K.I. Woo looks into Nobel laureate Joseph Stiglitz's assertion that the current global crisis represents a failure of US-style capitalism.
RECENTLY in Bangkok, Nobel laureate Joseph Stiglitz said the current protracted global economic crisis represented a colossal failure of US-style capitalism.
Perhaps we should also be examining the concurrent rise of state capitalism represented by sovereign wealth funds (SWFs) and their influence on the free market system that has driven unprecedented global economic growth since WWII.
Stiglitz blamed financial market deregulation, especially in the United States, as the main culprit of the current crisis.
"Even though financial deregulation has undoubtedly resulted in faster growth during the past decade, it has also brought about extreme svolatility," he said.
Deregulation, he said, also brought greater risk without commensurate appropriate returns. "The world should be creating real economic growth in a more sustainable way," he said.
Moreover, US government action to fund bailouts of billions of dollars, Stiglitz said, has not allowed normal free market processes to deal with winners and losers. The US government bailouts have encouraged moral hazard by socialising losses and capitalising gains. Investors keep all the profits if an investment is successful while the government covers all the losses.
"The US no longer practices free market capitalism - it has ersatz capitalism," he said.
Meanwhile, in a recent Foreign Affairs article, Ian Bremmer said the rise of SWFs during the past decade has similarly reshaped international politics and the global economy by transferring increasingly large economic power levers and influence to state central authority. "SWFs now account for one-eighth of global investment and rising," he said.
Consequently, the free market economy is now fast becoming replaced by state capitalism, especially with the US government's trillion-dollar bailouts. "The government is now functioning as the leading economic actor and uses the market primarily for political gain," he said.
For instance, state-owned funds and assets support Russian oligarchs, and Singapore controls large chunks of its economy through state-controlled national champions. "With politics injected into economic decision-making, an entirely different set of winners and losers is emerging," he said.
State-owned companies control more than 75 per cent of global oil reserves and production. In sectors such as petrochemicals, power generation, mining, iron and steel production, port management and shipping, weapons manufacturing, cars, heavy machinery, telecommunications and aviation, a growing number of governments are no longer content with regulating the market, Bremmer said.
"They use the market to bolster their own domestic and international political positions," he said.
The rise of state capitalism has introduced massive inefficiencies into global markets because populist politics are often injected into any economic decision.
In Bangkok, Stiglitz said the US deregulation era permitted many organisations to acquire and control large swaths of individual industries. When business conditions deteriorated, politicians would not allow the free market capitalist system to force the losers into bankruptcy.
Political leaders, he said, feared the social unrest that would emanate from massive company closures and accompanying layoffs. "Companies were suddenly deemed too big to fail, too big to resolve and too intertwined to fail," he said.
According to Bremmer, many governments use SWFs as surrogates because they themselves can't finance national champions by printing more money. "Inflation would eventually erode asset values and direct state-budget funding could leave future shortfalls if economic or business conditions deteriorate," he said.
Although SWFS normally act as repositories for excess foreign currency earned from exports of commodities or manufactured goods, Bremmer said, they are more than just bank accounts. "These state-owned investment funds have mixed portfolios of foreign currencies, government bonds, real estate, precious metals and direct stakes in a host of domestic and foreign firms," he said.
SWFs were ostensibly established to maximise returns which Bremmer said could be either political or economic. "This client-patron dynamic has brought politics, politicians and bureaucrats into economic decision-making to an extent not seen since the Cold War," he said.
The rise of SWFs, Bremmer said, raises several global market- performance risks. Commercial decisions are often left to political bureaucrats who have little experience in efficiently managing commercial operations. "Their decisions often make markets less competitive and help less-productive patrons threaten the private sector," he said.
With more than 50 state enterprises controlling large sectors of the economy, Thailand's leaders could also use the current global economic downturn to re-examine how best to manage long-term sustainable economic growth and harmony.