When does state-permeated capitalism work?

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In recent years, state capitalism has become an important buzzword in the development economics discussion (again). In view of the very different ways in which this term is used, Ilias Alami and Adam Dixon recently highlighted the dangers of using the term too loosely in an article in Competition and Change. In view of its recent popularity, state capitalism could suffer a similar fate to the terms “neoliberalism” or “financialisation” by becoming a very loose rallying cry without any significant analytical value. To overcome this problematic situation, Alami and Dixon propose that future research should (1) develop a theory of the capitalist state, (2) circumscribe the time horizons of state capitalism, and (3) locate state capitalism more precisely in territorial and geographical terms.

Although I am not sure whether the genius can be put back into the bottle by developing a unified theory of the state (too many different theoretical traditions are involved by now), I am very sympathetic to the latter two demands. Our recently published book “State-permeated Capitalism in Large Emerging Economies” (Routledge) is a modest contribution to the latter goals. It deals with the economic development of Brazil, India, China and South Africa between 2000 and 2015. Departing from a comparative capitalism perspective, we have developed an ideal type of state-permeated capitalism as opposed to liberal, coordinated and dependent capitalism – and examined to what extent large emerging markets are approaching this ideal type.

During the last two decades, comparative capitalism scholarship – defined by common features such as the emphasis of institutional contexts that are sticky and most important on the national level – has evolved a lot. Despite the existence of various earlier and parallel developments, the “Varieties of Capitalism” approach had become canonical during a first generation of comparative capitalism research. Many of its basic features are still useful for the analysis of capitalist systems. This primarily refers to the distinction of five institutional spheres (corporate governance, financial system, industrial relations, education and training as well as the transfer of innovations) and the identification of cross-cutting coordination mechanisms (inter-firm networks and associations in coordinated economies, in contrast to competitive markets and formal contracts in liberal economies). The narrow analytical focus on OECD countries as well as the rigid typological dichotomy of the original framework later has been overcome by extending the study of national capitalist institutions to other world regions and constructing new ideal types accordingly, including the state-permeated type mentioned above.

China and India, the two economies that come closest to the ideal type of state-permeated capitalism, have featured very high growth rates during the last decades. This growth was based on real investments in industry, not only on financial sector activities. Against the conventional wisdom that emerging markets’ growth is mainly based on exports, industry in the countries following the state-permeated model mainly produce for domestic markets, particularly in a market segment with a medium level of technology. Domestic markets are sheltered from global competition, both by tariffs and regulatory measures. In order to tap this market segment, companies in state-permeated capitalism are supported by institutional complementarities that provide a high degree of stability, both with regard to corporate governance and finance for investment.

Both the temporal and territorial issues highlighted by Alami and Dixon play an important role in our research. From the perspective of development economics, the key question should be: When does state-permeated capitalism work? Let us first turn to the territorial aspect. A core problem for different types of state capitalism is the problem of state revenues and the associated phenomenon of “rent-seeking”. Certain economic groups gain a dominant position in the state apparatus and abuse it for personal enrichment, or to gain anti-competitive advantages for their affiliated companies. As has been documented some decades ago, this is a major problem for development, particularly in economies based on natural resources. Our research on more successful forms of state capitalism has shown that the latter are based on competition between different coalitions of state and business that keep each other in check, thereby preventing extensive state capture and rent-seeking by a single group. In both China and India, no economic power is able to fully control the state’s steering of the economy. In contrast, there are a number of competing coalitions on the subnational level, very often based on close informal and reciprocal cooperation between local or regional authorities and large companies based in these regions. These coalitions form an informal system of checks and balances. The system largely prevent the harmful capture of the state apparatus by a single group. However, an important prerequisite for this mechanism to work is a very large economy. Smaller economies can be more easily controlled by a single group of rent-seekers.

Turning to the time dimension highlighted by Alami and Dixon, we find that the rise of state-permeated capitalism was accompanied by an economic situation in which large Western companies were desperate to access the large domestic markets of major emerging markets in the face of stagnant demand and fierce competition in their home economies. Both the Chinese and Indian governments controlled the access to their large domestic markets and were able to negotiate large concessions from Western companies. This was most pronounced in the case of China where, for example, Western car producers were forced to undergo joint ventures with local companies and agree to substantial technology transfer, in order to be able to set up shop. During the 1950s or 1960s, in contrast, the negotiation position of the Chinese or Indian government would have been much weaker, due to sufficiently high growth rates in the Western economies.

In both dimensions (space and time), state-permeated capitalism has turned out to be an option for major emerging markets only. Small emerging markets, in contrast, are neither large enough to develop competing state-business coalitions, nor do they have a strong negotiating position to force Western companies to cooperate on their terms. Correspondingly, state-permeated capitalism is no panacea for successful economic development.

However, not even all large emerging economies have proven to be able to mobilize the advantages of state-permeated capitalism in spite of their temporal and territorial advantages. Our study of the cases of Brazil and of South Africa demonstrate that state-permeated capitalism also requires a certain degree of political coherence to work well. During the last decades, both in Brazil and South Africa, massive conflicts between the various class fractions dominating their political economies have prevented their ability to come up with a coherent institutional set-up for the successful pursuit of state-permeated capitalism. At least in case of Brazil, a strongly entrenched role of foreign-linked capital also inhibited the development of a common national development project.

To conclude, Alami and Dixon are to be applauded in highlighting very important factors for the future study of state capitalism, even if their rallying cry for a coherent state-theoretical foundation of this research may prove to be elusive. At least for the case of state-permeated capitalism, both time and space have proven to be important factors circumscribing their effectiveness.

Dr. Andreas Nölke is professor of political science at Goethe University and head of research group at the Leibniz Institute for Financial Research SAFE in Frankfurt, Germany.

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