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Controversial Doesn't Always Mean Right
Is authoritarian capitalism a successful model?
Posted By Daniel W. Drezner
Thursday, August 21, 2008 - 6:23 PM
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Not only do we live in a new “age of authoritarianism,” but we live in a world where autocratic governments increasingly finance democratic governments.... One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies. A gathering of the countries that matter for global economic coordination will no longer be a gathering of the leaders of the world’s big democracies. Coordination among the large democracies was never easy — and likely will only get harder as additional countries have to be brought in.Then there's the New York Times' Jad Mouawad on national oil companies -- most of which are based in non-democratic countries:
Oil production has begun falling at all of the major Western oil companies, and they are finding it harder than ever to find new prospects even though they are awash in profits and eager to expand. Part of the reason is political. From the Caspian Sea to South America, Western oil companies are being squeezed out of resource-rich provinces. They are being forced to renegotiate contracts on less-favorable terms and are fighting losing battles with assertive state-owned oil companies. And much of their production is in mature regions that are declining, like the North Sea. The reality, experts say, is that the oil giants that once dominated the global market have lost much of their influence — and with it, their ability to increase supplies.... As late as the 1970s, Western corporations controlled well over half of the world’s oil production. These companies — Exxon Mobil, BP, Royal Dutch Shell, Chevron, ConocoPhillips, Total of France and Eni of Italy — now produce just 13 percent. Today’s 10 largest holders of petroleum reserves are state-owned companies, like Russia’s Gazprom and Iran’s national oil company.... Western companies are far better than most national oil companies at finding and extracting petroleum, experts say. They have developed advanced exploration technologies and can muster significant financing to develop new fields. Many of the world’s exporting states, however, have spurned their expertise. Oil company executives see a straightforward explanation: a trend known as resource nationalism. They contend that they have been shut out of promising regions by a rising assertiveness in the Middle East, in Russia, in South America and elsewhere by governments determined to keep full control of their oil. Even in places where they are allowed to operate, the Western oil companies face growing problems. Countries like Russia, Algeria, Nigeria and Angola have recently sought to renegotiate their contracts with foreign investors to capture a bigger share of the profits. “The problem with the supply side of the equation is a problem of accessing the resources in the ground so they can be explored and developed,” Rex W. Tillerson, the chairman of Exxon, said in a recent interview. “That’s a political question where governments have made choices.”And oil is not the only area of resource nationalism and nationalization. There's cement. And, potentially, food:
While Saudi Arabia sets up its first sovereign wealth fund, ordinary Saudis are more preoccupied with the rising price of food. This is prompting the Saudi government to consider a new direction for foreign investment: buying farms in the poorer parts of the world.... Saudis are thinking of buying rice farms in Thailand, the world’s biggest rice exporter. Rice prices are climbing especially fast, as several rice-producing countries have restricted exports, fearing domestic shortages. Thailand has even flirted with the idea of an OPEC-style rice cartel. Investors from elsewhere in the Gulf, including Qatar and Abu Dhabi, are scouring the world for undeveloped farmland to buy, especially in Pakistan and Sudan. Libyans and other Arabs have been checking out Ukraine. Kuwaitis have been looking in Myanmar, Cambodia and Laos.A few thoughts on all of this:
- There's no question that there's either been a shift in the distribution of power -- or a shift in norms. Fifty years ago, there's just no way the United States tolerates this kind of nationalization in Venezuela, for example.
- The rise of authoritarian capitalism still seems a bit overstated to me. Setser, for example, makes his point by looking at the size of official reserves in democratic vs. authoritarian countries. And, sure enough the latter now dawrfs the former. Except this is a bit deceptive, since I'm willing to bet that the distribution of privately-held assets looks much more like the traditional distribution of power. Even in an area like oil wealth, OECD governments still hold a lot of leverage, as Daryl Press and Eugene Gholz point out in today's New York Times.
- I don't doubt that authoritarian capitalism can thrive in the short to medium term, but I'm still unconvinced that it can outperform the more liberal varieties of capitalism in the long term. Centralized governments do pretty badly once they are done with technological catch-up. And I'm very fond of this Ken Rogoff quote: "Governments have a long tradition of losing massive amounts of money in financial markets. This tradition is not likely to end anytime soon."
- I could be wrong about point #3. Maybe Rogoff was talking about the U.S. Trasury rather than China's State Administration of Foreign Exchange.
- Really, this all boils down to China. Every other "rising power" in today's economy is either a democracy or sitting on natural resources that will eventually decline in value.
As far as I can see, authoritarian capitalism is more successful than socialist capitalism which is what we have in the US. After socializing Fannie and FRE, we will have universal healthcare after the elections.
