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The Rise of State Capitalism

By Ian Bremmer, Devin T. Stewart | Eurasia Group | May 26, 2010

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DEVIN STEWART: I'm Devin Stewart, from the Carnegie Council, and I'm here with Ian Bremmer. He is head of the Eurasia Group, a Carnegie Council Trustee, and author of a new book, The End of the Free Market: Who Wins the War Between States and Corporations?

Thanks for coming today, Ian.

IAN BREMMER: Thanks, Devin. Glad to be here.

DEVIN STEWART: The last time we talked, it was about The J Curve, which is a fantastic book. Just last week, you were with Jon Stewart, on The Daily Show. This week you were on Fox promoting your book. And you stopped by the Carnegie Council. It's great to have you here.

Let's start with the title. Sorry, but the end of the free market, really? I mean, come on. Is it really that dramatic?

IAN BREMMER:
There's still a free market in the United States. There's a free market in Europe. There's a free market in Japan. But the world as a whole over the last 40 years has been governed by an increasingly global free-market system. That was the dominant economic paradigm. We hit the tipping point on that.

There is now a competing system. It's real. It's state capitalism. It's a system where the state is the principal actor in the economy. It uses the markets for ultimately political gains and there's no rule of law.

DEVIN STEWART: What drove us to that tipping point? What were the motivations, what were the factors that led up to this tipping point, to state capitalism, which we have to define first? What is it that led us to this point?

IAN BREMMER: There have been aspects of state capitalism that have come for a while. You used to have authoritarian regimes that had centrally planned economies. As globalization took hold, enriching the world, the one group of folks that had a serious problem with it was the authoritarian governments, because they increasingly needed to provide growth to their own domestic populations or they were going to be out of power. Yet giving that over to the private sector thoroughly undermined their model. So what they did was that they created a system, a new system, that took the tools of the free market and used them for political ends.

DEVIN STEWART: And you call that state capitalism.

IAN BREMMER: That's state capitalism. Yes, it is.

DEVIN STEWART:
Tell me about your very interesting story in the book with the vice minister for foreign affairs of the Chinese government, who kind of inspired you—ironically or not—with the title of this book. Tell us about that.

IAN BREMMER: He did inspire me, there's no question. He is an incredibly articulate fellow. His name is He Yafei, and he is the vice minister of foreign affairs in China. They called me up and they said he wanted to exchange views with me. This was last May.

We got together. I'm sitting across the table from him and the first question he asks me is, "Now that the free market has failed, what do you believe the appropriate role of the state in the economy should be?"

This is a serious and senior guy. It turns out that he is the official that in Copenhagen, when President Obama did not meet with Wen Jiabao, this is the guy that came in to meet with Obama.

DEVIN STEWART:
So he has some gravitas.

IAN BREMMER:
He is a very impressive and articulate fellow. His English is as good as anyone on the street here in New York.

DEVIN STEWART: Who else was in that meeting?

IAN BREMMER:
We had a few key economists. For some reason, they sat me directly across from him, and I got the first question. Nouriel Roubini was there, the illustrious "Dr. Doom" economist. Bob Hormats was there, who was at Goldman Sachs; now he is under-secretary of state. Don Hanna, who was the chief economist at Citi at the time. So there were about six major economists and me, the political scientist.

DEVIN STEWART:
And you're right in the middle.

IAN BREMMER:
I'm right in the middle, and he asks the first question, not to the economists, but to the political scientist. This was completely stage-managed.

DEVIN STEWART: You had to represent your whole field of political science in front of all these important people. What was your response?

IAN BREMMER: Looking back on it, it was very clear that China is not just about the economy. China is ultimately about the politics. China is a country that knows that it needs economic growth because of its ultimate priority, which is political stability. If you lose the economic growth, you lose the political stability.

In the United States, if we lose economic growth here, we can vote out our government. But you're not going to get rid of the Supreme Court. You're not going to get rid of the House of Representatives. They are still going to be there.

In China, if you lose economic growth, you can lose the entire regime. And they are very, very aware of that.

