The End of the Free Market: Who Wins the War Between States and Corporations?
The End of the Free Market: Who Wins the War Between States and Corporations?

The End of the Free Market: Who Wins the War Between States and Corporations?

Jun 3, 2010

Full Video

Global Ethics Forum TV Show

Ian Bremmer demonstrates the growing challenge that state capitalism will pose for the entire global economy, and what free market nations must do to protect their economies as this new system gains popularity.

IntroductionJOANNE MYERS: Good afternoon. I'm Joanne Myers, Director of Public Affairs Programs, and on behalf of the Carnegie Council, I'd like to thank you all for joining us.

It is a pleasure today to welcome Ian Bremmer to our program. For those of you who are familiar with Ian or his work, you know that he is a prolific writer who has published about a book a year for the past three years, while juggling a schedule that would frighten most of us.

Ian is the President and founder of Eurasia Group, a leading global political risk research and consulting firm. In addition to writing books, his articles have appeared in illustrious publications such as the Wall Street Journal, The Washington Post, Newsweek, and Harvard Business Review. To the amazement of many, Ian also finds time to participate in numerous world conferences, seminars, and meetings, while also fitting in appearances on talk shows, including The Daily Show, NPR, and Fareed Zakaria GPS.

Today he will be discussing his latest work, entitled The End of the Free Market: Who Wins the War Between States and Corporations?

The End of the Free Market begins with a discussion of the history of capitalism from mercantilism through the end of the Cold War and lays the foundation for the major theme of this book, which is about the emergence of a new strain of capitalism where the state is the dominant actor. Countries such as China, Russia, and Saudi Arabia are prime examples where state capitalism is in the ascendancy and the state politically directs investments which threaten free markets everywhere.

Ian's book is the story of how in the first decade of this new century public wealth, public investment, and public ownership have made a stunning comeback. As his narrative unfolds, our speaker will tell us how this happened, why it is problematic and endangering the future of the global economy, and what we can do about it.

If you have read Ian's earlier works, such as The Fat Tail, The J Curve, or Managing Strategic Surprise, you'll understand why I'm so bullish on Ian. It's not just that his writing is lucid and the concepts presented are so accessible, but his ability to understand major changes in international politics and the global economy is extraordinarily insightful. His reputation precedes him, for, within days of being published, The End of the Free Market jumped to number 29 on Amazon and the Wall Street Journal listed it among the top 15 last Friday, May 21, 2010. I know that Ian is hoping that after today it will make The New York Times Best Seller list.

Ian, we will do our best to help you, not only because we like you, but because it is a very good book which confirms your acumen in forecasting trends and, at the same time, it really does provide a sobering reminder of what we can economically anticipate in the coming years.

While the global free market as we know it may be ending, still, there will be winners; there will be losers. Who might they be? To learn more, please join me in welcoming a very special friend of the Carnegie Council, our guest today, Ian Bremmer.

Remarks IAN BREMMER: Thank you very much, Joanne. Liking me should be sufficient. That would work for me.

I'll tell you a relevant anecdote. I wasn't planning on starting with an anecdote, but you actually made me think of this one.

I was talking to Andrew Ross Sorkin, who wrote Too Big to Fail. When his book came out, we were talking about it, and I had some views.

I used to go into a Lehman executive committee meeting every Monday morning and I was the one guy from outside of the group. It was a very unusual experience. What amazed me is that Sorkin nailed it, just got it right. So we started talking about the personalities. At one point he said, "You know, nobody else described it that way. You really have a different view of the book than a lot of the people I've talked to."

I was, like, "Oh, I'm sorry." I thought it was a strange thing.

He said, "No. That's great. When I saw Quentin Tarantino talking about his films, he said that when he makes a film, for him, a successful film is when everyone that sees the film feels like they've seen a different movie. And that's the way I want people to experience my book."

I said, "I completely disagree with you."

I said, "When people read my book"—now that it has come out, The End of the Free Market—"I really want everyone to have read the exact same book. I want people to get me. But the reason is probably because I want people to like me much more than you do."

We agreed. I think there was a little insight on Sorkin and myself, slightly different in terms of our personal foibles. I just want to be liked. I hope you like the book, but if you like me, that's actually more important from a personal perspective.

I'm always delighted to be here. I am a trustee of the Carnegie Council, which means they are forced to host me. But what it really means is that—I had no idea that, at 40, I could be a trustee of anything. It doesn't seem reasonable that you should be entrusted with things at 40—certainly not people that know me well. But it's an august institution, and Joanne Myers and Devin Stewart and Joel Rosenthal and others have done a fantastic job with it over the years. I am privileged to be a small part of the organization and will do whatever I can, as I know everyone in this packed room will, to help make it successful.

I just want to start, really, with that and my thanks for being here.

Let me talk about the book. The name of the book is The End of the Free Market. Do I really believe that we have hit the end of the free market? With a couple of caveats, the answer is that I do.

