'State Capitalism: How the Return of Statism is Transforming the World'

Monday, June 20, 2016
Anil Usyan/Reuters

Joshua Kurlantzick, CFR Senior Fellow for Southeast Asia discusses his new book, State Capitalism: How the Return of Statism is Transforming the World, with CFR President Richard N. Haas. Kurlantzick examines the rise of modern state capitalism and its impact on the global economy.  He considers which countries practice state capitalism most efficiently, the relationship between state capitalism and authoritarianism, how state capitalism can limit innovation, and whether state capitalism and free market capitalism can exist together. 

The CFR Fellows’ Book Launch series highlights new books by CFR fellows. It includes a discussion with the author, cocktail reception, and book signing.

HAASS: Well, we will get started. Welcome to the Council on Foreign Relations. I’m Richard Haass.

And this is part of a series of events which are high on my list of favorite events because it is a book launch and that suggests a book has been written, which in fact it has, in this case by Josh Kurlantzick who is a senior fellow here at the Council on Foreign Relations and is our expert on all things Southeast Asia, although in this case he has taken not a geographic approach, but a functional approach and is tackling the question of what he describes as state capitalism.

Let me make sure that is shown.

The subtitle is—OK, this is a New York City driving exam eye test and I just flunked—“How the Return of Statism is Transforming the World.”


KURLANTZICK: Thank you. Thank you.

HAASS: So Josh and I are going to talk for a few minutes about the book and then we’re going to open it up to you for your questions, your comments, above all your applause and congratulations because all authors deserve it and need it.

So, Josh, let’s start out at the beginning, at the basic just so we understand exactly what it is we’re talking about and ultimately reading about, which is, what is state capitalism?

KURLANTZICK: OK. Well, thanks to everyone for coming.

In the book I look at the growth of what I call modern state capitalism over the last 15 years, a number of prominent, mostly developing countries where the state has exerted greater control of the economy.

And in the book, to differentiate it from states where the state accounts for a significant percentage of GDP through welfare spending or entitlements, et cetera, I just look at states in which the state has control or de facto control of one-third of the largest companies in that country.

And that gives these states like China, like Venezuela, a number of these are in the news now, not always for such good reasons, like Thailand, like Malaysia, Russia, give the state much more direct leverage over the corporate sector than they would have if the state accounted for GDP through welfare spending, through defense, et cetera.

HAASS: So this is—we would expect this in places, say, like a Saudi Arabia where you have a cash crop, a large, extractive industry, but you’re writing much more broadly, correct?

KURLANTZICK: Right. I mean, there is quite a wide range in the book. There are—there’s two spectrums. There is the spectrum of state capitalists who are highly inefficient, like Russia in which the state has captured a significant portion of the corporate sector and has resulted in an extremely predatory type of pseudo-capitalism, all the way to ones which are somewhat more efficient, on the end of Singapore, Vietnam, Thailand, and even China which, despite significant problems, is a much more efficient economy.

And the other spectrum is autocratic to democratic, and there are some overlaps there, but not only natural resources countries.

HAASS: And are we seeing more state capitalism recently or now? If so, why? And does state capitalism, how would I put it, does it wax and wane? If you were going to take a long, historical take on it, have there been previous periods when state capitalism was on rise, and have there been periods when state capitalism was on the fall?

KURLANTZICK: Well, certainly we have seen different periods. But this is a period that has grown since the late ’90s, early 2000s. So there was another period after the Second World War in which there was an era of import substitution, statist economics, et cetera.

What we’re seeing now is a number of trends that have come together. One, you have a number of countries, Turkey—Turkey’s not state capitalist—but Turkey, Thailand, Russia, Venezuela, Malaysia, others, leaders who are kind of, like, elected autocrats. They were elected in elections that run on the spectrum of freedom, but they had elections. But they also don’t really subscribe to the constitutional bases of democracy, so they’re elected autocrats. For them, state capitalism is also a means of perpetuating their power.

Second, you had in the Asian financial crisis and post-2008 financial crisis significant weakening of the allure of the Western economic model or of the free market economic model.

Third, you have the example of China as a kind of counterweight.