DEVIN STEWART:
What is state capitalism? Before we go further, we have to define our terms. How does it differ from the free market?

IAN BREMMER: State capitalism is very simple. It is an economic system where the state is the principal actor, and it uses the markets for, ultimately, political gains, in the absence of rule of law.

In a free-market economy the principal actor is, of course, not the government. The principal economic actor is the private sector; it's the multinational corporation. There is rule of law.

Now, there are rules, and the government plays a role. In a properly regulated free-market economy, the government is a referee, who, when there are problems, will penalize somebody—

DEVIN STEWART: So in the free market, government is a referee.

IAN BREMMER: Yes.

DEVIN STEWART: In state capitalism, government not only controls the rules of the game; they are also the referee and they control the main players of the economy.

IAN BREMMER: They are a referee where one of the teams is stacked with the ref's friends and family, and they only bother to tell that team what the rules are. That is a rather different game than the one that we're used to playing on the international economy.

DEVIN STEWART:
Before we get to whether that works or not, that doesn't sound quite fair. If you are going to be competing in a global marketplace, where governments can muster the resources to buy major assets through their sovereign wealth funds, for example, is it fair to be able to put these things on the market to states that have that much influence in their own economies?

IAN BREMMER: It looks fair if they need you. If suddenly they don't need you, you can find that it's not fair very quickly. In the absence of contractual obligations that have to be fulfilled, in the absence of your ability to go and actually lay suit against someone, you have problems.

In the United States, a lot of people were upset about AIG, those bonuses—$165 million. Obama came out and said he was outraged. People were talking about ripping those contracts up. The next week, Obama thought about it and came back and said, "You know, I've reconsidered. I'm actually less outraged than I thought I was."

Why did he do that?

DEVIN STEWART: That always happens, though.

IAN BREMMER: It happens all the time.

DEVIN STEWART: You start outraged, get less outraged.

IAN BREMMER:
And then you get less outraged.

In this case, of course, the American people were still outraged, and Congress was still outraged. But Obama sort of recognized that in the United States, if they had ripped those contracts up, you were going to get lawyered up for years.

DEVIN STEWART: Is that like getting "Googled out"?

IAN BREMMER:
It's a little different than getting "Googled out." Getting lawyered up means that—

DEVIN STEWART: It's what happens in a free-market system.

IAN BREMMER: What happens in a free-market system. In a state capitalist system, when they don't need you, you get "Googled out." So it's being "Googled out" versus being lawyered up. I think that is actually a very good dynamic. Think about it.

DEVIN STEWART:
That's a great article right there.

Which one is more painful, do you think?

IAN BREMMER:
Being lawyered up is like a death by 1,000 cuts, which is why you want to generally avoid it. Getting "Googled out" can hit you suddenly.

DEVIN STEWART:
It's fast.

IAN BREMMER:
It is fast, no question.

DEVIN STEWART: Quick pain.

IAN BREMMER: I wouldn't say it's painless, but it's very fast.

DEVIN STEWART: You brought up getting "Googled out" on The Daily Show. I think it's the first time I have ever heard that phrase used anywhere in the world.

IAN BREMMER: It was certainly the first time Jon Stewart ever heard it.

DEVIN STEWART: I don't know if you coined it on the spot.

IAN BREMMER:
Yes, I coined it.

DEVIN STEWART: He loved it. So tell me more what you mean by "Googled out." How do you view what I think—and I think a lot of the colleagues here at the Carnegie Council believe—is a pretty extraordinary event, where it seems that Google took a moral stand on China and decided to do an ethical thing? In the popular imagination, businesses only operate, at least in the free-market system, from profit. State capitalism is based on politics or state power, right?

IAN BREMMER:
Ultimately, yes.

DEVIN STEWART: What about the driver of ethics? How do you square that with the future of China?

IAN BREMMER: There's a lot to unpack in that question.

The first is that there is a difference, of course, between long-term profitability and short-term profitability. What we have seen in the U.S. over the last two years is that there were a lot of financial institutions that were focused on short-term profitability and took some decisions that we might consider immoral.