We have gone through some 40 years—there was a pretty clear paradigm. The G7 was in charge. Multinational corporations were increasingly the dominant economic actors. You actually could see that in our popular culture. I quoted the movie Network a bit in the book, talking about Mr. Beale and, "There is no state. There is only Union Carbide and IBM."

You go back to movies like Rollerball, the original, or, more my generation, RoboCop. The corporations were taking over. These were the dystopias that we grew up with—Naomi Klein's No Logo. We really believed that the private sector was dominant and multinational corporations were increasingly going to take advantage of global consumer markets and capital markets and labor markets. That's a big part of what globalization was all about.

I would argue that over the last 18 months we have hit a tipping point and that there are some states out there that are free-market and there are some states out there that are not. It's not that the states weren't free-market and suddenly changed, but that the nature of who is doing well, what the trajectory is, and what global governance looks like is very different than it was.

We don't have a G7 that's governing the world anymore. We have a G20, which is basically the Security Council. What I mean by that is that it's roughly as effectual. There is not a lot of actual coordination going on.

We're in a world where the Brazilians and the Turks—Brazil in the Western Hemisphere, Turkey a NATO ally of the United States—can freelance to develop a [nuclear swap] deal that's utterly unacceptable to the United States and the West on Iran, and the Americans don't even know they are doing it until after the deal is out of the bag. It's a very different kind of world.

But economically it's a particularly different kind of world. On the one hand, you have countries in the developed world, where the private sector still is the dominant economic actor, and there is more or less regulation. Over the last ten years there was increasingly less regulation; now we will see more regulation.

Then you have economies where the state is the dominant economic actor, using markets for ultimately political purposes, and where there is no fundamental rule of law.

I'm not trying to sit here in front of you and say that one system is good and the other is bad. In fact, I should give you a little rumination on how I think of this, from a normative perspective.

If you think about political systems, I subscribe to the notion that Winston Churchill did: that an advanced liberal democracy is the least worst political system out there.

But I also fully recognize that if you try to take an authoritarian state, in many aspects of development, and throw a liberal democratic system on top of it, you will end up with worse outcomes. We saw this in Algeria and in Gaza. Lord knows we have seen it just now in Afghanistan. Having free and democratic and open elections in Afghanistan right now from my perspective is a bad idea, even though, ultimately, democracy is a good system.

The same thing, in my view, is true economically. There's a parallel. In other words, I think that the system of a properly regulated free-market economy, which is not the system that we have had in the United States or the West over the last several years—a properly regulated free-market economy is probably the least worst economic system that we have found thus far. But if you were to try to put a properly regulated free-market economy, with multinationals as dominant economic actors, with rule of law—if you try to put that in place in a state capitalist system, you could probably cause a lot more harm than good.

So despite the fact that we may have the relative efficient system, going to the Chinese or the Russians and telling them that "this is the system for you" is fundamentally more problematic than you would like it to be.

There's the world as I see it right now: A state capitalist system that is becoming stronger.

The Chinese government is now the world's second-largest economy, as of 2010, first and fastest out of the blocks following this economic crisis. The Americans, the Japanese, and the Europeans are having an increasingly hard time, economically, politically, and in justifying the values that have actually made them strong and made their economies work over the course of these decades. This is going to lead to a very different way of thinking of the economy.

  • First of all, it means that we will have less economic growth, because we will have less access to global markets and we will have less efficiency.
  • Second, it means you will have more regionalization of capital and trade flows as opposed to globalization—politically determined, in many cases.

  • Third, it means that multinational corporations in many sectors will have troubles.
It used to be that if you were an international oil corporation, you could go to a dictator, you could sign a deal, you could give him some cash, and in return, you could stick a straw in the ground and you could take oil right out.

That worked really well until the dictators realized that they had their own straws, and national oil corporations were created and OPEC was created. Then if you were an international oil corporation, you had two choices. You could adapt, get out of the straw business and do something else that would be important and indispensable to those countries and leaders, or you could leave. Failure was an option. Failure is always an option. I've never quite understood people that say failure is not an option.

Some of those corporations died and some of them adapted. ExxonMobil today is not the world's largest exploration and production company. I had a piece in the Wall Street Journal this weekend talking about 13 of the world's 15 largest reserves being held by the state companies. If you really want to complain about "Big Oil," you're complaining primarily about states before you complain about companies, though, as we see in the Gulf and other places, there are many reasons to complain about private-sector corporations as well.

But the point is that that was oil. And what happened with oil, in my view, is now happening in many sectors.

Hillary Clinton has just gone to China, and as opposed to focusing on currency, the first thing that Geithner and Hillary were focused on was creating a level playing field for Western corporations in China. That is our view; that's what we want to see. Good luck. It's not going to happen. There are perfectly justifiable reasons, from the Chinese perspective, for why it won't happen.

