Democracies vs. Autocracies: State Capitalism's Uncertain Future

In this very globalized world, governments and businesses must grapple with a variety of shifts in markets. Which government system is ultimately best equipped to deal with such challenges?

Editor’s Note: The following is an excerpt from Scott MacDonald and Jonathan Lemco’s new book State Capitalism’s Uncertain Future. It is republished with permission.

For economic policymakers, business managers, and citizens, the shifts in the global system since 2008, in particular the rivalry between two broadly defined political-economic models, are impinging on day-to-day reality. It becomes even more daunting when other factors are added: Islamic terrorism, continent-crossing disease like Ebola, longstanding border disputes, a surplus of available weapons in places like Africa, and climate change, with major swings in the weather. For the average citizen, this translates into employment, health, and lifestyle issues. Is public transportation safe? Does a political struggle elsewhere end up being fought in their neighborhood shopping mall? Is it safe to fly during the holidays, or is a bomb likely to go off? Do pollution problems elsewhere end up affecting the local weather or result in flooding of coastal areas? Does another government’s support for the local state-owned company translate into the loss of a job elsewhere by someone working for a private sector company? As the public grapples with these issues, so do economic policymakers, seeking to find solutions. In turn, finding solutions has its own set of political considerations that can determine the economic outcome. When people are angry, they are more likely to vote against those sitting in office.

For many large multinational companies that have benefited from globalization, increasing revenues and profits have come hand-in-hand with greater risk factors. Many management teams in the past have opted to ignore political risks or not put their companies into those markets. In this they have either exposed their companies to greater risk or missed substantial opportunities for growth—which means the generation of jobs. However, being in business today has exposed companies to wars, expropriation, and abrogation of contractual obligations, including debt repayment. We must add that this is not just a problem for private sector companies, but hits at many state-owned companies active in foreign markets.

Major private sector companies must enhance their ability to identify political risk. This entails a commitment to having the right people or groups in place to screen and interpret considerable data and correctly measure the nature of particular geopolitical risks. This is not just a matter of understanding politics and economics, but also of being able to assess the strategic challenge of a competitive business coming from an autocratic state capitalist company. Questions that need to be answered include what level of support is given to the company by its government, what access to credit the company has, including the ability to tap government banks and sovereign wealth funds, and how competitive the products are that such companies offer. This takes a combination of political science, economics, and business acumen, particularly credit analysis. As for the last, data necessary includes how revenues are generated, how debt is managed, and how management is selected. Equally significant is how transparent the company is in its financial statements and how willing it is to disclose that data. Investing in foreign markets therefore embraces an approach of the macroeconomic, political, and business environments. For doing business in autocratic states, the added risk is that the rule of law can be selective and regulatory enforcement targeted.

Companies conducting business overseas or competing with foreign companies in their own markets face a world driven by tectonic changes. Russia’s actions against Ukraine leap out in this regard, considering the adoption of sanctions by both sides against businesses. The major change was that Russia pushed back against what it perceived as the relentless Western advance in its traditional sphere of influence. This was played out between European, American, Ukrainian, and Russian governments, but as the Eastern Crisis became an extended affair, it was businesses in all of these countries that ended up on the firing line: losing sales and being forced to close down operations and seek new customers to make up for the loss of old business. Also affected by these measures are people: the workers who depend on salaries to feed their families and pay their rent or mortgages. The risk is that while policymakers wrestle, it is the citizens that are hurt.