Perhaps more importantly from a capitalist perspective, they weren't very intelligent from a long-term profitability perspective, no matter what your short-term compensation was.

You could make the argument that Google increasingly understood that, long-term, they were done in China. They were out. It was just a question of when.

DEVIN STEWART: From a business case.

IAN BREMMER:
From a business case. I could easily make the argument, and probably would, that Google was going to lose in China. They were having an ethical discussion. They were having a crisis of conscience within that company. There's no question that they were. You have Sergey Brin, who is, of course, an émigré, who feels very strongly anticommunist sentiments. I have spoken to many Google employees. They always had a problem with the notion of compromising their integrity and their baseline values to do business in China.

But, of course, the reality is, they weren't doing great business in China. They increasingly were at war with the Chinese government.

The subtitle of my book is "Who Wins the War Between States and Corporations?" I can answer it very, very simply. If there is a war between a state and a corporation, the corporation loses.

DEVIN STEWART: Really?

IAN BREMMER: Of course.

DEVIN STEWART: But corporations make the stuff that conducts war—Lockheed Martin, Boeing.

IAN BREMMER: Yes, they do. But, of course, they do that because they're not at war with the corporations that they are selling into, and that is very important to recognize. When you're talking about Google—so far we have had one war between a state and a corporation this year, 2010. It's China 1, Google 0. There are going to be more. If you are a corporation and you are starting to be in a situation where you are going to be at war with a state, you have to do one of two things. You have to avoid the war and find a way to still be on the good side of the state or you have to leave.

Google's problem was not human rights.

DEVIN STEWART: There's no downside for China in the long term when Google leaves, for researchers or scientific development?

IAN BREMMER:
There's downside.

DEVIN STEWART: You mention it in your book. Long-term economic growth can be in jeopardy.

IAN BREMMER:
Yes. But there's downside either way. This is a really interesting point, and it deserves a step back. Liberal democracy, in my view—I'm going to take a stand here—is the most effective political system that the world has seen to date.

DEVIN STEWART: "The least worst"?

IAN BREMMER: "The least worst," as Winston Churchill would say—most effective, least worst.

Yet there are many countries where, if you were to put a democratic system in place, it would be much, much worse for that country. Think about the elections that we just had in Afghanistan. It never should have happened. The country was not ready for democracy. Smart governance in that country would have told you, don't have democratic elections.

That's one point.

Now, let me make a similar point for the economy. I'm going to make another stand; this is a value judgment on my part—that a properly regulated free-market economy—properly regulated; not what we have seen in the last few years—is the most effective, or least worst, economic system that the world has seen. And yet if you take that system and you suddenly put it into a country that is authoritarian, that has state capitalism, you could do extraordinary damage to that country's stability. It is probably right for the Chinese officials not to want to move quickly to a free-market economy today. And I hate to say it, but it may even be right for the United States to support that.

DEVIN STEWART:
This sounds like themes from The J Curve.

IAN BREMMER:
That's right.

DEVIN STEWART:
If you're traveling along the J curve—if I remember correctly, your prediction was somewhat of a flag. You were flagging China that it could experience some instability as it opens up—

IAN BREMMER: More than some.

DEVIN STEWART: Do you still believe that?

IAN BREMMER: Of course.

DEVIN STEWART: When is it going to happen? Besides the 10,000 or 100,000 protests—

IAN BREMMER:
In the last two years, they have stopped opening up. The Chinese government had been incrementally opening their economy over the past 20, 30 years, but not once the economic crisis hit.

We need to recognize that we have now given them the ability, not just for He Yafei to talk to me, but for the Chinese government to tell their people, "Look at what happened with the free market. It's America's fault, and all these free-market capitalists, that the economy is in the situation that it is."

DEVIN STEWART: It's a coping mechanism.

IAN BREMMER: In other words, if you had believed that there was a possibility that the Chinese model was maybe unsustainable in five or ten years—if you believed that two years ago, you had better be pushing that back now, because they have just given themselves an extraordinary lease on life.

DEVIN STEWART: Very interesting.