The question I ask at the end of my book is, who wins the war between states and corporations? If there is a war between a state and a corporation, the corporation loses. We have had one so far this year. It's China 1, Google 0.

There are other wars coming between states and corporations. If you are a corporation and you see a war coming—this is not like the East India Trading Company, where you have your own navy.

Western multinational corporations do not have states directly behind them; they don't have armies. If they are in a direct fight against a state, they are in trouble, which means they need to recognize it and they need to adapt or they need to get out. We're going to see this in the aviation, automotive, telecommunications, and technology sectors.

There are other places where we won't see it; where Western multinationals will be indispensable and will remain indispensable for a long time. A lot of services such as health care, green technology and alternative energy. But the point is that a lot of the sectors that we thought heretofore were ones where we could just go in and make a lot of cash, it's not that way anymore.

Part of the issue is that the Americans need to be perceived as too big to fail. Yet if you are a lot of other countries around the world today, you don't see it that way as much anymore, because Americans are not going to be able to do the consuming that they have over the past decades, because China no longer needs the foreign direct investment dollars. They have overheating in their own country. They don't need as much technology, and for the technology they do need, a lot of Western corporations have had their stuff ripped off, and they don't want to actually provide it anymore. So you don't have the level of indispensability.

The proper strategy for China in that regard is to try to decouple: develop your own indigenous technology and get more profits staying in the country for what you do export. Diversify your exports away from the West—South-South, developing states, and in Asia—and build up your own domestic demand. It's going to take a long time to do all those things, but the intent is there and the political decoupling is happening.

What I am saying here is not that we have a battle of good versus evil. I'm saying that the nature of what has happened in the global economy and the global polity over the past 18 months has created structural conflict between the world's two largest economies. We can try to pretend it's not there, but it's coming. It's going to get larger. I think what's going to be particularly important for the West is their ability not to take the kneejerk reaction and put the walls up. With 17.2 percent real unemployment in the United States, it is only understandable that the reaction in the United States will be to put up the walls.

We see a lot of support for the new immigration bill in Arizona. We see Obama today talking about sending national troops, reserve troops, down to the border because he wants to be on the right side politically of that issue. We don't see a lot of support for free trade in the United States today.

If the United States is having a hard time thinking internationally, then don't get me started on Europe. And if the Europeans are having a hard time thinking internationally, then don't even think about getting me started on Japan, which is a disaster.

It's an unfortunate time for the Western governments to be so extraordinarily politically constrained, and yet they are.

That's where I wanted to go. I wanted to spend a few minutes just outlining what I think the book is about, the main arguments. I am very happy to talk with you all about Europe, about China, about the United States, about some of the issues of lack of coordination and what that's going to mean for the crises that are percolating—North Korea and Iran.

Thank you very much.

Questions and Answers QUESTION: Should Hillary Clinton, in talking about leveling the playing field, be talking about the justice system in China or in Russia, where the justice systems have been subverted to the political systems? Should that be a tack?

I don't know that it would get very far. There are international laws as well. Is that something that should be pursued vigorously?

I guess I should paraphrase her husband: It depends on your definition of "should." It will feel good morally. It is consistent with American values and America's legal tradition. It's not going to accomplish very much.

I think we have to recognize that the Americans have done a lot of telling other countries what America would like them to do, for a long time now. America has been in the position in many cases where they could actually get a fair amount of support, in part because of the power asymmetries and also in part because the Americans were doing enough lifting that it gave them a greater level of, not just power, but also moral suasion. I'm here at the Carnegie Council for Ethics in International Affairs. It's a good thing to address.

But today that's not true. This is going to fall on deaf ears in China.

We need to recognize that there is a general presumption in the United States that if you give people the right to vote, and Lord knows, if you give them a modem, they are going to make their voices heard—and I agree with that; they will—but furthermore, when they speak, they will sound like Americans; they will share American values. That's just wrong.

Let me just ruminate a little bit about where China is today. One of the things I said on The Daily Show the other day, where I thought we really had a good back-and-forth around, was that I firmly believe that if you ask the average Chinese what they think about their system today, their government—an authoritarian system—after 30 years of state-directed growth, after an enormously successful Beijing Olympics, in the middle of an enormously successful Shanghai Expo, they are more favorably inclined, on average—significantly so—toward their government than the average American is about the American government or the German about the German government or a Brit about the British government and the rest. I think that matters when you talk about things like Google. It matters when you talk about currency.

I think we should also recognize that the West has developed and the West has made a lot of money with their multinationals all over the world. The Chinese have seen that, and their view is, now it's their turn. The average Chinese does not believe that the West wants them to have their turn. They think that the rules were stacked in favor of the Western multinationals back when China was underdeveloped, and they would like to change the rules right now.

