Since the start of the current global economic crisis in 2008, there has been renewed interest in the concept of ‘State capitalism’, as distinct from ‘market capitalism’. (The term ‘liberal capitalism’ is shorthand for ‘liberal democracy plus market capitalism’.)
This interest is centred on China more than any other country, in part because of the country’s ability (so far) to ride out the crisis, in part because of the key role it has played in keeping the global economy running while the developed West has been stagnating and in part because China is, unlike India or Brazil or South Korea, not a democracy. This last factor creates the impression of a ‘Chinese model’ of autocracy plus State capitalism that can be compared and contrasted with the ‘Western model’ of liberal capitalism.
There has been considerable debate about the rival merits of these ‘models’ in recent times. Thus, renowned British historian Niall Ferguson, who teaches at Harvard University, in the US, had a recent article on State capitalism in the US academic journal Foreign Policy. In late January, The Economist, of London, had a cover and special report devoted to State capitalism. The topic has also been addressed in the past couple of months by The Wall Street Journal and Bloomberg Businessweek. And these are only some, albeit prominent, examples.
However, what is meant by State capitalism?
“State capitalism is the situation where the State tries to run a business on a commercial basis,” defines Econometrix director and chief economist Azar Jammine. “China is regarded as the main example.” Ferguson, in his article, quoted (without agreeing with) global political risk consultancy Eurasia Group president Ian Bremmer, who wrote that State capitalism saw “governments use various kinds of State-owned companies to manage the exploi- tation of resources that they consider the State’s crown jewels and to create and maintain large numbers of jobs”.
The Economist says: “State capitalism . . . tries to meld the powers of the State with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses tools such as listing State-owned companies on the stockmarket and embracing globalisation.”
One thing State capitalism is not: it is not a synonym for resource nationalism. Resource nationalism has been defined as the control, by the country in whose territory they are located, of in-the-ground (including under- the-seabed) resources and the means of extracting and refining them. (See Mining Weekly January 26, 2007.) State capitalism and resources nationalism are thus very different things.
Another thing that State capitalism is not: it is not new. The Economist cites democratic Japan in the 1950s and Imperial Germany in the 1870s as previous cases, although “never before has it operated on such a scale and with such sophisticated tools”.
State Capitalism and Natural Resources
State-owned companies dominate the global hydrocarbons sector. National oil companies (NOCs), as they are referred to, hold a staggering 77% of the world’s oil reserves.
The biggest oil company in the world is Saudi Arabia’s Saudi Aramco, which has 280-million barrels of proven reserves and has a production capacity of 12.5-million barrels per day (although it usually keeps its production at lower levels, partly to preserve reserves and partly for politico-economic reasons). From second to tenth place (in terms or production), the remaining top ten oil com- panies are the National Iranian Oil Company, Petroleos Mexi- canos (better known as Pemex), the Iraq National Oil Company, Exxon Mobil, BP, the China National Petroleum Corporation (which has a publicly listed sub-sidiary called PetroChina), the Abu Dhabi National Oil Company, the Kuwait Petroleum Corporation and Petroleos de Venezuela (known as PDVSA). (This list was compiled by Forbes magazine in 2010.) Of these companies, only two, Exxon Mobil and BP, are not State-owned.
In the mining sector, however, the picture is very different. The world’s top three miners are all private-sector companies – BHP Billiton, Vale and Rio Tinto. While the number four company, China Shenhua, is a subsidiary of the State-owned Shenhua Group, its market capitalisation in 2010 was half that of Rio Tinto, reported PricewaterhouseCoopers in its Mine 2011 report. Fifth place was held by Xstrata, sixth by Anglo American, seventh by FreeportMcMoRan, eighth by Barrick Gold, ninth by Potash Corporation and tenth by Coal India. Of these, only Coal India is State-owned.
Of course, China as a country has very significant mineral and metal reserves. In 2008, according to thebusinessofmining.com, its share of global production was 37% for iron-ore, 39% for coal, 16% for copper and 97% for rare- earth minerals. In 2009, the country accounted for 6% of copper, 12% of gold and 25% of zinc production. But this pro- duction is spread across some 200 000 mining companies, most of them tiny. However, a small number of major mining com-panies have emerged, with the big three being China Shenhua, the Aluminium Corporation of China (usually known as Chinalco) and China Coal Energy. All are wholly or partly State-owned.
Thus, State capitalism is huge in the global oil and gas industry, but of much less significance in the mining sector. However, there is an important qualification to the latter observation. Chinese State capitalism is characterised by State-owned central holding agency, the State-Owned Assets Supervision and Administration Commission, which controls groups of vertically integrated companies (although this control is often, in practice, loose). Because they are vertically integrated, many of these companies, although their core business is not mining, are nevertheless involved in mining (to provide raw materials for their core operations or for energy to power these core operations).
Moreover, with China’s demand for almost all types of mineral, metal and hydrocarbon inputs now exceeding its domestic production, many State-owned enterprises are looking abroad for these resources. In this, they are being supported by the Chinese government, which is particularly uneasy about the country’s dependence, since 1993, on imported oil.
State-owned companies have accounted for 80% of Chinese foreign direct investment, supported by soft loans from State banks. The country’s oil com- panies have been especially active, and deals exchanging infrastructure for oil have become a common business tool for them – and for other Chinese State-owned companies seeking access to other commodities. This, of course, puts private-sector resource companies from other countries at a serious disadvantage.
State Capitalist South Africa
South Africa is a long-standing practitioner of State capitalism. The great bulk of key infrastructure, whether railways, ports, airports, electricity generation and transmission, water and sewage and broadcasting systems, is in the hands of wholly or predominantly State-owned companies. Moreover, the State is the biggest shareholder in national tele- communications giant Telkom with a 39.76% share, with the next biggest shareholder being the Public Investment Corporation – which manages public-sector pension, provident, social security, development and guardian funds – with 9.31%; the biggest private- sector shareholder is Allan Gray Investment Council, with 8.82%. So, although Telkom is not, technically, State-owned, it is certainly State-dominated.
