State Capitalism
fredzhang
Bremmer_Chs34_1_1.pptxThe End of the Free Market: Who Wins the War Between States and Corporations? Ian Bremmer
Ch. 3: State Capitalism: What It Is and How It Happened
Ch. 4: State Capitalism Around the World
State Capitalism - Defined
State capitalism is characterized by the dominance of state-owned business enterprises in the economy
An economic system in which commercial economic activity is undertaken by the state, with management and organization of the means of production in a capitalist manner—maintaining the labor markets and capital markets.
“State capitalism is a system in which the state dominates markets, primarily for political gain.” (Bremmer)
Tipping point that separates state capitalism from free market capitalism
I. Role of state in the economy
State capitalism - Government plays role of lead economic actor
Free Market capitalism – Legal limits on state’s ability to regulate the actions of private companies and investors
Development strategy
State capitalism – considered a strategic long-term policy to guide the economy over a period of decades
Free Market capitalism – will use intervention only to rebuild a shattered economy or jump-start an economy out of recession
Role of markets
State capitalism –
markets are primarily a tool that serves national interests, or at least those of ruling elites]
markets are used to extend the state’s own political and economic leverage—both within society and on the international stage
Free Market capitalism –
markets are an engine of opportunity for the individual
markets are used to extend private corporation’s own economic leverage
Governance
State capitalism –
The adoption, according to circumstances, of different mixes of public and private capital.
state may retain control - “Leviathan as a Majority Investor” - or limit itself to the role of mere shareholder - “Leviathan as Minority Investor”
The capitalist firm may be a component part of the state bureaucracy, but political interference in day-to-day operations of the firm generally limited
Governments often control and/or direct bank lending to targeted sectors of the economy
Free Market capitalism
Corporate board of directors are responsible for overall guidance of corporations
How is state capitalism managed?
Political leaders tend to use a variety of intermediary institutions to carry out development and political goals
Resource Nationalism – use of oil, gas & other commodities as political tools and strategic assets
NOCs – natural oil and gas corporations
SOEs – other state-owned enterprises
SWFs – sovereign wealth funds
NOCs – National Oil & Gas Corporations
Oil and Gas – projected world demand
Oil – 29.3%
Coal – 27.2%
Natural Gas – 22.7%
EIA – US Energy Information Administration
Largest oil and gas companies by USD 2015 revenue
¾ of global crude-oil reserves are now owned by national oil companies
Saudi Aramco,
Sinopec (China)
CNPC (China)
NIOC (Iran)
PDVSA (Venezuela)
Petrobras (Brazil)
Kuwait Petroleum Corporation Petronas (Malaysia)
These state-owned giants are the world’s largest energy companies measured by reserves.
The biggest multinationals collectively produce just 10% of the world’s oil and gas and hold about 3% of its reserves. (Bremmer, p. 56)
Bremmer Thesis: Back to neo-mercantilism
Russia, Venezuela, Nigeria, Libya, Angola and Algeria scrapped foreign-investment-friendly policies in favor of higher taxes on foreign firms operating in the energy sector and legal mandates for a larger state role in the development of new fields.
Legal safeguards against resource exploitation by outsiders
Use of state power to negotiate contracts with multinational corporations (such as Exxon Mobil) for technology and drilling expertise
Rich source of government revenue
Relationship between state and oligarchs (neo-merchants)
There are powerful reasons why Houston-based Exxon would want to get back into business with the state-backed firm: Their agreement to form a joint venture, signed in 2011, allowed Exxon to conduct offshore exploration in the Black Sea and the Kara Sea in Siberia.
The undeveloped oil fields are thought to be the most promising in the Russian Arctic, according to S&P Global Platts.
In 2012, the two firms agreed to jointly develop more oil reserves in Siberia and establish a research center in the Arctic. Plans to build a large natural gas plant near Vladivostock in eastern Russia followed in 2013.
The deepening relationship was put on hold, however, after the U.S.,European Union and other Western countries imposed sanctions on Russia in 2014 over its role in the crisis in Ukraine.
Exxon, which has been operating in Russia for more than 20 years, was allowed to finish some of its projects. But then the drilling stopped.
