State capitalism is referred to as a monetary system wherein business functions (profit oriented) are initiated by the state.
The production systems are arranged and controlled by the state. The government agencies manage the complete process – capital increase, the wage for labour and centralized management.
State capitalism is the combination of wage structure of production and control by the government. It could be utilized to denote a structure in which the state makes economic decisions to safeguard the well-being of mega businesses.
This is not a new concept e.g., the East India Company. However, it has witnessed an impressive recovery.
During the 1990s, state-controlled firms were nothing but government divisions in developing economies. The assumption was that, as the economy seasoned, the government would either shut or ensure they are privatized.
The crisis in the West and growth in emerging markets has convinced some experts, state capitalism is a viable model. According to them, capitalism has been revamped to ensure it is more efficient.
The requirement for leaders of the G-20 to construct consent behind the implementation of modified rules for financial institutions and dependable global oversight would supplement the movement.
Over a period of time, state capitalism has become prominent. The governments are steering mega capital flows across international markets with significant inferences for free markets and global growth.
The mega oil firms globally, assessed on the basis of their reserves are managed by governments.
Some of the examples are Saudi Aramco, Gazprom (Russia), China National Petroleum Corporation (CNPC), National Iranian Oil Company (NIOC), Petrleos de Venezuela (PDVSA), Petrleo Brasileiro (Petrobras), and Petronas (Malaysia).
The trend is not restricted to only the energy sector. State-controlled firms are making a foray into several sectors – military, power, telecommunications, metals and aviation.
The growth in an advanced segment of sovereign wealth funds is also facilitating an increase in state-controlled functions.
The governments with huge holdings in the currencies of other nations are creating mega risk-oriented funds to optimize the ROI and increase their political clout.
The international credit crunch increased the difficulty in securing funds, hence, sovereign wealth funds have become vital for the funding of state capitalism.
Economists backing state capitalism feel that it can deliver stability along with development.
The governments are in a position to lessen the crisis that a globalized capitalistic economy causes by increasing investments in public infrastructure projects and soft infrastructure of leading enterprises.
The Singapore government under the leadership of So Lee Kuan Yew allowed international companies to operate, accepted western management concepts and owned significant portions of firms.
China has achieved a growth rate of 8% in recent times. The US has a trade deficit of nearly $300 billion with China.
Several nations that function based on a state capitalist structure have overcome the impact of the global recession with better strength than free economies of the developed world.
The governments in a state capitalist structure, usually make long-term investments. The establishment of national mega firms that support the pursuit of the government’s policies is a critical strength of state capitalism.
However, there are serious weaknesses linked to state capitalism. State controlled firms absorb the capital and expertise that could have been used efficiently by private firms.
State-controlled firms usually replicate others technology since they could leverage the government’s influence to secure others technology. They would become competitive if they invest significantly in R&D.
State-controlled firms make few mega investments instead of many small investments. The pioneering innovations globally are mostly interconnections of small new ventures.
Stability is an area of concern. State capitalism functions efficiently only if it is managed by a capable state. Several nations in Asia have a common cultural background.
State capitalism favours insiders having excellent relationships with decision makers to highly efficient outsiders. It encourages crony capitalism.
The internal weaknesses in a state-controlled firm are not visible in the short-run, while resulting in several economic issues. Global investors in developing economies have to be careful.
State-capitalist regimes could be unreliable, with absolutely no concern for smaller shareholders. Some investors would find their affiliates or joint ventures facing direct competition from state-controlled firms.
A serious issue is the influence of the model on the international trading structure. Geopolitical problems could impact the trading structure.
For developing nations seeking to be competitive globally, state capitalism definitely has an appeal. It gives them a significant advantage in terms of the political influence that would take private firms a long-term to establish.
There would be more constraints on the entry to some international markets for certain firms.
The governments would provide subsidies to facilitate social development. This could have a negative impact on the economy.
The demerits overshadow the merits. The leadership of state capitalism must reduce their mega holdings in preferred firms and boost greater private investment.
To conclude, state capitalism would influence international economic trend significantly, but it would not be able to change the globalization process. State capitalism must negate the internal inconsistencies – the ecological price.
Globalization is not based on the acumen of political decision makers. Hence, it would be able to overcome the threat of state capitalism.