Illiberal capitalism

Since communism failed as an economic system, Russia and China have had to embrace free markets. But hopes that reform of communist economies would produce western-style democracies have been shaken.

The new Russo-Chinese model is authoritarian and attempts to marry capitalism with a large state role in the economy. Moscow and Beijing increasingly stress a combination of economic growth and nationalism. Futhermore, the two countries have frequently opposed western efforts to exert pressure on repressive governments such as Iran, Iraq, and Sudan.

Robert Kagan, foreign-policy analyst at the Carnegie Endowment for International Peace, argues that “an informal league of dictators has emerged, sustained and protected by Moscow and Beijing”. The FT’s Gideon Rachman has also written on illiberal capitalism, concluding that hopes that China and Russia would embrace the western political model now seem outdated and naive.

So what are the implications of the rise of state capitalism? Will mutual interests in a global economic system limit any new rivalry between the west and Russia and China? Will economic freedom eventually produce political freedom in these countries? Or is the era of free markets fading away? And will new alternative to the western model continue to thrive?

Dr Kagan and Mr Rachman answered readers’ questions on illiberal capitalism on Tuesday.

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I’ve read that the Chinese political-economic system has garnered a very receptive audience in parts of Asia, Africa and Latin America as an alternative model for ending poverty. Are the Chinese actively promoting authoritarian-capitalism to the rest of the world, or are they merely letting results speak for themselves? Will the world one day break up into a new cold war with competing camps of Authoritarian-Capitalists on one side and Democratic-Capitalists on the other side?
Patrick Michael, Florida, USA

Robert Kagan: There’s no question that China is an attractive model for autocrats who would like to be able to pursue economic growth without losing control of the levers of power. Recall that the consensus in the West during the 1990s, and perhaps even today, was that economic growth must necessarily produce democratic government, as growing middle classes demand greater political rights. China provides a stark example of remarkable economic growth without political liberalisation. Russia, with its oil-fed economy, is providing another example, especially to neighbouring countries in Central Asia and the Caucasus.

Are China and Russia actively exporting authoritarianism? I would say no. They do not hold universalist principles of the kind that inspired Marxism-Leninism. On the other hand, there should be no doubt that by the force of their example, and also by their power to influence the international system - at the UN and elsewhere - they are making the world safer for autocracies.

As to the last question, I believe, and argue in a forthcoming book, that the world is already dividing up along authoritarian/democratic lines, and will do so more in the years to come.

Gideon Rachman: Well, there is certainly a lot of interest in the idea of Chinese “soft power” in Beijing - at a moment when opinion polls suggest that American prestige around the world has sunk pretty low. The Chinese are engaging in cultural diplomacy by setting up “Confucius Institutes” around the world. The Beijing Olympics will also be an opportunity to market China – and the Chinese model – to the world.

The Chinese are also increasingly vocal in questioning western or American efforts to promote democracy around the world. A recent editorial in the “People’s Daily” warned that the current problems in Kenya are what happens when you attempt to export democracy to countries that are not ready for it.

But I think there are obvious limits to Chinese “soft power”. China’s Asian neighbours may be inspired by the rise of China – but they may also feel threatened by it. And there is some evidence of a backlash in Africa against Chinese investment deals that pay no heed to human-rights.

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Given the unexpected strength, in both China and Russia, of state- and locally-owned commercial enterprises, shouldn’t we in the West reassess what is happening in both countries? Is not what is happening there a form of neo-Communism rather than an inexorable march toward some mythical free market?
Louis Godena, Providence, Rhode Island

Robert Kagan: I would agree that what we are seeing in Russia and China is not simple free-market capitalism. It may not be neo-communism. There is considerable economic freedom for individuals in China and Russia. And people are allowed to get very rich - so long as they don’t run afoul of the political interests of the autocracies.