The Chinese see that the West wants them to agree to restrictions on their emissions around climate change. Climate change matters to the Chinese. They don't want to destroy their environment. But their highest priority is economic development, of course. They believe that, with increasingly constrained commodities, the West ultimately will not want them to grow. They may well be right.

Let me make one more point, which is kind of interesting. If I were advising the Chinese government today—and I'm not, but if I were—and they asked me about what to do on Google, I would have told them to kick Google out. I've never said that to a crowd before. Let me tell you why, from the Chinese perspective—not from my perspective.

I was upset that Google was kicked out. It was unfortunate. This is definitely a hit to open speech and to free expression and to the ability of all these repressed peoples to have access—Tibet and Xinjiang and all these things we know about.

If I was China it would be a different story. Google has access to an enormous amount of information. They are following all of this data that all of these Chinese citizens are collecting. We don't know what they are doing with it. The Chinese don't know what they are doing with it.

If you are China and you think that over time the U.S.-China relationship is maybe not going to be so great, and you are conservative by nature and you hedge a lot—you don't want to take big risks—what happens if at some point Google decides they want to sell that information to the U.S. government?

More importantly, what happens if the U.S. government demands access to that information because they need to know what these Chinese are up to? Do you want to take that risk if you are the Chinese government?

You do not. You want a Chinese firm that you have control over and influence over and know what they are up to and can stop them if there's a problem with access to your data. I think that that was an incredibly foresightful decision by the Chinese government, from their direct statist perspective.

The problem is, with state capitalism, the perspective is statist. It's not global or humanist. It's supporting the perpetuation of that regime. It comes out of authoritarian regimes that used to have centrally planned economies. They don't work as well anymore because their people have more information. It may be authoritarian, but they want more stuff. They know a lot about what's happening in the world. If you are an authoritarian state and you want to stay in power, you know central planning isn't going to do it.

So what do you do instead? You use the tools of capitalism for political ends. Baidu is not a state-owned company. It's a privately owned company. But China prefers them, and rightly so, from China's perspective.

QUESTION: This leads us to a country that you haven't had a chance to discuss yet, and that's Russia. What better example of a central planning state that, under American influence that became more capitalistic and now is becoming more statist than ever and taking back a lot of the oligopolies from the people they allowed to become very wealthy?

IAN BREMMER: True. Russia is a big state. They have a lot of natural resources.

From a governance perspective, Russia is much more volatile than China. I would argue that Mr. Putin is the single most powerful individual in the world. He has concentrated more power in his personal hands than anyone else. I suspect he would like it if he heard me say that. They have absolutely [concentrated power], in terms of no more elections for governors. Super-governors are appointed by the state. The fact that oligarchs not in the power structure can have their assets stripped away and given to other oligarchs.

There was one oligarch who was brought in from London, a Dagestani exile, and given a piece of Deripaska's empire, which doesn't belong to the state. Putin just said, "You're going to give this to him"—because they wanted his help in dealing with the Islamic radicalism issue that they have in the North Caucasus around Dagestan. He has a lot of control.

That much control in the hands of an individual means that there is a lot of ability for policies to become very volatile. In good economic times, a lot of people can make a lot of money. In bad economic times, you could have currency controls overnight.

In China that's not going to happen. You have to have consensus in China. One thing we know is, if they move on their currency, they're going to do it very carefully and very slowly. They're going to think about it. They're going to make sure they're not exposing anyone to too much damage and danger. We know this. They don't move overnight.

The Russians are a very different story. Of course, their population is a demographic tragedy. There's not an enormous amount of foreign direct investment coming into Russia because of the corruption, because of the opacity.

The big-plus wild card in Russia is who benefits more from the polar cap melting in terms of availability of resources and also sea lanes. I don't have a good way of handicapping that, but that's one of these interesting upsides that the Russians could really make a lot of hay out of. Of course, that's one of the reasons why you saw them stick this titanium rod in the North Pole with their submarine a year and a half ago.

One of the big differences with Russia and China, of course, is that Russia's own corporations are not as technologically sophisticated, productive, efficient, and, of course, they don't have the labor advantages of China. If they want to develop different parts of their economy, they need foreign investment more than the Chinese do. The system may be even more problematic to invest in than the Chinese system, but the power asymmetries play more to the West's advantage with Russia. So on balance, you would say Russia is not as much of a structural issue.

One more point on Russia. They feel more secure. They got Ukraine back. They have bases now in territory that used to belong to Georgia. Kyrgyz Republic—we just saw one kleptocracy out, another government come in. The new government looks okay. But the Russians were the first to recognize them diplomatically.

The Russians—right after this tragedy with the Polish president and the ministers going down, Putin shows right up, improving the relationship with Poland, too.

One of the places Obama has done the worst job with since coming in is probably Poland. The Poles are really upset about lots of feeling that they have been sold down the river by the Obama Administration.