Point 1 - the US did tolerate "this kind of nationalization in Venezuela" 30 years ago:
http://en.wikipedia.org/wiki/History_of_the_Venezuelan_oil_industry
I'm pretty sure Ekonomix doesn't actually understand what socialist capitalism is. We have far less regulation of the economy in the US than any Western state. And, what exactly is bad about everyone having healthcare? Grow up. Get over labels and come up with solutions.
[...] Drezner has a neat post on trends in authoritarian capitalist states, a concept I was interested in but didn’t have a name for until I saw an article in Foreign [...]
the notion that "authoritarian capitalism" is sustainable in the long term is really silly, actually, given everything we know about economic and political development, modernization theory, and so forth. the concept's vogue says more about the shallowness of current discourse and most pundits and commentators than it does about the future of Russia, China, or any other country. With the neocons, I can sort of understand why they've latched onto it--they always need to have some sort of world-historical enemy to counter, whose perceived growing strength and ultimate triumph (but for the heroic efforts of said neocons) is the specter that drives the urgency of their appeal. But others? I have to say, it's surprising. When any actual decent-sized authoritarian economy (as opposed to simply a tent on top of a well) goes into five digits in per capita GDP, then we can start getting worried... Until then, everybody should just relax.
lc
He's missing some seriously big things. Less and less of the world economy is bound in resources like oil, and more and more in higher and higher-worth products like manufactured goods, engineering products, and especially into services. Democracies provide the higher end of the scale, authoritarian states the lower end.
He has plenty of company in this, but China isn't so much authoritarian as
oligarchic. It's certainly unfree and will have corresponding R&D disadvantages so long as that stays true, but it is smarter about climbing the ladder - it's rapidly industrializing. It's too early to say what Russia will be in the post-Putin era, but right now it's authoritarian and having authoritarian disadvantages.
Dan, this is nitpicking, but I'm writing a book about this stuff so I feel that I have to.
(1) Fifty years ago is 1958, by which point the U.S. was perfectly happy to allow foreign companies to nationalize our assets as long as they received fair compensation. That's the same as today --- consider that as soon as Cemex announced that they would be taking Venezuela to ICSID, Venezuela started making soothing noises about paying the Mexican company what it believed its assets were worth.
The reason, of course, is twofold. First, in 1938 the U.S. put a squeeze on Mexico, and the oil companies were not only compensated ... they were /overcompensated/.
In 1954 the U.S. went beyond squeeze in Guatemala and Iran, and bad political things resulted. Therefore, the State Department became even more vocal about refusing to allow Commerce to sanction countries that interfered with U.S. investments, for fear of emboldening the Communists. Even with the Hickenlooper Amendment /requiring/ U.S. sanctions, State consistently slapped Commerce down. (Cuba is partial exception, but there were other motives in play.)
In other words, the change in behavior is a bit older than 50 years. The U.S. started to tolerate this stuff in the 1930s, and inasmuch as Washington did react, it did so with a toolkit much like the one in use today. By the high Cold War, the U.S. really did look the other way at nationalizations-without-proper-compensation, but that is no longer the case. The only difference is that the sanction mechanisms have been institutionalized via ICSID or the various panels attached to trade treaties.
Apologies, but like I said, I work on this stuff.
(2) One point that's often missed is that sovereign wealth funds enhance the political power of the countries in which they invest, especially the United States. Why? Well, under the Foreign Sovereign Immunities Act of 1976, sovereign assets used for "commercial purposes" don't enjoy sovereign immunity. That means that governments that buy assets in the United States have effectively hung out a nice sweet hostage that Washington can threaten in order to punish behavior that it doesn't like.
Hey, if Caracas can do it, why not us?
I've got an op-ed on this point floating somewhere.
A colleague of mine and I argue in our 2008 APSA paper that political institutions do matter for reserve accumulation, but for more subtle reasons having to do with how institutions channel interest group demands for compensation. We estimate, for example, that democratization in China would--ceteris paribus--increase China's level of foreign reserve holdings.
http://www.people.cornell.edu/pages/tp253/docs/ToHaveAndToHoard.pdf
[...] the rise of authoritarian capitalism is overstated, says political economist Daniel Drezner. The world’s democracies may no longer be its [...]
As an economist, you must know that its not technically capitalism when an oligopoly, or an investment pool controlled group of companies enters a market and bleeds the original market participants until they own all of the market that matters, then re-creating and re-structuring the market supply and demand as they see fit.
Its called market failure, or perhaps more accrately, socialism privatized. But it goes under the name of "free trade".
This is exactly what is happening in the soros color revolutions. A billion in Us aid is only a band aid when all the agriculture and manufacturing is bled out and replaced by malls and foregn il stations.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.
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