The return of the visible hand: How struggles for economic and political dominance turn state capitalism into authoritarian capitalism

budapest-parliament-hungarian-parliament-building-hungary-people-politicians-viktor-orban-hungarianBy Gerhard Schnyder and Dorottya Sallai

The state has made a return with a vengeance in economic matters in the past decade or so. Mainly due to the success of the Chinese model and the – less permanent – strong economic performance of countries like Brazil and Russia, the erstwhile Washington Consensus of the superiority of markets over states as mechanisms of economic coordination has been put in serious doubt.

Scholars have picked up on this trend by increasingly referring to the term (new) ‘state capitalism’. Some consider it an undesirable threat to the existing economic world order, while others show how states can effectively promote development and economic growth.

While the term state capitalism has been useful to bringing the state back in yet again into debates in political economy, the term itself is not unproblematic. Indeed, there is a risk that it perpetuates, rather than surpasses, the sterile debate about the state versus the market. Put bluntly: If there is such a thing as state capitalism, what does non-state capitalism look like?

The term “state capitalism” implies that capitalism without the state is possible. While that certainly is what anarcho-capitalism would argue and wish for, the historical reality is that capitalism only ever has existed when the state created the conditions for its existence, as a minimum by providing basic legal institutions such as property rights and contracts. Similarly, while libertarians often invoke Hayek to the effect that markets are spontaneous orders, few people recognise that states have emerged equally spontaneously in human history and have since co-evolved alongside markets.

From this perspective, the phenomenon that the term ‘state capitalism’ seeks to describe is distinct from what we have observed at least since the 1980s (what many would describe as the neo-liberal model) – not so much in the sense that one is characterised by the presence and the other by the absence of the state -, but rather that the state plays a different role in the two ideal-typical models.

The broad term ‘state capitalism’ may lead us to neglect this nuance and focus on the wrong opposition of markets versus the state (the former cannot exist without the latter). What we should focus on is developing our theoretical tools that allow us to capture the changing role of the state in the economy and in economic development.

In a recent paper, we take up this challenge based on an in-depth case study of state-business relationships in Hungary. We use the Hungarian case to describe and analyse in detail how the role of the Hungarian state has changed from a poster child of post-socialist liberal transition praised by the OECD, World Bank and others, to an arguably outright authoritarian form of state not just in the political, but also in the economic realm.

We describe the different mechanisms that an increasingly authoritarian government has used to push the boundaries between the public and the private and thus redefine the role of the state. Our findings highlight how the Orbán government on the one hand decreased the state’s autonomy by centralizing state control, creating state dependencies for economic actors through regulation, drastically changing the formal structures of interest representation and raising the share of public procurement contracts in some sectors to over 50 percent. On the other hand, we discuss, how it gradually increased state intervention by three interrelated processes. First, it created markets dominated by a new economic elite and national champions. Second, it extracted private rents from the economy by using the state as a tool – through institutionalised corruption. And third, it introduced what we call ‘authoritarian shareholding’ via predatory nationalisations of certain sectors and the forced buy-outs of independent, private firms.

The nature of these mechanisms leads us to classify Hungary after 2010 as a case of ‘authoritarian capitalism,’ which we argue should be distinguished from other cases of state-intervention economies. Indeed, focusing on the extent of state intervention in the economy alone, leads us to define categories such ‘state capitalism’ which are too broad and analytically not very helpful. Focusing on the precise nature of the state and the mechanisms that the state uses to control the economy or businesses allows us to distinguish cases of ‘authoritarian capitalism’ from the broader category of ‘state capitalism.’

The 21st century will almost certainly not be the century of the free market. Neither will it be the century of the state.  Rather, it will be the century of a new synthesis of states and markets, where the former more confidently shape how the latter work and indeed use them to promote either collective goals or the goals of the elite in control of the state apparatus. Scholars of comparative political economy need to focus more on the mechanisms and struggles over the control of the state and the economy, rather than primarily focusing on the tools of state capitalism, such as state ownership of firms. Current authoritarian trends in many countries around the world provide an important empirical field to study these questions. Doing so will allow us to better understand the trends of our times.

Gerhard Schnyder is Director of the Institute for International Management (IIM) at Loughborough University London and Research Associate at the Centre for Business Research (CBR), University of Cambridge, UK.

Dorottya Sallai is Assistant Professorial Lecturer at the Department of Management, London School of Economics and Political Science (LSE).

Photo: The Hungarian parliament.

 

 

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