The model in Russia and China today is more like the autocratic-bureaucratic states of the past. In both countries, businesses operate only with the support and in many cases the collusion of the autocratic state. No one who does business in China is under any illusions about that. Being a successful businessperson in China requires obtaining a strong patron in the government apparatus. In Russia it is also the case that businesses rely at the very least on the tolerance of the state authorities. The Russian state is constantly using its powers, especially the power to tax and investigate alleged tax fraud, to put people out of business who refuse to toe the government’s line. Especially when it comes to the activity of Russian business abroad - where they invest, for instance - there is clear government collusion. When Gazprom buys, it is not just Gazprom buying. It is also the Russian state.

Gideon Rachman: No, I don’t think its neo-communism – at least, not in an economic sense. China’s export-oriented companies have to pay heed to the demands of the global market. The big new Russian firms are certainly not averse to the idea of private profit. That said, the fact that the state still plays a big role in Russia’s energy industry and in the Chinese banking system creates inefficiencies, which could cause problems.

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In hard times, where the market systemically fails to properly allocate risks and liabilities, do we have to ask for support from financial interventions from illiberal states or should we count on our own safety systems, whose governance after all are still based on democracy?
Loris Di Pietrantonio, Brussels

Robert Kagan: I believe we will have to be cautious. There is no avoiding the realities of the global economy: China has huge amounts of cash to invest. And in many ways its investment in the economies of Europe and the US can help make it the ”responsible stakeholder” in the international economic system that everyone wants it to be. I don’t think it will be possible for the democratic economies to be self-reliant - and especially those that depend, for instance, on the energy resources of Russia.

At the same time, however, we need to be aware that Russia, in particular, is using its investments in Europe and Central Asia to improve its geo-strategic position. It is not making decisions based purely on economics, any more than great powers ever have or do. Therefore, the democracies need to be willing to examine the strategic consequences of individual cases. One thing worth noting is that Russia does not permit true reciprocity of investment. The Russian government wants an open field to invest in Europe, but wants to control the amount and direction of foreign investment in Russia very tightly. It isn’t obvious to me why European governments should put up with this asymmetry.

Gideon Rachman: If you believe in a market system, then I think you have to leave it up to private firms like Morgan Stanley to decide whether they want to accept investment from China’s sovereign wealth fund. And – in many ways – such investments are a very good thing. All too many western banks clearly badly need the funds at the moment. And if the Chinese own large chunks of the American economy, they also have a stake in the continued success of the US. That said, there are clearly industries in which Russian or Chinese investment raises strategic issues – most obviously Russian investment in the European energy sector. And with those types of investment, I think it’s both inevitable and necessary that western governments examine the strategic implications before giving the go-ahead.

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Why use the term state capitalism to describe a move away from capitalism and towards economic interventionism? It is fascism. Why sully the name of capitalism, the only system that liberates the individual from state oppression?
Andrew West, New Jersey

Robert Kagan: I wish it were that simple. If one believes capitalism is synonymous with ”freedom” and ”democracy,” then the point is well-taken. However, it seems to me that historically, something usually called capitalism has been able to coexist with non-democratic forms of government, where political freedoms are limited. Late-19th-century Germany was hardly democratic or devoted to the rights of the individual as opposed to the state. It was very much a state-centric political system. Yet most people consider capitalism to have flourished there. Nor is it obvious that capitalism of a certain kind was incompatible with fascism.

Without worrying too much about what to call things, I believe the central point is important: We lived under the illusion that economic success required political liberalisation. All the optimism of the 1990s rested on this assumption. Now it appears that the causality is less certain. Autocratic governments can sustain economic growth, and indeed their economic success helps them sustain their autocracy. This means, if nothing else, that we must be ready for a world in which powerful autocracies endure and perhaps even thrive. That will require a significant adjustment in the way democracies behave. It is no longer simply a matter of waiting for the inevitable triumph of democracy. The old struggle, the one that long predated the Cold War, has returned.