And then fourth, particularly after 2008, a lot of developing countries, I think, also saw that doing new bank regulations in Europe particularly and other reasons, many of their industries were starved of possible infusions of capital, and they were looking for other places for capital.

So there have been previous eras, but this is an era dating back to the late ’90s, early 2000s.

HAASS: OK. You mentioned what I thought you were going to say, which is 2008 clearly hurt the alternative model, I guess you’d call it more market capitalism as opposed to—what is the opposite of state capitalism? What do you call it?

KURLANTZICK: Yeah, free market capitalism.


KURLANTZICK: And obviously there’s some spectrum, but if you take, say, Hong Kong on one end and North Korea on the other or something like that.

HAASS: Yeah, that kind of puts you beyond the end zones. Does this suggest—I guess maybe I’ll ask the question this way. Are we at something of an apogee—i.e., if China were to have some real problems, and it’s obviously slowing considerably, does this potentially taint the appeal of state capitalism, what we’re going to see then down the road, Brazil’s got problems, China’s got problems, and so forth, that we think maybe state capitalism has peaked and in a few years, you know, you wouldn’t be writing this book?

KURLANTZICK: Well, I think that we are seeing significant problems in all the different—first of all, I don’t think the free market model is the alternative. This was the alternative, so now we’re in two different potential alternatives.

But China has problems, Brazil has problems, but still China’s growth rate over the last 35 years is staggering. And at the same time, a lot of the problems of free market capitalism we’ve seen reflected along with other trends, but the growth of populist parties in the West, so both of the models, I think, have substantial problems.

But the longer that China in particular continues to grow substantially, the more attractive it remains as a model for other countries. It doesn’t necessarily have to grow at the rates as it did before, but just continuing to grow.

I can talk about, if people have questions, there are significant flaws, there’s NPLs piling up. But the longer that China continues to grow and also become more assertive in promoting its model, it does—

HAASS: NPLs mean non-performing loans?

KURLANTZICK: Non-performing loans.


KURLANTZICK: China’s state banks and state companies still need substantial reform.

HAASS: SOEs. We can kind of make this like a NATO meeting and just use acronyms—(laughter)—and all that.

Let’s talk about Brazil for a second because it’s much in the news. You’re about to have the entire world focus on it. What are we, roughly, six weeks or so, give or take, away from the Olympics? You’ve got the impeachment trial of the president. You’ve got corruption on steroids, literally and figuratively I guess I’d say, not bad—(laughter) —in Brazil. What does that tell us about state capitalism? Or to ask a question in a more leading way, is it just about inevitable that state capitalism leads to corruption? Do the two almost inextricably go hand-in-hand?

KURLANTZICK: Probably in the long term, although there are examples, again on a spectrum there is not a high level of corruption in Singapore and Norway, which I also look at in the book.

I think that Brazil is an interesting example because, one, it shows in the long term that there are significant problems with state capitalism in terms of graft. They can be avoided, but it’s very difficult.

But on the other hand, even though there has been significant graft, there hasn’t been significant pressure in Brazil for a dramatic shift in economic policy. There have been pressures for cleaning up graft and total disgust, but you’re not actually seeing a dramatic swing to pressure for complete disavowal of the Lula/Dilma policies.

So you have democratically elected politicians who want to respond to public demand for a degree of state intervention, but they’re sort of stuck in a trap there.

HAASS: So let me circle back in a different way. If you were going to choose the places, either current or historical, where state capitalism really looked pretty good in terms of overall growth, both in the collective sense as well as per capita, rising living standards and all that, like, what would be your—what’s on the short list of places where state capitalism seems to have worked?

KURLANTZICK: It has worked pretty well in Singapore, although I know there are huge human rights problems. It has worked with the state providing initial capital in Rwanda. It has worked quite effectively in Norway where they combine state companies with a high degree of free market-type governance. It has worked somewhat effectively in Thailand and Malaysia. It has worked somewhat effectively in Indonesia.

And to be fair, it has worked somewhat effectively for a long period of time in China.

HAASS: Now, most of those, but not all of those tend to be more towards the developing side of the spectrum than mature. So is there an argument that state capitalism might lend itself to developing economies, but at a point at which, say, GDP per capita is above X, 10,000, I don’t know what the number is, that it no longer makes so much sense?