As a consequence, the Russians, in their own "near abroad," as they call it, feel more secure, a feeling of security that the Chinese had come to on places like Taiwan ten, 15 years ago. That also makes them a little bit less volatile to deal with on the international stage—probably part of the reason they were more willing, at the edges, to play ball with the West on Iran.

QUESTION: I was at a conference a few days ago where they were talking about China's increasing influence in the world. I was quite stunned by the fact that China maintains good relations with both Iran and Israel, which I had not been familiar with.

I'm struck by the comment you made earlier about the deal that Turkey and Brazil struck with Iran. Then you said later, in another answer, that if you were advising China about Google, you would advise them to do exactly what they did.

If I were to ask you to put on the hat of advising the American president—ever since I've been in my post in the United States, I'm seeing a lot of political tension and polarization, sometimes a little bit of dysfunctionality. But, fundamentally, the system, I think, still works. I'm a big admirer of the United States, so, for me, I don't need to be convinced.

But if you were advising, in the light of all the theses that you have brought forward—and I congratulate you on them, by the way, because it's a very eloquent presentation—what would you be advising?

When I suggest that the United States needs to be too big to fail, we need to recognize that the way you get the Chinese to support your policies is that you need them to have skin in the game. You need it to be truly problematic for China if something happens to the U.S. economy. You don't want them diversifying away from the dollar. You want them putting more into the dollar.

You don't want them diversifying and not investing in American companies. You want them putting more into American companies. God forbid something goes wrong in the United States. The Chinese are the ones that have the most to lose. That's what you want. Politically, it's going to be difficult to get there. We are moving in the opposite direction. Understandably, the relationship is getting politicized. That's where you need to go.

The other thing you need to do is have more leverage by coordinating with likeminded friends. The United States has done this pretty effectively on Iran. The United States has gotten the Europeans and the Japanese sufficiently on board. It has taken a lot of time, and Lord knows it has given the Iranians all sorts of capacity to develop their nuclear energy program, but that meant that the Chinese were going to look really embarrassed by vetoing the sanctions procedure all by themselves.

On how many issues out there can you say the United States is coordinating effectively with likeminded states on China?

On the Dalai Lama—the United States should have a policy on the Dalai Lama. It should be the same policy as Europe and Japan. I don't actually care what it is. It can be more Germany's policy. It doesn't have to be America's policy. But don't allow the Chinese to leverage and play off one party against the other. You have a common policy.

On climate change, the United States made this incredible mistake of pretending that there was going to be a G2 agreement with China before Copenhagen [2009 United Nations Climate Change Summit].

There is no G2. What they should have done was coordinate with the Japanese and the Europeans on how they were going to approach China, so it would not have fallen apart; you wouldn't have allowed the Chinese to be in the driver's seat on that issue.

You need to have countries that actually share basic and fundamental values on these issues with the Americans to work together so that you actually have more leverage.

That's in the areas where the Chinese and Americans don't see eye to eye. In areas where the Americans and the Chinese do see eye to eye, then do everything you can to try facilitate that process.

On North Korea, the United States and the Chinese see eye to eye. The problem is, the Chinese are just in a very difficult position. The Americans and the South Koreans have said that the North Koreans sank this South Korean corvette, the Cheonan, which left 46 South Korean sailors dead. I've heard about some of the intelligence. It's very compelling to me. I think it's very clear that this was a North Korean act. The Chinese have come out and said that it's not yet clear to them that the North Koreans are responsible.

Yet I think the Chinese are doing us a favor here. I really do. What the Chinese are doing behind the scenes is creating a little bit of leverage for themselves with the North Koreans. They're saying, "You know what? We're still giving you a little bit of slack, but I swear, if you do one more thing here, if you continue with this, we're going to come down hard, with the Americans."

If they came out with the Americans to begin with, you don't have that stick. I think that's what they are doing here, because I know for a fact, after the last nuclear test, the Chinese are no friends of the North Koreans at this point. The North Koreans are simply a problem for a China that wants stability.

The fact that the North Koreans did what they did means that the South Koreans are now tacking on the security side directly to Washington. You're going to have joint military exercises. The Chinese don't want that. Hatoyama in Japan now has some justification for allowing the United States to keep their base in Okinawa. This is a guy with 18 percent approval ratings.

So this is all very bad for China. But it's a tough one. In this environment one thing we need to recognize is that after 18 months of all of this pain, everyone says there are all of these things that are happening now that are making it worse. They're connected.

These Thailand explosions are much worse because of what has happened in the last 18 months. That's why the monarchy doesn't have as much support. That's why the red shirts are out there in such force. That's why the people are supporting them, the urban poor, not just in the rural areas, because they have taken such hits over the last 18 months.

Social instability in Greece and Spain and Portugal, and going to be a lot worse, because of what has happened in the last 18 months. You mean to tell me that BP didn't cut more corners in the Gulf because they had to work a little harder to make their numbers? I suspect they did.

