Return of state capitalism?

The state gradually stepped back from economic activity over the past two decades and more of liberal reforms. Now, the global commodities boom and the growing trade surpluses in Asia are helping a few governments reclaim some of the economic power that they have lost. Other governments are reacting to this by claiming the right to vet foreign investments.
Are we headed for a new era of interventionist state capitalism? Venezuela’s President Hugo Chavez has decided to nationalize his country’s oil industry. There is speculation that he may target the power and telecom industries next. Russia’s Vladimir Putin has forced investors to give up some of their rights to the Sakhalin oilfields to his government at ridiculously low prices.
Both Chavez and Putin are using their oil revenues to play power games. Chavez is helping other Latin American countries stand up to the Washington consensus, the set of market-friendly policies that have gained acceptance in most parts of the world. Putin is using his natural gas resources to bully Russia’s neighbours.
Meanwhile, some oil-rich countries in West Asia as well as China are setting up sovereign wealth funds—investment companies that will use part of the burgeoning foreign exchange piles of these countries to buy companies and assets elsewhere. Investment bank Morgan Stanley estimates that these sovereign funds already have $2.5 trillion to play around with; this corpus will swell to $5 trillion in 2010 and $12 trillion in 2015.
In other words, sovereign wealth funds will get an additional $9.5 trillion to play around with over the next eight or nine years. That’s more than a trillion extra dollars a year. The United Nations’ world investment report says that total new FDI flows between 2001 and 2005 were $3.7 trillion, or $748 million a year. What this means is that government investment companies are likely to fund more FDI in the coming years than all the world’s private companies put together.
This could lead to a political firestorm—and a further round of intervention in countries that are likely to be recipients of the trillions that will come in from China and the Arab countries.
In Britain, there has been a raging debate ever since the China Development Bank took a stake in Barclays Plc. last month. Qatar’s investment fund is trying to buy British retailer J. Sainsbury Plc. German chancellor Angela Merkel says that her government is thinking of introducing legislation to make it more difficult for sovereign wealth funds to buy into German industry. She is also trying to cobble together a pan-European alliance to address the challenge. The new French President, Nicolas Sarkozy, too, has made protectionist noises.
Nobody is talking about blanket bans as yet—and thankfully so. Europe’s leaders seem to want to protect —though not own—“strategic industries” such as energy, banks and ports. Though they may not realize it, this is the resurrection of an old approach where the state would control key sectors that it believed to be too important to be left to the private sector. It’s the commanding heights doctrine all over again.
We already hear echoes of these debates in India. There are reports that the draft National Security Exemption Bill, which will pinpoint sectors where intelligence clearance will be needed before an FDI proposal gets the final green light, mentions a large array of sectors where foreign money cannot sail in unhindered. While money from terror networks is the bigger worry right now, it is quite possible that such rules can be used to limit investment by various sovereign wealth funds.
There is little doubt that countries such as China could use their investment funds to buy companies for reasons beyond pure commercial profit. But does that mean that the governments of countries that are likely to attract money from state-owned investment funds should go into a protectionist hurdle? It’s a difficult question to answer. However, it would be worth looking at other options as well.
Most of the areas that are being defined as “sensitive” by governments (including India’s) are dominated by monopolies and oligopolies—oil, power, mining, telecom and ports, for example. The fear that a China or a Qatar could derive unfair economic power by buying companies in these sectors is based on the fact that there is limited competition in them. One sensible policy would be to aggressively break down monopolistic and oligopolistic power in these areas, perhaps through a combination of market reforms and strong anti-trust action.
But the power of government investment funds could be overrated. As the Wall Street Journal wrote in an editorial earlier this week, China’s famed $3 billion investment in the IPO of private equity firm Blackstone is already in the red. Blackstone’s share price is way below its IPO price. It’s early days yet, but the old rule applies—governments are usually terrible investors.