Let's talk about some of the ethical outcomes of these two systems. Let's talk about, first, the charges that Obama is a socialist or a state capitalist. On the other side of the spectrum, if BP were owned by a government, should we expect any other consequence in the Gulf Coast? Would a state capitalist oil company have done a better job in Louisiana?

IAN BREMMER: I think we need to recognize that the failure of BP off the Gulf Coast was a failure of the executives that were involved in those decision-making processes and it was also a failure of the governmental regulatory agencies that clearly were unaware and didn't make themselves aware of the lack of understanding of how one would cope with such a catastrophe. Let's recognize that the blame deserves to be expanded.

What we have seen in the last two years was not the failure of the free market. It was the failure of the SEC, the failure of the CFTC [Commodities Future Trading Commission], it was the failure of Greenspan. You left your eyes off the ball.

The fact that now President Obama cannot support the free market because it's politically imprudent, maybe even indefensible, to do so is a real problem. Obama is not a socialist. I understand that it is increasingly fashionable in some circles in the United States to levy that charge against him. It is certainly true that after all of this deregulation, the pendulum will shift, and will probably shift too far. It will probably shift too far. But that is very different than saying that the United States is becoming socialist.

The incredible power that corporate lobbies have in the United States, with Democrats and Republicans in Congress, the Supreme Court recently ruling on actually expanding that influence, the importance of multinational corporations as actors in the United States—the U.S. is clearly a free-market system, and nothing that Obama is going to do will fundamentally challenge that.

DEVIN STEWART: When thinking about the murky motivations of state capitalism advancing a state agenda, state power, political motivations, and then looking at the free-market system as being basically driven by profit, it seems like you could also say that the state capitalists are also driven by politics, state agenda, power, and profit. They want to make money. They are making money.

IAN BREMMER: They are making money.

DEVIN STEWART:
Doesn't it seem to suggest that there is a fundamental vulnerability in state capitalism? Where you have all these incentives and motivations swimming around, it makes decision making murkier. How have you seen that play out, where you might be getting mixed signals—it's politically expedient, but I might make money? Have you heard of any accidents happening on the scale of BP in the state capitalist world?

IAN BREMMER: Sure. They happen all the time. If you have to make a choice—everyone has everything as a priority. In the United States, corporations want to be socially responsible, but they want to make profit. If they can put those things together, that's great. But if they have to choose one or the other, we know which one they choose.

In a state capitalist society, the government wants to have as much growth as possible. They also want political stability. When they are forced to choose, they choose political stability. That is important to recognize.

In Abu Dhabi today, you have sovereign wealth funds. They are not trying to maximize returns. They were before the crisis. Now they are much more economically constrained, and they have this massive problem in Dubai. It doesn't make a difference what kind of returns they make; they are putting their money in Dubai first.

If you are China, you must secure commodities all over the world for your people and your growth. It doesn't matter if it's an authoritarian state and it doesn't matter if that's maybe not the most rational, efficient use of that currency today and those surpluses today, because you understand that you need that or you're going to have serious political problems domestically.

So as you find that things are constrained, that you have make choices, that you have priorities—the Chinese care enormously about environmental degradation. They do. It's a priority. They want to move to alternative energy. They're doing it. But the priority is economic growth, more than that.

Why? Because the priority is political stability. That requires that growth. That growth has to happen every year, every quarter. As a consequence, they are continuing to engage in this extraordinary degradation of their environment.

All of these things create unsustainability over the long term. But it's the long term. In a country with 1.3 billion people, with extraordinary capacity to continue to leverage the productive capacity of those people—much more than any other country in the world today—they can make a lot of mistakes and they can be less efficient, and they can still grow quite a bit.

DEVIN STEWART: One of the ways that a lot of the reviewers have described your book is that this is a new thing, state capitalism. But you, Ian, actually took a very ethical step in your book in saying, "Slow down. It's gaining a lot of momentum, but it's not new."

There is a very interesting section in your book where you talk about the origins of state capitalism, 100 or 200 years ago. Tell us briefly about this. Where did this all come about? I think you said somewhere in Germany, there was a politician who sort of referred to it. Where did it come about, mercantilism?

