State Capitalism And The Crisis

Author: Ian Bremmer

It's been nearly three decades since Antoine van Agtmael coined the term "emerging market" to describe the waking giants of the developing world. During that time, we've come to think of emerging markets--including the so-called BRIC nations of Brazil, Russia, India and China--as immature states in which political factors matter at least as much as economic fundamentals for the performance of markets. As globalization came to seem more and more like a historical inevitability, the assumption among wealthy nations was that the injection of politics was a temporary stage, that these developing economies would mature (each at its own tempo) into a state of grace in which economic balances, not politics, would drive local markets.

The financial crisis has turned this assumption on its head. Today, political battles weigh on economic policymaking, even in the world's richest economies. Nowhere is this shift more obvious than in Washington, D.C., where debates over bailouts for the auto industry, new financial rules and individual elements of a $787 billion stimulus package have become fodder for the partisan political blogosphere and have created complicated sets of risks and potential rewards for lawmakers and investors alike.

Both the growth of emerging markets and the determination of political officials around the world to avoid the social upheaval that the global financial crisis might generate have injected politics and political motivations into the performance of global markets on a scale we haven't seen in decades.

The Rise of State Capitalism

As the Cold War stumbled to a close, the belief that governments could micromanage national economies and generate prosperity seemed dead. The dynamism and market power of Japan, the U.S. and Western Europe--fueled by private wealth, private investment and private enterprise--appeared to have fully and finally established the dominance of the liberal economic model. As these countries' governments privatized businesses and pensions, companies such as Exxon Mobil ( XOM - news - people ), Microsoft ( MSFT - news - people ), Toyota Motor ( TM - news - people ), and Wal-Mart Stores ( WMT - news - people ) feverishly sketched out global expansion plans. Globalization became a household word.

But even before the still-developing global financial crisis had shaken the foundations of faith in free markets, the determination of a new generation of emerging-market heavyweights (many of them politically authoritarian) to chart their own courses toward prosperity and power ensured that public wealth, public investment and public enterprise would make a stunning comeback. Over the past several years, an era of state capitalism has dawned, one in which governments are again directing huge flows of capital--even across the borders of capitalist democracies--with profound implications for free markets and international politics.

State capitalism is an economic system in which governments manipulate market outcomes for political purposes. Governments embrace state capitalism because it serves political as well as economic purposes--not because it's the most efficient means of generating prosperity. It puts vast financial resources within the control of state officials, allowing them access to cash that helps safeguard their domestic political capital and, in many cases, increases their leverage on the international stage. But state capitalism also stems the rise of globalization, because to varying degrees it hampers the flow of ideas, information, people, money, goods and services within countries and across international borders.

The Engines of State Capitalism

Yet, despite the massive state interventions in economies across both the developed and developing worlds, many corporate leaders and investors act as though globalization remains the dominant paradigm. That is a mistake. In fact, the new importance of the state had become obvious well before the onset of the current crisis. Energy markets provide a good example.