State capitalism hold potential – and potential pitfalls – for emerging markets

With demand dwindling in European and American markets, some emerging markets are flirting with state-directed firms as a means to achieve economic growth. From China to South Africa, the rise of state capitalism is unmistakable. But as alluring as its purported stability can be, an article in The Economist issues a warning that there are weaknesses in the new model, which is unlike that seen in Britain some decades ago.

The selectivity of favoring certain companies over others can “soak up” resources that could be better used by private companies, which tend to grow at a more rapid pace.

“Nor does the model guarantee stability. State capitalism works well only when directed by a competent state. Many Asian countries have a strong mandarin culture; South Africa and Brazil do not,” notes the article.

Furthermore, the Economist adds, “it may take many years for the model’s weaknesses to become obvious; and, in the meantime, it is likely to cause all sorts of problems. Investors in emerging markets, for instance, need to watch out.”




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