On the face of it, Davos doesn't seem to make much sense. For business and political leaders who are increasingly mistrusted by the public, cloistering themselves in a luxurious mountain redoubt for a week seems like a good way to sharpen the perception that they are far removed from the interests and concerns of their constituents. And in a world of ever-proliferating global forums -- TED and Google Zeitgeist for the techies, Clinton Global Initiative for the high-minded policy and business types, the list goes on -- the World Economic Forum (WEF) has a bit of an identity problem. Aside from the invigorating alpine freshness, the good skiing, and the chance to meet Charlize Theron, is there any reason to come here? And does what happens here still matter at all?
Yes. For why, see my Foreign Policy piece here on why Davos is more than just a ski camp.
With this week's Davos edition of The Economist, the concept of state capitalism has now graduated from provocative idea to conventional wisdom. The magazine's report on this trend is a must-read.
What exactly is state capitalism? No one knows better than Chinese and Russian leaders that communism doesn't work. They know from personal experience that the state can't engineer lasting long-term growth and that markets are crucial for the rising standards of living that autocratic governments must deliver if they are to remain in power. But these leaders also know that if they simply let markets decide who wins and who loses, they deny themselves control of the money needed to keep people in their jobs and off the streets in times of trouble -- and they risk enriching and empowering some who might use their newly won wealth to challenge for political power.
The goal of state capitalism then is to allow the state to play the largest possible role in controlling the wealth that markets generate within their borders. China, in particular, has used state-owned companies, privately owned national champions, sovereign wealth funds, and state influence over bank lending to build a powerhouse economic engine that its political leaders continue to drive.
This is a subject close to my heart. In fact, I've been invited to take part in an online debate on The Economist's website in which I argue that state capitalism is not a viable long-term alternative to the free market variety. In general, I was impressed with The Economist's excellent comprehensive coverage of this trend.
Until the very end of its report.
The Economist argues that "both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private investors. If these companies are as good as they boast they are, then they no longer need the crutch of state support.
It's no surprise that The Economist would argue against the use of this system. Pretty much everyone here at Davos who is not part of the Chinese, Russian or Gulf Arab delegations would agree. I know I do. But The Economist is telling China's leaders to immediately begin shedding the system that has made their economy the second largest in the world while helping them maintain their monopoly hold on political power-and to opt instead for the brand of capitalism blamed for the financial crisis, the global recession which followed, America's economic malaise, and the Eurozone's current crisis of confident. While we're at it, why don't we ask the Chinese leadership to become a "responsible stakeholder."
As I've said, I agree entirely with the larger point that state capitalism is not a viable long-term alternative to liberal capitalism, but there is no reason for the governments that use it to ditch it this year.
Why not? Look again at China. The vast majority of its state-owned enterprises and privately owned national champions lag far behind multinational corporations in access to state-of-the-art technology, branding expertise, and market share. They still have work to do and can use every advantage their government can provide to narrow the gap with their foreign competition. In addition, China remains a hugely important market for foreign companies and investors. This provides Beijing with the leverage needed to help more Chinese companies find their footing.
In other words, China has not exhausted its opportunities to "level the commercial playing field" (from China's point of view) or "further stack the deck" (from everyone else's).
One day, the changing competitive landscape in China will make that market much less attractive for outsiders, and things will have to change. A rising standard of living will make China's plentiful labor and capital much more expensive, encouraging companies to look elsewhere in Asia for these advantages. This process is already underway, and even some Chinese companies are joining their foreign competitors in opening up shop in places like Vietnam, Thailand, Indonesia, Malaysia, and the Philippines.
In the end, the Chinese government will have to liberalize its economy. It won't be easy, because all these state-owned companies will have their defenders within the political elite and the bureaucracy. But for the time being, it is clearly in China's interest to stay the course awhile longer.
Not that China's leaders care very much what we think.
Ian Bremmer is president of Eurasia Group and author of End of the Free Market: Who Wins the War Between States and Corporations?
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By Ian Bremmer and David Gordon
Individual hackers and organized crime organizations have targeted businesses for years, but cyberattacks have rarely created political risk. They do now. The centralization of data networks -- both in energy distribution (the move to the smart grid) and information technology more broadly (the shift to cloud computing) -- is increasing the vulnerability of states to potentially debilitating cyberattacks. As governments become more directly and actively involved in cyberspace, geopolitics and cybersecurity will collide in three major ways.
