Who Does Capitalism Better, China or America? Ian Bremmer Will Make America’s Case at the March 13 Slate/Intelligence Squared…

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March 6 2012 6:30 AM

Full Speed Ahead, Without a Steering Wheel

Why Eurasia Group President Ian Bremmer will argue that America’s liberal capitalism is still better than China’s state capitalism at the Slate/Intelligence Squared live debate on March 13.

Ian Bremmer, President of Eurasia Group.
Ian Bremmer, President of Eurasia Group

Bill Pugliano/Getty Images.

Ian Bremmer, founder and president of Eurasia Group, a consulting firm that researches political risk and economic markets, is less than dazzled by China’s 12.5 percent growth rate. He’s not swayed by its 10 percent annual increase in wages or the 440 million Chinese who’ve lifted themselves from poverty over the past 30 years. While its accomplishments are impressive, he says, China remains a poor country, with a per capita GDP hovering around that of Senegal. And while China may be maximizing growth in the short term, it is ultimately setting itself up for a fall.  

Katy Waldman Katy Waldman

Katy Waldman is Slate’s words correspondent. 

Bremmer will argue against the motion that China does capitalism better than America at the Slate/Intelligence Squared live debate in New York on March 13. He will attempt to show that central planning drains innovation from economies, and that it protects jobs at the price of “creative destruction,” which refreshes the market by allowing vigorous new firms to oust fading old ones. China, he says, is like a fast car without a steering wheel.

I recently caught up with Bremmer, the author of the best-selling book The End of the Free Market, about his latest visit to China, the global economy, and the problem of cheap labor. Below are some excerpts from our talk.

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Slate: How would you describe the difference between American capitalism and Chinese capitalism?

Bremmer: A couple of points. The first is that in state capitalism, which is what China has, the state is the principle actor in the economy, whereas, in properly run free-market capitalism, the role of the state is to be a referee, to set the rules. In China, as in any state capitalist society, you have some aspects of a free market, with a few corporations that operate openly; and, of course, in the U.S., the government plays a role in the military industrial complex, postal service, and so on. But those are small inconsistencies. The second major difference is that in a state capitalist system, the government is using the market ultimately for political outcomes, not economic ones. So it really works with authoritarian regimes, and it’s used by governments to bolster their own rule and ensure their own survival. In a free market, actors just want to maximize profits.

Slate: What will you argue are the main disadvantages of state capitalism?

Bremmer: It doesn’t play nicely with countries outside the system. State capitalists use their control of state-owned enterprises, of legal and judicial systems, to advance their own companies and interests. That causes all sorts of recrimination over the long term from Western multinationals.

State capitalism also avoids creative destruction. In the free market system, if what you’re selling doesn’t make any sense, or your competitors come up and do something differently, you have to adapt or you’ll die. Take Borders: Suddenly Amazon arrives with a completely different model, a different technology and product, and Borders folds because it can’t adapt. State capitalism insulates companies from having to make adaptations. The state will do everything possible to maintain its champion firms.

Slate: Creative destruction is one way to describe job loss, right? Are you saying the U.S.’s higher unemployment rate [8.3 percent, to China’s 4.1 percent] might be a sign of a more efficient economic system?

Bremmer: Yes, but make no mistake: Creative destruction is painful, especially from a short-term perspective. Companies that experience it need to adapt as quickly as possible—and sometimes the government can help with that! But if you don’t have competition within a system, you’ll ultimately lose a lot more jobs. We’re not talking about a world where state capitalism is a self-contained economy, so that you can keep competition out. While you try to avoid adapting and optimizing in a certain place at a certain time, the rest of the world keeps going.

Slate: Is state capitalism always an inferior model to the free market? Or are there stages in a country’s development where it’s actually the wiser choice?

Bremmer:  Right now, the Chinese government has very good reasons for keeping state capitalism in place. In fact, if I were advising them, particularly for the short term, I’d probably tell them to keep doing what they’re doing. But it’s kind of like telling U.S. officials not to deal with the deficit. Taking on the deficit would be painful, and put people out of work, and lead to less government spending, which would lead to less jobs. It’s rational for the Chinese government to postpone a transition, especially because U.S. corporations aren’t pressing them yet.

Slate: What would have to change to make China rethink its strategy?

Bremmer: When China went after Google and shut them down for a period of time in China, Google’s competitors didn’t get up and complain. Yahoo, for example, was very careful not to make common cause with Google; Everyone backed away. That’s what you find: American companies are quick to cut a deal that will cut out their competitors. They still see lots of market opportunity in China. They see 1.3 billion consumers. Also, Chinese state-owned companies in many sectors are still nascent forces.

As China gets bigger and its companies become more dominant, Western multinationals and governments will start reacting to moves like the Google shutdown. You see this already with Hillary Clinton’s big speech on economic statecraft. The reaction will grow and intensify. While the Chinese clearly have some time left to take advantage of state capitalism, their competitive edge is shrinking.

Slate: You’ve suggested that fixed investments may become an Achilles’ heel for China.

Bremmer: An awful lot of fixed investments need to be made in China, and they’re making them. Chinese exports to the West has fallen over the past few years. Consumption has increased a little, but what’s really been expanded to fill the gap are internal fixed investments.

Yet fixed investments tend to be inefficient and underused. For example, high speed rail between Shanghai and Nanjing is very underpriced, very underserviced. The Chinese government says, “Well, they’ll grow into it.” They’re quadrupling down on that bet across the country. But the jury is still out. Furthermore, a lot of fixed investments end up in these ridiculous, dinosaur-like projects, because small-town officials spend with reckless abandon on projects that put them on the map but don’t actually make sense. In one town hall, you have a replica of the U.S. Capitol building, for example. When decisions come down courtesy of local officials and not the market, with private investors, lots and lots of mistakes get made.

What’s more, labor in China is getting much pricier, and soon the ability to fund fixed income in an efficient way isn’t going to be there. Right now, if you need to build a bunch of nuclear plants, you’ll want to do it in China because the labor there is still comparatively cheap. That’s not going to be true in 10 or 20 years—and it’s going to be a problem on a whole bunch of fronts. If you’re a state capitalist system like China, you’ll need a lot of people monitoring the internet. Those people will get much more expensive. Chinese state capitalism is not an oil intensive model, not a land intensive model—it’s a labor intensive model. So the fact that they’re running out of cheap labor is an enormous issue.

Slate: What’s happening to the cheap labor?

Bremmer: China is growing, and so are the per capita incomes of its people. The Chinese are moving into the cities, getting jobs, and becoming better educated. It’s part of the process of globalization that’s happened all over the world and is now happening in China. It’s been going on for 34 years, moving people out of the peasantry and into lowline manufacturing jobs. Now, though, you’re starting to see lowline manufacturing jobs becoming highline manufacturing jobs. Already, in places like Shanghai, the per capita income is similar to that of Portugal, and even in the interior, a lot of the lower-paying jobs are moving outside of China, to Indonesia and other countries. So China is increasingly pricing itself out of labor in the same way that historically the U.S. did when jobs moved to Mexico. People cry out, “Where are the jobs?” Well, a lot of manufacturing jobs in the United States aren’t coming back. People will be asking the same question in China and at that point the Chinese economy needs to look very different; it can’t just be about manufacturing and infrastructure.