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If State Capitalism Is So Good, Why Are Russian And Chinese Entrepreneurs Fleeing?

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Image by AFP via @daylife

State capitalism was touted by Lenin as a positive step on the road to socialism. By state capitalism, Lenin meant a “commanding heights” of large businesses and trusts controlled by a state that served the interests of the working class.

Lenin’s transitory state capitalism of the 1920s was replaced by Stalin’s command economy. Postwar France’s dirigisme and Japan’s industrial policy were both failed experiments with state capitalism, but it is alive and, some think, well in China, Russia, Brazil, and many other countries.

I spent four days in Moscow last week, attending a conference on the Gulag system and renewing old acquaintances. On my last visit three years ago, I encountered mixed opinions on Vladimir Putin. He had some strong defenders and few vehement opponents.  This time, the common response to Putin’s return to the Presidency was: “Why do we need that guy back?”

Russian entrepreneurs understand that another six or even twelve years of Putin means more of the same state capitalism, which they see as unbridled corruption, cronyism, and extreme uncertainty with regard to property rights.

My colleagues told me that Russia’s successful businessmen were all looking for ways to depart the country and take as much of their money with them as possible. Many of them already have shipped their families to the United States, Germany, or other safe havens. Berlin alone hosts a couple of hundred thousand Russians hoping for better times in their homeland.

Russia’s state capitalism cannot keep Russian entrepreneurs home. Their valuable talents and resources are fleeing elsewhere.

China’s state capitalism is touted as the model to replace “failed” American capitalism. Its boosters claim it has brought high growth and unlimited opportunities to the Chinese business class. Yet a recent survey of China’s millionaires shows that more than half are considering leaving the country or have already taken steps to do so. They claim to want better living conditions abroad, but their real reason is the extreme risks of doing business in China.

If state capitalism is so great, why do its best entrepreneurs want to leave?

Chinese and Russian businessmen understand, better than any outsider, two facts of life under state capitalism.

First, the quickest path to wealth is through state and party connections. The state gives out licenses, rights of way, and clears away potential rivals. But what the state gives, the state can take away.  Your benefactor may lose his position or may move his sponsorship to a rival. The license on which your business depends may go to someone who offers a higher bribe.  Your success always hinges on the whims of state officials and their relatives. You can lose everything over night. It is best to get out while you can.

Second, even if you have made your success on your own by offering a superior product or service, influential persons can take your business away virtually any time. They may discover a licensing problem. Your business may have violated environmental standards, and, of course, the tax authorities may discover you cheated on your taxes. You are then told all these problems can be resolved if you sell your business to a certain person at the right price.

Once Russia’s and China’s business elite are gone, their businesses will be run by those whose only skills are making payoffs, using connections, and engaging in corruption. They cluster into tight-knit groups of cronies, who battle other crony bands for dwindling spoils. In Russia, the economic consequences of crony capitalism can be masked by high energy prices for a short while. In China, they might be masked by the growth that low labor costs and expanding international trade bring.

But the consequences of state capitalism will eventually show through, and we will be surprised to learn that Chinese and Russian state capitalism were houses of cards.