State Capitalism and the Crisis

It’s been nearly three decades since Antoine van Agtmael coined the term “emerging market” to describe the waking giants of the developing world. During that time, we’ve come to think of emerging markets—including the so-called BRIC nations of Brazil, Russia, India and China—as immature states in which political factors matter at least as much as economic fundamentals for the performance of markets. As globalization came to seem more and more like a historical inevitability, the assumption among wealthy nations was that the injection of politics was a temporary stage that these developing economies would mature (each at its own tempo) into a state of grace in which economic balances, not politics, would drive local markets.

The financial crisis has turned this assumption on its head. Today, political battles weigh on economic policy making, even in the world’s richest economies. Nowhere is this shift more obvious than in Washington, DC, where debates over bailouts for the auto industry, new financial rules, and individual elements of a $787 billion stimulus package have become fodder for the partisan political blogosphere and have created complicated sets of risks and potential rewards for lawmakers and investors alike.

Both the growth of emerging markets and the determination of political officials around the world to avoid the social upheaval that the global financial crisis might generate have injected politics and political motivations into the performance of global markets on a scale we haven’t seen in decades.

The Market State

While we expect the steady advance of market capitalism to continue, the state—far from withering away—is likely to play an ever-larger role over the next decade, for three reasons. First, even before the financial crisis hit, governments everywhere found themselves increasingly called upon to mitigate the sometimes negative impact of globalization on individual citizens.

Second, the crisis itself has prompted large-scale direct government intervention, both through fiscal stimulus and calls for increased regulation. That tilt in the power balance has been reinforced in much of the world by the perceived failings of the US-led free-market model and the success so far of a Chinese model that, while market-oriented, assumes that the state’s guiding hand will stay firmly clasped around many levers of power.

Third, the spread and dispersal of economic power around the world is making it harder to reach consensus on multilateral approaches to setting the rules of the global game. Bilateral and regional investments are increasingly common, and these more local arrangements will remain largely market-based. Yet for business, this continuing shift away from a single set of rules will inevitably make it more challenging to seize opportunities globally. It will also require companies to engage across many fronts with many critical regional and national government actors.

In the long term, a company’s business interests and the interests of society converge. Companies, communities, individuals, and governments: we are all interdependent. Every healthy, high-performing company has an obligation to use its strengths to help society, and each can do so in ways that enhance the viability of the business, too. From how products are grown and made to how they’re transported and sold, companies can pursue innovative new methods and processes that provide lasting benefits to their stakeholders and to the communities in which they operate. Large-scale change does not happen overnight, but the stakes and potential benefits are immense.


Executive Leadership

Mr. James Moore

Mr. James Moore

Mr. David Solomon

Mr. David Solomon

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