October 1, 2008

Authoritarian capitalism and sovereign economic actors

Authoritarian capitalists, especially Russia, spotted a political vacuum – that there is no political control over economic actors to speak of – and decided to move into the vacant space.

Authoritarian capitalists, especially Russia, spotted a political vacuum – that there is no political control over economic actors to speak of – and decided to move into the vacant space.


György Schöpflin

Authoritarian capitalism and sovereign economic actors

Authoritarian capitalists, especially Russia, spotted a political vacuum – that there is no political control over economic actors to speak of – and decided to move into the vacant space.

There is a long accepted proposition in political science that whereas a dictatorship can coexist with markets, a market is a necessary condition for democracy. What this proposition does not analyse, though, is the nature and quality of these phenomena – what do we mean by authoritarianism and how should our social and political life be determined by market actors? Globalisation has intensified this question, in that supra-state market actors can affect democratic politics in virtually any state in the world; multinationals do exactly this. A further turn of the screw can be seen in the emergence of consensual authoritarianism with a stronger legitimacy than that of traditional dictatorships and another in the rise of systems that simulate democracy and markets. To these can be added the spread of the resource curse which comes as a direct result of globalisation; namely the near total freedom of capital movements and a massive growth in demand for raw materials, especially energy carriers, thanks above all to the transformation of China and India.
allows them to play their dual role of representing authoritarian modes and using the secure institutions of democracy to this end. The rule of law is the most important, as it permits these actors to find a safe haven for their funds and also to build political leverage in the democratic states concerned.
As far as these latter see it, at any rate for the time being, ‘money has no odour’ (pecunia non olet) and an investment is an investment regardless of where it comes from. Ethical business practices, such as fines for corrupt practices abroad, may be imposed on all democratic state actors, but the activities of authoritarians are not subject to the same scrutiny. Similarly, any Western economic actor which looks like it is constructing a monopoly and using it to distort the market is subjected to legal sanctions; authoritarian economic-political actors are not. A good illustration is the decade-long campaign waged by the EU against Microsoft and its restrictive practices. Gazprom has not been targeted in the same way.
A direct consequence of the resource curse, then, is that in the states affected by it, society can be bribed to stay outside politics while at the same time the large sums of money derived from the sales of raw materials can be accumulated in sovereign wealth funds that are outside any control but the elite’s. These funds can then be used elsewhere, in market democracies, for example, to achieve political objectives. By this complex mechanism, politics has been reintroduced into global market relations, but in a way that represents a serious threat to democracy. What we are seeing is the rise of sovereign economic actors that mimic some of the qualities of multinationals, but simultaneously retain the political and legal protection enjoyed by state sovereignty.
The entire problem is exacerbated by the ideologues of globalisation who cannot or will not see the problem of the entry of non-democratic actors into the global system. They assume that all actors in global markets are economic and that they are motivated by purely economic aims; the evidence that authoritarian states with the necessary resources are active for political purposes is, it seems, not understood or else not believed or ignored or dismissed. This gives the authoritarian states a free ride and
Sometimes the argument is made that sovereign economic actors are basically no different from Western multinationals, that they are exploiting their economic power in much the same fashion as the multinationals, but do so not primarily in the interests of profit-seeking shareholders but the citizens of the state concerned. Even if there is an overlap between some state economic actors and multinationals – which there is – they are still qualitatively different from one another, in part because their aims are different (political rather than economic) and also because state economic actors are not in any way open to risk. True, multinationals seldom go bankrupt, but their assets are bought and sold while those of sovereign economic actors are, by definition, not exposed to risk and their assets are protected by the state in which they have their origins. Thus both Rosneft and Gazprom have very high debt-to-earnings ratios – 106 and 70 respectively – but no one seriously expects them to go belly up. They will be bailed out by the Russian state should the need arise.
In the 1980s, it became widely accepted that the private sector was inherently more efficient than the state and denationalisation – the privatisation of state assets – followed. This proposition is largely true, though not invariably because cultural factors also play a role, some states being more efficient than others. Privatisation was accompanied by a global opening of markets, permitting in particular the international free flow of capital and creating an opportunity. This was initially for Western economic actors, but by 2000 non-Western actors had entered the scene, many of them closely tied to authoritarian states. The other enabling factor favouring state economic actors has been the very high price of certain strategic raw materials which, as noted, has also been caused by globalisation. Globalisation’s chickens have come home to roost as vultures.