You are going to have more second-order crises after this unprecedented shock to the global economic system, the worst we have seen in decades. You have to expect that. It's all linked.

QUESTION: This so-called war between corporation and state that is occurring within the United States, this nation, in that the libertarians, conservatives, and some Republicans are warring against the government.

They're furious, they're angry, because they see more and more corporations they think that are being taken over by the state, and their fear is that this is an encroachment that will continue. That is creating a great deal of the toxic atmosphere.

I wonder what you think about that and where you see this going—the automobile industry, the health industry, the banks, TARP [Troubled Asset Relief Program], the monies that have been given to create jobs and take over a number of companies and so forth. It's creating a great deal of hatred and anger in this country.

IAN BREMMER: This book came out a little over a week ago. I've been making the rounds and I've been doing all of the shows—the whole political spectrum. I don't have an ideological axe here. I think that should be obvious to everyone in this audience. I'm a political scientist.

If we can get to the point where we actually understand what's going on, no matter where you are on the political spectrum, we will be in such a better place than we are today. So let's just start with that, and then you can ask me what my preferences are. But let's start with actual understanding.

I am amazed with how many times I have had to respond to "Obama is a socialist." My response is that we have been under-regulated for a long time. Self-regulation of banks didn't work very well.

By the way, the reason I call my book The End of the Free Market right at the beginning—last May, He Yafei, the vice foreign minister in China, wanted to exchange views with me here in New York, and so I met with him. We were sitting across the table from each other. The first thing he asked me: "So, Ian, now that the free market has failed, what do you think the role of the state in the economy should be?"

It's the same thing as saying Obama is a socialist. The free market has not failed. Greenspan failed. The SEC [Securities and Exchange Committee] failed. The credit ratings agency failed. There were a lot of referees that didn't have their eyes on the ball and there were a lot of executives with some dicey ethics that were doing some short-term stuff that was not in shareholder interest. That's not the failure of the free market.

We are now going to probably have the regulatory pendulum go too far in the other direction; the United States will look a little bit more like France. For some in the United States, particularly those in the Tea Party, that's anathema. But that's not socialism.

I have a lot of clients who are CEOs in the United States. CEOs in America don't like Obama. They don't have the same access they used to. They think labor is becoming too important and all the rest. But I always like to say, in historical context, if you look at the power that you, Mr. CEO, have in your corporate lobby over Democrats and Republicans in both houses of Congress, look at the orientation of the Supreme Court towards the private sector with recent rulings, it looks better for you guys than anywhere out there. And rule of law matters.

Obama was really upset about AIG. I remember this—$165 million in bonuses. He said he was outraged. Then he thought about it over the weekend. He came back out and the socialist Obama said that he actually was less outraged by these AIG bonuses than he was before, and the reason for that is because we have lawyers in this country; we have rule of law. You want to rip up those contracts? How many years do you want to be in court for?

This is not Argentina. It's not Venezuela. It's not Russia. It's not China. It's not North Korea. This is going to cost you. If you want to do stupid things that are against rule of law, it's going to cost you.

Obama decided he didn't want to do stupid. And God bless them, even Congress realized, Democrats and Republicans, that they didn't really want to do stupid either, even though the Republicans in Congress on AIG looked just as socialist as the Democrats in Congress. We ended up all getting a little bit of regulated free-market spirit here.

I think that people like Palin aren't actually stupid. I think they know what they're saying. I think they're doing it because it plays well politically. And that's unfortunate. But I don't actually think that the people that are saying this really believe it. I think Americans don't want to pay more taxes.

In Europe it has gotten so bad that they've finally gotten to the point that they recognize they need to do something serious. The Germans recognize that this is crunch time and they have to put this cash up, even if it hurts Merkel politically. The Greeks and the Spaniards and the Portuguese recognize that they are going to have to take 10 percent GDP hits. This is serious austerity time. That's the good news.

The bad news is it may be too late.

The good news in America is that we have a lot more rope to hang ourselves with. The bad news is, we do seem intent on using it.

Starting in the 1970s, it seems as if the Arabs, who began nationalizing all their oil, were going to take over the world. Now we see that's not the case. Dubai is having problems and so on. Then in the 1980s it was the Japanese who were going to take over the world. They certainly took over Rockefeller Center. As you mentioned, now—

That doesn't count?

Well, they've given it up, actually. Now, as you said, they are a basket case.

Now, you are talking about the BRICs [Brazil, Russia, India, China], particularly China and India. Everybody says, if you just project laterally their growth rates, they are going to take over the world, too.

How can we be sure that what happened with the Arabs and what happened with the Japanese will not also happen to these emerging markets that seem to be on the rise right now?

IAN BREMMER: That's a great question. I'm glad that I have a chance to address that.

