"Authoritarian capitalism"

Joshua Kurlantzick, a visiting scholar at the Carnegie Endowment for International Peace, has piece in Boston Globe called State Inc. In it Kurlantzick discusses the rise of what has become known as "authoritarian capitalism". This is where state owned companies from authoritarian nations, such as, for example, China, the United Arab Emirates and Russia, are becoming global economic players. As the article notes

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.

In the case of China Kurlantzick notes

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 results of this has been some of the most staggering economic development in modern history, albeit from a very low base,

... 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.

In Russia

... Vladimir Putin essentially has shut down most of Russia's privately held natural resources companies in order to build up the national gas firm Gazprom and other state companies. Gazprom alone controls roughly one-fifth of all gas production in the world, far larger than any private sector rival. (And its financial power translates into political power: Presumptive next Russian president Dmitry Medvedev, anointed by Putin, previously ran Gazprom.) Under Putin, the Kremlin also has extended its reach into industries from titanium manufacturing to aviation.

The implications of this are far reaching.

Many authoritarian governments realize that, in the post-Cold War era, a wealthy nation can extend its power very effectively without trying to build an army to compete with the US in military force in the short term. In Beijing, policy makers have developed a definition of China's strength called "comprehensive national power," which goes far beyond military strength to include economic might. China is now becoming a major aid donor across Africa, which it can than leverage to help Chinese companies win access to African resources.

But as Kurlantzick also notes

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.

Kurlantzick goes on to point out that

Though it may seem as unstoppable as the rise of private corporations in the 20th century, today's shift to authoritarian capitalism may actually contain the seeds of its own demise.

State capitalism of this type fosters corruption, allowing smaller circles of state-connected elites to control more wealth.

In China, state dominance has meant that "princelings," relatives of leading Communist Party members, have gained control of some of the nation's most powerful companies. Even one Chinese government study of 3,000 of the nation's richest businesspeople admitted that a significant majority are related to top officials.

In Venezuela, growing state control has made the national oil firm less productive and more opaque, one reason why the country now ranks near the bottom on Transparency International's index of the world's most corrupt nations. Across Central Asia, too, state dominance of national oil companies has led to a spout of graft, including a US Justice Department indictment that fingers Kazakhstan's president, identified as "Official #2," for receiving millions in bribes.

In addition despite the amount of national resources that can be poured into business growth these state firms still have to compete in the global market and they are likely to suffer because of it. These firms have no exposure to domestic competition and therefore their managers have little experience on how to compete on an open market. They will also suffer since they have no pressure to adopt real corporate governance and oversight measures. International markets will demand more openness and transparency.

There is also the issue that these countries are authoritarian, as people demand more social and political rights the economic advantages of the few who control the state owned companies will also become increasingly under attack.

Kurlantzick ends the article on a positive note,

There is already some indication that openness has its advantages: India has more globally competitive multinationals than China. It is a slightly smaller country, and far poorer, but unlike China it is a true democracy.

"Authoritarian capitalism", if not actually an oxymoron, may be workable in the short run but it doesn't look like it's sustainable over the longer term.