[Reader-list] China Inc.

[S. Jabbar]

Jeebesh, you may find this interesting.
sj

State Inc.

The most important new forces in global business are aggressive, wealthy,
and entrepreneurial. But they aren't corporations: they're authoritarian
governments.

By Joshua Kurlantzick  |  March 16, 2008

IT WAS THE biggest corporate deal in the history of sub-Saharan Africa: Last
October, a foreign firm spent nearly $6 billion for a chunk of Standard
Bank, the South African company that has long dominated finance on the
continent.

Yet the foreign suitor was not Citigroup, or UBS, or some other titan of
private commerce. It was the Industrial and Commercial Bank of China, a
company owned wholly by the Chinese government.

On a business level, the deal gave ICBC's Chinese customers access to
banking across Africa, and set the stage for closer relations between
Chinese companies and African nations. In a bigger sense, it embodies a
change that is reshaping the dynamics of global business.

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.

The rise of states as global economic players marks a sharp reversal from
decades in which private enterprise seemed an unstoppable force in global
finance, commerce, and culture. It represents a new and unexpected fusion of
state control with the business principles of capitalism. And it is already
causing a significant shift in global power.

The new state capitalists - China, the United Arab Emirates, Russia, and
others - are primarily authoritarian nations. And as they become bigger
commercial players, they are gaining new influence in a realm once dominated
by the democratic West. Some political scientists, such as Azar Gat of Tel
Aviv University, who coined the phrase "authoritarian capitalism" to
describe the trend, see these countries as the first major threat to the
idea of free-market democracy since fascism and communism.

One striking recent study by the American Enterprise Institute, a
conservative Washington think tank, shows that the economies of politically
unfree nations have grown faster than those of politically free nations over
the past decade, often through forceful use of business and financial power.
A recent report by the global monitoring organization Freedom House found
that "a group of market-oriented autocracies" were an important force in an
overall decline in world freedom.

Arch Puddington, Freedom House's director of research, sees these countries'
new financial clout as having significant consequences for the world. "These
autocracies are unapologetic and increasingly assertive, at home and
abroad," he writes.

In modern times, business and government have occupied increasingly separate
spheres in Western economies - separation that has laid the groundwork for
their economic ascendancy. By the end of the 20th century, many economists
and political scientists assumed there was no other path to growth.

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.

But the wake of the Cold War also sowed the seeds of a new discontent with
free-market private enterprise. Many emerging nations were stung by
ill-planned privatization strategies in the 1990s. In Latin America, a
decade of privatization proved so unpopular that, in a regionwide poll taken
in 2001, a majority of people across 17 countries viewed privatization
unfavorably. Across Africa, this era, known as the "lost decade," resulted
in rising poverty, and even longing for some nations' authoritarian past.

The failure of those privatization strategies helped create a ready audience
for a different model. Perhaps the most dramatic example is China. 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 result has been the most staggering economic development in modern
history - 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.

The Chinese example is proving immensely influential. Though China does not
explicitly promote itself as a model of development, its government runs
training programs for thousands of technocrats from across the globe, who
hail from nations as wide ranging as Cuba and Vietnam. At last year's
African Development Bank summit, held in Shanghai, President Marc
Ravalomanana of Madagascar told the hosts, "You are an example of
transformation. We in Africa must learn from your success."

Even officials from wealthier developing nations come home impressed. When I
interviewed one leading Thai businessman, a titan who owns a slew of
industrial estates, he couldn't stop talking about China's development. He
marveled at how quickly investments could be set up in a Chinese city: If
the government decided it wanted that company, it would make permits so easy
they could be done in a day.

In Syria, the government of Bashar Assad has launched plans to emulate
China, while in Iran both reformers and conservatives have discussed how to
copy China. Raul Castro, who has visited China several times, reportedly
wants to emulate Beijing in revamping Cuba's economy.

Other nations are building their own powerhouse companies. 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.