In 2002, the government created the Petroleum, Oil and Gas Corporation of South Africa (PetroSA) as the country’s NOC. It explores for and exploits hydrocarbons both at home and abroad, and owns and operates the largest commercial gas-to-liquids refinery in the world – at Mossel Bay on the country’s south coast. At home, the company operates the FA-EM south coast gasfields and the Oribi and Oryx oilfields, while abroad it has exploration licences in Equatorial Guinea and Namibia. Although a minnow by global standards, the company’s official vision is to “be the leading African energy company”.
PetroSA also undertakes the marketing and trading of oil and petrochemicals and is involved in the development of the country’s refining and liquid fuels logistics system. To this end, the company has a $11-billion project for a refinery with a daily production capacity of 400 000 barrels, which would be sited in the Coega industrial development zone, in the Eastern Cape province. (There is also an alternative feasibility study for a smaller refinery at Coega.) If this project goes ahead, it could involve giant Chinese State-owned oil group Sinopec, with which PetroSA has a memorandum of understanding, signed in September.
BP chief economist Christof Ruehl has cast doubt on the economic logic for this project, called Mthombo by PetroSA. He has warned that Chinese policy was to have self-sufficiency in refinery capacity, which will constrain the growth of the export market, while, at home, such an extra refinery could create a surplus of petrol. PetroSA maintains that the refinery is necessary to replace ageing plants and reduce South Africa’s dependence on exports.
Further, in 2007, the South African government set up the African Exploration, Mining & Finance Corporation (AEMFC), under the Central Energy Fund (CEF), as a first step in the creation of a State-owned mining company. The company has since been awarded 27 exploration rights in South Africa and started the development of its first mine, a coal operation at Vlakfontein some 100 km east of Johannesburg, in February last year. It should start production next year, and the AEMFC hopes to be one of the country’s top five coal producers by 2020.
Earlier this month, the government approved a plan to “hive off” the AEMFC from the CEF, with the mining company to act as the core element in the State’s participation in the mining sector. Government sees the AEMFC as an essential element in its strategy to beneficiate the country’s minerals and the company has already targeted chromium, diamonds, gold, iron-ore, manganese, nickel, platinum, titanium, uranium and vanadium as well as coal.
“I think the South African government has an ideological obsession with State involvement in the economy. The South African government very strongly supports State intervention in the economy,” argues Jammine. “I think the Chinese example is a convenient excuse. Politicians refer to China to justify policy in South Africa. But they ignore the differences. There are huge differences between China and South Africa. The Chinese are seriously embarking on developing their human capital resources whereas South Africa has a dearth of skilled managers and doesn’t seem to be on the way to improving this at the moment. My biggest concern about State capitalism is that the [South African] State has thus far failed to implement projects it has planned and budgeted for. So it cannot run its own companies effectively. I have the same misgivings about the State-owned mining company.”
A New Model?
But is there such a thing as a State capitalist model? Bremmer believes so, and also believes that it is a threat to market capitalism and to democracy in the developing world. Of State capitalism he says: “The State is using markets to create wealth that can be directed as political officials see fit . . . the ultimate motive is not economic (maximising growth) but political [Bremmer’s emphasis] (maximising the State’s power and the leader-ship’s chances of survival). This is a form of capitalism but one in which the State acts as the dominant economic player and uses markets primarily for political gain.”
Ferguson, however, has a different view. “Ultimately, it is an unhelpful oversimplification to divide the world into ‘market capitalist’ and ‘State capitalist’ camps. The reality is that most countries are arranged along a spectrum where both the intent and the extent of State intervention in the economy vary. Only extreme libertarians argue that the State has no role whatsoever to play in the economy.”
Although Ferguson gives no examples, they are easy to find. In strongly free market Chile, copper mining major Codelco is still State-owned. In the US, the country’s national passenger railway company, Amtrak, is State-owned, as are various local commuter and suburban railroads. America also has State-owned electricity-generating companies, of which the most famous is the Tennessee Valley Authority (which, interestingly, is run on a not-for-profit basis).
On the other hand, it must not be forgotten that, under Mao Zedong, the Chinese economy was effectively 100% State-owned, including collectivised agriculture. Today, collectivisation has been abolished and agriculture has been semiprivatised, while the private sector now accounts for more than 60% of the country’s economic output and employs at least 80% of its workforce. Moreover, Chinese Premier Wen Jiabao recently publicly called for “more economic and political structural reform” and, although these reforms should be “step by step”, they were nevertheless an “urgent task”, otherwise the huge progress China has made over the past 30 years “may be lost”.
Meanwhile, neither of the two other emerging economic giants, Brazil and India, has shown the slightest indication of taking a State capitalist approach. In fact, in January, the Indian government approached London-listed miner Vedanta Resources to sell its stakes in two of the group’s subsidiaries, Bharat Aluminium and Hindustan Zinc, for $3.2-billion. Vedanta revealed its acceptance of the deal early this month. And, in Brazil, the current centre-left administration last month reinitiated privatisations – the antithesis of State capitalism – by concessioning two airports and a terminal at a third for a total of $14.1-billion.
“The real contest of our time is not between a State-capitalist China and a market-capitalist America, with Europe somewhere in the middle,” wrote Ferguson. “It is a contest that goes on within all three regions as we all struggle to strike the right balance between the economic institutions that generate wealth and the political institutions that regulate and redistribute it. The character of this century . . . will be determined by which political system gets that balance right.”