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 / Summer 2010 / Issue 59(originally published by Booz & Company)


Surviving State Capitalism

As a result, I think business leaders are thinking differently about the long-term exposures they have in some countries — not just China, but places like Russia, Brazil, and some Middle East countries. These governments are run by able and talented people, but their governing institutions are still immature. As they step out on the global stage, they are not as transparent as Western economies, and their financial institutions are not as experienced and sophisticated.

So far, no company except Google wants to publicly confront China, because there’s still too much money to make there in the short term. But companies are planning internally for more difficulty in China. Their CEOs are talking to us, and they are scared. They’re talking to the National Security Agency about potential problems with information technology and cybersecurity.

S+B: In The China Strategy [Basic Books, 2010], Booz & Company Senior Partner Ed Tse argues that China’s economy can’t be ignored or isolated — no matter how active the government is.
That’s true. But for a majority of multinational corporations, the China business model is going to become vastly different over the next five to 10 years. It will be a distinctly new ball game. Global oil companies used to conduct exploration and production everywhere, and then state-owned companies took that over. Now ExxonMobil, Shell, and BP survive by selling technology, distribution, and management expertise. We’re going to see similar changes in sectors across the board, and other forms of conflict.

I doubt the U.S. will end up in an explicit war with China. But increasingly Americans will perceive their national security, broadly construed — economic security, cybersecurity, and technological competitiveness — as being threatened by state capitalist countries.

S+B: Which side will countries like India and Brazil take?
They fall between the Chinese model and the U.S. model; they are hybrids. India, for example, is a very decentralized place. Governance works from the provinces. As a result, India cannot do a lot of infrastructure building or drive growth with state capitalism. And there is a fair amount of rule of law in both of these countries, and contracts are generally viewed as sacrosanct. But they are not necessarily convinced that the U.S.-style free market is right for them. How well the U.S. and China succeed economically over the next 10, 20, or 30 years will determine to a large degree where countries like India or Brazil end up.

S+B: How sustainable is this new state capitalist model?
I think that the ability of state capitalists to ensure stability will keep them in place for a long time. Were China to establish a free market capitalist system right now, it would probably spell the end of the Chinese Communist Party, and the end of a managed economy that the vast majority of the Chinese people support.

For the moment at least, state capitalist governments like China have a huge advantage because they can mobilize massive cash, programs, and investment. Their model may well be sustainable for another 20 years. Beyond that, it depends on the level of development of their political and social systems.

Author Profile:

  • Art Kleiner is editor-in-chief of strategy+business and the author of The Age of Heretics (2nd ed., Jossey-Bass, 2008).
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