Friday, 24 January 2020

The Rise And Fall Of State-Ventures

Updated: May 7, 2011 1:07 pm

Of late, a clearly discernible trend is being noticed all over the world. As we see more and more the so-called civil rights activists agitate against the private enterprises in the name of the environment and human rights, a theme underlying this week’s cover story in our magazine, some governments around the world have been transforming themselves into deal-makers and business players on a scale never seen in the modern era.

                In China, state-owned oil giant PetroChina has become the largest company in the world, worth more than $1 trillion. In Russia, state-owned Gazprom has grown into the world’s largest gas company. States are also wielding influence by directly buying into major private firms: The investment fund run by the Arab Emirate of Abu Dhabi was until recently the world’s largest and had spent $7.5 billion to become the top shareholder of the American financial giant Citigroup. That it lost badly following the global recession is a different matter. Singapore’s state-controlled wealth fund, Temasek Holdings, sank $5 billion into Merrill Lynch, the largest US brokerage. By 2015, according to an estimate by Morgan Stanley, such state-owned funds will control a staggering $12 trillion, far outpacing any private investors.

                The rise of states as global economic players marks a sharp reversal from decades in which private enterprise seemed an unstoppable force in global finance, commerce, and culture. It represents a new and unexpected fusion of state control with the business principles of capitalism. And it is already causing a significant shift in global power.

                It is important to note that overwhelming majority of the new state capitalists—China, the United Arab Emirates, Russia, and others—are primarily authoritarian nations. And as they become bigger commercial players, they are gaining new influence in a realm once dominated by the democratic West. A study by the American Enterprise Institute, a Washington think tank, shows that the economies of politically unfree nations have grown faster than those of politically free nations over the past few years, often through forceful use of business and financial power.

                In fact, by exploiting their natural resources, particularly oil, the Arab world, led by Saudi Arabia, has been promoting Islamic fundamentalism all over the world, thus challenging democracy, secularism and freedom. Not long ago, the global monitoring organisation “Freedom House” found that “a group of market-oriented autocracies” were an important force in an overall decline in world freedom.

                The interesting case of China merits longer explanation. Over the past 30 years, while keeping firm control over its economy, China has adopted many of the tools of capitalism—ceding some operational power to a Western-trained executive class, inviting foreign investment and partnerships, and buying and selling on the global open market. Beijing has also selected a range of strategic industries to develop, from oil to telecommunications to automobiles. By creating the state-owned China National Chemical Corporation in 2004, Beijing gave birth to, what is called satirically, “a plastics manufacturing giant”, one that quickly swallowed foreign companies like Qenos, one of the biggest plastics firms in Australia. State-owned Chinese auto-maker Nanjing Automobile bought up famed British car brand MG Rover, while Huawei, boosted by massive loans from state-linked Chinese banks, has expanded around the globe.

                The result has been the most staggering economic development in modern history—all with a firm government hand on the tiller, and without the liberal political reforms considered by the democrats all over essential to economic growth. China has become the second-largest economy in the world. And the Chinese example is proving immensely influential.

                In Russia, the “strong man” Vladimir Putin essentially has shut down most of Russia’s privately held natural resources companies in order to build up the national gas firm Gazprom and other state companies. Gazprom alone controls roughly one-fifth of all gas production in the world, far larger than any private sector rival. Across Latin America and Central Asia, governments such as Bolivia, Venezuela, and Kazakhstan also have reasserted state control over their oil and gas resources. Already, many of these national companies dwarf any rivals.

                The state capitalists also are gaining influence through their power in global finance. Firms such as Merrill Lynch and Citigroup have found out, state funds provide a vital new source of investment across a world in need of capital. The funds are increasingly bailing out American banks, giving them significant leverage over the US financial sector. They also are forcing the financial world, accustomed to a tight circle of power concentrated in places like New York and London, to woo developing nations. Leading banks have begun aggressively courting West Asian and Southeast Asian state funds. Global institutions, too, understand the power shift: Recognising China’s growing economic might, the International Monetary Fund revamped its voting structure to give Beijing more power.

                Because of the close links between government and company, the state capitalists also use their diplomatic strength to create business opportunities in a way free market nations never could. For instance, as Chinese companies have tried to win contracts to explore fields in Vietnam and Afghanistan, they have come head to head with other competitors. Wealth also can be used in other ways. Within authoritarian countries, the new model allows governments to dilute potential opposition without giving up political power. In China, the government’s co-opting of entrepreneurs, now allowed to join the Party, has helped ensure that the middle class, which in the 1980s usually supported reform, increasingly tolerates the regime. In Russia, nationalising the energy industry has reduced the possibility that any future Mikhail Khodorkovsky, a tycoon who once used his petroleum wealth to fund civil society groups, might emerge within Russia itself.

                These stories are negating the lessons of the past that the state-controlled business was chiefly one of failure. When the fascist and communist governments of the 20th century seized the reins of domestic industries, they ended up undermining development and bringing misery to millions of their own citizens. As private enterprise flourished in the West, the end of the Cold War and collapse of the Soviet Union were widely seen as a repudiation of the idea that governments could successfully control the business sector. But the wake of the Cold War also sowed the seeds of a new discontent with free-market private enterprise. Many emerging nations were stung by ill-planned privatisation strategies in the 1990s. In Latin America, a decade of privatisation proved extremely unpopular. Across Africa, this era, known as the “lost decade,” resulted in rising poverty, and even longing for some nations’ authoritarian past.

                What does this lesson imply for India? Should we go back to the days of permit-and-license raj (True, this raj has never been ended, but few in the country, excluding perhaps the communists, have been championing its cause in public parlance)? No way. The Chinese and Russian examples notwithstanding, today’s shift to authoritarian capitalism may actually contain the seeds of its own demise. State capitalism fosters corruption, allowing smaller circles of state-connected elites to control more wealth. That, in turn, will make people angry and agitate. In China, state dominance has meant that “princelings,” relatives of leading Communist Party members, have gained control of some of the nation’s most powerful companies. In Venezuela, growing state control has made the national oil firm less productive and more opaque, one reason why the country now ranks near the bottom on Transparency International’s Index of the world’s most corrupt nations.

                Moreover, despite the national resources that can be poured into business growth, in the long term, state mega-companies are likely to suffer from competition on the global stage. Without exposure to domestic competition, their managers never get enough experience to compete on an open market. That is why I still value the proposition that leading business companies of a democratic India will ultimately prevail over their Chinese counterparts once they become more transparent in their functioning and competitive.

By Prakash Nanda

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