First, new cyber capacity allows governments to project power in a world where direct military strikes are much more costly and dangerous. There have been plenty of stories about well-funded efforts from inside China to manipulate access to the Internet, but it's the almost-certainly state-sponsored Stuxnet attacks on Iran's industrial infrastructure that provide the clearest early glimpse of what tomorrow's carefully targeted state-sponsored attack might look like. When a missile is launched, everyone knows where it came from. Cyberattacks are a very different story.
Second, we'll see more cyber conflicts between state-owned companies and multinational corporations, providing state capitalists with tools that give them a competitive commercial advantage. China and Chinese companies are by far the biggest concern here. Throw in Beijing's indigenous innovation plans, which are designed to ensure that China develops its own advanced technology, and this is probably the world's most important source of direct conflict between states and corporations.
Third, there is the increasing fallout from the WikiLeaks problem, as those sympathetic to Julian Assange unleash attacks on governments and the corporations that support them in targeting WikiLeaks and its founder. In fact, the principal cybersecurity concern of governments has shifted from potential attacks by al Qaeda or Chinese security forces to radicalized info -- anarchists undertaking a debilitating attack against critical infrastructure, a key government agency, or a pillar of the financial system. Whether attacks are waged for power (state versus state), profit (particularly among state capitalists), or for 'the people,' (as in the WikiLeaks case), this will be a wildcard to watch in 2011.
On Friday, we'll talk about Top Risk no. 4: China -- and why its policymakers will frustrate much of the international community this year.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
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Yesterday, I posted Tom Barnett's interesting reaction to my new book, The End of the Free Market: Who Wins the War Between States and Corporations?.
Today, it's Tom's turn again:
In reply, Ian, I would simply say that you're a bit guilty of trying too hard to sell the "unprecedented" nature of state capitalism's rise (a small editorial sin, considering you're selling a very good book). I think it's misleading to suggest that the "past several decades" were some golden age for free markets and Western multinationals, because it's not like OPEC's national oil companies or China's state-owned/-dominated enterprises came out of nowhere--they've been there all along. The rising relevance of these companies is real, but we're talking a matter of degree and only in states that have historically featured authoritarian governments, so the structural impact on the system is, in my mind, not as significant as you make it out to be (so it's taking longer than the optimists declared regarding political pluralism in recently marketized regions -- big deal!).
The vast bulk of wealth in the system remains in private hands; sovereign wealth funds control a mere fraction of that. So I just don't recognize the "tipping point" that you do between a free market-dominated global economy of yesteryear and one that's increasingly steered by single-party states, especially when, as you note both here and in your book, those regimes really don't share any truly exportable ideological consensus.
by Ian Bremmer
Globalization has created unprecedented opportunities for new investment in education within dozens of emerging and frontier-market countries -- by providing new generations of students with the information and resources they need to compete in the global economy.
As with everything else related to globalization, there's a downside. Upwardly mobile elites in volatile developing states often choose to apply what they've learned in the more lucrative job markets of the West. In many countries, this chronic problem discourages state spending on education: Why commit substantial capital for a long-term investment in people who may simply take their gifts elsewhere -- especially when near-term results can be achieved by spending on something more tangible? Yet, failure to invest in education lowers the arc of a country's development.
For a glimpse of the future of a state's economic growth and its political stability, a look at its education system can provide useful insights.
global standards, particularly in higher education, is becoming one of the
biggest advantages for Persian Gulf states. Governments
throughout the region have devoted much more time and resources to it in recent
years-Saudi Arabia, Dubai, and Abu Dhabi especially-both in terms of building
infrastructure, attracting top talent, and leveraging partnerships with other
institutions of higher learning. But the most important change comes in the
form of new opportunities for young women, empowering a massive untapped
resource. At the same time, we're likely to see a growing development gap
within the United Arab Emirates as the less developed emirates-Ajman, Ras
al-Khaimah, Sharjah, etc-are burdened with well-entrenched elites who fiercely
resist the social liberalization that comes with radical improvements in
The Gulf stands in marked contrast with most of North Africa, where government policy reflects the preferences of an older generation that still sets the curriculum and rejects western-style training in favor of a focus on nationalist and, in some cases, socialist principles. Budgets are also a problem. That's a particular issue in Egypt, where younger urban lower and middle classes are increasingly frustrated with the quality of local schools. Growing emigration rates for the most talented young people create risks of increasingly brittle economic growth.
In sub-Saharan Africa, top students traditionally studied in public boarding schools. Strong economic growth has generated rising demand for better educational standards, but state governments haven't been able to keep up. To fill the vacuum, the private sector is stepping in to build private day-schools, which are located in neighborhoods that can afford them-unlike the boarding schools, which mix students from different class and tribal backgrounds. As a result, the private sector is giving a generation of Africans a much stronger sense of tribalism-with fewer opportunities to meet students from different cultural and socioeconomic backgrounds. These changes will help to heighten long-term risks of increased tribal and ethnic polarization.
