State Capitalism in China - Case Study Example

CAPITALISM IN CHINA al Affiliation CAPITALISM IN CHINA capitalism is a concept that has evolved over the past years attracting attention due to its presumed value for the growth of a country’s economy. Capitalism is defined as a social system that is based on the principle of personal rights within the economic sphere. In many countries, capitalism is associated with the existence of free-market where private owners have individual rights to run product in the best way they can. On the other hand, state capitalism is defined as an economic system where the government dominates the commercial market with high control of capital accumulation and organizational management. While every country has some level of state capitalism, China has come under spot for being one of the countries where government control has a lot of influence within the economic sphere. State-owned enterprises dominate the market and the government has extreme control of the stock, bank and bond market. While there is evidence that China’s state capitalism has helped the government to improve the country’s economic position, there is evidence that this strategy has reduced the incentive for private investors. State capitalism is a hindrance to the development of the free-markets which other countries have embraced as part of their strategies to promote the private sector. From this perspective, there is need for the Chinese government to reduce its control of the market and shift its policy towards market liberalization. State capitalism is a topic that has garnered a lot of attention from a wide range of literature. The concept has come to refer to an economic system where the government become a major player in the economic system (Dale, 2004). The government becomes a central manager with high influence on capital accumulation, wage labour and investment decisions. One clear indication of state capitalism is the dominance of state-owned enterprises (SOEs) within a country. The SOEs become the main player in the market and make huge profits because they have support from the government. The government monopolises the market and puts barriers to prevent entry of private organization within the industry. In addition, the state controls the banking sectors as well as the public listed corporations within the stock market. Therefore, private investors face barriers of market entry as the government policy favour monopolistic SOEs (Dean, Browne and Oster, 2010). Besides the government has control over the labour market and therefore has a high chance of influencing the employment rate and financial flow within the market. Recently, a different perspective of state capitalism has evolved with regard to the extent of market control by the state. In some countries, there is evidence that the number of private investments outnumber the government’s investments. However, it is possible that state dominance may be established where the government has considerable restrictions over the allocation of credit and investment. In such instance, the productions systems are privately owned but the government has high control over these private investors (Haley and Haley, 2013). While such markets may appear as liberalized economic systems, the government control ensures its dominance and private business owners have little influence on profits and growth (Cao and Liu, 2011: Cao, Qian and Weingast, 1999). Besides, state capitalism may be manifested where the government within a country take control over the market and decides which private companies will dominate the market. For instance, the government may form policies to protect a few large-scale producers to ensure that they monopolise the market. The concept of state capitalism continues to evolve as the extent of government economic manipulation changes and the tactics vary (Laux & Molot, 1988). However, there exists a consensus that state-capitalism, irrespective of its form, hinders free market operation, which should be supported to promote fair trade. The concept of state capitalism evolved in late 19th century when the idea of state socialism evolved (Bremmer, 2009: 2010). State socialism is an idea that was coined shortly after the criticism of private capitalism that was becoming toxic to the world economy. The government intended to take control of the economy and to prevent monopolistic competition that was impacting the economic gap within many countries. The main intention was to create government oversight to prevent exploitation of the poor in the society and to promote equity within different countries. However, traditional theorist that state socialism would usher a period of state capitalism where the government would exploit the public (Robinson, 2004). Therefore, the transformation controls that state socialism was expected to bring would be a dream far from realization. This was evident later in the 20th century when the government mechanisms that were meant to control the private sector empower state owned companies and the government became the economic controller. Therefore, the government exploited the people while majority of the public became drowned in poverty. Liberalism economists used the term state monopoly capitalism to refer to the governments’ control of the economic sector that allowed large private owners to dominate the market while pursuing selfish interest (Pollard, 2011). At the end, the decisions of the government were oppressive as they failed to represent the interests of the consumers and the majority poor in the society. Sharp criticism of state capitalism has been evidence since its resurfacing in the 1970s when the free market advocates opposed the high government control in the economy. The period between 1900 and 1970 was market the strategies of the government to take portions of the economy (Wooldridge, 2012). In 1970s, market liberalist privatised government run businesses and the pruned the welfare state. However, this did not last long after the global economic crisis hit the world and there was need for strict control of the world economy. When large companies such as the Lehman brothers that controlled the stock market collapsed, the consent of free-market came to a standstill. The impacts of liberalization of the market were unbearable as small countries