Gideon Rachman: I’m not especially attached to the term “state capitalism” – it’s a tricky thing to describe. But I would avoid the term “fascism”, simply because it’s so loaded with emotional and historical baggage that it is likely to obscure more than it explains. The Economist has made the case that Russia is beginning to look a little fascist – a leader cult, nationalism, revanchism, youth groups developed to support the ruling party, close links between business and political elites etc etc… But, actually, the leader cult in Russia seems to me to be much less developed than in fascist Italy or Spain, let alone Nazi Germany. And Russia’s actions overseas – while unsettling in some ways – are not (as yet) nearly as aggressive as Germany or Italy in the 1930s.

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Chinese politicians have talked openly in their domestic press about ending what they call “Western economic pre-eminence”. The Chinese also see Africa as being a feeder continent in terms of providing natural resources. What can the West do to stop Africa from falling under the influence of China?
Tony Makara, Manchester

Robert Kagan: It’s a good question. Until recently, China has had at least one distinct advantage in Africa: the willingness to bring huge quantities of cash to governments with no strings attached. The US and Europe, and what we like to call the ”international community,” have a whole list of requirements for providing assistance. There are requirements for political and economic reform, anti-corruption measures, etc. These may be good for the country, but they are often not in the interests of an African government, and especially an autocracy. So to such a government China’s offer of cold cash with no strings attached looks pretty tempting. The net effect over time may be to strengthen the autocrats or would-be autocrats in Africa. How will the West compete? Clearly, the democratic countries are going to have to redouble their efforts to assist African peoples AND to make clear the benefits that come from reform. But there is certainly a competition under way now, and with geopolitical as well as humanitarian implications.

Gideon Rachman: It’s true that China’s “no-strings-attached” aid deals are making it harder for the World Bank or the IMF to insist on political or economic reforms as the price of new loan deals in Africa. That does erode western influence, as does the fact that the Chinese have a lot of money and are very keen to secure natural resources. But to the extent that China is providing badly-needed new investment, I’m not sure that it is always appropriate to oppose their push into Africa. However, if the Chinese get into the habit of propping-up dictatorial regimes – or concluding deals that seem obviously exploitative – I think they may experience a backlash in Africa.

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One of the strengths of capitalism within free markets is the concept of dispersed knowledge: information that is dispersed throughout the marketplace, and not in the hands of any single agent. How can a state, and certainly ones without proper check and balances (like China and Russia), operate in global liberalised markets over a long period of time? Is state capitalism a sustainable economic model?
Tony van den Berge, Amsterdam

Robert Kagan: It is almost certainly true that freer systems will produce stronger and more adaptable economies than closed political systems, where information is controlled by the state. However, the question is how long it may take for these natural advantages to affect the international system. It could be that Russia can continue to thrive on energy resources, as well as increased economic capabilities in other fields, for quite some time before it begins to fade. China has risen to become an economic giant in the world merely by freeing up its manufacturing sector. I’m not an economist, but I know many economists believe China can proceed in this fashion for some time before the limitations the government places on the dispersal of information begin to have a notable negative effect. After all, Soviet communism proved to be unsustainable as an economic model. But it took 80 years for that reality to play itself out. Imagine what China may look like in 20 years at present rates of growth.

Gideon Rachman: I think one of the reasons that China has been successful economically is that by going for export-led growth, they have imported market signals from the rest of the world. But a lot of people in the energy world say that the Russian state’s insistence on controlling its domestic industry is harming efficiency, which will damage the industry.

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I am a Western-educated overseas Chinese. I am truly sick and tired of the West’s self-bestowed, self-righteous and self-appointed right to interpret world events based upon a totally Western-centric bias. How long will the West still persist and insist on this misdemeanour, simply ignoring the rest of the other world?
Lee Wee Shing, Malaysia

Robert Kagan: I don’t think the West ignores the rest of the world. There is much more respect in the West for other cultures in the world today than there was, say, even 20 years ago. There is a sense of foreboding, especially here in Europe. All we have been hearing for the past decade is that this is the ”Asian century.” But if what you are referring to is the sense in the West that its ”enlightenment” values are superior, that they represent the universal aspirations of all human beings, and that non-democratic forms of government are inherently less compatible with the rights and freedoms that the West considers to belong to all human beings - then you are right to worry. That sense of superiority will endure for quite some time, I suspect.