IAN BREMMER: "State capitalism" is used as a term by a lot of people in a lot of different ways. State capitalism itself, in this manifestation, is pretty new, in the way that it's using these tools of the free market. But there's no question that it had its origins in mercantilism, in the 18th and 19th centuries, where you did have effective unity between states and a lot of key corporate actors—the East India Trading Company, for example, which basically operated as an arm of government and took advantage of investment opportunities in that way.

People didn't think about free trade, and they certainly didn't have free currency flows in the way that you do today. Mercantilism was really a very early precursor of the state capitalism we have right now. But there's no question that you see that happening.

DEVIN STEWART: What distinguishes state capitalism from mercantilism?

IAN BREMMER: Again, I think the big difference is that you have governments now that are actually actively using pricing mechanisms and tools of contemporary markets, globalized markets, for their own political outcomes.

The contemporary manifestation of state capitalism is also not new. It started with national oil corporations—the foundation of OPEC, in particular. It used to be that if you were an international corporation doing oil, you would go to a dictator, you would cut a deal, and in return for giving him some cash, he would let you come and put the straw in the ground and take some oil out, until these countries created their own national oil corporations.

DEVIN STEWART: Daniel Day Lewis comes with a big straw, right? [Referring his role in the film, There Will Be Blood]

IAN BREMMER: Pretty much, and makes a lot of money.

The funny thing is, I thought that was fairly known, that 13 of the biggest 15 oil producers now in the world are not private-sector companies. If you don't like big oil, you should be focusing on states. There are some reasonably big oil players that are private-sector, but the biggest oil, of course, is all states.

But I was amazed that a lot of people who have reviewed this book have come to me and said, "We were really surprised." In the Wall Street Journal this morning, the guy came across surprised to find that 13 of the 15 biggest companies are states.

DEVIN STEWART: Oil companies.

IAN BREMMER: Yes. This isn't new.

DEVIN STEWART:
Three-quarters of the reserves are owned by states.

IAN BREMMER: That's right. That's not new. That's not new at all.

DEVIN STEWART:
Been in development since the 1970s.

IAN BREMMER: Yes, without any question—actually, in some cases before that, but really picking up steam in the 1970s.

My argument is that what we saw then with oil we are now seeing in many sectors—in aviation, in technology, in telecom.

DEVIN STEWART: So we're getting to spotting a state capitalism duck when it walks down the street. It seemed from your book that you said there's no such thing as a purely free market. That would be anarchy. There's no such thing as a socialist utopia. It's all a spectrum.

So to answer some of the critics or the reviewers or the bloggers out there, Ian is not saying that there are these pure forms floating around like platonic forms. You're describing something more nuanced.

IAN BREMMER: I'm trying to describe something that exists.

DEVIN STEWART: Exactly, and nothing is in the pure form.

One of the ways you spot a state capitalist when it's walking down the street is to look at how it uses certain tools, which is what you were getting to right here. You have sovereign wealth funds. You have national champions, which is very interesting. States point to a company and say, "You're our guy, and we're going to use you."

IAN BREMMER: Not owned by the state. It doesn't have to be Baidu. Google's problem in China was with a private company. It just so happened that the private company was supported by the Chinese government and Google wasn't.

DEVIN STEWART: Why is that?

IAN BREMMER:
A couple of reasons. First of all, because there are connections, of course, politically that are effective within the government. That always matters in authoritarian states—always matters.

Secondly, because there's a lot of mistrust that a company like Google, connected with the U.S. government—they provide a lot of data on counterterrorism, for example, to the National Security Agency. There are a lot of fundamental questions in China, in the government and among the Chinese, that what Google is doing with that data that they are collecting on all of these Chinese searches is probably not in China's national interests. And even if they are not using it in a malevolent way today, who's to say they won't in the future?

Why wouldn't China want control of that? Seriously, if I were the Chinese government, I would want Google out, without any question.

I think we need to spend more time putting ourselves in their shoes, the shoes of a government that knows it needs the support of the Chinese people. And, actually, they're doing a pretty good job of getting it.