India and Brazil have similar structural challenges and proposed solutions. To overcome lagging local education spending, they're bringing in the private sector and foreign direct investors to bridge the gap. Brazil is likely to have more success with this strategy, in part because the political system is more centralized and the country is less culturally diverse than India, where more than two dozen languages are each spoken by at least one million people. The most useful parts of a program that works in one area-like special schools sponsored by Embraer, an enormous Brazilian aircraft manufacturer, with advanced science and engineering-can be implemented in other regions of the country. In India, charter schools tend to function like special economic zones. They're effective, but their programs aren't easily transferable to another region of the country where different languages are spoken and cultural values respected.
In Russia, government has reinserted itself into school systems in a big way, both in terms of textbook content (in history and social sciences), as well as a broad effort to improve the quality of military training. Spending on culture and the hard sciences has lagged considerably. Combined with the extraordinary demographic crisis looming in Russia (with 0.5% negative population growth annually, Russian demographics are unmatched globally in any country not ravaged by war or famine), the longer-term trends look especially worrisome.
As with so many social developments, China's educational problems create competing internal pressures. The Chinese government has long been committed to vastly improved education standards for an enormous (and largely illiterate) rural population. It has succeeded. To maintain social order, Beijing must now create jobs for many more graduates than it did a few years ago. More than 20 percent of Chinese university graduates today are unemployed, while Chinese stimulus spending continues to focus mostly on energy-intensive (and not high-value, labor-intensive) industry. That's a problem that's likely to increase over time, in part because of the skepticism of Chinese leaders over more intangible non-industrial production, and in part because of the top-down, more rote nature of education in the Chinese system.
Then there's the leadership's strategy of nurturing nationalism in Chinese universities. The state has invested in the promotion of party loyalty within many institutions, including by creating so-called 50-cent gangs, students who receive small payments for each positive posting they write on behalf of the Communist Party on university web bulletin boards. A point of related tension: Increasing numbers of foreign students (including a growing number of Americans) are attending universities in China's fast-growing, increasingly prosperous eastern cities. Thus far, they've been relatively isolated from the general student population, but that's likely to spark conflict in coming years.
On the subject of education and nationalism, Western European schools have dramatically scaled back the teaching and promotion of national identity in recent years. But with growing immigration from Eastern Europe, the Muslim world, and elsewhere -- and a sharp economic downturn -- these governments are now struggling to cope with the rise of new ethnic, religious, and regional enclaves within their states. As a result, we're likely to see a serious backlash toward conservative state-sponsored promotion of national identities-some of which will be exclusionary, fueling intensified domestic social tensions.
By Ian Bremmer
Everyone's talking about how decidedly gloomy Davos is this year. Actually, the gloom is pretty much everywhere else. Here at the actual meeting it is a little more serious than the usual and not exactly festive, but plenty energized.
The World Economic Forum's tagline, "Committed to improving the state of the world," assertively rebuffs gloom. And this year's topic is typically upbeat, "Shaping the Post-Crisis World." Never mind that most everyone I'm talking to thinks we won't be looking at an upturn until 2010 or later. (Thus far, best intervention on that point: Japanese economist Heizo Takenaka, who wants to see more focus on monetary policy than fiscal stimulus from the developed world.) But from the first day, at least, the focus is less on getting from A to B than understanding how best to shape A so B looks reasonable.
In part that's because the financial firms and corporations in the most distress aren't actually here. But the real point is the historic number of heads of state -- 41 (which is itself an understatement, since Putin's here; call it 41 3/4), most of whom are far more likely to be around when the global economy finally turns to rebound than their colleagues in the private sector.
The government leaders also come with much larger delegations (a small but telling indicator of why state capitalism trends towards greater inefficiency...). So while the meeting participants look comparable to last year's numbers, the physical infrastructure is bursting at the seams.
One of the things I find most endearing about Davos is that the crush of all these visitors in a small mountainside village means folks are sleeping in conditions that they probably haven't experienced in a while. Which seems decidedly healthy, especially in today's economic environment. Not that you necessarily recognize it as such at the time. I was cranky this morning, on four hours sleep, and no gym to work out, the daily regimen out the window, which I grumbled to the CNN anchor before an interview. At which point the crew chimed in that they were actually bunked up in a gym.
Everyone wants what they can't have.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.