Gideon Rachman: As long as we can get away with it.

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What are the limits of the development of this illiberal capitalism?
Cesar Diaz, Miami

Robert Kagan: Another good question. I don’t know. I would say that, in China, it may have already exceeded most expectations, at least those based on the ”economic liberalisation-equals-political liberalisation” model.

Gideon Rachman: Who knows? People have been predicting that the Chinese economy is heading for a nasty crash for well over a decade. Will Hutton has a new book out, which is still pushing this theme. Eventually, it may prove to be correct. But many years of watching China’s economy defy the sceptics has made me believe that there is still a lot of growth left in China and that Goldman Sachs’s projection that China’s economy will be larger than the US economy by 2027 is not too far-fetched. I’m less sanguine about the prospects for the Russian economy, which seem to me to be much more dependent on high energy prices (not that that is likely to change soon, either.)

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How can you compare Russia and China together, when Russia is democratic and China is not?
Bhoj, Amsterdam

Robert Kagan: I find it very difficult to call Russia a democracy at this point. In recent elections, opposition parties have faced huge obstacles in competing with the government. The government controls the television stations and most of the rest of the media. Those who try to finance opposition parties are hounded out of the country or thrown in jail. Domestic and international non-governmental organisations have been closed or are harassed. The Russian government effectively threw out the international monitors of the OSCE, an organisation of which Russia is a member. Putin and other Russian leaders today speak of ”managed democracy” or ”sovereign democracy,” which is different from multi-party competitive democracy. Let’s recall that the Somozas in Nicaragua also held elections, but somehow the Somozas always won. Was that a democracy?

Gideon Rachman: You are right that Russia has a freer media than China, and Russia stages competitive national elections – and China doesn’t. That said, state television in Russia reflects the Kremlin line pretty faithfully; the law is being used as a political weapon; and it is also clear that the identity of the next president has essentially been decided in the Kremlin and that March’s election will be a rubber-stamp. The new Freedom House rankings place Russia firmly in the “not free” camp.

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How do western views of corruption apply to the Russo-Chinese model?
John Ormond, Canada

Robert Kagan: I guess I’m so locked in my western world view that I think corruption is just corruption. On the central point, when a business has to bribe government officials to be able to operate their business, either by providing cash or by giving the government officials a piece of the business, that is corruption. I understand that it may be the way business is done in a place like China, and elsewhere. But it’s still corruption and impedes, as earlier questioners have noted, the working of both free-market capitalism and political freedom. Of course, there is and has been corruption in all political and economic systems. But at least let’s call it what it is.

Gideon Rachman: I’m not sure that there is a single western view of corruption. I’ve heard some western businessmen describe corruption as an inevitable part of doing business in China and Russia – even as a necessary way of cutting through bureaucracy. I think that the Chinese and Russian economies clearly can grow strongly for long periods, despite corruption. Perhaps the real threat posed by corruption is that it could provoke infighting among the political elite, and so destabilise the system. This clearly is a worry in Russia at the moment, as President Putin prepares to step down.

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About the expert

Robert Kagan is a senior associate at the Carnegie Endowment for International Peace. His most recent book, Dangerous Nation: America’s Place in the World from its Earliest Days to the Dawn of the 20th Century, gives a history of US foreign policy, in which he argues that America is “an ambitious, ideological, revolutionary nation with a belief in its own world-transforming powers and a historical record of enough success to sustain that belief” (read an extract).

Dr Kagan writes a monthly column on world affairs for the Washington Post, and is a contributing editor at both the Weekly Standard and the New Republic. He served in the State Department from 1984 to 1988 as a member of the Policy Planning Staff, as principal speechwriter for Secretary of State George P. Shultz, and as deputy for policy in the Bureau of Inter-American Affairs. He is a graduate of Yale University and Harvard University’s Kennedy School of Government and holds a PhD in American History from American University.

Gideon Rachman is the FT’s chief foreign affairs columnist.