for power and influence. Juggernaut nation-states are powered by economic engines, of which the individual business is the base element. The character of business is important as the foundation upon which strength (or weakness) is built.
The most resilient and effective business character is that which accelerates innovation. If expanding the conditions of the environment to encourage innovative commercial behaviors is what needs to be done, then Joshua Kurlantzick puts forward a compelling why in his new book, State Capitalism: How the Return of Statism is Transforming the World. In it, he presents the case that state capitalism is on the rise and, as practiced by autocracies, represents a ‘significant threat to international stability.
Still, not all state capitalists are autocratic and not all state capitalism is bad. State capitalist nations are defined by Kurlantzick as those “countries whose government has an ownership stake in or significant influence over more than one-third of the five hundred largest companies, by revenue, in that country.” It may be surprising that nations such as Norway are a part of this club, in addition to the usual suspects of China and Russia. One strength of the book is its examination of state capitalism in all its contexts, which sets this work apart from most other literature on the subject.
Kurlantzick accurately writes that a strength of SOEs (and related sovereign wealth funds) is that they can indeed provide governments with the ability to invest dividends in critical infrastructure improvements, as in the case of Singapore. SOEs can also provide examples of good governance; Norway’s Statoil is an excellent model of transparency and responsibility. The potential political benefits can be attractive as well, both domestically as a fuel for populist policies and internationally as instruments of coercion. What sets the example of Norway apart from those of China and Russia, of course, is the nature and cause of the political system from which its economic instruments spring. Norway does not rule by command.
Admittedly, state capitalists today operate differently than the command economy models of the 20th century commonly associated with the Soviet Union and its eastern European satellite governments. Modern state capitalists engage with the global economic order rather than operating in isolation. That said, the motivation for perpetuating such a system remains anachronistically the same. In the opening pages of the book, Kurlantzick quotes former Chinese premier Wen Jiabaom who captures a good deal of conventional wisdom when remarking, “[t]he socialist system’s advantages enable us to make decisions efficiently, organize effectively, and concentrate resources to accomplish large undertakings.” Persisting attitudes such as this are perhaps one reason why state capitalism has grown over the last 20 years. Yet despite the positive assessment of those such as Premier Wen, the potential benefits of SOEs are limited.
SOEs will find it difficult to compete over the long term in a global market where speed and innovation are currency. Kurlantzick hedges on this to some degree, though he gets credit for dispassionately acknowledging the relative successes of state capitalist systems thus far. He is also quick to point out that despite some apparent advantages of SOEs over free market alternatives, their risks to global stability demand action on the part of multinational corporations, citizens of state capitalist countries, and other national governments.
Absent action, state capitalism may prove a siren song that tempts developing nations to turn away from free market practices and free democratic practices. As Kurlantzick notes, South Korea’s advancement from having a GDP per capita roughly equal to the Congo 60 years ago, to having one of the most dynamic economies on the planet today, provides a powerful example of prosperity. Yet allowing this narrative of state capitalist success to go unchallenged ignores the system’s negative effects on both domestic populations and the global economy.
The author posits that moving from the “Washington Consensus” toward a “Beijing Consensus” would not be a positive outcome, as such a shift would threaten both political and economic stability around the world. Kurlantzick lays out five threats state capitalism represents to international order. First, in young democracies, state capitalism could corrode nascent democratic culture and institutions by placing too much power in the hands of too few elites. Second, political instability can follow from the application of state capitalism. Third, state capitalism could lead to economic collapses on a scale that reverberates negatively across the globe. Fourth, state capitalism could become so attractive that it becomes a model in increasing use. And fifth, autocratic state capitalists such as China and Russia will use their companies as weapons of war.
Kurlantzick accurately identifies the fifth threat as the greatest. To understand why, let us revisit our opening example involving the Chinese drilling operation off the coast of Vietnam or consider the activities of Russia and Gazprom vis-à-vis Ukraine. One of the book’s policy prescriptions urges democratic governments to seek political reform in those nations they seek to influence and to promote democracy as opposed to imposing market reforms as a pre-condition for cooperation. Kurlantzick embraces an inevitable degree of controversy by effectively endorsing the democratic peace theory by both asserting the primacy of democratization while stating “[t]he past sixty years of history show that democracies, whether state capitalist or free market, almost never go to war against each other.” But he also provides a convincing rationale — that it is important to de-link the two notions of autocratic rule and state capitalism. Doing so would remove legitimacy from the Chinese Communist Party, for example, as it argues that the successes of SOEs and economic well-being of Chinese citizens would be impossible if not for China’s authoritarian style of government.
Certainly, an emphasis of democratization will not be enough to erode the legitimacy of authoritarian state capitalists. A natural extension of Kurlantzick’s analysis is to explore the importance of commercial innovation and how the United States in particular is scoring these days. Innovation and adaptation are true sources of competitive advantage; in creative centers such as Silicon Valley, London, and Berlin, leading voices know this. That’s why the idea ofdisruption is so pervasive.
Disruption is literally an existential concept within the technology sector. As Marc Andreessen pointed out in an epic tweet storm, disruption is about creation, not destruction. Innovative companies create. SOEs typical of most state capitalist nations destroy or, at best, exploit the status quo for as long as possible. It is therefore in the interest of market capitalist governments to grow conditions conducive to innovative discovery. Those conditions include somewhat simple things such as a fast and reliable internet, acceptable roads, railways, and airports, as well as access to capital. But those conditions also include very difficult things such as an abundance of imagination, daring, and commitment to exploration — not to mention a talented workforce developed in a world-class educational system. It is possible to argue that United States in particular is moving in the wrong direction in this regard.
Sound policies are integral to creating an effective environment for challenging state capitalism. Unfortunately in the United States currently, government funding for research and development programs is decreasing, physical infrastructure continues to decay, and enacted byzantine, short-sighted immigration policies do nothing to create the conditions for innovation and long-term economic success. This must change. Richard Haass did well to remind Americans that foreign policy begins at home in his book of the same name. In State Capitalism, Joshua Kurlantzick does similarly well to remind us that foreign policy also begins in the boardroom. A well-rounded national security practitioner would be wise to invest in both books.
Brian Collins is Vice President for Policy at Business Executives for National Security (BENS). Prior to joining BENS, he served as a combat decorated infantry officer in the U.S. Marine Corps.
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