KURLANTZICK: Yeah, I think that that’s an argument, although we’re going to see it play out in China, which is the biggest example.

In Singapore, when Singapore basically was divorced from Malaysia, the government needed some way to launch a range of industries. They were having troubling, they had very shallow capital markets, no one really wanted to invest in Singapore.

The government used state resources to both attract investment and to provide some seed capital as kind of an angel investor in a few industries. Now the government has stepped back somewhat, and that’s kind of the model that a lot of other countries are looking for, so that’s, like, the ideal model.

HAASS: Would Japan have been a country that at one point you would have described as state capitalist and has, to some extent, evolved so it’s less so?

KURLANTZICK: Yeah, probably you would. I mean, the government links are a little bit less clear because of the ways that the government, the ministries, and the major companies interact or are a little bit less clear, but yes.

HAASS: And what are the biggest present or historic failures of state capitalism? Where has it clearly done little or no good for the society?

KURLANTZICK: Well, the most obvious example and the one that’s most worrisome because you have a combination of predatory capitalism with one of the world’s major military powers is Russia.

You have a total failure of using the state to support innovation. You have predation that has crowded out entrepreneurship. You have Russian elites who have left, and you have a very angry nationalism.

HAASS: What about Venezuela?

KURLANTZICK: Venezuela I would say would be number two, just Venezuela. Although the collapse of the Venezuelan economy is problematic, it’s not the same as a potential collapse of the Russian economy, plus Venezuela doesn’t have nuclear weapons, doesn’t have a Pacific fleet, et cetera.

HAASS: I asked you before about corruption and whether there was something about state capitalism that more or less inevitably increased the odds that corruption would become a significant problem. What about democracy and human rights? To what extent does state capitalism almost ensure that, how would I put it, that the political evolution or development of society lags?

KURLANTZICK: I’m not sure that the evidence is so clear on that as it is on corruption. If you take an overlap of countries and the degree of state intervention in the economy with Freedom House’s Freedom in the World scale, there is not a direct overlap.

There are countries that have historically been state capitalist that are democracies. There are countries today, even Brazil, which is, for all of its problems, a relatively vibrant democracy. The problems that are coming out in Brazil you wouldn’t see exposed in Russia because there are no institutions to expose them.

So I think it’s possible that in the hands of someone like Thaksin Shinawatra, Prime Minister Najib of Malaysia, and others, state enterprises can be deployed to limit political opposition, but it’s not an exact match, it’s not necessarily so.

HAASS: When economies that are, quote, unquote, “state capitalists” in their DNA or nature, when they run into problems, is the tendency to become more state or more capitalist?

KURLANTZICK: I think that that depends largely on the government and it depends largely on the quality of government.

In Singapore, I think the tendency has become more capitalist, and I think that that is also true in some other countries.

In China, despite promises by the current government, the tendency, because they have a much greater desire for control, the tendency is to become more state.

HAASS: That certainly does these days. You’re a specialist on Southeast Asia, so let me combine the two. What is your part of the world, what’s the evidence there? You mentioned before Indonesia, Thailand, Vietnam now increasingly as probably entering the state capitalist space, so what are we seeing there?

KURLANTZICK: What we’re seeing in Southeast Asia, as a region that once was considered both an economic model and also, in many ways, a model of democratization, has, with a few notable exceptions, significantly regressed.

And you have in Thailand a military junta which is increasingly meddling in a lot of realms of the economy. You have in Malaysia real regression democratically and a government that’s also increasingly using state enterprises a kind of political vote banks.

Singapore is an exception, but you now have in the Philippines a new president, and it’s unclear what’s going to happen, but he has vowed to himself kill alleged criminals. It’s not a great statement for the rule of law. And he also comes from a background that is very much inclined towards using state enterprises as a political tool. So you’ve had a meshing there of some pretty worrying trends.

HAASS: Are there certain prerequisites that if they’re there increases the odds a country will go down this path and if they’re absent it won’t?

For example, India is not particularly going down this path, so what is it about India explains the fact that it has not opted for state capitalism?

