state-capitalism

State Capitalism In A Nutshell

Business / By / October 31, 2023

State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

AspectExplanation
DefinitionState Capitalism is an economic system in which the state plays a significant role in the ownership and operation of businesses and the allocation of resources. In this model, the government may own or control key industries, regulate markets, and influence economic outcomes to varying degrees. It combines elements of both capitalism and state intervention. State Capitalism can take on different forms, ranging from more market-oriented to heavily state-controlled economies.
Key Concepts– Government Intervention: State Capitalism involves substantial government intervention in the economy, which can include ownership, regulation, and planning. – Economic Diversification: Governments may aim to diversify their economies by investing in various industries. – Public Ownership: State-owned enterprises (SOEs) are common in State Capitalism, with the government owning and operating businesses. – Strategic Planning: Governments often engage in long-term economic planning and may set specific development goals. – Political Influence: Political considerations can play a role in economic decisions.
Characteristics– Mixed Ownership: State Capitalist economies feature a mix of public and private ownership of businesses. – Economic Planning: Centralized economic planning may guide resource allocation and development. – Government Control: The government has a significant say in key industries and sectors. – Political Influence: Political factors can impact economic decisions, potentially leading to non-market-driven outcomes. – Resource Allocation: The state may allocate resources based on strategic priorities.
Implications– Government Influence: The government’s involvement can shape economic outcomes and priorities. – Economic Stability: State intervention can contribute to stability during economic crises. – Resource Allocation: Resources are directed based on strategic goals rather than solely market forces. – Reduced Market Efficiency: Excessive intervention may lead to inefficiencies and market distortions. – Political Tensions: Political considerations can introduce tensions and conflicts into economic decision-making.
Advantages– Economic Stability: State Capitalism can provide stability during economic downturns or crises. – Strategic Development: Governments can guide economic development toward specific industries or technologies. – Infrastructure Investment: The state often invests in critical infrastructure. – Resource Management: It allows for strategic management of vital resources. – Social Welfare: Governments may prioritize social welfare programs.
Drawbacks– Market Inefficiencies: Excessive government control can lead to market inefficiencies and resource misallocation. – Corruption Risk: State involvement can increase the risk of corruption and cronyism. – Lack of Innovation: Heavy regulation may stifle innovation and entrepreneurship. – Bureaucracy: State intervention can result in bureaucratic inefficiencies. – Political Influence: Politics can override economic considerations, leading to suboptimal outcomes.
Applications– China’s Model: China is often cited as an example of a State Capitalist system with significant government control and ownership. – Nordic Countries: Some Nordic countries employ elements of State Capitalism, with strong welfare states and government ownership in key sectors. – Resource-Rich Nations: Countries with substantial natural resources may adopt State Capitalism to manage and leverage these resources. – Developmental States: Many emerging economies use State Capitalism to accelerate economic development and reduce dependency on foreign entities. – Strategic Industries: State Capitalism is often applied in sectors deemed strategically important, such as defense or energy.

Understanding state capitalism

In a capitalist country operating under a free market economy, the government provides and upholds a legal framework under which businesses operate. In general, there is little to no governmental intervention in business matters. Multinational corporations are the principal actors.

In a state capitalist environment, the government is the principal actor, and it takes an active role. In his book entitled State Capitalism, author Joshua Kurlantzick argues that state capitalism in its modern form is “more protectionist, more dangerous to global security and prosperity, and more threatening to political freedom” than free-market economics.

Kurlantzick asserts that the two biggest state-capitalist countries in China and Russia are using their powers globally to:

  • Employ state-owned companies as weapons during conflict.
  • Control access to natural resources such as water and precious metals.
  • Steal sensitive information or technology.
  • Undermine entrenched environmental or labor laws in countries where their state companies operate. 

Other examples of state capitalism

China and Russia are the most high-profile examples of state capitalism, but several other examples deserve mention.