DEVIN STEWART: Let's take a couple of the tools that state capitalists like to use. They have national oil corporations and they also have sovereign wealth funds. There's a state in the United States that has sovereign wealth funds:  Alaska. That's one of the top ten or 20 in your book.

IAN BREMMER:
Top 20, I think it is.

DEVIN STEWART: You list it in your book.

IAN BREMMER: Toward the bottom of the top 20, yes.

DEVIN STEWART: Is Alaska the most state-capitalist state in the United States? Should we be sending a memo to Sarah Palin?

IAN BREMMER: We probably should be sending a memo, though—

DEVIN STEWART: What would it say?

IAN BREMMER: It would probably have lots of things in it.

DEVIN STEWART:
Can you say it?

IAN BREMMER: It would say Obama is not a socialist. I don't actually think she believes that. I think she's actually not as stupid as people portray her, and I think she uses all of this stuff because it works politically. Everybody does. We can only get so worked up about stuff that's clearly meant to just incite rage.

DEVIN STEWART: Alaska has a sovereign wealth fund.

IAN BREMMER: It does.

DEVIN STEWART: How does that fit into—

IAN BREMMER: It would be kind of funny to say, "See, Sarah Palin, you opposed the free market." But, of course, she doesn't.

DEVIN STEWART: Should more states have sovereign wealth funds? Should we be following that example?

IAN BREMMER: It makes sense in Alaska because you have these massive surpluses because of the extraordinary mineral wealth that they have in the country. As a consequence, they are basically playing for the long term. But again you have rule of law in Alaska, and private-sector corporations are the most important economic players. Norway has a sovereign wealth fund, too, but again corporations are the most important players; you have rule of law.

It is not just about: is the state playing a role? The state plays a role everywhere. The U.S. government plays a role in the military-industrial sector, Amtrak. But Amtrak doesn't make you a state-capitalist society—thank God, because that would be a poor indication of how that system actually works.

DEVIN STEWART: Is the state capitalism craze catching on in the world?

IAN BREMMER: Of course it is. I think you need to recognize, we just had primary elections in the United States, and none of the incumbents did very well. The Tea Party is picking up, and folks on the far left in the Democratic Party as well. You had Rand Paul winning a primary basically saying, "I have no political experience, and that's a great thing." It's very rare when you can argue that the reason why you are well qualified for a job is precisely because you have no experience doing anything remotely like that job. Objectively, that actually sounds funny.

And yet this is not just in the U.S. We just saw this in Great Britain, with their elections. We saw it in Germany with the elections that Merkel got her—and we have seen in Japan where they have overturned a single-party system that has been in place for 50 years. There is no place in the West today where these governments are not on the back foot in a massive way because of the feeling that the free market has not worked for them.

DEVIN STEWART:
It's on the defensive.

IAN BREMMER: It's on the defensive in an unprecedented way. Let's be clear. The biggest and most successful experiment that the free market has ever engaged in is now under unprecedented stress. That is, of course, the creation of the world's largest common economy, the eurozone.

DEVIN STEWART: You are one of the most famous political-risk gurus. What do you foresee for the European experiment? Is it going to hold together?

IAN BREMMER:
The eurozone is, of course, in very serious trouble. I believe the eurozone holds together. There are lots of ways that European governments can find to basically avoid carrying out the will of the people. The people don't want the eurozone. But they didn't want the Lisbon Treaty either. But when you are a European bureaucrat, you can find procedural things to hang your hat on that can keep folks tied up in knots for years and years and years. And they'll do that with the eurozone as well.

But it is plausible now that there are scenarios where the Germans pull out. It is certainly plausible that the austerity that is being enforced on the Portuguese, the Spaniards, the Greeks will not work. It's plausible that Northern Europeans will not find mechanisms to be able to actually dispense 1.1-plus trillion in support. It's possible that European banks will fail. The markets know that, and so the euro is trading at historically low levels right now. Psychology in the markets can cause a real run against these guys. So this is serious, serious stuff.

DEVIN STEWART: One possibility is Germany leaving.