went into a crisis and no hopes of standing up again. The banking sector was greatly hit by the global recession and the government was blamed for failing to curb the problem. This became a turning point when the government control appeared as a valuable measure within a country and a strategy to prevent economic crisis. The idea that state capitalist is a form of antagonism to creation of free-market has become a controversial issue. Evidently, state capitalism is a double-edged knife that mat either promote a country’s economy or ruin. A wide range of literature supports the idea that state control prevents aggression within the economy and prevents exploitation within the society. Private capitalism creates a situation where a few market giants push selfish economic goals at the expense of small companies and the consumers. Therefore, private capitalism results to the formation of wealth gap within the society (Chen, Lee & Li, 2008). Therefore, government control helps to curb this behaviour and protects the public’s welfare. On the other state capitalism is oppressive and may foster monopolistic competition, where certain government heads pursue their own political goals and do not put the plight of consumers first (Nee, Opper & Wong, 2007). Secondly, the government oppresses the private sector by eliminating healthy competition that would benefit the consumers. From this perspective, the government control may be a hindrance to economic development within a country. More reasonable authors advocate for a fair market where the government and private sector interests are balanced to meet the needs of the consumer. The purpose of this is to prevent the aggression of both the private and public sector. China is one of the countries has attracted a lot of attention as a country that manifests the highest level of state capitalism (Dollar and Wei, 2007). The government’s role after the economic recession in 2008 has become a controversial issue (Guthrie, 2001). After the world recession, the Chinese government took a central position in the trade sector, what was seen as a move to reinstate economic balance and to prevent the country from plunging into recession in future. This was experienced widely in the world as the government in almost all countries took the wheel to control their falling economies. However, China’s government seems to have taken the best position as compared to other countries. The Chinese government took over more control on the stock market and regulated the countries that dominated in this market. In 2011, there was evidence that government owned companies within the stock market dominated by 82%, while only 18% comprised of private companies (Wooldridge, 2012). This was extreme compared to other countries such as Brazil where the private sector dominates the stock market. In Brazil the private sector takes 62% while the government sector takes over 38% (Wooldridge, 2012). This was part of the Chinese government’s strategy to take more control in the stock market and to prevent a situation where the collapse of one large private company would affect the stock market. At the same time, the Chinese government has taken more grip of the financial sector to develop the largest companies in the country. The country possesses the largest share value in the banking sector (Huang et al., 2011). The Bank of China, Agricultural Bank of China, Industrial and Commercial bank of China and China construction bank are examples of state owned banks that are the major players within the financial sector. Also, the state owns other large companies such as the China mobile and PetroChina which have been listed among the largest global companies. This situation is different in countries such as US where private companies such as Wal-Mart dominate the market and have the largest revenue (Liaoyuan, 2006). Moreover, the country is increasing its grip on emerging companies that promise to be future giants in the market. For instance, the government is slowly increasing its control in Lenovo, which considers itself a private company (Wooldridge, 2012). Therefore, the government market control can be visualized from the efforts that China has taken to control to influence the financial systems and focus on large company investments. The government of China has used state capitalism to take control of the global market and to focus on opportunities within other countries. The country has created global champions that are strong enough to invest in the international market and increase the government share value. Chinese government has been keen to focus on countries that have refused to engage in the west as a strategic measure to compete in this market. For example, the country has allied with the Sudan government to explore oil in the country, which will be an opportunity to strengthen China’s economy. In Iraq, China National Petroleum Corporation, one of the SEOs, won the contract to explore oil reserves in Iraq (Wooldridge, 2012). Therefore, state capitalism has contributed to the formation of large companies that can go alone in the international market and generate profits for the country. Analysts show that the country’s GDP is the fast growing and that this may be a reward of the formation of state-capitalism within the country (Minggui, 2006). In the last five years, Chinese economy has been rated among the top performers after US, which is a manifestation of the government’s efforts to add value to its country. Recently, there has been criticism of the vast research that has depicted China as a country that experiences the highest level of state-capitalism. There is evidence that the private sector continues to flourish and that they are taking the centre-stage in the economic landscape. The government’s share in exports declined by 11% and the number of people employed by state owned businesses declined by 40% (Wooldridge, 2012). Therefore, there are those who feel that the issue of China state dominance in the economic landscape is exaggerated and that the government is focusing on possible ways of liberating the market (Lin, 2011: 2013). The World Bank statistics show that the country has increased its loan issuance to private company and over 54% of new loans to offer to non-state companies. However, the idea that the state has liberated the market