The re-emergence of state capitalism after the financial crisis is turbo-charging the competition between governments for power and influence.
Although the US continues to dominate financial markets, increasingly, countries that do not share the US belief in limited state intervention play a lead role in the origin, destination and intermediation of capital via markets and real economic sectors. In their models, the state attempts to play a leveling role in markets, to ensure that booms and busts are limited and that unbridled capitalism is tempered by the interests of the state and other stakeholders.
In some ways this is not new – for many years governments have used their ownership of companies and financial institutions to further their strategic goals – but today they are extending their influence in powerful new ways.
Politicized central banks
Firstly, through increasingly politicized central banks that use ‘unconventional’ tools to advance national policy interests with significant cross border and, in some cases, global impact. As fiscal authorities have become increasingly paralyzed and politically constrained, post-crisis responses have fallen to central banks via monetary policy. Central bankers have, by choice or otherwise, become owners of enormous swathes of securities, with enormous influence as a result.
In addition, central banking supervisory authority has been enhanced by post-crisis legislative efforts to manage financial system stability. Emerging market central banks are increasingly caught between domestic political pressures and alleged monetary policy and supervisory independence. The risk of states using central banks to advance interests beyond those explicitly consistent with their mandates is on the rise.
Governments are using standard-setting, legal and policy reforms to advance national interests/national champions by changing the rules of the road for crucial sectors and industries regionally and globally.
The establishment of regional and/or international norms for strategic sectors is now more likely to play a role in advancing national interests via economic and regulatory tools. The establishment of cross-border norms for financial market instruments, banking, technology, energy and trade has always been inherently political, while ostensibly technical. Now, we can add strategic as well, with market, legislative, regulatory and other policy tools increasingly being used to try to strengthen state-owned enterprises (SOE’s) and national champions.
For example, there are competing visions and standards for applying anti-monopoly tools to advance national interests in the name of market competition. In many instances, the guise of “leveling the playing field” is used as justification for strategically important economic outcomes.
Regional and global standards are increasingly being set (or impeded) by those countries whose national champions dominate or challenge incumbents in strategic industries and sectors. In particular, the US, China and the European Union grapple with standard setting and regulatory frameworks in strategic sectors including finance, energy and technology. The impact of each sector extends far beyond economic interests and impacts the role of countries, companies and regions in terms of economic independence and political security and stability.
The growth of strategic sectors
And they are blurring commercial and strategic lines for sectors like technology and finance, where implications of advancing national agendas have global implications. Technology is of increasingly strategic concern, with major powers assessing a landscape of economic and security concerns emanating from the opportunities and risks posed by the interlinkages and deep dependence on technology as the foundation of global economic, military and political security.
As the US and China, for example, discuss technological and intellectual property concerns, NATO grapples with its potential response function to intrusions under its mutual defense obligations.
Recent “hacking” into Sony Pictures and disclosure and theft of its private files and films has sparked speculation of government related catalysts and retaliation. How will future security and technology concerns be addressed and agreed upon? Who will set the rules and who will seek to ensure that they are enforced?
Who are the winners and losers?
For central banks, the US – as the dominant global reserve currency – stands out as the biggest winner. Central banks of other major economic and financial actors, including the European Central Bank, Bank of Japan and Bank of England whose policy choices have extensive strategic policy influence beyond their borders. China’s People’s Bank of China, whose ascendance is both strategically important and necessary for the optimal functioning of the global economic system, is also a winner.
Countries with large national champions are likely to be winners. Conversely, the US, which has traditionally used its influence without actual ownership or control of the tools of its economic influence, is a loser, should the world evolve into a more SOE-centric model.
Existing national champions and dominant market actors are winners if they benefit from continued support by their governments, allowing them to accept or even reject internationally agreed upon standards/outcomes. Under this framework, global norms are less likely to be agreed upon than are regional ones and regional ones are more likely to result in regulatory agreements that favor incumbents.
US technology companies are both major winners and potential losers. The increasing role of technology on the global strategic landscape means companies with a dominant role are likely to be winners. The regulatory and legal backlash and protectionist agendas of some countries, however, makes these same companies and sectors potentially vulnerable to challenge both by national competitors and government backlash, to the point where their dominance makes them particularly at risk.
Sadly perhaps, the biggest losers in these scenarios are the international institutions whose mandates are global, but where their limited abilities, resources and practical implementation issues mean that regional and national efforts will fill gaps created by their inability to solve global problems.
The report, Geo-economics: Seven Challenges to Globalization, is available here.
Author: Douglas Rediker, Visiting Fellow, Peterson Institute for International Economics
Image: Office buildings of housing banks and wealth management funds are pictured in Singapore’s financial district March 17, 2009. REUTERS/Vivek Prakash