Saturday, May 9, 2015

A Revival of State Capitalism in the New Global Economic Order

Today, the Russians celebrate the 70th Victory Day, their edition of the World War II defeat of Nazi Germany, with a huge military parade in the Red Square at the center of Moscow, as well as central areas of all major cities that had important roles in the pivotal and brutal conflict.  Given the ongoing standoff in Ukraine, the hitherto Western allies of the Russians will neither be present not pleasantly following the parade from afar.  The presence of the Chinese and Indian leaders at the parade will further establish a view, among the mainstream media at least, of entrenched split of the Allied camp in the 21st century.

Such split should not be easily dismissed, even by optimists who see the ongoing conflict in Ukraine and the Russian near-abroad as mere temporary setbacks to otherwise smooth transition of Russia and the lands beyond into a fundamentally Western-oriented economic order.  They comfortably point to the dependence of Russian economy on energy exports to the West, as well as the importance of Western investments and know-how in the rapid emergence of BRICS and other developing states as potential economic powerhouses.  To them, any permanent effort to disrupt this exchange sounds inconceivable.

However, such simplistic statements completely miss the point of just how far capitalism as they continue to thrive in Western states and the capitalism that was imported but then customized in these new economic powers have diverged over the last decade or so, as catch-up growth quickly closed the development gap between the two sides.  Nowhere is this clearer in Russia, which, despite continued Western sanctions, is slowly but steadily recovering its economic footing, in the process allowing its currency to gain back lost value and as a result, weakening the effect of the sanctions itself.

The answer to the recovery is the state-led economic effort by non-Western powers, including China and India, to prop up the Russian economy and reduce its dependence on trade with the West through a series of state-backed economic deals.  Currency swaps were agreed upon, energy deals were signed, and exports of Russian technologies in the forms of weaponry and nuclear power stabilized the country's previously shaky economic footing.  The speed at which such economic deals at the state-level can translate to real economic effects illustrate one thing: the power of state capitalism that became the dominant economic form.

Unlike the West, where private corporations, some of which wealthier and more influential than states, dominate the economic landscape and often set political agendas and priorities through lobbying and other forms of collusion with politicians, in Russia, China, and elsewhere, the state still have full control over private businesses.  Often, the state can directly coerce private businesses to take up politically inclined directions with threats of policy changes and governmental actions that disfavor the firms in question.  Western government of today hold no similar sway over businesses in their respective countries.

Ironically, the evolution of state capitalism in this sense is not new, but extension of something perfected under the very regime the Russians are celebrated their victory over.  The Nazi regime, professed anti-communist in ideology, instead used a combination of already advanced German industrial know-how and top-down prioritization of re-militarization to rapidly extricate the country from its high-inflationary Weimar phase.  Shrewd government use of private business capacities is what gave the regime its capability to wreck havoc throughout Europe in an extreme short span of time.

This is not to say that the present reincarnation of state capitalist tendencies will eventually end back up in the military manner of Nazi-led global violence.  Yet, it is perfectly conceivable that using the same state-business partnership, a country can quickly build up economic power, even without the kind of technological prowess pre-WWII Germans possessed.  It is the resulting acceleration of more widespread but state-directed economic development that perhaps Western nations should be most afraid of.  As shown in Russia's new non-Western economic orientation, it pulls the teeth from the West's economic bites.

Indeed, for the West at least, state-led economic efforts under the state capitalist model would only hurt private corporations without political coordination.  It is difficult to expect single corporations, no matter how large and powerful, to effectively counter systemic efforts by multiple countries determine to box out foreign presence.  This fact will only become more accentuated in the future when multilateral institutions led by non-Western powers (including not just FTAs, but also AIIB, the BRICS bank, etc) begin to set economic terms with global implications.  It is definitely something to watch out for.

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