still remains controversial due to the manifestation of new forms of state-capitalism. The government of China has shown support to large private companies and more control for small companies. The idea that prevails is that the country’s leaders support private companies that pursue their political interests and that this is a manifestation of irregularities that exist within this market. The dominance of the Chinese government in the financial markets has been interpreted as the manifestation of its efforts to seize the economy and dominate the market. The government of China has seen leadership become a tool for economic control, with the primary goal not being economic development but gaining political control. The leaders in China have fostered the formation of more SOEs to ensure that the government possesses the highest proportion of revenue (Seo et al., 2010). Governments that make money become more influential and possess more power at its hands. Therefore, the Chinese heads has used this as a strategy to keep them within power and to control private companies that may overturn the profit balance. While theory suggests that revenue in hands of the government is crucial for development of social services and in the closure of the wealth gap, there is little evidence of social development in the country. While there is evidence that there is rise in economic class within the country, there is evidence that a large portion of the society is still embroiled in poverty and that there is no plan to rescue them (You-Tien, 1998). The fact that the private sector is a major employer, compared to the government shows that the government’s strategy are not solely meant to streamline the economic balance. The control on the organizational leadership shows the great influence of the political leaders within the economic market. In China, the leaders of big companies are compelled to cooperate with interest of the political leaders. The frequent transfers of company leaders to other companies is a strategy that the government uses to curb any resistance to its interest. The states put in leadership those who obey the directions of the leaders and those who oppose are demoted. In many occasions, the government’s decisions are political and override the decisions made by the company boards (Sheppard & Mandel, 2006). While company corporate boards think about increasing the company value within the market, the political leaders feel that such companies are meant to pursue their own interests. For instance, corporate decisions are overturned easily by meeting that are conducted by government officials. Oversight bodies such as the State-Owned Assets Supervision and Administration Commission pressure the organizations to increase the government share value rather than satisfy the consumer expectations. Therefore, the government control has been skewed to political ambitions and has nothing to do with economic development within the country. The government’s support for large private companies and its willingness to support them is questionable. The country has completely lost hold of small private companies and focused on the large companies. Companies such as Lenovo that are privately owned have received a lot of help from the government while small companies are collapsing with no one to assist them. This exhibits a new form of state-capitalism where the government supports some companies and ignores the small companies (Mustachio & Lazzarini, 2014). The rationale for such support is that the government will accrue more power from such companies since they will back them up in their political bargains. The creation of such private giants is more similar to private capitalism that was supposed to be eliminated by state socialism. In this form of capitalism, the large companies are the price setters and their main objectives is to accrue more capital at the expense of the poor (Burstein and Vogel, 2011). Therefore, supporting such companies is against the consumers rights to cheap products and more employment levels (Buera and Kaboski, 2012). Such companies underpay their work since there is low employment opportunities and provide no support to the society. The result is the increase in the wealth gap and the death of small companies. The sustainability of the state-capitalism in China has come under sharp criticism. While government control is essential to curb aggressive behaviour in the economy, there is evidence that it has its bad side. Control that is geared towards political goals does not focus on long-term development and hence may be only beneficial for a few years. The country risks getting into an economic turmoil when such large companies crumble down (Wooldridge, 2012). In a capitalist market, there reach a point when there is too much capital and this cannot be reinvested. As a result, the country’s economy may crumble down when such situations arise. Besides, China’s strategy to focus on complex markets is risky since economies in such countries is at the risk of political turmoil (Szamosszegi & Kyle, 2011). Countries such as Iraq are politically unstable and hence economically unpredictable. From this perspective, it is recommendation that the government of China liberates the economic landscape, promote young private companies and prevent exploitation of the poor in the society. This will ensure long-term sustainability and protect the country from future economic recessions. In conclusion, China state capitalism is a great threat to its future economic sustenance and a new balance needs to be developed. The government’s overdominance in the financial sector, stock market and bond market is crucial to build strong companies but may result into economic problems in future. To worsen the situation, the government has used state-capitalism to push its personal political ambitions and to keep them at power. The various forms of state capitalism manifested in China poses danger for the country’s sustenaibility. The government needs to take a turning strategy to focus on liberalizing the market to foster a healthy competition and maintain economic stability with a long focus. Bibliography Bremmer, I. 2009, State Capitalism Comes of Age: The End of the Free Market?. Foreign Affairs, 40-55. Bremmer, I. 2010. 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