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Why State Capitalism Has Regained Importance, Especially in Emerging Economies

Book Review

Sunday 30 October 2022, by siawi3


In ’State Capitalism: Why SOEs Matter and the Challenges They Face’, author Lalita Som tracks the evolution of modern state capitalism the world over, and its manifestation in various countries, including in India.

Review: Why State Capitalism Has Regained Importance, Especially in Emerging Economies

Representative image. Photo: armbrusterbix/Unsplash
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In the late 1970s in the UK, privatisation of state-owned enterprises (SOEs) was a major component of the neoliberal policies unveiled by prime minister Margaret Thatcher’s regime. It was soon emulated by other advanced economies, followed by the debt-ridden developing countries in Latin America. After the collapse of the USSR, Russia and East European countries also witnessed aggressive privatisation programmes in the 1990s. According to a study, between 1977 and 1999, 2,459 deals worth over $1 trillion occurred across 121 countries involving the transfer of ownership of SOEs to the private sector.
Public reaction against perverse outcomes engendered by the privatisation experiences – from sharp rises in utility tariffs to the overnight creation of billionaire oligarchs through the expropriation of public properties and resources – slowed down the privatisation trend by the turn of the century. Following the global financial crisis and the Great Recession of 2008-09, state intervention came back into play across the globe. Since then, SOEs have once again regained importance, more so in emerging economies.

Lalita Som
State Capitalism: Why SOEs Matter and the Challenges They Face’
Oxford University Press (March 2022)

This provides the backdrop for the book State Capitalism: Why SOEs Matter and the Challenges They Face. Author Lalita Som argues that China’s rise coupled with the relatively better record of the emerging mixed economies, like the BRICS, in dealing with the financial crisis and faster recovery during the post-recession period compared to the advanced economies is attributable to the larger role played by SOEs, state-owned banks and financial institutions in these economies.

In these economies, the SOEs are mostly concentrated in strategic sectors like banking and finance; natural resources like minerals, energy; and network industries. Elaborating on several problems and apprehensions regarding SOEs that remain, the book characterises modern state capitalism as “a hybrid that encourages the pragmatic use of markets and prices”.

The author notes that SOEs have emulated large private firms through corporatisation, listing in the stock markets, and reforming corporate governance. Thus, they also improved their “acceptability”. Leveraging the strengths of government control and resources, SOEs have also deployed industrial policies to foster innovations and evolve “national champions”.

Joint ventures with global multinational companies (MNCs) have helped in the transfer of technologies as well as managerial know-how. The cross-border acquisition of industrial assets by SOEs and sovereign wealth funds (SWF) and engagements with a wide range of market players have helped in evolving state capitalism in the globalisation era.

Also read: ‘The Neoliberal Project is Alive But Has Lost Its Legitimacy’: David Harvey

The book tracks the evolution of modern state capitalism by first constructing a framework for studying SOEs, then applying that framework in eight country case studies in as many independent chapters: Brazil, China, India, Indonesia, Russia, Saudi Arabia, Singapore, and South Africa.

The final chapter seeks to draw a few generalised conclusions. The well-structured book contains interesting insights regarding the development experiences in the eight emerging economies.

The updated analysis contained in Kwiatkowski et al. (2022) shows that the number of SOEs in the Fortune Global 500 list increased from 64 in 2005 to 142 in 2015, then declined to 126 in 2017 and subsequently increased again to 141 in 2020.

The same study shows that in 2005, there were 15 Chinese SOEs on the Fortune 500 list which had increased to 93 in 2020. The number of advanced or developed country SOEs declined from 37 in 2005 to 31 in 2020, while the number of developing country SOEs (other than China) increased from 12 in 2005 to 17 in 2020. Among the Fortune 500 list of 2020, there were 124 Chinese companies, including 93 SOEs, and 121 American companies – among which only three SOEs. The rise of state capitalism on the global stage is therefore a largely Chinese phenomenon.

Chinese experience

The chapter on China in the book highlights the significant transformations that have occurred with regard to the SOEs in China since 1978. A phase of autonomy, downsizing, and privatisation of SOEs in China throughout the 1980s, 1990s, and early 2000s has been followed by a phase of corporatisation, mergers and consolidation, leading to the emergence of giant conglomerate central SOEs, under the
state-owned Assets Supervision and Administration Commission (SASAC).

These SOE conglomerates in turn own a larger number of subsidiary SOEs of various sizes, many of which are listed in the stock exchanges of Shanghai, Shenzhen, or Hongkong. SASAC-like holding companies exist for SOEs at the provincial and municipality levels too.

Employees work at a production line of lithium ion batteries inside a factory in Dongguan, Guangdong province, China October 16, 2018. Photo: Reuters/Joyce Zhou

Overall, there were 5,1341 SOEs in China in 2015, as per the data provided in the book. This implies China alone has almost 20% of all SOEs in the world. However, while the SOEs have grown bigger to attain the commanding heights of the Chinese economy and establishing their global footprint, SOEs’ share in China’s GDP has shrunk to less than 30% and is projected to decline even further.

Global experience

Similar trends of SOE reform are evident from all the other country studies in the book, although the magnitude of state intervention varies widely, both in terms of quantity and quality. The highly efficient SOEs of Singapore are lauded in the book, as also some “islands of excellence” in Saudi Arabia and India.

SOE reforms in Brazil, Russia, India and Indonesia are discussed elaborately, but their problems seem to far outweigh their successes so far. Inefficient political control and corruption remain dominant in the case of South Africa.

Also read: The Neo-Liberal Push Against India’s Public Sector Enterprises Will Come at a Cost

While being thematically fascinating, the very wide array of SOE experiences that the book has sought to bring together under one cover has to some extent diluted its focus. The common problems with regard to the SOEs, namely counter-productive political interference and control, corruption, cronyism, conflicts of interest, allocative inefficiency, contradiction between the state’s ownership of enterprises and its regulatory functions, etc., have been described at length in almost all the country level studies. Singapore is the only exception. However, no clear roadmap emerges from the author’s analysis.

The author clearly holds privatisation as no panacea for the SOEs. She holds fairer competition and regulation to be the key to efficiency and calls for a ‘symbiotic’ public-private collaboration. However, the effective strategies for SOE reforms in the concrete context of each country do not emerge from the discussions, especially in terms of ownership choices, corporate governance structures and anti-corruption measures.

In India for instance, despite massive booms in telecommunications and civil aviation in the last two decades, SOEs in these sectors have either languished or are being privatised. On the other hand, the Delhi Metro Rail Corporation (incorporated in 1995) has set exemplary performance standards as a new SOE in the transportation sector.

What lessons can we learn from these experiences in terms of SOE reforms?

There are other unaddressed questions. In a global context where socio-economic inequalities are rising like never before alongside political authoritarianism and divisiveness, can state capitalism help redistribute incomes and improve employment generation; protect the environment and mitigate climate change through innovations; expand democratic rights, especially of minorities and dismantle oligarchic privileges? There are no easy answers.

Prasenjit Bose is an economist and political activist.