The dominant belief system, especially in Anglo-Saxon capitalism but to a greater or lesser degree present throughout the democratic West, is that the private sector is a more efficient user of scarce economic resources than the state. In essence, the post-1945 experiment in extensive state provision was thought to have produced too much inefficiency and that only private sector skills and market discipline could correct this. There was a fair measure of truth in this, though there was always a problem with the process of privatising natural monopolies. But when the privatisation revolution was launched in the 1980s, no one dreamt that state economic actors from outside the West, particularly those flush with money from the raw materials market, would ever return as investors. Consequently, no thought was ever given to elaborating a code of conduct or constructing a legal regime that would ensure a degree of protection from sovereign economic actors and their potential for exploiting their economic power.
The power linkage is at the heart of this. A sovereign economic actor from a democratic country, like Norway say, operates in a reasonably transparent fashion and is, presumably, ready to accept both political and economic constraints wherever it operates, reflecting the democratic assumptions of its state of origin. In the case of a sovereign economic actor from an authoritarian state – and it may be from a consensual authoritarian state meaning that the authoritarian government can act more aggressively than a traditional authoritarian system – the chances are high that the authoritarian assumptions of the state of origin will be transmitted to the democratic economic space abroad in which it is seeking to operate.
Let us be realistic. Western states are not Platonic actors either and they are ready to use their political weight to produce an advantage, the Anglo-Saxons included. Think of the Dubai Ports World investment bid for various port facilities in the US (in 2006) which was frustrated by political pressure or the corrupt practices of British arms salesmen in Saudi Arabia. From this perspective, sovereign economic actors are similarly more up front about their objectives; except that in the final analysis, Western states do respect some limits and an attenuated, mediated political control over their activities, which is completely absent in authoritarian states, does exist. Besides, the activities of
Western states in this murky area remain just about within economics and even the committed free market globalisers are a bit shamefaced about what goes on, unlike the authoritarians.
The jury is still out as to whether all authoritarian capitalist systems are alike. Not least because this entire phenomenon is still at an early stage of evolution and its outlines can only just be discerned; new sovereign economic actors could change direction and operate differently in different political-economic environments. What is clear, however, is that sovereign economic actors will only abide by the rules to the extent that they are forced to do so and they will explore every loophole, to some degree following the example of multinationals. Certainly they will also exercise undue pressure on weak, unprotected governments in order to widen their opportunities.
It is important to distinguish these new sovereign economic actors from an earlier generation of authoritarian capitalists, like Taiwan, South Korea and Chile. All of these squeezed consumption by suppressing society – quite cruelly – to launch a process of capital accumulation, with quite a degree of help from the US in the form of inward investment. But these states had no ambition to project their systems beyond their frontiers. In addition, these states accepted, however reluctantly, that relatively free economic activity would allow a middle class to emerge and eventually demand a voice in politics. Arguably China might have been moving vaguely in this direction in the 1980s, but Tiananmen put paid to that.
What is striking about the new generation of authoritarian capitalists is that they have no desire to see the emergence of an autonomous middle stratum with political aims; they are actively engaged in global processes that may result in neglecting the home market and are consistent in ensuring that political power will always prevail over economic interest. It is noteworthy that this applies in their domestic dimension as well, in that the distribution of wealth is arranged by opaque political rules and criteria – there is very little trickle down or reinvestment at home and even this includes upgrading the infrastructure that feeds the raw materials boom.
Russia as a case study
It is worth looking in some detail at the case of Russia because this example illustrates the phenomenon of authoritarian capitalism most vividly. In sum, Russia has become the beneficiary of a huge financial windfall with the surge in the cost of energy carriers and, under Putin, has opted to use it for clear-cut political objectives – primarily to reassert its power positions, to extend them where possible and to pursue revanchism for the humiliation that Russia suffered in the aftermath of the collapse of the Soviet Union. It is worth noting that while the rise in the price of energy was a necessary condition for this shift, it was not a sufficient one. Russia also needed to import western technological and management skills – oil resources are extracted much more efficiently now than in Soviet times. And it also required a political leadership and a new elite, the siloviki, with the will to launch this new strategy.
The need for up-to-date technology has created a reverse opportunity structure. Western investors have acquired a presence in Russia but, unlike in the West, the Russian fiscal and economic environment has become more rather than less opaque; indeed, Western investors are regarded by Moscow as enjoying excessive power over Russian resources. This is quite logical – as Moscow sees its raw material assets as a source of power, foreign shareholder ownership is understood as a threat.
These Western investors have seen this power clawed back by the abuse of legal instruments (such as environmental regulations) and sometimes by straightforward threats – sell up or else. So we can see that a key quality of authoritarian capitalism is that it does not tolerate reciprocity. There is one law for inward investors – that determined by supreme political power – and another for Russian political activity in the West, which demands the full openness of market conditions there for Russia’s outward investment. Russian spokesmen have repeatedly insisted that their investments are like anyone else’s, obeying the laws of the market; this is not actually true.
