China's state capitalism poses ethical challenges
By Ian Bremmer and Devin T Stewart
Earlier this summer, a company owned in part by the Chinese government bought a
5.1% stake in the only American-owned provider of enriched uranium for use in
civilian nuclear reactors.
The stake is small, but its implications are considerable. The American
company, USEC, was involved with the original development of the atomic bomb
during World War II. Chinese involvement could raise concerns about national
security in Washington, and given China's opaque form of economic management,
the transaction raises other ethical issues around transparency and fairness.
In the long run, however, free market economies like the United States would
best serve the cause of individual freedom worldwide
by practicing what they preach. They should keep the global flow of money,
ideas, and goods open.
As China's economy grows, its political influence will expand, bringing Beijing
into ever-closer contact with the interests of others. As the world's largest
exporter, for example, China will find itself in competition (and sometimes
conflict) with a diverse set of multinational companies and governments. Within
China, there will be more clashes involving the collision of local rules with
foreigners and their business models.
Beijing continues to welcome foreign investment, but recent labor disputes at a
Honda Motor factory and a spate of suicides involving workers at Foxconn, a
Taiwanese-invested Chinese company that manufactures the Apple iPhone,
underline the clash of political and commercial cultures. Sometimes these
confrontations produce compromise or even a convergence of standards. At other
times, open conflict is the likelier scenario.
China is the world's leading practitioner of state capitalism, a system in
which governments use state-owned companies and investment vehicles to dominate
market activity. The primary difference between this form of capitalism and the
Western, more market-driven variety, is that decisions on how assets should be
valued and resources allocated are made by political officials (not market
forces) with political goals in mind.
In China, robust growth is a good thing, as long as it doesn't have
second-order effects that undermine the leadership's monopoly hold on political
power. Russia, Saudi Arabia, Venezuela, and other governments practice various
forms of this system, but China gives state capitalism its global significance.
The political agenda behind China's state capitalist development is a
complicated one. On the one hand, the financial crisis and global market
meltdown have bolstered the arguments of those within the Chinese leadership
who warn that reliance for economic growth on exports to Europe, America, and
Japan exposes China to Western market volatility. In response, Beijing will
gradually work to increase domestic demand for Chinese products and to reduce
the country's dependence on foreign consumers. On the other hand, the
leadership knows that Chinese companies must adopt Western working standards
and management techniques if labor unrest is to be contained.
The cases of Honda and Foxconn, which employs some 800,000 people in China,
underline a remarkable trend: Chinese workers are demanding and receiving
better working conditions and wages. For example, the Guangdong Provincial
People's Congress may give workers the officially sanctioned right to strike.
This marks a positive development in the interaction of state capitalist and
market-driven economics, but continued progress won't come easy. The Chinese
leadership will respect labor rights when necessary and ignore them when
The financial crisis and BP's oil spill in the Gulf of Mexico remind us that
excessive focus on near-term profits continue to plague market-driven
capitalism. Yet, state capitalism poses profound ethical challenges of its own.
First, when state-owned companies go abroad in search of new contracts, they
are not bound by shareholder opinion or reputational risk. As a result, they
can do business in places and with people that their private-sector rivals
cannot - and with a high degree of secrecy.
There are familiar examples like Iran, Sudan, and Myanmar. In Guinea last year,
just 15 days after soldiers shot down 157 pro-democracy demonstrators, an
unnamed Chinese company signed a $7 billion mining contract with the Guinean
government. Multinational companies can no longer afford such transactions.
In addition, within free market democracies, courts exist to safeguard the
rights of individuals and companies. In state capitalist countries, they exist
to legitimize the state's hold on political power. As a result, when the White
House pressures BP to pay damages, the company knows it will have its day in
court. In China, a foreign company is unlikely to win a ruling against the
government. In the United States, companies "lawyer up". In China, they are
Take Google, for example. When Google executives decided that cyber-attacks on
its Gmail accounts from inside China could no longer be tolerated, they decided
on open confrontation with China's government over censorship issues. Google
remains a relatively popular brand with Chinese Internet users, but there were
several reasons why Beijing would rather force Google out than compromise with
First, there are other search engine firms that do not challenge the
leadership's right to restrict the flow of information. Second, one of those
firms is Baidu, a Chinese company with friends in government and a much larger
Chinese market share than Google. The message sent to Google was clear: Lawyer
up if you want to, but you have started a war you cannot win.
The clash of market-driven and state-driven capitalism poses other questions.
Should US lawmakers allow a company or investment fund owned by a foreign
government to own significant stakes in a US financial firm or oil company?
On the one hand, the political firestorm that erupted in Washington when China
National Offshore Oil Corporation tried to buy US-owned Unocal in 2005
generated plenty of friction in US-Chinese relations and did lasting damage to
America's reputation as a destination for foreign investment.
Yet, there are good reasons to scrutinize these kinds of proposals. State-owned
companies and sovereign wealth funds based in authoritarian countries are often
as opaque as their governments. Is it not reasonable to wonder how such a
company or fund will manage its new assets before approving a sale with
potential security implications?
On the other hand, if relatively free market economies are to compete
successfully with state capitalist systems, it won't be by trying to beat them
at their own protectionist game.
The unprecedented cross-border flows of ideas, information, people, money,
goods, and services have already done a lot of good for a lot of people. If
allowed to develop further, they will eventually open state capitalist systems
to a degree of free market competition that will force them to change.
Not all trades are good ones. Some foreign investment might legitimately
compromise US national security. But if the goal is to shift power and wealth
from authoritarian governments into the hands of private citizens, the game
must be played on free-market terms.
Ian Bremmer is president of Eurasia Group and author of The End
of the Free Market: Who Wins the War Between States and Corporations? Devin
Stewart is program director and senior fellow at the Carnegie Council
for Ethics in International Affairs, where Bremmer is a trustee.