[State capitalism] Is it a rival to market capitalism? And how does it affect the natural resources industries? – by Keith Campbell (MiningWeekly.com – March 30, 2012)

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Since the start of the current global economic crisis in 2008, there has been renewed interest in the concept of ‘State capitalism’, as distinct from ‘market capitalism’. (The term ‘liberal capitalism’ is shorthand for ‘liberal democracy plus market capitalism’.)
 
This interest is centred on China more than any other country, in part because of the country’s ability (so far) to ride out the crisis, in part because of the key role it has played in keeping the global economy running while the developed West has been stagnating and in part because China is, unlike India or Brazil or South Korea, not a democracy. This last factor creates the impression of a ‘Chinese model’ of autocracy plus State capitalism that can be compared and contrasted with the ‘Western model’ of liberal capitalism.
 
There has been considerable debate about the rival merits of these ‘models’ in recent times. Thus, renowned British historian Niall Ferguson, who teaches at Harvard University, in the US, had a recent article on State capitalism in the US academic journal Foreign Policy. In late January, The Economist, of London, had a cover and special report devoted to State capitalism. The topic has also been addressed in the past couple of months by The Wall Street Journal and Bloomberg Businessweek. And these are only some, albeit prominent, examples.
 
Definitions
 
However, what is meant by State capitalism?
 
“State capitalism is the situation where the State tries to run a business on a commercial basis,” defines Econometrix director and chief economist Azar Jammine. “China is regarded as the main example.” Ferguson, in his article, quoted (without agreeing with) global political risk consultancy Eurasia Group president Ian Bremmer, who wrote that State capitalism saw “governments use various kinds of State-owned companies to manage the exploi- tation of resources that they consider the State’s crown jewels and to create and maintain large numbers of jobs”.
 
The Economist says: “State capitalism . . . tries to meld the powers of the State with the powers of capitalism. It depends on government to pick winners and promote economic growth. But it also uses tools such as listing State-owned companies on the stockmarket and embracing globalisation.”
 
One thing State capitalism is not: it is not a synonym for resource nationalism. Resource nationalism has been defined as the control, by the country in whose territory they are located, of in-the-ground (including under- the-seabed) resources and the means of extracting and refining them. (See Mining Weekly January 26, 2007.) State capitalism and resources nationalism are thus very different things.
 
Another thing that State capitalism is not: it is not new. The Economist cites democratic Japan in the 1950s and Imperial Germany in the 1870s as previous cases, although “never before has it operated on such a scale and with such sophisticated tools”.
 
State Capitalism and Natural Resources

 
State-owned companies dominate the global hydrocarbons sector. National oil companies (NOCs), as they are referred to, hold a staggering 77% of the world’s oil reserves.
 
The biggest oil company in the world is Saudi Arabia’s Saudi Aramco, which has 280-million barrels of proven reserves and has a production capacity of 12.5-million barrels per day (although it usually keeps its production at lower levels, partly to preserve reserves and partly for politico-economic reasons). From second to tenth place (in terms or production), the remaining top ten oil com- panies are the National Iranian Oil Company, Petroleos Mexi- canos (better known as Pemex), the Iraq National Oil Company, Exxon Mobil, BP, the China National Petroleum Corporation (which has a publicly listed sub-sidiary called PetroChina), the Abu Dhabi National Oil Company, the Kuwait Petroleum Corporation and Petroleos de Venezuela (known as PDVSA). (This list was compiled by Forbes magazine in 2010.) Of these companies, only two, Exxon Mobil and BP, are not State-owned.
 
In the mining sector, however, the picture is very different. The world’s top three miners are all private-sector companies – BHP Billiton, Vale and Rio Tinto. While the number four com- pany, China Shenhua, is a sub- sidiary of the State-owned Shenhua Group, its market capitalisation in 2010 was half that of Rio Tinto, reported PricewaterhouseCoopers in its Mine 2011 report. Fifth place was held by Xstrata, sixth by Anglo American, seventh by FreeportMcMoRan, eighth by Barrick Gold, ninth by Potash Corporation and tenth by Coal India. Of these, only Coal India is State-owned.
 
Of course, China as a country has very significant mineral and metal reserves. In 2008, according to thebusinessofmining.com, its share of global production was 37% for iron-ore, 39% for coal, 16% for copper and 97% for rare- earth minerals. In 2009, the country accounted for 6% of copper, 12% of gold and 25% of zinc production. But this pro- duction is spread across some 200 000 mining companies, most of them tiny. However, a small number of major mining com-panies have emerged, with the big three being China Shenhua, the Aluminium Corporation of China (usually known as Chinalco) and China Coal Energy. All are wholly or partly State-owned.
 
Thus, State capitalism is huge in the global oil and gas industry, but of much less significance in the mining sector. However, there is an important qualification to the latter observation. Chinese State capitalism is characterised by State-owned central holding agency, the State-Owned Assets Supervision and Administration Commission, which controls groups of vertically integrated companies (although this control is often, in practice, loose). Because they are vertically integrated, many of these companies, although their core business is not mining, are nevertheless involved in mining (to provide raw materials for their core operations or for energy to power these core operations).
 
Moreover, with China’s demand for almost all types of mineral, metal and hydrocarbon inputs now exceeding its domestic production, many State-owned enterprises are looking abroad for these resources. In this, they are being supported by the Chinese government, which is particularly uneasy about the country’s dependence, since 1993, on imported oil.
 
State-owned companies have accounted for 80% of Chinese foreign direct investment, supported by soft loans from State banks. The country’s oil com- panies have been especially active, and deals exchanging infrastructure for oil have become a common business tool for them – and for other Chinese State-owned companies seeking access to other commodities. This, of course, puts private-sector resource companies from other countries at a serious disadvantage.
 
State Capitalist South Africa

 
South Africa is a long-standing practitioner of State capitalism. The great bulk of key infrastructure, whether railways, ports, airports, electricity generation and transmission, water and sewage and broadcasting systems, is in the hands of wholly or predominantly State-owned companies. Moreover, the State is the biggest shareholder in national tele- communications giant Telkom with a 39.76% share, with the next biggest shareholder being the Public Investment Corporation – which manages public-sector pension, provident, social security, development and guardian funds – with 9.31%; the biggest private- sector shareholder is Allan Gray Investment Council, with 8.82%. So, although Telkom is not, technically, State-owned, it is certainly State-dominated.

For the rest of this article, please go to the MiningWeekly website: http://www.miningweekly.com/article/is-it-a-rival-to-market-capitalism-and-how-does-it-affect-the-natural-resources-industries-2012-03-30

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