SODOM & GOMORRAH: A special report in this week’s Economist on state-owned enterprises in emerging markets validates one of my theories – classical, small-state liberalism eventually morphs into the modern, welfare-state governments that we see today. The moral is that any time material interests dominate the political, the former will eventually use tools of coercion to force out rivals.
In the 1990’s with the fall of the Soviet Union, it was thought that state owned enterprises in emerging markets would eventually be dismantled in favor of more open trade systems. However, they don’t seem to be going away. As the Economist reports, the world’s ten largest oil and gas companies are state-owned and state-backed firms make up 80% and 62% of China’s and Russia’s stock markets respectively.
Brazil, South Africa, and other emerging countries are considering similar models. Supporters of state capitalism argue that it can provide stability and growth to an otherwise unstable free market. Infrastructure would especially be benefited because the state can quickly mobilize resources for large scale projects. Arguments in favor of state-owned enterprises have generally relied on the belief that some activities of public importance can be done most efficiently when one firm manages the market.
We are seeing a few developments.
First, emerging markets are opting toward state capitalism instead of toward a more free market model. They are marrying politics with economics in order to try and take advantage of diminishing returns.
Second, state-owned enterprises are being consolidated. Governments are being very selective in which state-backed firms they allow to survive. This means the overall number of firms has shrunk, but the size of the ones that remains has grown.
Third, state-owned enterprises are becoming more productive. In China for instance, the return on assets for government-owned companies has increased from 0.7% in 1998 to 6.3% in 2006. However, this is mainly because the government companies are better at copying what the private sector does than because of any real economic advantage.
I would argue that the growth of state-owned enterprises in emerging markets shows us our future. The vested interests of the heirs of the classical liberal tradition aren’t as prevalent in these countries. Instead we see modern politicians who are free to carry out the promise of their ideologies with very little opposition. The Economist would have you believe that this is the result of the current crisis of Western free market liberalism. Yet they overlook the fact that liberalism is the crisis; what we’re seeing in the West are the birth pangs of what’s already coming to be in emerging markets.