But let me first beat on Jim O'Neill from Goldman Sachs, because I think the BRICs are a pernicious concept. We've been around for a long time now, and we have these concepts of the way we think about economies and money.

We have emerging markets and we have developed states. There are a lot of developed states that look a lot less emerged today than emerging markets. Yet, because of these concepts, these are the buckets that people invest money in, that our pensions invest money in, the developed or the emerging. That's a problem.

The BRICs—you have these countries that are lumped together, Brazil and India becoming increasingly transparent and oriented towards the free market and multinational investment, and Russia and China that aren't.

I would break them apart. We should stop using the term. That's just my little tweak. But he makes a lot of money on it, so he shouldn't stop. If I were advising Jim, I would say, "You go with those BRICs." But for those of us who have money to invest that is our own, "You stop. Don't listen to him."

There is a lot of relativism going on for a Council on ethics here, I know. But you have to start someplace.

Your question: Doesn't it happen to China? Isn't China a bubble, too?

Yes, I think China is a bubble. If you read the end of my book, I ultimately think that China is probably a bubble. In five and ten years, the demographics start getting considerably worse than India.

They are going to be fighting tooth and nail with the Indians over scarce commodities, and that's going to really hurt them. Their ability to innovate themselves, when Western multinationals don't want to cooperate, is going to be constrained. And the enormous devastation on the environmental front, especially in terms of access to water, as well as things like land degradation and air quality—these are all serious problems.

But let us not compare China to Japan. China has 1.3 billion people, and most of them are making less than $3,000 a year. As they move up to the $5,000 and $6,000, as you see in places like Shanghai, they start spending like they're making $5,000 and $6,000. That domestic consumption will pick up.

If you had asked me 24 months ago, before the financial crisis, I might have said that within five years maybe the Chinese bubble will burst. But with what has happened in the last 18 months, nothing has given the Chinese bubble a longer lease on life than the fact that they can now point the finger very convincingly at the West for having gotten them in all of this trouble.

I think that for five years, absolute minimum, ten years, it is much more likely that we are going to continue to see very strong capacity and even with inefficiencies of Chinese economic growth, because of the extraordinary capacity of them to simply out-produce, with all this labor, all this new infrastructure and greenfield sites and the rest.

Jim Chanos goes on CNBC and says the China bubble—the real estate is going to fall apart. He's going to short them within a day. The Klieg lights are on bright on Jim Chanos. He's just wrong. He's not even a little wrong. He's ridiculously wrong.

There probably is going to be a correction of real estate, particularly high-end in some of the main cities. That's not a bubble for the Chinese economy. That's not the end of the story for the average Chinese leader and the Communist Party.

I think the issue is that if we are talking about the economy, there aren't many people out there that are interested in what happens in 20 years. People want to know what's going to happen in two years, in four years, in five years, maybe, God willing, ten.

What I'm suggesting is that for the next five to ten years, this isn't going to go away. This is just starting. This is the new paradigm. And we're going to have to come to grips with that.

The question will be, through that challenge, will we be able—and the Europeans and the Japanese and others—to actually stay to our core principles or will we start to see the kind of polarity that could really lead this country in a very difficult direction?

If you ask me who ultimately wins the war between states and corporations, I think the corporations will, because they're more flexible and they're more efficient.

State capitalism is a statist ideology, and I think China is ultimately a bubble. But it's not a 90-10 call. I would make the bet, but I wish it was a safer bet. It's not as safe a bet as it should be, even with the extraordinary incumbency advantages the United States has—size of economy, scale of research and development dollars, rule of law, quality of educational institutions. These are major benefits of incumbency for the United States. Yet I don't feel comfortable that it's a safe bet. I think it's merely a good bet. That's not where we want to be.

QUESTION: I was in the import business and traveled extensively in Southeast Asia. I was in China in 1971-72, when Kissinger and Nixon opened up China, and I was one of the first Americans there. I am very optimistic about China, much more than many Americans.

Many of the children of the politburo went to universities in the United States. They still come here. They know the difference of the children who are now running the major corporations. China is the "Middle Kingdom." People came to them in olden times, they do it today, and they are continuing to do so.

I think that as time progresses and many of the children who have studied overseas come back to China, China will be more democratic.

I would not call it today a communist country. I would call it a socialistic/capitalistic dictatorship by the party. Their income of $3,000 is not the equivalent of $3,000 in the States. It's probably the equivalent of someone making $10,000, $12,000 in the States.

The overall situation, however, is that I do not think that the United States government and legislature, when they get on the bandwagon beating up China or some of the other countries, are realistic about the competition that China is giving us now and will give us in the future. It's a matter of educating the American people, which is not really happening through either the previous administration or this one.

You made some really good points there. I certainly agree with you that China is not communist. We have declared three obituaries in the last decades. We declared that communism was dead. We declared that authoritarianism was dead in The End of History and the Last Man by Francis Fukuyama. Then we declared that the state was dead and multinational corporations were rising—all those folks I talked about at the beginning.

