State Capitalism Comes of Age

The End of Free Market? By Ian Bremmer

Presentation by: Andres AGUILERA

In a nutshell
Governments, not private shareholders, already own the worlds largest oil companies and control three-quarters of the worlds energy reserves. [] Sovereign Wealth Funds a recently coined term for state-owned investment portfolios, account for one-eighth of global investment

Government owned or Stake in Major International Corporations

The State to the Center Stage

According to Bremmer, the first wave of state capitalism started taking shape during the 1973 oil crisis, the world most important commodity had become a geopolitical weapon. Second wave 1980s by the rise of developing countries controlled by State-centric values and traditions. (Brazil, China, India, Mexico, Turkey) Third wave: The rise of the SWFs since 2005 that challenge the Western dominance in capital flows. Fourth Wave begun with the Global Financial Crisis

Policy Response to the Financial Crisis

Stimulus packages.
Protectionist measures. Competitive devaluations. Drop of interest rates to historic lows. Regulatory measures. Quantitative Easing. Largest economies currently carrying massive deficits.
Source: Lessons of the Financial Crisis. CFR Special Report No. 45 March 2009

Country Abu Dhabi Norway Saudi Arabia China China Singapore Hong Kong Kuwait China Russia 19th South Korea

Sovereign Wealth Funds Rankings by Assets

Fund Name Billion USD $627 $471.2 $415 $347.1 $332.4 $247.5 $227.6 $202.8 $146.5 $142.5 $30.3 $3969.8 Inception 1976 1990 n/a 1997 2007 1981 1993 1953 2000 2008 2005 Abu Dhabi Investment Authority Government Pension Fund - Global SAMA Foreign Holdings SAFE Investment Company China Investment Corporation Government of Singapore Investment Corporation Hong Kong Monetary Authority Investment Portfolio Kuwait Investment Authority National Social Security Fund National Welfare Fund Korea Investment Corporation TOTAL Oil Oil Oil

Origin

Noncommodity Noncommodity Noncommodity Noncommodity Oil Noncommodity Oil Noncommodity

SWF by source and region

Source: Sovereign Wealth Fund Institute. Online at: http://www.swfinstitute.org/fund-rankings/

[] governments are no longer content with simply regulating the market. Instead, they want to use the market to bolster their own domestic political positions.

Industrial Policy is no longer taboo

Mario Monti EU former competition comissioner

[] the World Bank, after decades of consensus that industrial policy doesnt work for developing nations, is now recommending its use. Dani Rodrik author of Industrial Policy for the Twenty-first century (2004) The Growth Report and New Structural Economics by Justin Lin & Celestin Monga (2010)

Source: The Economist, August 7th ~ August 13th 2010.

Leviathan Inc.

State Capitalism Examples Russia: patronage examples (Norilsk Nickel) (Novolipetsk Steel) (Evraz) (SeverStal) China: due to the structure of the economy (AVIC) (Hwawei) (Lenovo) Brazil: (Vale) India: (Tata) Israel (Tnuva) Algeria (Cevital) Philippines (San Miguel Corporation)

Rationales for Industrial Policy

Job creation and growth. Economic rebalance from finance and property to manufacturing and clean tech. Success in industrial policy application (i.e. Silicon Valley, Israel Hi-tech industry, France Nuclear power, Aerospace, Boeing & Airbus) Industrial policy related to fast economic growth (i.e. Japan, South Korea, China)

Unintended Consequences of Industrial Policy

Picking winners.
Corruption and cronyism. Patronage of supportive constituencies. Bureaucratic overload. Protectionism.

Trends to Observe
SWF are estimated to grow to $15

trillion in 2015. Job creation and economic performance is still weak. More stimulus? No clear exit strategies in sight. Undermined confidence in the freemarket model. From Washington to Beijing Consensus? Protectionism begets protectionism. Comprehensive trade negotiations (WTO) undermined by the proliferation of bilateral trade agreements. Decoupling Increasing SouthSouth exchanges.