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"The end of free market?" This is the question that many ask in the midst of today's global economic recession. This is the question that Ian Bremmer, a president of Eurasia Group, also poses in the last issue of Foreign Affairs (State Capitalism Comes of Age May/June 2009). His answer? No, the free market won't die.

Bremmer considers the recent sharp turn towards state controlled economy as dangerous if it continues too long. Every economy in crisis needs in some degree of state intervention and decisive political actions to be cured, but the excessive political measures are proven ineffective simply because of the ineffectivness of central planning. Bureaucrats and social engineers cannot play the role of free market managers. They have no experience in commercial decisions, they often do not care about the property they managed, and they sometimes create crony rings and corruption.

The neo-liberal free market ideology was dominant during the last 20 years of the 20th century, but suddenly, in 2008, this trend changed when the United States entered in the biggest financial crisis since 1933. The new course of state control over key economic sectors in the U.S. - the freest and biggest economy of the world - made the global economic land shaft completely different. The West has moved "left," and this intensified the already existing tendencies toward state capitalism in the developing world.

In his essay Bremmer argues that the West is responsible "whether free-market capitalism will remain a viable long-term alternative will depend in large measure on what U.S. policymakers do next." Interventionism and protectionism are the biggest threats in long term perspective. The government of the U.S. should know when and where to stop its interference. "Protectionism begets protectionism, and subsidies beget subsidies," Bremmer says and recalls the terrible effects of Smoot-Hawley Tariff Act (1930), which raised tariffs on 20,000 imported goods in America to record levels and evoke the same respond in all over the world - something that turned the Great Depression into world economic war.

"State capitalism will not disappear anytime soon - says Bremmer - Throwing up walls meant to deny access to U.S. markets will not change that. Instead, profiting from commercial relations with state capitalist countries is in the United States' near-term economic interests. For the sake of the United States' and the world economy's long-term prospects, defending the free market remains an indispensable policy. And there is no substitute for leading by example in promoting free trade, foreign investment, transparency, and open markets, in order to ensure that the free market remains the most powerful and durable alternative to state capitalism."

Nowadays state capitalism takes more and more ground over the world: 75 percent of global oil reserves and production are controlled by state owned companies such as Saudi Arabia's Saudi Aramco, Russia's Gazprom and Rosneft, National Iranian Oil Company, Petróleos de Venezuela, S.A., the China National Petroleum Corporation, Malaysia's Petronas, and Brazil's Petrobras. The state penetrates in sectors "as diverse as petrochemicals, power generation, mining, iron and steel production, port management and shipping, weapons manufacturing, cars, heavy machinery, telecommunications, and aviation, a growing number of governments are no longer content with simply regulating the market, a growing number of governments are no longer content with simply regulating the market," says Bremer.

When the state takes control over economy, the economy becomes a hostage to political goals. This creates authoritarian political regimes, in which polititians are connected with business elites as is in Russia where the biggest companies are controlled by a small group of oligarchs supported by Kremlin. The motivations behind investment decisions in state capitalism are political rather than economic. On the international stage in a world dominated by state capitalism economy is not anymore a source for cooperation but a tool for political pressure and conflict. This fact has been proven over the years and the last blatant example was the dispute between Russia and Ukraine this January (2009) that endangered Europe's gas supplies.

Today's state capitalism exists in countries where the rule of law is weak and corruption is a common practice. In his essay Bremmer prognoses: "In the long term, state capitalism's future will likely prove limited, particularly if it cannot provide even its two leading practitioners with a working model for sustainable economic growth. Managing China's looming social and environmental challenges will ultimately prove beyond the capacity of bureaucrats; they will eventually realize that the free market is more likely to help them feed and house the country's 1.4 billion people and create the 10-12 million new jobs needed each year. In Russia, faced with a declining population and an economy too dependent on the export of oil and gas, policymakers may conclude that future economic prosperity requires renewed free-market reforms. The United States should reassert its commitment to expanding trade both with the European Union. In the United States and Europe , the power of the invisible hand remains an article of faith. Governments on both sides of the Atlantic know that to maintain popular support, they must keep their promises to return the banking sector and large enterprises to private hands once they have been restored to health."

IAN BREMMER is President of Eurasia Group. He co-authored The Fat Tail: The Power of Political Knowledge for Strategic Investing with Preston Keat.

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