KURLANTZICK: Well, India did opt for a highly socialist economy in the past.

HAASS: Yeah, correct.

KURLANTZICK: And so I think one thing that is clear is if you try this and it fails people will go in a different direction. And so India and Indonesia have opted for less than, say, Malaysia because it had such significant failures with it.

In addition, I think in a place like India or some other countries that have opted away from it, the influence of democratic civil society and democratic civil society that has been seen, an interplay between state capitalism and authoritarian rule in the past, so that’s one reason why on India.

But you know, I think there’s on one factor. But for those who see going down this road the last 10 or 15 years, I think the model of China’s success, and China’s also become increasingly interested in promoting and success through a range of kind of soft power tools as well.

HAASS: But if a lot of the pessimists then—I’m going to open things up in a second—if a lot of the pessimists turn out to be right about China, that its real rate of growth now is way, way low, and even that rate of growth is largely because of public infusions of money rather than real economic growth, then it suggests to me not only might China be in some difficulty, but the model that China’s been so responsible for might be in difficulty.

KURLANTZICK: No, I think that’s accurate. I mean, I think we have to see that play out. I don’t disagree with that. I think that we’ll have to see how that plays out.

I mean, there has been a high degree of pessimism. I think some of that is warranted. But it’s been still a quite impressive model for some time.

HAASS: And lastly, if I were to add up, I’d have to think about it, but state capitalist economies in the world and not, it would seem to me that state capitalism or economies that are so defined or described would still be less than half of the world’s economies. Simply the U.S. and Europe alone would pretty much get you to the 50 percent line and a few others would get you above it. Is that fair?

KURLANTZICK: Yeah, that’s fair, it depends on the growth rate of China.

HAASS: OK, it all comes down to China. OK.

Why don’t I stop? Why don’t we open it up to you, our members and guests, to ask your questions?

What we will do, we have this new invention called the microphone, so when it comes around if you want to raise your hand we’ll give it to you, if you’d give us your name and your affiliation and ask a question of Josh Kurlantzick. That would be great.

I should also—I’ve been remiss. I’ve not mentioned that this book is published by Oxford University Press. And even more important, it is for sale approximately 20 yards in that direction, by that happy gentleman sitting there. But he was feeling a little bit lonely and wishes he had more attention and more business. This is our version of state capitalism. (Laughter.) We are encouraging you to participate in the local economy here. OK.

So any hands up? I see two gentlemen in beige suits, so we’ll get the one closer to me and then the one farther away from me. I don’t have my glasses on, I can’t take it that far.

Q: Niso Abuaf, Pace University.

This morning on CNBC, none other than Larry Fink of Blackrock suggested that the solution to the current malaise of very low or negative interest rates is private-public partnership. That sounds like state capitalism to me in the developed world. I was wondering if you have any thoughts about that.

KURLANTZICK: Sure. I mean, I’m not an expert on what’s going to solve negative interest rates, but there are elements of that.

If you go back to Singapore, in the early days there was a very statist model, and then you have now a situation in which there are some state-public partnerships in a number of industries the Singapore government believes are crucial to the future, state-public partnerships in building infrastructure, which is certainly something that we need here.

But the state also forces both state companies and private sector companies to compete quite intensively, something that you don’t get in a place like Russia and that you get only somewhat in China.

HAASS: Yeah, and depending upon the rules or constitution, say, of a national or regional infrastructure bank, they might or might not qualify. And if you have public-private, almost the percentage of public and the percentage of private, both in funding and in who makes the decisions, so it could also actually be the opposite.

To you, Craig?

Q: Yeah. Thanks, Richard. Craig Charney of Charney Research.

You know, I remember that when Schumpeter was writing in the 1940s, the thought was that the increasing role of state capitalism would also be a redistributionist and egalitarian force in Western societies. I’m curious what your thought about the beneficiaries of state capitalism today is.

I’m struck by the rollcall of countries that you mentioned, which sound to me to be those which have authoritarian populism as their primary mode of governance. So would your thought be that state capitalism is essentially a way that elites are reinforcing their privileges, or what?

KURLANTZICK: I think that the role is varied. There are countries that are authoritarian and some that are hybrid and some that are truly democratic, like Brazil and Indonesia. They’re not ideal democracies.