Across Latin America and Central Asia, governments like Bolivia, Venezuela,
and Kazakhstan also have reasserted state control over their oil and gas
resources.Already, many of these national companies dwarf any rivals.
State-owned oil companies around the world now control nearly five times the
reserves of their private rivals; Saudi Aramco, the Saudi government's oil
company, can pump roughly three times as much oil as any other firm, and has
launched a massive $50 billion expansion program that will make it even more
powerful. Corporate behemoths such as ExxonMobil and Shell may be among the
largest private corporations in the world, but they are no longer the
biggest players in their own industry.

In aviation, an industry that requires vast amounts of capital, state-linked
airlines now dominate private firms. From virtually nothing two decades ago,
Dubai has built Emirates airlines, backed by the state, into a world leader
and the second-most profitable airline in the world. The most profitable,
Singapore Airlines, also enjoys state support - Singapore's state-owned fund
owns nearly half the airline, as well as six of the country's other largest
corporations.

Nations are entering global business in another way as well. Besides
building companies, states are using their cash reserves to create their own
investment funds, and have rapidly become major players in global finance.

The rising price of oil has put a gusher of cash in the hands of
authoritarian petrostates like Saudi Arabia and Russia, all of which now
want to invest their cash hoards. With their pile of reserves, oil producers
like the United Arab Emirates and Asian exporters have developed massive
state-controlled funds that can buy into companies around the globe. Abu
Dhabi's fund alone controls nearly $900 billion, while China's controls $200
billion and Kuwait's $250 billion.

Overall, state-controlled funds control as much as $7 trillion, according to
several estimates, more than the entire hedge-fund industry. And they are
growing.

"The [funds] will become absolutely massive in size in the not-too-distant
future, and will have powerful implications for the financial markets,"
notes Morgan Stanley's Stephen Jen, an expert on state funds.

As the global business momentum shifts from private companies to national
governments, the implications 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.

The state capitalists also are gaining influence through their power in
global finance. As firms like Merrill Lynch and Citigroup have found out,
state funds provide a vital new source of investment across a world in need
of capital. The funds are increasingly bailing out American banks, giving
them significant leverage over the US financial sector.

They also are forcing the financial world, accustomed to a tight circle of
power concentrated in places like New York and London, to woo developing
nations. As shown by this winter's deals, leading banks have begun
aggressively courting Middle Eastern and Asian state funds. Global
institutions, too, understand the power shift: Recognizing China's growing
economic might, the International Monetary Fund has revamped its voting
structure to give Beijing more power.

Yet these state funds are often far more opaque than major investors in the
West. Even the largest, like Abu Dhabi's, reveal little about their
workings. And unlike hedge funds, which are also secretive, they could be
acting on political motives rather than purely financial ones. When a
Russian fund buys into companies in Eastern Europe, for example, it is
impossible to tell if it is doing so for financial reasons or to boost the
Kremlin's political influence over its neighbors.

Because of the close links between government and company, the state
capitalists also use their diplomatic might to create business opportunities
in a way free market nations never could. As Chinese oil companies have
tried to win contracts to explore fields in Vietnam, they have come head to
head with Western competitors. According to two people with knowledge of the
negotiations, Chinese government officials have informed these Western firms
that, if they want continued access to Chinese markets, they should give up
their efforts in Vietnam. In Russia, the Kremlin's growing wealth has
allowed Moscow to use Gazprom as a weapon against democratic neighbors like
Georgia.

Wealth also can be used in other ways. Within authoritarian countries, the
new model allows governments to dilute potential opposition without giving
up political power. In China, the government's co-opting of entrepreneurs,
now allowed to join the Party, has helped ensure that the middle class,
which in the 1980s usually supported reform, increasingly tolerates the
regime. In Russia, nationalizing the energy industry has reduced the
possibility that any future Mikhail Khodorkovsky, a tycoon who once used his
petroleum wealth to fund civil society groups, might emerge within Russia
itself.

In the long run, though, worries about these developments may fade. 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 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.

And despite the national resources that can be poured into business growth,
in the long term, state mega-companies are likely to suffer from competition
on the global stage. Without exposure to domestic competition, their
managers never get enough experience to compete on an open market. They also
have no pressure to adopt real corporate governance and oversight measures.

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.

Joshua Kurlantzick is a visiting scholar at the Carnegie Endowment for
International Peace and author of "Charm Offensive: How China's Soft Power
is Transforming the World."