Debating the rise of state capitalism: a nuanced approach

The state can behave just as badly corporations. But it can also play a positive role in development.

Farwa Sial
8 November 2019, 11.55am
Image: Kennisland, CC by 2.0

This article is part of ourEconomy's 'Decolonising the economy' series.

‘Reclaiming the commons’ is an important slogan of our times. It is about taking control, redistributing resources and confronting the despondency of extreme inequality. However, the question of how this is to be achieved remains open. In an earlier article in this series, we were informed of the dangers of associating the idea of public ownership with the rise of transnational state capital. The role of expanding transnational state capital in its various manifestations, including sovereign wealth funds, greenfield investments, state-led foreign direct investments (FDI) and the internationalisation of state-owned enterprises (SOEs), was rightfully framed in relation to unsustainable practices, aggressive takeovers and a general tendency of usurping that which falls within the public interest.

Within this broader context, the article specified three major critiques of state capital, including its ability to mimic the practices of private competing market participants, its capture of domestic elites and its ownership of fossil-fuel companies. A discussion of these problematic facts was then followed by an alternative solution of ‘reclaiming the commons’. This included promoting a strategy of localism, as well as an emphasis on understanding the globalised nature of economies.

Whilst I agree that a blinkered approach to viewing state capital as a panacea for socio-economic reform is problematic, a proposition of building redistributive resource systems without the role of the state has its own set of problems.

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a) Who does what with transnational state capital?

A first reminder is that the emphasis on a contemporary ‘rise of transnational state capital’ needs a proviso; it is not ubiquitous across the world. In fact, the rise of transnational activities by SOEs can be traced to a few developed countries which are overwhelmingly OECD members. Within these countries, the motivation for SOE transnationalisation, state-led FDI and/or use of sovereign wealth funds varies. For example, whilst Chinese and Russian SOEs pursue aggressive mergers and acquisitions to fortify their geopolitical expansion, the internationalisation of commercial SOEs which originated in Germany, France, Austria, Finland and Sweden has historically formed the basis of their industrialisation processes as ‘national champions’.

Norway’s oil-based sovereign wealth fund also combines aspects of social democracy and extensive welfare with transnational investments. On the other hand, Middle Eastern sovereign wealth funds extend the rentier model of these economies and target geopolitical spheres of influence in Asia and Africa. Transnationalisation of state capital outside of developed countries is led by Indian and Brazilian commercial SOEs, which are marginal in comparison to those of developed countries.

The point is not to deny the ability of state capital to replicate private capital but to understand the nuances of dependency relations, which continue to distinguish developed countries from developing countries. This consideration is also necessary in conjunction with the need to distinguish commercial SOEs and non-commercial SOEs. State capital need not be synonymous with transnational state capital and the presence of SOEs does not guarantee transnational activities.

More importantly, the critique of the transnational characteristic of state capital raises a fundamental question of the role of state in supporting the rise and transnationalisation of private companies. States may not own private companies but that has never stopped them from bolstering their internationalisation or bailing them out in situations of moral hazard. The proliferation of Public-Private Partnerships (PPPs) adds yet another layer to the role of state in supporting the private sector’s role in economic growth. However, the role of state ownership becomes important and even necessary when considering the domestic economy and protection of collective commons including health, water, transport etc. These issues are even more fundamental for the growth of developing countries.

b) State-capital is important for developing countries. ‘Rebuilding the commons’ is not antithetical to rebuilding the state.

The systematisation of predatory value extraction under neoliberalism has resulted in the dismantling of public services and deepening of inequality. Whilst the causes of inequality are generally well understood, there is less engagement with the contemporary restructuring of the state, especially in the context of its historical role in development. Effective state planning in developing and developed countries has been a driver of socio-economic growth. Strategic industrialisation, progressive governance and protectionism are not mere weapons of nationalism but also tools which enabled inter-sectoral resource transfer to the ends of pursing equitable distribution, regulation of monopolies and enhancement of quality of life. Sending a message to developing countries to shrink the role of state capital requires caution, as it inclines towards the now popular double-standard of ‘kicking away the ladder’.

For developing countries, the advocacy of localism cannot compete with the state’s capacity for investment and redistribution. In industrial policy, the motto of bringing the state back symbolised a rejection of the neo-classical construction of free markets. Substituting the narrative of free markets with localism through well-conceived models such as cooperatives would still rest on a strong state.

Moreover, while I agree with the need to better engage with the phenomenon of global capitalism, this also includes a deeper understanding of the pressures imposed on developing countries’ states in relation to the activities of private multinational corporations. Aggressive takeovers by foreign private equity companies, institutional and vulture funds originating in many developed countries have in fact bolstered the need to expand domestic state owned enterprises in developing countries to ensure sovereign protection. In this context, state ownership should be encouraged and differentiated from transnational state capital.

Another issue with advocating localism without lobbying for state reform is the lack of institutionalism in developing countries. Whilst state capture by domestic elites is a phenomenon shared by both developed and developing countries, the latter are much more vulnerable to global power dynamics.

Genuine grievances of populations in developing countries have often been hijacked by foreign interests, building on legacies of imperialism. The politicisation and disfiguration of the demands of local activists often become manifest in unintended ethnic discord and irredentist sentiments, where none existed previously. The movement very often results in regime change but leaves the fundamental issues of redistribution unaddressed. The causes of this cyclicality are no doubt complex and it is important to emphasise that a statist or localist view alone cannot be the answer. However, localism need not preclude action for state reform.

The state is an arena of conflicting ideas of reform in developed countries today. Proponents of the Green New Deal, MMT and de-growth are advocating for alternatives to the current order with many similarities as well as differences amongst them. The exigencies of climate change and inequality pose an existential threat, which requires a big push for systematic restructuring. Local activism needs to lobby the state for reengineering progressive transformation. The state belongs to the commons; it needs to start working for them.

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