IAN BREMMER: Yes.

DEVIN STEWART: Going back to the spread of state capitalism, I would like to touch on whether you see a kind of Cold War brewing here, which you address in your book. You are responsible to do so.

Do you see state capitalism spreading around the world at a greater pace or do you see a sort of inflection point where people say communism is in the dustbin of history? Is there going to be a sort of reckoning in the world?

IAN BREMMER: It's definitely going to get more problematic before it becomes less, because of the nature of all of these developed states being on the defensive. So you will have more support for populism. You see that with the elections. You see that with the views of Americans on this immigration bill in Arizona. You see it in terms of the opposition to free trade when people are asked about it. And you will see, of course, much stronger support among many emerging markets; the Chinese model seems to be working.

I don't think that that's forever. I certainly hope it's not forever. But I don't think it's forever, because I think that ultimately China has a lot of problems with its own sustainability. We discussed that a little bit already. But let's be clear. This is not a two—or three—or five-year thing. Not many people are focusing on 20 years out. If they were, we would have different climate change conversations. We would have different nuclear proliferation conversations. They are focused much more on the near term.

In the near term, state capitalism is growing. If there is one thing we can learn from what has happened in the last 18 months, it is that the state is getting bigger all over the world. That means, necessarily, that state capitalism is growing.

DEVIN STEWART:
Ian, do these two systems threaten one another?

IAN BREMMER: They don't always. If you look in the Persian Gulf—state capitalist systems, but these guys don't have the labor, they don't have the educational systems. They have development in oil and petrochem, but they haven't developed any of the other sectors. They desperately need the West. Even though it's state-capitalist, even though you can lose your contracts—if you fall afoul of a government, you can suddenly be in a lot of trouble very shortly, so you need to be aware of that—it's not a war.

But the relationship between the U.S. and China, the world's two largest economies, is very different, because the Chinese increasingly don't need the West the way they did before.

They used to need foreign direct investment dollars. They don't anymore. They have the investment. They used to need Western technology. They have stolen and developed a lot of that, and the West doesn't want to bring in a lot of what they have brought in the past because they are losing it. In addition to all of that, you have the Chinese recognizing that they cannot count on the West to consume their exports the way they used to. So the Chinese want to decouple. It's going to take a long time, but that's the strategy.

So between the United States and China, the world's two largest economies, there is actually a war between state capitalism and the free market. The systems are fundamentally incompatible.

DEVIN STEWART: But it's not an existential threat, like the Cold War. It's not like one system must prevail at the expense of the other system. But you're making a subtle point. You're also saying it's not quite the G2, "Chimerica" situation.

IAN BREMMER: Chimerica is a joke.

DEVIN STEWART: It's a "choke".

IAN BREMMER: No one ever should have talked about a G2. It is a system where there are some zero-sum components and there are some positive-sum components. But in the last 18 months, the zero-sum components have become more important, and on every major issue, whether we're talking about Iran or Taiwan or the Dalai Lama or currency or cyber security or trade or intellectual property or the environment. On every single one, the U.S.-China relationship is in worse shape than it was two years ago and it's deteriorating.

DEVIN STEWART: How is not a Cold War? How can we be hopeful?

IAN BREMMER: It's not a Cold War because we need each other—

DEVIN STEWART: But less so.

IAN BREMMER: In the case of the Cold War, the Soviet Union was just a threat to the United States. We wanted to undermine them. That was actually the appropriate policy measure.

When the Soviet Union collapsed, the U.S. and the Europeans only gained economically. We brought Europe together. We reunified Germany. So the right strategy was to undermine all of these countries in the Soviet bloc, all of these regimes, so that they could unleash themselves from the shackles of communism.

In the case of the relationship between the U.S. and China, if China fails, we have serious problems, and yet if they really succeed with the system, we have serious problems. So this is a very tough one to manage. You know what it's like? It's a strange sort of analogy. It's like you have some 60-year-old billionaire who has married a 20-year-old model. It may not be a sustainable relationship, but they are both sort of getting what they want—except that five years later, the model becomes a supermodel and has her own means of supporting herself.

