Is State Capitalism the Answer?

Last Updated Sep 17, 2010 2:57 PM EDT

Free market capitalism got a big black eye as the economic meltdown progressed, and many thinkers began to look, sometimes longingly, at state capitalism as a potential remedy.

After all, it seemed even the Obama administration itself was leaning this way as it pushed through public bailouts and acquisitions of private companies, and launched government-centered health care reform. Still, Great Britain appeared headed in the opposite direction, pulling back on government-backed retirement entitlements and reintroducing more free market competition into its own health care system.

Which begs the question: Is it time for free market democracies to take a fresh look at state capitalism?

There is a great discussion developing on this subject on HBR.org, titled The Strengths and Many Weaknesses of State Capitalism. The participants are Harvard Business School's Tarun Khanna, author of Winning in Emerging Markets, and Ian Bremmer, who wrote The End of the Free Market: Who Wins the War Between States and Corporations.
Both, I think it fair to say, would place themselves closer to the free market side of the question than on the state capitalist side. And their discussion at this point has mostly identified weaknesses with the state option. Here are some of their arguments.

State capitalism is inefficient. "The Chinese economy does not exhibit good allocative efficiency," Khanna says. "That is, even relative to poorer cousin India, it delivers much less output per unit of input. The waste is colossal." He says Venezuela's national petroleum company, Petróleos de Venezuela, S.A., has backslid since being taken over by the Chavez regime.

Moving between one form and the other can be nation-wrenching. Countries that try to change their model quickly sow the seeds of great turmoil, as Russia did in the 1990s as it moved its economy from more open to more controlled. China is moving toward more open markets in an inch-by-inch, one step ahead, two steps back progression.

Free democracies fare better in bad times. When state capitalist economies start to slow, leaders face a stark choice, says Bremmer: "Open up and take your chances with the free flow of ideas and information or shut it down, speed the breakdown, and launch the crackdown." For the latter, see Cuba and North Korea as examples. Democracies are much better at getting through turmoil.

"Japan's economy lost a decade, but the social shock absorbers provided by representative government have helped limit any loss of faith in Japan's political system. In state capitalist countries, even those as large and complex as China and Russia, when growth slows, anxiety grows. And for good reason."
Keep an eye on this discussion by two acknowledged experts in the area of global trade.

What's your take. Does state capitalism have something to offer?

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.