State Capitalism from a Different Perspective –

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rajat saggar's picture

State Capitalism from a Different Perspective –


Capitalism is a word which we hear quite often in our daily life which means that there is private ownership when it comes to the means of production and the creating products (both goods and services) to generate profits. It was in the year 1776 when Adam Smith in his book “An Inquiry into the Nature and Causes of the Wealth of Nations” better known as “Wealth of Nations” came up with a concept of the “Invisible Hand” which was nothing but the market price decided up on by the demand and supply in an economy. He said that if an economy is not balanced then the Invisible Hand will appear and get it into equilibrium which meant that the market will eventually re-adjust itself based up on the demand and supply in the market and the price would be derived. Here the market is free from any external intervention and the system is such that it will correct itself, thus no outside intervention like from the government is needed. The system of capitalism has been amongst the most popular systems so far followed in each and every nation around the world in one or another form.


It was Japan which has seen this system since the 19th century when the corporate governance was propelled with the formation of the Meiji Restoration. Then it was known as Zaibatsu where the companies or the conglomerates were supported by the government and they backed these companies to do well the in markets. The system works in such a manner that there is a conglomerate of companies where each company holds a financial stake in other group companies and at the centre of the same there is a core bank. This helps the company to stay at bay from the stock market fluctuations as well as from attempts of hostile takeovers as well. This furthers helps the companies to enable a long term planning, especially on their innovative projects. The system crumbled as during the Second World War most of these industries were nationalized, and post the loss of Japan in the Second World War many of these Zaibatsu were dissolved.

As a part of restructuring of the nation, came the structure of Keiretsu which was formed on similar principles and these companies were given a full support of the government so that the national building process can be done quickly. The system worked exceedingly well as this form of Public Private Partnership helped in getting the economy back on track. Several successful models of Keiretsu can be seen with Mitsubishi (Mitsubishi, Nikon, Nippon, etc), Mitsui (Sony, Japan Steel Works, etc), DKB, Fuyo (Nissan, Cannon, Hitachi, Ricoh etc) and many more. This helped the nation grew at a much faster pace than expected after such demolition.


With South Korea, the nation in the year 1961 under the presidency of Park Chung Hee led to the Industrial of the nation and instead of directly being involved they backed several private players to spur the process. This was a borrowed concept from Japan with some alterations to suit the economy and from being an agrarian economy in the 1960s, the nation became an industrial economy by 1980s and 1990s. This led to formation of several large organizations like LG, Hyundai, Samsung, Lotte, and more. As they grew larger and became stronger, they became independent and required little or no help from the government in times to come.


The term State Capitalism seems to have come up in the last 3-4 years since the economic downturn in 2008 where the participation of the state has increased in several markets around the world like China, Russia and Brazil to be amongst the most prominent ones. Here it has been seen that in the system of state capitalism the government is taking a direct role in managing the assets of the economy and have a share in the large companies in the economy. Instances could be that of China were they directly own stake in companies like Sinopec Group, China National Petroleum Corporation, and State Grid Corporation of China which are amongst the top ten listed companies as per Forbes, 2010. This just gives us the might of state capitalism and how nations like China, Russia and Brazil have been using it in their own economies.

Sectors like Energy, Utilities and Telecommunications are seen to be the sectors where the state owned companies is highly present with others being Financial Sector, Industrial Sector and Material Sector as well where the state shows a large interest. Here we see a direct relation between the state and the companies as these are directly owned by them but this phenomenon started way back in Asia with Japan and South Korea being the pioneer in the same during the 1950s and 1960s.

What is also evident is that the state owned companies are more focused on developing the core sector and thus the presence of state capitalism is more in areas like energy, utilities, telecommunications, financials and industrials. These are also seen as the basic necessity for nations to economically prosper in the future as well. There are some nations like that of India which are still not clear as to where they want to go, as in whether to promote state capitalism or not. But this also turn out to be another way of state capitalism as the nations like Russia, China, Brazil, Japan etcetera have their own styles of state capitalism which are quite different from one another and yet quite effective.


This is a form of state capitalism which existed way back in the world unlike what we see today. In the present system of state capitalism there are several inherent flaws which the system might not be able to manage. With a direct involvement of the state in the business activities and having a control over large proportions of the nation’s natural resources the inherent flaw is that the whole system is prone to collapse if the top political leadership which controls these resources are not free from corruption and not looking for their personal gains in the short run (in case the ideals and direction of thought of the political leadership are misguided). With the model of state capitalism adopted by Japan and South Korea, the government is not getting directly involved with the business processes but is still managing a certain degree of control. Additionally with so many private players the chances of monopoly in the system reduces. Moreover the government is also in a much better position to run the nation as they can stay focused on a single task rather than making money which is now left to private players, but not entirely.


The debate is not whether state capitalism is good or bad, but what is the right way of State Capitalism. Allowing everything under direct control to the state to manage would mean that there is always a chance for capitalism and monopoly which could again give rise to such a problem of recession which we had in 2008 and previously in 1930s. As stated by Karl Marx in his work, “The system of capitalism is inherently flawed, as it generates so much wealth that it eventually becomes unsustainable”. Thus as a nation we must be sure of what we are doing and what could be the consequences of the same.


1. Kotz, D. (2008). the final conflict: what can cause a system threatning crisis of capitalism. Retrieved january 10, 2013, from

2. Schumpeter, J. (1943). Capitalism, Socialism, and Democracy. Routedge.

3. The Economist. (2012, January 21). The Visible Hand. Retrieved January 6, 2013, from