We got one of the three obituaries right. Communism is dead. It's not coming back. If this crisis couldn't bring communism back, it ain't happening.

But the state is very much alive, much to the joy of political scientists everywhere. And so is authoritarianism. China is the world's finest example of what the state and authoritarianism can do when they hook up. And that's where we are.

I agree with you wholeheartedly that Americans are not yet fully cognizant of the level of competition that they are going to be facing domestically within China. But I do think they are very cognizant of the lack of equality in the playing field.

Cyber-security issues—when you have industrial espionage that is directed by a state against hundreds of multinational corporations based in the United States, that is effectively an act of war. Just two days ago, you had a four-star general in the U.S. armed forces raised up to be in charge of cyber-security within the Pentagon as a national security issue. It's going to get funding and it's going to be treated as a matter of national defense. The United States government is going to work closely with technology companies. They are going to be more aligned with the national security industry. We are going to see huge fights on this.

I'm not expecting conventional war between the United States and China. But I see the national security issues becoming very, very serious, and they should become serious.

There's no question, China is becoming more—"democratic" as in the Western and loaded term—the Chinese system is becoming much more transparent, and there is much more say of the Chinese people in what happens in China. No question. You look at the way the Chinese government handled SARS. No one had any clue within months of what was going on.

Look at the way they handled the earthquake
. You had the prime minister digging in rubble within days, because the Chinese people were aware of what was going on and they demanded accountability for the fact that these schools had shoddy construction and the Communist Party installation buildings did not, and they stood up.

But the fact that the Chinese people are capable of making demands does not mean that what they are demanding is to become a liberal democratic society in the eyes of the West. I think that last point is one we should be very careful about.

By the way, I would say that what American people are demanding, if they were really given the vote, is not necessarily, increasingly, a liberal democratic government along the lines that we typically value in the West. The more the challenges grow, the less we are going to be able to say that.

It seems to me that the model that is currently working in China has a vested interest in expanding or exporting to other nations. To what extent do you think they are actively doing that today?

I don't think they are exporting the model. The model is about China. One of the interesting things about state capitalism is that the free-market system is one that elites all over the world can all share. Governments can all say, "It works for us. Bigger market space, we all take advantage of it." What state capitalism does when it gets larger and more powerful is it creates client-state relationships.

The Chinese go into a commodities-producing country. They don't export their model. What they do is, they create a cozy relationship with the government, they tie up commodities for a long time, and they give the government what they need to ensure that that government can stay in place and other things that they want, so they will like the Chinese, and the Chinese exploit those resources. This is much more colonialism, in reality, which the West has great experience with historically.

The difference in the case of China is that the Chinese need to get resources. They export capital, but they also export labor. That is a problem for them.

If you are in Kenya and you are seeing the Chinese build port facilities and highways, and you are seeing these Chinese workers come in, building their dormitories and their restaurants, you increasingly are very upset. I've said this once before in this forum. The one way we can tell if the Chinese are becoming a superpower in Africa is when their embassies start getting bombed. That hasn't happened yet, but it will.

Keep in mind that they are not as good at this as the West was, because they have to learn so quickly. Their institutions, their corporations are becoming very multinational almost overnight, where American corporations and European corporations have had decades to learn more of what is more sustainable for them over the long term. As a consequence, they are likely to get their fingers singed on many occasions.

QUESTION: When do you expect that the Chinese will revalue the RMB?

IAN BREMMER: I think that with the European crisis such as it is, it's a little less likely to happen in the near future. It needs to happen by the G20 at the end of June [2010], or there's going to be rising tensions specifically around that, and they are likely to be declared a currency manipulator by the Americans at that point. We are in an election year.

When they do move, this is not a 10 percent revalue. Paul Krugman came out and said 25 percent. He said if they don't do 25 percent, slap 25 percent tariffs on them.

The problem with Paul Krugman saying that is that most American congressmen don't actually understand what the economic implications are. So Krugman gave them the moral capacity to come out and say, "Twenty-five percent or else." He empowered Schumer in a way that he should never be empowered—and others. I'm playing to a New York crowd.

In an election year, this relationship is going to get politicized. If they move 3 percent, that's not going to do it. There are so many issues that are coming that are structural, that are problematic.

The way I would end this is by just pointing out one thing. Back in 2008, you could vote for Obama or McCain and not know or care what their views were on China. That's not going to happen again. This relationship is going to become fundamentally politicized.

It is the most important economic relationship in the world. I'm a political scientist. I know what happens when relationships get politicized—personal relationships, family relationships, relationships between companies, employees, relationships between countries. It's not going to go as smoothly. And I think that's what we are looking at. Currency is a big piece of it but it's not even close to the only piece.

I hope you enjoyed this. I thank you all very much.

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