To that end, Kurlantzick argues that state capitalism exists on a continuum of efficiency. The continuum is in turn determined by the degree of innovation, global trade, and modern management techniques, among other things. Efficient countries include Norway and Singapore, while Brazil is less efficient.

Norway

State capitalism in Norway is a result of post-World War II democratic reform and public ownership of vast oil reserves in the country. 

The Norwegian government has significant stakes in many of the largest publicly listed companies, owning 37% of the Oslo stock market. It also has full ownership of the two largest private companies in Norway that operate in the petroleum and hydropower industries.

Singapore

From a collection of small villages just a few decades ago, Singapore is now a world city home to many of the most powerful global corporations. It has achieved this remarkable feat through business-friendly legislation and close collaboration between the state and corporations.

The government is a majority shareholder in many major companies and, like Norway, favors investment in sovereign wealth funds. 

Brazil

Brazil has a long history of state capitalism. As early as 1930, the Brazilian government provided subsidies to support specific industries in the role of de-facto owner.

Private companies in the banking, utility, shipping, and railway industries were guaranteed survival – even if they went bankrupt.

In more recent times, the government has invested billions of dollars in Brazilian meat processing company JBS. This company has been actively involved in acquiring international food companies and, unsurprisingly, is one of the Brazilian government’s biggest donors.

Key takeaways:

  • State capitalism is an economic system where the government controls business and commercial activity.
  • State capitalism is prevalent in Russia and China where state-owned enterprise is used during conflict or to control access to important resources. State capitalism is also used to steal sensitive information or subvert laws and regulations.
  • State capitalism exists in many countries to varying degrees. Some argue that an efficiency continuum can best describe the way certain countries have used state capitalism to their advantage while others have faltered.

Key Highlights:

  • State Capitalism Definition: State capitalism is an economic system where the government exercises control over business and commercial activities through state-owned enterprises. In this system, the government plays an active role in forming, regulating, and subsidizing businesses to achieve political goals or enhance international influence.
  • Contrast with Free Market Capitalism: Unlike free market capitalism, where businesses operate within a legal framework with minimal government intervention, state capitalism places the government as the central player in the economy.
  • Characteristics of State Capitalism:
    • State-owned enterprises are major players in the economy.
    • Government directs capital allocation towards its political or international ambitions.
    • State capitalism can involve using state-owned companies as tools during conflicts, controlling access to key resources, acquiring sensitive technology, and influencing foreign markets.
    • State capitalism can vary in terms of efficiency and impact.
  • Examples of State Capitalism:
    • China and Russia: These countries are prominent examples of state capitalism. They utilize state-owned enterprises to achieve global influence, control resources, and even engage in cyber espionage.
    • Norway: Norway practices state capitalism through significant ownership stakes in major companies, especially in the petroleum and hydropower sectors.
    • Singapore: Singapore’s government plays a vital role in its rapid economic development, partnering with corporations and investing in sovereign wealth funds.
    • Brazil: Brazil’s history includes state capitalism efforts that subsidized industries and protected failing private companies. The government also invests in companies like JBS, a major food processing company.
  • Efficiency Continuum: Author Joshua Kurlantzick proposes an efficiency continuum to describe state capitalism’s impact on countries. The continuum considers factors like innovation, trade, and management techniques. Norway and Singapore are cited as efficient state capitalist examples, while Brazil represents a less efficient case.

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Connected Economic Concepts

Market Economy

market-economy
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

positive-and-normative-economics
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

how-does-inflation-affect-the-economy
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

asymmetric-information
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

autarky
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

demand-side-economics
Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

supply-side-economics
Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

oligopsony
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

paradox-of-thrift
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

circular-flow-model
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

trade-deficit
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

rational-choice-theory
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

conflict-theory
Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

peer-to-peer-economy
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.

Knowledge-Economy

knowledge-economy
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

labor-unions
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

bottom-of-the-pyramid
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Glocalization

glocalization
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

market-fragmentation
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

l-shaped-recovery
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

comparative-advantage
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

easterlin-paradox
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

economies-of-scope
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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