There’s an uncomfortable trend emerging across the developed world. Relatively free and capitalist countries are increasingly drifting towards what can only be described as the ‘China model’, i.e., capitalism but with the heavy hand of the state playing a growing role in directing resource allocation.
Take the United States. Under President Donald Trump 2.0, the federal government has sought equity stakes in major companies like US Steel and Intel. It has already taken an ownership share of a struggling rare earths miner in Las Vegas—after “spending billions of dollars assisting the development of processing operations”—and is clipping 15% of the proceeds from every chip sold to China.
In Australia, the Albanese government is considering “investments or stakes in Australia’s ailing metals smelters”, and has already taken “a $50 million stake in Liontown Resources to support the struggling lithium miner.”
Today it’s smelters and lithium miners, all in the name of “sovereign capacity”. What’s next—government stakes in farms and biotech? Or when the next crisis hits, how about airlines and banks?
The problem with this model is as the government’s economic reach expands, so too does the politicisation of capital. It is then politicians and bureaucrats in Canberra playing with tax dollars, not investors using their own funds, that decide who survives, and at what price. Maybe it’s just a simple equity stake, giving unions a strong bargaining position the next time it comes to negotiate an award. Or perhaps, in return for the investment, politicians “nudge” management to direct the firm’s funds to whatever the day’s political priorities may be.
Crony capitalism. State capitalism. Industrial policy. Mercantilism. Import substitution. “Sovereign capacity”. Call it what you will, but they’re all cut from the same cloth, and history suggests that the end result is typically economic mediocrity.
Capitalism is a system of profit and loss. Businesses should be allowed to fail, freeing up scarce resources for more productive competitors. By dulling the “loss” part of capitalism, the Trump and Albanese governments are locking in failures, creating moral hazard that removes market discipline, protecting inefficient firms from competitive forces, stifling innovation and productivity, and adding to the national debt burden.
Once the government has an equity stake in these companies, politicians will have a strong incentive to keep supporting them, regardless of how they perform. Doing so then crowds out potential competitors—including investors who might want to install new management through an acquisition and restructure—ensuring a less dynamic, less resilient economy.
A new working paper from the IMF found that China’s recent industrial policy, through its misallocation of capital based on political rather than market signals, has cost the country an estimated 1.2% in total factor productivity, or around 2% of GDP. The larger the scale, the more income lost.
There are legitimate national security concerns regarding certain sectors. But the existence of such concerns does not mean economic costs and trade-offs cease to exist. Call me cynical, but it certainly appears as though politicians are exploiting these often-vague concerns to justify large-scale, and unprecedented—at least for several decades—state intervention across a range of industries. And if we continue marching down this road, politicians will eventually struggle to avoid intervening in any sector on national security, or “sovereign capacity”, grounds.
So, the next time the Albanese government intervenes in an industry, I’d like to see it weigh the claimed benefits against the costs of action. Dreaming, I know. But if it’s serious about improving productivity, then that sort of transparency is essential.
Addendum: It’s happening in the UK too, with the government now running “over half of Britain’s steel industry” after it took over a struggling steel plant in Rotherham.