A seismic shift is reshaping the global economic landscape: the dramatic rise of State Capitalism. This phenomenon, characterized by increasing government ownership and influence over the private sector, has grown rapidly since the turn of the millennium.
Our latest guest on Exploring Prosperity was Professor Adam Dixon (video HERE), a leading expert in this field and co-author with Ilias Alami of 'The Spectre of State Capitalism.' This book provides a comprehensive analysis of how governments are increasing their ownership and influence over the private sector at an alarming rate since 2000, potentially challenging free-market capitalism.
Dixon's analysis raises a crucial question: Does this surge in State Capitalism pose a genuine threat to continued human prosperity?
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Dixon's insights reveal a nuanced answer: while the immediate impact seems limited, the long-term implications could be profound. The rapid increase in government industrial policy and ownership in the private sector over the last 25 years seems to have led to a level of acceptance that is new. And at the same time, the popularity of free market capitalism seems to be receding. These are both the remnants of the Great Financial Crisis and if they continue to grow, may ultimately enable enough government intrusion into free markets that could cause lasting damage to sustainable economic growth.
To understand this complex phenomenon, Dixon identifies four key state capitalist impulses that drive government intervention:
Productivist: Direct state involvement in production and competition
Absorptive: Recycling surpluses and absorbing over-accumulated capital
Stabilizing: Mitigating crises and maintaining economic sovereignty, and
Disciplinary: Both domestic (often repressive) and international (geoeconomic) in nature
The concept of State Capitalism encompasses various forms of government intervention in the economy, including Sovereign Wealth Funds (SWFs), State-Owned Enterprises (SOEs), industrial policies, tariffs, infrastructure spending, and more. The unprecedented scale and sophistication of these interventions demand closer scrutiny, as they could fundamentally alter the dynamics of global capitalism.
Drawing from the insights of Professor Adam Dixon in our interview and his book, we discuss below the theoretical risks, current impacts, and future outlook of this global economic shift.
II. The Rise of State Capitalism
Since 2000, the landscape of State Capitalism has expanded dramatically:
Sovereign Wealth Funds (SWFs) have grown sixfold, from 30 to 176, with assets increasing from $1 trillion to $12 trillion.
State-Owned Enterprises (SOEs) in the global top 500 companies have quadrupled from 32 to 132, with assets growing 3X from $13 trillion to $45 trillion. The value of all SOEs today is equivalent to about 13-22% of all public companies.
Government Intervention: While more challenging to quantify, there has been a notable increase in the acceptance and implementation of industrial policies, tariffs, and other government activities that directly intervene in the private economy.
This growth isn't limited to a single region or political system. From liberal democracies like Norway to authoritarian states like China, governments worldwide are increasing their economic footprint. Even the United States, long considered a bastion of free-market capitalism, has seen recent discussions about establishing a national sovereign wealth fund.
The rise of State Capitalism also extends beyond direct ownership. Governments are increasingly implementing industrial policies, imposing tariffs, and investing in infrastructure as means of economic intervention. These actions, while not always direct ownership, represent a more muscular and active form of state involvement in the economy.
III. Risks to Free Market Capitalism
While the growth of State Capitalism is undeniable, it is crucial to note that its risks to free market capitalism remain somewhat theoretical at this point. Nevertheless, these potential risks warrant careful consideration and monitoring:
Market Distortion: State-backed entities, particularly SOEs, may operate with objectives beyond profit maximization. This can distort market dynamics, affecting price signals and resource allocation.
Impact on Innovation and Efficiency: The presence of government-backed giants might deter entrepreneurs from entering certain markets. Private companies may be wary of competing against entities whose objectives can shift based on political considerations rather than market forces.
Geopolitical Implications: As state-owned companies expand globally, concerns arise about the potential use of economic power for political ends.
It's important to distinguish between the risks posed by different forms of State Capitalism.
SWFs typically pose a lower risk as they're often focused primarily on generating returns and are frequently managed by external asset managers, operating more like traditional institutional investors. Dixon pointed out though that there are a growing number of countries introducing a more activist cousin to SWF’s, Strategic Investment Funds, that seek to achieve political priorities.
In contrast, SOEs generally present a higher risk due to the potential for direct state influence on their operations.