Still, the opportunities for Russia as an authoritarian capitalist actor in the well-established rule of law states of the West are considerable, above all because Western political forces have been very slow in recognising or accepting the political aims of Russian economic-political activity. Too many Western governments and politicians are still living in the world of the 1990s, when the dream of integrating Russia into the Washington consensus had some reality. These days are over and, under Putin, Russia has made no secret of this; the only surprise is how long so many in the West have held onto their illusions. The positive reception given to Putin’s anointed successor, Medvedev, reflects the persistence of these illusions. There is somehow a strong normative belief that Russia is, at heart, looking to find a way to become a Western democracy, despite all the evidence pointing in the opposite direction.
What we have witnessed in the second half of the current decade is the steady expansion of Russian economic power spearheaded by the energy industry, which basically means Gazprom. The principal instrument used by Russia here has been the appeal to Western acquisitiveness. Just as Lenin is said to have remarked that capitalists will sell you the rope by which they will be hanged so Western investors, seeing no political dimension to Russian economic activity, have queued up to take Moscow’s money. The most egregious case is evidently that of Gerhard Schroder, who moved from being Chancellor of Germany to a senior position in Gazprom in one easy step. Paralleling this, German industry has been salivating at the chance to build the Nord Stream pipeline under the Baltic Sea, seemingly oblivious to the strategic implications with respect to the Baltic states and Poland, not to mention the environmental dangers.
Juicy contracts trump solidarity and even a strategic interest – that of loyalty towards Germany’s EU partners. The Gazprom-German energy relationship ties each of them to the other and self-evidently restricts the German government’s room for manoeuvre, as has been clear from Angela Merkel’s inability to change the terms of Gazprom’s stranglehold. Germany is not alone, though its size and prestige mean that its intimacy with Gazprom sets a rather bad example. At the same time, this serves to encourage Russia, as a message to the effect that there really is no limit to Western investors’ greed.
The state behind authoritarian capitalism functions in ways that the West regards as corrupt. Because political power decides what the rules are – the law is subordinated to power – the rules can readily be changed to the advantage of those who have power. In the case of Russia, the arrest and imprisonment of Khodorkovsky is a clear illustration. What, then, are the other instruments by which authoritarian capitalism tries to extend its reach? Using human greed offers an obvious opportunity, especially in the free-for-all atmosphere of globalisation and the boom of the last decade. But the list does not stop there. Where the rule of law and transparency are strongly established, bribes do not work well and the scandals that ensue can make the attempt less than worthwhile. But in states where strict compliance with legal regulation is incomplete, indirect forms of corruption can be successful. Most vulnerable are the former communist states, where the rule of law is not trusted and the habits of mind which see the law as a political device still live on. Here, Russia has another advantage. The networks of influence from the communist period may have been neglected during the Yeltsin period, but are currently being reactivated.
At the heart of the vision of the sovereign economic actor is the conversion of economic power into political power by the mechanism of predatory investment. The political aims of the state concerned override other considerations, including profitability, the interests of shareholders, the values of the state in which the predatory investment is made and, by definition, the very idea of stakeholding. The deployment of this political power can take many forms, including the denial of contracts to suppliers who are disliked by the political masters of the sovereign economic actor or the direct denial of supplies to a targeted state (e.g. Ukraine, Lithuania and Georgia by Russia). If another economic actor is looking to acquire an asset that cuts across the strategic aims of the sovereign economic actor, then resistance is punished. Down the line, one can foresee a predatory investor deliberately killing off competition, making it quite conceivable that Gazprom, say, could intervene in the development of renewable energy sources if ever these looked like supplying a sizeable share of the market. Beyond that, a sovereign economic actor could readily purchase media outlets to ensure favourable publicity for itself or float political parties to represent its interests. The building of networks of influence, through bribery and blackmail, could function in much the same way as it did during the Soviet period using the methods developed by the KGB.
Basically, authoritarian capitalists, especially Russia, spotted a political vacuum – that there is no political control over economic actors to speak of – and decided to move into the vacant space. The overlap between liberal and Marxist ideology, with globalisers insisting that that no political control was necessary because the market could solve any problem that might arise, enhanced this. The West should rapidly construct the necessary instruments of control over both types of economic actor, multinationals as well as sovereign econom ic actors, but re-establishing control over just the multinationals would in any case set a useful precedent and legitimate action targeted at authoritarian capitalists. Near complete economic freedom has been with us for over two decades and it is clear enough that it creates as many problems as it solves, above all in the damage that is being done to democratic norms and democracy itself. It is time re-examine the assumptions that have allowed this freedom to damage democracy and to take the necessary steps to curb the sovereign economic actors and their parasitical growth spawned by the globalised market.

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