State Inc.



The most important new forces in global business are aggressive, wealthy, and entrepreneurial. But they aren't corporations: they're authoritarian governments.

Officials from the Industrial and Commercial Bank of China.
Officials from the Industrial and Commercial Bank of China. (Bloomberg)

By Joshua Kurlantzick March 16, 2008

IT WAS THE biggest corporate deal in the history of sub-Saharan Africa: Last October, a foreign firm spent nearly $6 billion for a chunk of Standard Bank, the South African company that has long dominated finance on the continent.

Yet the foreign suitor was not Citigroup, or UBS, or some other titan of private commerce. It was the Industrial and Commercial Bank of China, a company owned wholly by the Chinese government.

On a business level, the deal gave ICBC's Chinese customers access to banking across Africa, and set the stage for closer relations between Chinese companies and African nations. In a bigger sense, it embodies a change that is reshaping the dynamics of global business.

In the past five years, governments around the world have been transforming themselves into deal makers and business players on a scale never seen in the modern era. In China, state-owned oil giant PetroChina has become the largest company in the world, worth more than $1 trillion. In Russia, state-owned Gazprom has grown into the world's largest gas company. States are also wielding influence by directly buying into major private firms: The investment fund run by the Arab emirate of Abu Dhabi is now the world's largest, and recently spent $7.5 billion to become the top shareholder of the American financial giant Citigroup. Singapore's state-controlled wealth fund, Temasek Holdings, sank $5 billion into Merrill Lynch, the largest US brokerage. By 2015, according to an estimate by Morgan Stanley, such state-owned funds will control a staggering $12 trillion, far outpacing any private investors.

The rise of states as global economic players marks a sharp reversal from decades in which private enterprise seemed an unstoppable force in global finance, commerce, and culture. It represents a new and unexpected fusion of state control with the business principles of capitalism. And it is already causing a significant shift in global power.

The new state capitalists - China, the United Arab Emirates, Russia, and others - are primarily authoritarian nations. And as they become bigger commercial players, they are gaining new influence in a realm once dominated by the democratic West. Some political scientists, such as Azar Gat of Tel Aviv University, who coined the phrase "authoritarian capitalism" to describe the trend, see these countries as the first major threat to the idea of free-market democracy since fascism and communism.

One striking recent study by the American Enterprise Institute, a conservative Washington think tank, shows that the economies of politically unfree nations have grown faster than those of politically free nations over the past decade, often through forceful use of business and financial power. A recent report by the global monitoring organization Freedom House found that "a group of market-oriented autocracies" were an important force in an overall decline in world freedom.

Arch Puddington, Freedom House's director of research, sees these countries' new financial clout as having significant consequences for the world. "These autocracies are unapologetic and increasingly assertive, at home and abroad," he writes.

In modern times, business and government have occupied increasingly separate spheres in Western economies - separation that has laid the groundwork for their economic ascendancy. By the end of the 20th century, many economists and political scientists assumed there was no other path to growth.

The modern record of state-controlled business, by contrast, was chiefly one of failure. When the fascist and communist governments of the 20th century seized the reins of domestic industries, they ended up undermining development and bringing misery to millions of their own citizens. As private enterprise flourished in the West, the end of the Cold War and collapse of the Soviet Union were widely seen as a repudiation of the idea that governments could successfully control the business sector.

But the wake of the Cold War also sowed the seeds of a new discontent with free-market private enterprise. Many emerging nations were stung by ill-planned privatization strategies in the 1990s. In Latin America, a decade of privatization proved so unpopular that, in a regionwide poll taken in 2001, a majority of people across 17 countries viewed privatization unfavorably. Across Africa, this era, known as the "lost decade," resulted in rising poverty, and even longing for some nations' authoritarian past.

The failure of those privatization strategies helped create a ready audience for a different model. Perhaps the most dramatic example is China. Over the past 25 years, while keeping firm control over its economy, China has adopted many of the tools of capitalism - ceding some operational power to a Western-trained executive class, inviting foreign investment and partnerships, and buying and selling on the global open market.

Beijing has also selected a range of strategic industries to develop, from oil to telecommunications to automobiles. By creating the state-owned China National Chemical Corporation in 2004, Beijing birthed a plastics manufacturing giant, one that quickly swallowed foreign companies like Qenos, one of the biggest plastics firms in Australia. State-owned Chinese automaker Nanjing Automobile bought up famed British car brand MG Rover, while Huawei, boosted by massive loans from state-linked Chinese banks, has expanded around the globe, even trying to take over US tech giant 3Com, a deal essentially scuttled by Congress.

The result has been the most staggering economic development in modern history - all with a firm government hand on the tiller, and without the liberal political reforms considered by many in the West essential to economic growth. China has become the third-largest economy in the world; the city of Shanghai has transformed into a soaring business district packed with skyscrapers and luxury hotels. Even smaller provincial cities have grown into high-rise centers whose shopping malls are packed with moneyed Chinese buying up cars, lattes, and all the other fruits of capitalist prosperity.

The Chinese example is proving immensely influential. Though China does not explicitly promote itself as a model of development, its government runs training programs for thousands of technocrats from across the globe, who hail from nations as wide ranging as Cuba and Vietnam. At last year's African.......

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