DEVIN STEWART: So China is the supermodel.

IAN BREMMER: China is the supermodel and the United States is 65 and increasingly isn't able to provide—the terms of the relationship have changed. They've changed dramatically. The U.S. is going to China and saying, "You don't need us as much anymore." And the Chinese are saying, "This isn't going to work."

DEVIN STEWART: Yet you are betting on the U.S., as the 60-year-old billionaire. You are betting on the U.S. to prevail. How does that come about?

IAN BREMMER:
I ultimately bet on the billionaire.

DEVIN STEWART: Why?

IAN BREMMER: Because it's the billionaire. The size of the U.S. economy —it's the largest in the world, and not just by a little. In addition to that, the U.S. has the finest institutions of higher learning anywhere in the world, by far. No one is even close. They put more money in research and development than anyone else in the world, by far. The fact is that you have a game-changing technology today in the world in energy, this unconventional gas, shale gas exploration, and it's almost all being developed by American corporations. The next big things are likely to still be developed in the U.S.

The Chinese system is doing incredibly well. But as you ask long-term, do we think that that authoritarian system, with the massive environmental degradation that's going on, with the troubled labor and demographic issues that will be coming down the pike, with the problems with indigenous innovation and entrepreneurship, especially when they are going to be more in confrontation with the West—whom do I want to bet on? Ultimately, the safer bet is the West, there's no question. But it's not as safe a bet as it would have been five years ago.

DEVIN STEWART: And the bet is contingent on what? What must the West do to make sure it succeeds?

IAN BREMMER: The West can't do stupid. And the West has been doing a lot of stupid recently. It has to get its act in order sustainably. In Europe they have waited too long.

The good news in Europe is that they finally have gotten to the point—they have finally gotten to the point that they recognize that there is a serious crisis and they need to do something about it. The problem is that they might have waited too long; it might be too late, as we discussed on the euro.

In the United States, the good news is, we have more comfort; we have more rope to hang ourselves with. But the bad news is, we're probably gearing ourselves up to use it. We need to have a conversation about fiscal responsibility in this country. But we've spent the last year talking about health care. On balance, it's a slightly better bill than we had before. But we didn't have a year to talk about health care in this country.

DEVIN STEWART:
So, essentially, boiling down your recommendations to the U.S., it is to think more strategically, think more long-term?

IAN BREMMER: Yes.

DEVIN STEWART: Last question: How do we make that happen? How do we get Americans to think more long-term?

IAN BREMMER:
Obama has extraordinary political capital. It's not just his charisma. He has a big majority in Congress. He'll keep a majority in Congress after the midterm, even with a hit. He has the ability to lead. He has not been a horrible president. He has probably, on balance, between a B or a B+. The problem is, the United States right now needs an A+ president.

DEVIN STEWART:
That's weighted?

IAN BREMMER:
On balance, I'd say he has been okay. He has been smart. The international community—he's engaged. It's a tough environment. The TARP [Troubled Asset Relief Program] got done. It's not a disaster.

Outside the United States, if you ask an objective third-party observer, what do you think about Obama, they would probably say he's a pretty good president, all in all. Very few people would say he's an amazing president, he's a great president, he's going to get it done.

The fact is, like so many, he's a politician. These are times that call for more than just politicians. You need to actually get this Fiscal Deficit Commission together. In December, when they give their recommendations, you are going to need to plow them through. You're going to need to take it seriously and do some stuff that hasn't been done in the U.S. since after the Great Depression.

Obama has a shot at getting it done, if he wants to. It's not clear to me that he wants to. We'll see.

DEVIN STEWART: It sounds to me like a call for moral leadership, I hope.

IAN BREMMER: It is a call not only for moral leadership, but also for visionary leadership. I think we cannot afford to be tactically moral. We actually need to be much more strategic in the way we look at the world.

DEVIN STEWART: Ian, on The End of the Free Market: Who Wins Between States and Corporations? I highly recommend it. Thank you so much for that advice and that interview.

IAN BREMMER: Thank you.


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