In the worst of them, like Russia, the state is using state capitalism to reward a small group of elites.

In those that are more egalitarian, the state is not only using state capitalism to reward a small number of elites, but it is trying to address inequality in some ways. Like, for example, in Singapore and when Thaksin Shinawatra became prime minister in Thailand, for whatever his failings, his use of the economy was indeed designed in part to reduce inequality, also because that was politically effective for him.

So I think there’s a wide range. I don’t think it’s only being used to reward predatory elites.

HAASS: Someone from this side of the room. Now, we’re—yes, you have your hand up? Yes, ma’am.

KURLANTZICK: Hi, Margaret.

Q: Hi, Joshua. Congratulations. I haven’t read your book, but I look forward to it. But I—

HAASS: Margaret, you have to introduce yourself.

Q: I’m Margaret Scott, I’m a journalist, and I’ve known Joshua for a long time.

I’m interested in what drew you to this subject. Your last book was a very interesting look at the challenges and the fragility of democratization. This book is about the state and that state capitalism is transforming the world.

What drew you to take a look at that? And I’m just wondering because as a lay journalist that doesn’t know much of anything, I see the nation state as under threat in the world today or challenged and capitalism challenged, too. So I’m just interested in what drew you to this idea of state capitalism becoming so much stronger.

KURLANTZICK: Well, I think that this was, in a way, kind of a pseudo-sequel to my previous book that you mentioned, which it was about the regression of or at least the stagnation of democracy in a number of developing countries. And it’s possibly a hope I’ll have a trilogy because I’m interested in the combination and not just the regression of democracy or the failure of democratic institutions, but the ability to take advantage of them by authoritarians and authoritarian populists. So that might be coming next.

But it basically stems from the previous one. I was interested in how in a number of these countries, particularly in Southeast Asia, but others, state capitalism was both a predecessor to the rise of these elected autocrats and then often a tool that they were using to reinforce their rule. But it wasn’t always one or the other.

And there was also these exceptions, like in India where you have the Licence Raj, you had quite a long period of socialism, you had emergency rule, and yet they were able to escape both of those. So it sort of came from—in the democracy book, I looked at India as a counter example where democracy had continued to thrive compared to a lot of other countries.

So the democratic regression sort of led into this, and I wanted to look at the economic side and the way that it played in.

HAASS: Just so I understand, by the way, you’ve got state capitalism, you’ve got market, you know, economies, and you have some, you know, varying degrees of hybrids. Is there something else, other than these two poles and hybrids, is there something else out there?

KURLANTZICK: Not that I know of.


KURLANTZICK: I think that the hybrid can vary, like a French hybrid, a Nordic hybrid.

HAASS: Yeah. That’s a—(pronounces with an accent)—“hybrid.” (Laughter.)


Q: Looking at—

HAASS: You have a microphone right there.

Q: Thank you. Looking at what we’re calling state capitalism or the hand of the state in an economy where markets exist, there’s a difference. If you look at the earlier generation, France you just mentioned, most of the GDP was coming out of state-owned companies for a very long time. And to the amazement of the world and, even more so to the amazement of the French, they were growing even a little bit faster than the Germans, which is not the way the world was supposed to be ordered.

The Italians had something somewhat similar; the Spanish to a slight extent.

And these state-owned enterprises did rather well. They were market-competitive where there was, you know, not talking about railways, but all in all they did very well and they were the main instruments of post-war modernization.

And you went over across to Japan, where they did something very similar without owning them. I mean, who owned Mitsubishi during the great growth phase is a reasonably interesting question. It certainly was not the government, it was not outside. I think Mitsubishi owned Mitsubishi, and it raised all kinds of—but it was a different form of economic organization and state power and state intervention in markets did an awful lot to propel Japanese growth during the high-growth period.

HAASS: So your question?

Q: My question is, is this latest generation, which China is the leading candidate, comes a lot out of Japan as well as the ownership, is this going to go in the ways these others did, which led to stable democracies in a very great way when the odds weren’t altogether there? Or is this simply another instrument of, you know, increasingly totalitarian, authoritarian government?