Industrial policy intervenes directly into free market behavior by harnessing the power of the state for political objectives. Unfortunately, changes in industrial policy are too difficult to quantify so we cannot know precisely how much bigger its impact has been. But we do know that in past decades, the United States Congress has been reluctant to engage in anything that could be considered industrial policy. Recently, however the design and deployment of industrial policies in the United States like the Infrastructure Investment and Jobs Act, the US Science and Chips Act and the Inflation Reduction Act, has been a response to initiatives such as the Made in China 2025 and other modalities of industrial policy in China, as well as crises such as the Great Financial Crisis and COVID19. The EU is also responding with its Green Deal Industrial Plan, European Chips Act, and other industrial policy initiatives.
IV. Current Impact Assessment
Despite the theoretical risks, the current impact of State Capitalism on free market dynamics has been limited so far. This is particularly true for Sovereign Wealth Funds, which have largely acted as passive investors seeking returns rather than vehicles for state intervention.
Professor Dixon notes that many SWFs operate in a market-driven, market-conforming way. They're often run by professionals and aren't typically engaged in active management of their investments. In fact, many SWFs delegate their asset management to established firms, investing in major companies and indices much like any other large institutional investor.
The impact of industrial policies and tariffs is more direct but hasn't yet shown signs of significant market disruption on a global scale. While these policies can influence specific sectors or regions, their overall effect on global market dynamics has been moderate.
However, it's crucial to monitor the long-term effects of these interventions. As Professor Dixon points out, the cumulative impact of various state interventions could potentially alter market dynamics over time, even if individual actions seem benign.
V. The Dual Nature of State Intervention
State Capitalism isn't inherently negative- state intervention has played crucial roles in stabilizing economies during crises and can foster development. Moreover, state investment in infrastructure and key industries can lay the groundwork for future growth and innovation. Many technological advancements, including the internet and GPS, originated from government-funded research and development.
However, excessive state involvement can stifle the dynamism and efficiency that free markets tend to foster. The key question is whether governments can effectively intervene when necessary without undermining the fundamental drivers of economic growth and innovation.
VI. Global Perspectives
The manifestation of State Capitalism varies significantly across different political and economic systems. In authoritarian countries like China, state ownership and intervention are more direct
and extensive. Chinese SOEs, for instance, often have clear links to government policies and objectives.
In contrast, democratic countries tend to have more indirect forms of state involvement. Norway's sovereign wealth fund, for example, operates with a high degree of independence and transparency, focusing primarily on generating returns for future generations rather than serving immediate political goals.
The United States presents an interesting case. While traditionally seen as a free-market champion, it has significant state involvement through growing tariffs and industrial policies. The recent interest in establishing a U.S. sovereign wealth fund stated by both parties would represent an unprecedented extension into state ownership of the private sector.
VII. Future Outlook
Looking ahead, the upward trajectory of State Capitalism seems set to continue, driven by several factors:
Economic Challenges: As global growth rates decline, governments may increasingly turn to interventionist policies to stimulate their economies; often direct government investment seeks to bolster faltering industries marked by over-capacity.
Geopolitical Competition: The rise of China and increasing global tensions may drive more countries to view economic policy through a national security lens.
Crises Response: The apparent success of state interventions during recent crises may embolden governments to maintain or expand their economic roles.
Technological Change: As new technologies emerge, governments may seek to guide their development through industrial policies and state investments.
VIII. Conclusion
The rise of State Capitalism represents a significant shift in the global economic landscape. While its growth over the past 25 years has been remarkable, its impact on free market dynamics and human prosperity has yet to raise alarms.
Yet, as we learned from Professor Jared Rubin's interview (The Wealth Paradox: Understanding Global Prosperity Amidst American Discontent HERE), a key element that triggered the shift to recurring and enduring economic growth in the mid-18th century was the development of parliamentary checks against centralized authority.
Historically, economic prosperity has been marked by limited direct government intervention in free market economies. Clear examples of arrested economic development under strictly authoritarian regimes like North Korea demonstrate that extreme forms of government control over economic activity can severely hamper progress.
To safeguard prosperity, we must remain vigilant against the potential negative impacts of excessive state intervention.
Ultimately, the impact of State Capitalism on human prosperity will depend on how it evolves and whether it can be reversed if its growth erodes economic efficiencies. Professor Dixon believes our goal should be to harness the potential of State Capitalism while preserving the core strengths of free markets that have driven human progress. Striking this delicate balance could hold the key to sustained prosperity in the 21st century and beyond.
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