The Washington PostDemocracy Dies in Darkness

State-run economies increasingly adore the free market

It’s the best way they’ve found to advance their interests.

A worker on the site of an infrastructure project outside Jiuzhaigou, China. (Thomas Peter/Reuters)

This past week at the World Economic Forum in Davos, Switzerland, German Chancellor Angela Merkel warned against growing government intervention in international trade: "If we are of the opinion that things are simply not fair, then we have to seek multilateral answers and not pursue a unilateral protectionist course where we isolate ourselves." She was largely defending the Washington Consensus , a catchall term that suggests politics and economics ought to inhabit separate spheres. This is the orthodoxy upon which the current international order is based.

But that consensus is coming apart because, more than ever, state-led capitalism works — and it is here to stay. China's consolidation of its state-owned enterprises (SOEs), Russia's oligarch-led economy, the proliferation of sovereign wealth funds (SWFs) and growing government intervention in the West are clear indicators of state-led capitalism's success. Controlling market activity gives governments obvious advantages when it comes to advancing political agendas at home and foreign policy abroad.

China has nearly halved the number of its state-owned enterprises — firms such as China Guodian Corporation, a major power generator, and Shenhua Group, a coal producer — in the past 15 years. But this does not mean its SOEs are becoming smaller. Instead, these merged corporate behemoths will soon start taking larger stakes in China's leading private companies, thereby increasing their centrality to the nation's economy. Beijing is using these titanic companies to develop a global network of infrastructure projects, such as China Harbour Engineering's Port City project in Colombo, Sri Lanka, that will increase its influence in dozens of countries. At the same time, its economy continues to grow, and its soft power — the spread of its culture, films and TV shows — is reaching new peaks.

Another example of successful state-led capitalism is Russia, where government-linked companies have personalized ties to the state. Moscow is able to use these corporations for political ends: threatening gas supplies to keep European governments compliant, for instance, or directing energy revenue to finance military development. Russia's refusal to separate politics and markets has not led to any lessening of its influence in global politics. On the contrary, Moscow has pulled off the highest-profile annexation so far this century, in Crimea, and its intervention in the American presidential election has sent shock waves through U.S. politics.

Around the world, sovereign wealth funds, a type of state-owned investment vehicle, are as popular as ever. The Sovereign Wealth Fund Institute reports that there are dozens of SWFs, including 24 created in the past decade, which collectively control more than $7 trillion in assets. Responsible for massive flows of capital around the world and often under explicit political guidance, SWFs are an important feature of today's global economic landscape; governments also use them as agents of statecraft. SWFs in the Persian Gulf region, for instance, are investing in Russia because of concerns about America's regional staying power, and they are deepening ties with Muslim countries in Southeast Asia to ensure export markets and potentially to facilitate counter-radicalization initiatives.

State-led capitalism is even finding support in the West. Recent news of Norway using its SWF to pull capital out of what it deems unethical investments — such as the British defense company BAE — show that government intervention in markets can be used for a variety of ends (Norway's decisions also serve a political purpose, reinforcing its brand as a responsible member of the international community). And in the United States, President Trump has bragged that he personally influences firms' decisions about where to place their factories. His protectionist tendencies are on full display when he questions the North American Free Trade Agreement and flays the World Trade Organization (WTO), after having pulled the United States out of the Trans-Pacific Partnership.

This is a dramatic reversal of the trend from two decades ago. In the 1990s, there was a rush around the world to liberalize economies. Capitalism's defeat of communism made it seem that unfettered market activity was the key to success in a new era of globalization. WTO membership skyrocketed, ultimately including formerly communist countries such as China and Russia. Developing countries signed up with the International Monetary Fund's structural adjustment programs (SAPs), gaining access to loans in exchange for adopting neoliberal economic prescriptions.

But a number of factors led to skepticism about free markets. One was the underwhelming developmental effect of SAPs and liberalization. Particularly in Russia, such "shock therapy" caused societal upheaval that Russians still resent . A further blow to the neoliberal model was a series of financial disasters caused by unrestricted flows of capital, notably the 1997 Asian financial crisis and the 2008 global financial crisis. Perhaps the factor that has most undermined neoliberalism's attractiveness, though, is the persistent power of countries with state-led economies, such as China and Russia. These countries — the most powerful in the developing world — remain relevant not despite state intervention but because of it.

We are not seeing a "universalization of Western liberal democracy" and free-market capitalism, as Francis Fukuyama predicted after the fall of the Soviet Union. State-linked forces are major actors in international economics, and the geopolitical benefits they render their controlling governments mean they will stick around for the foreseeable future. Since the Cold War, capitalism has thrived in unforeseen variants, often fusing with elements of state control to great effect. As a result, we have entered an era when state-led capitalism is firmly entrenched.

Twitter: @NBorroz

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