April 2017 - CNN
Largest Russian oil and gas companies
Gazprom
Lukoil
Rosneft
Surgutneftegas
Chinese strategy
To meet domestic demand for oil and gas, Chinese leadership has sent its 3 national oil companies out into the world to win access to the long-term suppliers of oil and natural gas.
Algeria, Nigeria, Niger, Ghana, Angola - Competing with Western multinationals for energy supply contracts
China can offer foreign governments political & financial incentives
Chinese engineers work with national oil companies, bypassing laws that prohibit private MNCs in the oil and gas sectors
Will invest in large-scale partnerships with repressive regimes that MNCs can’t approach
Will finance pipelines
Largest Chinese oil and gas companies
Sinopec
China Petroleum & Chemical Corp – CNPC
PetroChina
Recall mercantilism:
Countries need colonies to gain wealth
Colonies not only provide much-needed resources (raw materials) but they also server as markets
Colonies exist to serve mother country
Saudi Arabia
Holds ¼ of world’s oil reserves
Aramco, the world’s largest producer and exporter of crude oil and a large-scale oil refiner and producer of natural gas
is 100 percent SAG-owned
its revenues typically account for around 85-90% of the SAG’s budget.
Resource Nationalism – use of oil, gas & other commodities as political tools and strategic assets
NOCs – natural oil and gas corporations
SOEs – other state-owned enterprises
Other State-Owned Enterprises
Saudi Basic Industries Corporaton – SABIC
State Grid Corporation of China
China Southern Power Grid
China Development Bank
Agricultural Bank of China
China FAW Group Corporation (automobiles)
Endiama (Angola) - diamonds
Sovereign Wealth Funds – The 2nd Tool of State Capitalism
SWF - Investment vehicles of foreign currency reserves, foreign and domestic stock, and foreign and domestic real estate owned by a government
Source of funds:
Foreign currency earned from export of natural resources, mostly oil and natural gas (Russia, Arab states of Persian Gulf, North Africa)
Balance of trade surplus (China’s net income from trade with US, Europe, Japan)
One-time transfers from federal budget
Pension reserves and social security funds
& Profits
SWF
How the Money in SWFs is Invested: Portfolio
Foreign currency (and Bitcoin & other cryptocurrencies)
Stock in domestic and foreign companies
Foreign and domestic government and corporate bonds
Precious metals
Foreign and domestic real estate
SWFs – Who Controls Them
Stakeholder – the government
“What makes them different—and poses challenges for free markets—is that those who manage their investments don’t answer to shareholders. A sovereign wealth fund has one stakeholder: its parent government.” (Bremmer, p. 70)
Purpose of SWFs
Protect & stabilize the budget and economy from excess volatility in revenues/exports
Diversity from non-renewable commodity exports
Earn greater returns than on foreign exchange reserves
Assist monetary authorities dissipate unwanted liquidity
Increase savings for future generations
Fund social and economic development
Political strategy
Largest Sovereign Wealth Funds
Russia
China
Saudi Arabia
SWFs are a small component of global institutional investors
But SWFs are growing quickly in number and relevance…especially since 2000
AUM – Assets Under Management
MENA – Middle East & North Africa
Who wins the War Between States and Corporations? The challenge to free-market capitalism
State Capitalism’s threats:
1. It will close the door to Western companies and their governments.
“What happens when the Chinese leadership decides that its development strategy no longer depends on so much foreign investment and prefers instead to use all the tools at the state’s disposal (its SWFs, NOCs and SOCs) to support local companies and shelter them from foreign competition?” (p. 150)
2. It will use SWFs to acquire strategic stakes in key industries around the globe, whether it be:
-Telecommunications,
-Energy,
-The media
-The financial sector,
-Or even to secure intellectual property rights in other fields.
It distorts WTO and other trade rules, making it difficult to establish and enforce fairness and “rules of trade”
Decoupling: The process by which emerging-market countries, particularly in Asia, sharply reduce their dependence for growth on US markets.
It undermines both America’s singular international influence and global economic interdependence that encourages governments to work together in ways that bolster growth
The advantages provided by state capitalism encourage some countries to pursue high-risk political strategies and reduce the ability of free-market democracies to pressure them to change their ways.
Russia threat to withhold oil/gas to Ukraine
Iran’s ability to fund its own nuclear weapons program
