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June 11, 2007

State Capitalism and Foreign Investment

By Judith Klinghoffer
Remember the concern with Dubai Ports World? A company owned by Dubai was going to run our ports. "You are xenophobic, anti-Muslim, anti-Arab," cried the deal supporters. Not so, we retorted. There is a fundamental difference between privately own companies and state owned ones, between market and state capitalism. Hence, state owned companies should be treated differently because while profits motivate businesses, geopolitical strategy motivates governments and, ultimately, the businesses they control.

Many in Congress agreed and promised to pass legislation to regulate access of such companies to US infrastructure. Alas, the National Defense Critical Infrastructure Protection Act, designed to block foreign-owned companies from purchasing or operating critical infrastructure, never passed. We failed to hold Congressional feet to the fire. Earlier this year Congress began to make some tentative moves in that direction, but if we are not on our guard, we may not like the results. In the meantime the stakes got even higher.

I opened the Financial Times recently, and there it was, a most disconcerting article by Gerard Lyons, chief economist at Standard Chartered Bank, entitled, How state Capitalism could change the world.

State capitalism and resource nationalism are set to become two of the main economic issues of our time. Across Asia, Russia and the Middle East, governments look set to use their countries' currency reserves and savings to acquire overseas assets.
Financial Post columnist, Jacqueline Thorpe, is just as concerned about what the politically correct call "sovereign wealth funds" if for no other reason but than their size. She quotes a Starfor report:

That amount ($300,000bn) represents the single largest pool of cash that any government has thrown at anything, ever. Adjusted for inflation, the United States' largest effort, the Marshall Plan, comes in at just over US$100- billion. In essence, China is about to throw a very large rock into the pond without telling anyone where specifically to expect the splash.
China is not alone. Many other states are throwing rocks into the pond. They include Russia, Korea, Singapore, and the Middle East. Estimates of the size of their investment range between $1.5 trillion to $2.5 trillion. And it has only just begun. But daunting as the size of the rocks may be, the fact that the throwers are continually controlling their trajectory and location is truly distressing.  Financial Post editor, Terence Corcoran provides just the example:

Canada saw a small example of national corporatism at work last week when Abu Dhabi National Energy Co. announced the purchase of Northrock Resources Ltd. of Calgary for $2-billion....

Why would a state-owned water- filtration company from the Middle East be interested in Calgary oil? Something to do with getting a window on the United States oil market, a company official says. But if Canadians wouldn't let the government of Canada nationalize Petro-Canada to get a window on the oil industry, why do we let Abu Dhabi do it?
So what is to be done? Gerald Lyons offers a minimalist solution based on the principle of reciprocity. He writes:

All a US politician needs to ask is: should China be able to secure intellectual property rights overseas, when it cannot guarantee to safeguard such rights for foreign firms in its market? [....]


While the fear is a protectionist response, the west should use the growth of state capitalism to force positive changes in the investing countries' home markets.... Chinese banks may buy, own and exert full control over British banks, but could the reverse happen? If the west accepts that Chinese firms can buy freely overseas, this should lead to pressure for China to open its domestic markets further. Similar pressure should be applied to other countries with large state funds that invest overseas.
Of course, such attempts should be undertaken though we must not forget their history of failure. Indeed, such Western pressure has been rebuffed even during times when the balance of power was much more in favor of democracies than now. And in any case, reciprocity would not suffice because it is democracy itself that is in the balance, argues Terence Corcoran. Democracies are based on (indirect) public control of the executive purse. But what if governments expropriate funds to do with as they please? "No big deal" Some would say.  "People do not understand what's good for them." In other words, we are back to the Platonic model of benevolent dictatorship or rule by expert(s). Not so fast, Corcoran warns. If market capitalism is a force for peace, state capitalism is a prescription for war:

The private enterprise corporate model assumes a free market in capital that flows to the investments and corporations based on market principles and freedom of contract. National corporatism inserts the power of government, and then pretends the old market rules still apply. What it creates, however, is a new economic model, in which economic competition is between national governments rather than between businesses.

The latter delivers freedom and prosperity, the former promises control and international conflict.
I absolutely agree.  Regardless, the time for "benign" neglect is over.  It is time to start a serious conversation with the active participation of our powers that be and would be.  At the very least, I want to see each presidential candidate forced to address the issue.  After all, nothing less than our economic security, freedom and world peace are at stake. 
on "State Capitalism and Foreign Investment"
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