Free markets and state capitalism

In the globalised world, today’s “free” market narrative should be also connected with a widespread phenomenon of “state capitalism”. After more than a decade of triumphant Asian capitalism, the phenomenon was explicitly acknowledged by The Economist on 21 January 2012 with Lenin depicted on its cover. Paradoxically, just when globalisation in Western countries and particularly in Europe had mostly freed capitalism from the state control through liberalising measures, in another part of the world that same link was becoming so strong as to justify the label “state capitalism”. The flow of Chinese merchandise into all Western countries had been widespread for many years, especially after China’s entry in the WTO in late 2001. What was quite new in The Economist’s proclamation was its use of “state capitalism”. Up until this point the Chinese case had mostly been presented as a mix of market economy and authoritarian (communist) state. Investigations into Chinese capitalism show a more complex history composed of both forward and backward steps (Huang 2008) full of contrasts and social peculiarities (McNally 2011).

One might challenge the argument that the practice of keeping key areas of the economy under state ownership or control or using government subsidies and currency manipulation to promote exports is unique to China. One can refer as well to Brazil (Kurlantzick 2012) and other Western countries where such strategies have frequently been employed. But the Chinese case appeared too heterodox and challenging for a reflection on “different” forms of capitalism (Hall and Soskice 2001), especially after all the liberalizing reforms promoted by the West. It seemed different both in its political and institutional framework and its rules for protecting free trade, workers’ rights, the environment, and so on. Of course, no one can ignore these differences: they exist, and their analysis is essential for the advancement of the “diversity of capitalism” theory. Yet, at the same time, on the one hand, one may wonder if the model of “coordinated market economies” proposed by Hall and Soskice is enough, however useful it may be for framing some specificities. The idea of “state capitalism”, for example, and its neo-mercantilist inclination (as we shall see) are lacking in this label. On the other hand, one may wonder if the key of this “diversity” may be elusive of the strong connections between the Western “liberal market economies” and the “coordinated market economies”.

In other words, the differences between the two capitalisms seemed to justify the image of “another” capitalism, completely unrelated to its counterpart; a form of capitalism that can be easily blamed for threatening our civilisation and the goodness of its rules (Halper 2010). Nevertheless, the differences of Chinese capitalism might be framed in a complementarity perspective, or in one of integration. The complementarity perspective has been frequently used with reference to China’s role as the United States’ best lender and the most important owner of its debt, in light of the United States’ reciprocal role in giving technological support to Chinese economic growth. Although the perspective of reciprocity has not been used frequently to frame the relationship between the two capitalisms, China is important not only as the most important manufacturing country (now evolving into a more technologically-driven version), but also as a vast market for Western merchandise. More specifically, one can speak of China’s subsidiary role on at least two levels: first of all, because of the special importance of foreign direct investments in that country’s model of development; secondly, because of the mainly trade-centred character assumed by global capitalism. We shall now examine these two aspects in more detail.

In the process of globalisation, capitalism in all emerging countries grew thanks to Western technological and legal innovations aimed at market liberalization, expansion of cross-border operations of Western firms and protection of foreign investments. S. Sassen speaks of a “micro-history of legislative and executive provisions” facilitating global markets (Sassen 2006: 235). The Foreign Investment Act of 1976 was particularly important for the promotion of American firms’ extra-territorial expansion, a trend which continued from that point on, so that state-backed firms accounted for one third of the emerging world’s foreign direct investment in the period 2003-2010. No country has been so dependent on foreign direct investments for its economic development as China has (Callagher 2007) thanks to its choice of the so-called open door policy which attracted investments from the entire world and had important economic results and many spillover effects on its domestic firms’ productivity and export (Chen 2011, 213 ss.). Through foreign direct investments, a sort of new global “division of labour” was established with significant productive outsourcing making China the world’s largest manufacturing economy and generating $2.9 trillion in output annually. On the other hand, Western countries were increasingly focused on a service and finance economy, as was especially in the case of the United Kingdom (The Economist, 20 April 2013). Finally, after topping in 2012 the United States as preferred country for FDI, in 2013, China hit a new record in 2013, with $117.6 billion of FDI.

It is worth noting that up to three-quarters of the FDI in China was contributed by ethnic Chinese and countries from the same region (Chen 2011). Moreover, due to the crisis, in the last few years FDI flows from developed economies have been slowing down. However, the amount of Western foreign investment in China is large enough to indicate a significant involvement of Western capitalism in Chinese state capitalism. The two capitalisms are both part of a global system working on the basis of a new division of labour mediated by the centrality of trade. When we say that China’s labour market allows for high levels of worker exploitation, we also refer to Western firms who request and use this exploitation and to international agreements that allow outsourcing also as a sort of labour offshoring as well. After Nike’s sweatshop manufacturing practices at the end of last century, more recently we have heard about worker suicides in Apple’s sweatshop factory, as well as other cases re-casting previous negative experiences (Zumbansen 2013). All of this suggests that the two capitalisms cannot be considered as completely separate and unrelated. Moreover, we are speaking of theories and legal engineering of international competition conceived in the West, which made all these practices possible. China’s state choice of such a model of development does not rule out the full involvement of Western capitalism.

On the other hand, foreign investments contributed significantly to the foreign-trade-centred character of the global economy and to the central role played by China. It is hardly surprising therefore that, while much emphasis has been given by neo-liberals to private entrepreneurship and free markets, some have spoken of a remarkable re-proposal of “neo-mercantilism” in the global world, as prefigured by J. Robinson (Robinson 1973; Uzunidis 2011). New mercantilism is to be understood as a way of organising the relationship between the State and the market differently from the “free market” model, maintaining foreign trade as essential. As is well known, mercantilism was a sixteenth- and seventeenth-century economic doctrine that linked State power with foreign trade, which could be taxed for its benefit (Heckscher1931). As such, it was targeted polemically by Adam Smith in his Wealth of Nations. G. Arrighi, however, speaking of Adam Smith’s arrival in Beijing, assumed that the market-based development model chosen by the Chinese government corresponds better to Smith’s idea of markets as instruments of rule than to Marx’s idea of government as a committee managing the affairs of the bourgeoisie (Arrighi 2007: 358).

The 2008 crisis probably strengthened a more central role of the state in emerging countries. This is also because

[t]he growth champions of the past few decades - Japan in the 1950’s and 1960’s, South Korea from the 1960’s to the 1980’s, and China since the early 1980’s - have all had activist governments collaborating closely with large business. All aggressively promoted investment and exports while discouraging (or remaining agnostic about) imports. China’s pursuit of a high-saving, large-trade-surplus economy in recent years embodies mercantilist teachings. (The Economist 2009).^[1]

Further analysis of the current “mercantilism” is probably necessary to fully understand its Chinese version. At the same time, widespread state capitalism and its success appears a doubtful model for the future. Rather, these factors can be an important challenge for rethinking the laissez-faire dogmas and reconsidering the role that States and public institutions can play in global economics. Of course, this role has to be re-built in a different way from the past, which should be able to establish a better balance with the “free” market.

• [1] With those words, in The Economist on 14 July 2009, was (critically) referred D. Rodrik’sposition, envisaging the return of mercantilism, after 2008 crisis (Rodrik 2010; Rodrik 2013).