by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Joshua Kurlantzick explains in the latest issue of Bloomberg Businessweek why predictions of major positive changes within emerging economies are failing to materialize.
Over the past year leadership changes in many of the world’s biggest emerging markets, such as China, India, Indonesia, and Thailand, have created hopes of dramatic economic liberalization among citizens of those countries and foreign investors. Media reports cast the new men in charge of the two most populous countries—Indian Prime Minister Narendra Modi and Chinese President Xi Jinping—as once-in-a-generation reformers who could streamline their lumbering economies by slashing state enterprises and reducing waste.
These hopes are likely to be dashed. Modi, Xi, and every other supposedly visionary new leader across the developing world won’t dislodge state capitalism or seriously liberalize their economies. Instead, Leviathan will stay in control of the economy, eventually depressing growth and undermining the entire world’s chance to boom.
Although emerging markets have posted impressive growth rates over the past decade, weathering the global slowdown of the late 2000s better than most developed nations, high-growth nations such as Brazil, China, India, Indonesia, and Thailand have rarely adhered to a strict free-market script. They all maintain extensive state control of many parts of their economies. In China, state-owned enterprises (SOEs) make up almost all of the 20 biggest companies by valuation; in Brazil, India, Indonesia, and Thailand, the government still controls or has vast influence over many of the largest companies.
In the past decade state companies in many of these nations have become more entrenched and have learned how to lobby powerful officials—a relatively new phenomenon in places like China or Indonesia. For example, as Xi began his transition to leadership in 2012 and early 2013 and made clear he wanted to pursue economic reforms, state-owned enterprises, such as China Mobile (CHL), pushed back hard, pressing their case heavily with government officials, according to several Chinese academics. Some SOE bosses argued that their companies, though propped up with loans, were even more profitable than they had been a decade ago; in the first half of 2013 the largest state companies saw profits increase more than 18 percent from the year before, a very impressive figure. Other executives stressed that in a region where China faces increasingly hostile neighbors, state companies were critical to maintaining government dominance of important resources and of industries essential to national security.
It seems cronyism can flourish in any type of economy.