HAASS: What do you think?

KURLANTZICK: Well, that’s a lot of questions there. But I think that the world is—I agree with the premise initially, but the world is different in many ways. It’s harder for a lot of these state capitalists to protect their economies in some of the same ways because they’re already signatory to a whole range of trade agreements that bind them and make them so that many of their state enterprises can’t be protected in that way.

I think that the question of whether China is going to evolve, some of the countries I had mentioned already are relatively democratic. Whether China is going to evolve, I am not an optimist that this is going to evolve into a democratic system anytime soon. I think people have gone broke betting that it’s going to change dramatically anytime soon.

I do think that there was a role for the state in those economies, and some of the ones that I mentioned the state has played an important developmental role.

Many of the states have now reached a certain GDP level where the hand of the state is not necessarily that effective.

HAASS: What about when it comes to innovation? You know, a lot of it comes out of this country and we’re not an example of state capitalism for the most part. Is there a disconnect or a lack of correlation between state capitalism and innovation?

KURLANTZICK: Overall, yes. I think that some of the most effective state capitalists, like Singapore and Norway and others, have tried to use small portions of state funds to set up certain incubators, use state funds to promote industries that are going to be important in the future. China has done that as well, somewhat. But overall, they lack deep venture capital sectors, venture capitalists are afraid of the government, and there is a problematic correlation between state capitalism and indigenous innovation.

HAASS: OK. We’ve got time for one or two more.


Q: Joshua, is there a correlation between the underground economy, informal economy, whatever you want to call it, and state capitalism? Or is that just some overlap and some not?

KURLANTZICK: From my research, I think that the correlation has more to do with poverty and the rule of law. So the underground economy in Singapore, I don’t actually know about Norway, but I would be very surprised if Norway has a large underground economy, it is very small.


Whereas in Russia and Malaysia, the two largest sources of illicit capital flight in the world, but at the same time, some of the others in the top 10 of illicit capital flight are not state economies, they’re simply very poor countries or countries with a very weak rule of law.

HAASS: I saw hands. Yes, sir?

Q: My best friend who cares about ethics recommended your book. My question is, does ethics play an important role between the free market concept and state capitalism?

HAASS: Anytime someone recommends your book you don’t want to disagree with the premise of the question. (Laughter.)

KURLANTZICK: Yeah. I think that it’s—I’m not an ethicist. I think that the free market capitalism and state capitalism are ideas that can be infused and used in the most effective way possible. In the book at the end I talk about ways to, if countries are going to employ state capitalism, to do so with effective governance in ways in which the state doesn’t predate (sp) on citizens.

I don’t think there’s anything more or less ethical about either of them, but in either they can be conformed to ways that are more beneficial to all.

HAASS: Listening to you talk about your book, I get the sense that you’re not so much saying this is necessarily good or bad, it just depends upon the specific variation of certain tendencies, but it’s actually a more nuanced sort of argument. Is that fair?

KURLANTZICK: Yeah. I mean, besides the democracy element, I wanted to write the book because I saw the previous literature on state capitalism as very one way or the other. And I didn’t think that was necessarily accurate.

And I thought that looking at it from a policy perspective, that looking at with such a broad-brush approach is problematic, especially since there are so many actors making policy decisions involved, and that it was more nuanced than had been presented in the past.

HAASS: With that, nuance is always a good place to stop. There are copies of the book. Did I mention that? There are copies of the book for sale.

Look, what you’ve heard here tonight, I think, is a really, I used the word nuance, a really thoughtful exposition.

Josh, I think, is a twofer. He’s regional expert, but he’s also, with this book and his previous book, been someone who’s producing books that are really idea books. And the previous one on the state of democracy, this, in some ways, on the state of economies and what are the intellectual directions they are moving in, and I think he’s putting together a really important series of books and of intellectual work. So I commend anyone here or anyone watching it to it.

I really think that, you know, this series is an important contribution to the field and to the literature. So I want to again congratulate him on what he’s done and urge him to keep doing it.

KURLANTZICK: OK, thank you. (Applause.)

HAASS: There’s a reception in the back. And if I didn’t mention it, there’s books in the back. (Laughter.)


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