In his latest article in Bloomberg, global economics writer Adrian Wooldridge points to a major shift in the global economy: governments are returning as major players in global markets, playing a clear role as owners, financiers, investors and all-round capitalists.
Wooldridge proposes calling this period the “age of state capitalism,” an era marked by a rapid growth in the role of government in the global economy.
Massive growth in state capitalism
Data from Elias Allami and Adam Dixon, authors of “The Specter of State Capitalism,” show that sovereign wealth funds controlled more than $11.8 trillion last year, a massive increase from the $1 trillion they controlled in 2000.
This rapid growth makes sovereign wealth funds outperform hedge funds and private equity firms combined, according to Wooldridge.
Assets of state-owned enterprises (SOEs) also rose to $45 trillion in 2020, equivalent to half of global GDP, a significant increase from just $13 trillion in 2000.
State companies.. global expansion
Wooldridge explains that modern state-owned enterprises differ significantly from traditional government bureaucracies. Instead of governments being direct managers of these companies, today they are often passive owners, with often minority stakes.
These companies are run by executives who hold MBA degrees from well-known schools and often have extensive private sector experience.
However, these companies vary in their levels of performance and transparency. Some companies may be fronts for corrupt bureaucrats or tools for politicians allied with the government. In contrast, there are state-owned companies that operate professionally and successfully in global markets.
A tool to control global production?
The author points out that governments are now using state-owned companies to control global production networks. For example, when the Chinese state energy company CNOOC acquired the Canadian company Nexen in 2013, it not only gained access to oil from four continents, but also expanded its investments in oil sands and shale gas.
Such deals reflect the government's expansion into strategic industries globally.
The spiral of state capitalism
Alami and Dixon came up with an interesting concept known as the “state capitalism spiral,” suggesting that the expansion of state capitalism naturally leads to an increase in this type of capitalism even more.
This pattern illustrates how countries, such as Germany in Europe, have begun creating “national champions” to counter the electric battery subsidy policies introduced by the Biden administration in the United States.
There is also growing enthusiasm in Africa for the creation of sovereign wealth funds, with 22 currently operational and 7 more in the pipeline, inspired by the success of wealth funds in East Asia and the Middle East.
Challenges of State Capitalism
Although state capitalism appears to be a powerful tool for boosting the national economy, it comes with a set of significant challenges.
One of these challenges is the problem of concentration and monopoly, as state-owned enterprises control a large part of the global economy. According to the Organization for Economic Co-operation and Development (OECD), half of the world’s 10 largest companies and 132 of the 500 largest companies are state-owned.
The author also highlights the problem of transparency as a major challenge. For example, the State-owned Assets Supervision and Administration Commission of China (SASAC) is one of the most powerful institutions in the world, but it is unknown to most people.
This committee exclusively owns 96 holding companies that control their subsidiaries listed on the Shanghai Stock Exchange and international markets.
The need for wise management
Managing this emerging giant of state capitalism will require a great deal of ingenuity and innovation, and Wooldridge argues that we need to get rid of the idea that state capitalism is a relic of the past of state control or simply a phenomenon associated with Chinese power.
In fact, state capitalism is growing in strength and prevalence, with some of the most successful state-owned companies and sovereign wealth funds located in developed countries.
Wooldridge stresses the need to strengthen the role of global technocratic institutions, such as the World Bank, the International Monetary Fund, and the Organization for Economic Co-operation and Development, in regulating this growing global system, and setting clear boundaries between “good” and “bad” state capitalism, which is no easy task in an era in which populist governments have begun to dominate the global political scene.