The evolvement of state capitalism in recent times : what can we learn from Norway?

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Master Thesis Political Science

The Evolvement of State

Capitalism in recent times

WHAT CAN WE LEARN FROM NORWAY?

A thesis submitted by

Leonidas Vrailas

Student number: 11263571 Supervisor: A.F. Voicu

Second reader: Dr. Jasper Blom June 2017

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1 | P A G E

1. INTRODUCTION

1.1 BACKGROUND ON THE TOPIC

Fifteen years ago, it seemed that the great debate about the proper size and role of the state in the economy had been resolved. In Britain and the United States alike, the economic decisions of Tony Blair and Bill Clinton pronounced the end of the era of “big government” and the expansion of market forces (Economist, 2010). The privatization of state-run enterprises and the international development of the “Washington Consensus”1, promoted by free-market thinkers and influenced by the neo-liberalist approach to the field of economics, led to the minimization of the state in most advanced economies (Aldcroft, 2001; Van Horn et al, 2011). However, the recent emergence of new economic giants such as China or Russia, where the state exerts great influence over the market has reshaped the global economic thinking. In a series of articles, the English-language newspaper The

Economist has stressed out the return of “big governments” as principal actors in the

economy, driven by modern forms of state capitalism (Economist, 20122). The blooming of a new state capitalist wave3_{, China should be seen as the main driver, comes at a time} when the financial crisis has done considerable damage to America’s ability to lead by example as a champion of free-market capitalism (Bremmer, 2012).

In the United States, Europe and across all major advanced economies, the sudden trend of state interventionism aimed at tackling the global recession and restore indebted economies (Bremmer, 2012). In most cases, the governments of developed countries do

1_{A series of economic proposals considered to constitute a reform package. The goal was}

market-liberalizing reform in developing countries (Scruton, 2007).

Sarah Babb (2013) argues that the Washington Consensus was a transnational policy paradigm, shaped by political and economic forces.

2_{In 2012, the Economist published a special report section about state capitalism on the printed edition} 3_{Ian Bremmer (2009) identifies four waves of state capitalism. The first began during the 1973 oil}

crisis in the Persian Gulf. The second wave began during the 1980s, driven by the rise of developing countries, regulated by governments with state-centric values and traditions such as Brazil, India and Russia. The third was marked by the rise of Sovereign Wealth Funds in the beginning of the new millennium, and finally the fourth wave has now arrived, hastened by a global economic slowdown and the ‘rise of the rest’- China, Brazil, Russia, and India.

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4 | P A G E not intend to intervene in the economy indefinitely. However, according Bremmer (2010:40) in some other cases, especially in the developing world, “the state’s heavy hand in the economy is signalling a strategic rejection of free-market doctrine”. Modern forms of state capitalism are reshaping the global economy by increasing the economic power and influence of the central authority, the state. As time goes on, emerging markets and modern versions of state capitalism co-create a new global competition, not primarily between rival political ideologies but between competing economic models (Aligica & Tarko, 2012; Kurlantzick, 2016). The fact that state capitalist governments already own the world’s largest oil companies and control three quarters of the world’s energy reserves, while state-owned enterprises4 account for one fifth of the world’s total stock market capitalization, have created substantial economic and political anxiety in the international environment (Bremmer, 2009).

4_{A key characteristic of state capitalist economies that will be further explored in Chapter 4 and 5.}

State-owned enterprises serve as vehicles for greater state involvement in the economy (Musacchio & Lazzarini, 2014)

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5 | P A G E Figure 1 Influence of state capitalist countries to the international market5

Source: Deutsche Bank; Fortune; Economist

As the above graph suggests, already since 2011 state capitalist countries accounted for a significant percentage of the global wealth.

1.2 DEFINING THE SCOPE OF THE RESEARCH

The following research deals with the topic of state capitalism, an alternative economic model that does not provide resistance to the globalization process yet is fundamentally rejecting free-market capitalism. Nowadays, state capitalism offers a more regulated, not necessarily protectionist, view of economic exchange among states and individual actors in international markets (Grinder & Hagel, 2014). As an economic model, it promotes public rather than private capital as the driving force to economic success by underling the key role of the state in organizing and managing the economy (Schwartz, 2012). In other

5_{The presented graph is part of the article “The Visible Hand” (2012) appeared in the special}

report section of the Economist print edition in January 2012. Parts of the graph have also been included in articles of the Fortune Magazine and in special reports published from the Deutsche Bank

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6 | P A G E words, those in favour of this model view state investment and involvement as a possible way to accelerate economic growth beyond what is possible under free-markets.

Over the last two decades, state capitalism has expanded dramatically among some of the most important developing nations. Among them are also some emerging economies that have encompassed impressive rates of development which makes it of great significance considering that these countries will provide much of the world’s growth over the coming decades, and so will command even larger power in international institutions (Kurlantzick 2016; Schwartz, 2012). Even though it can be argued that for some of them growth rates may fluctuate or even shrink in the upcoming years, they have the potentials to power the international economy as their records of economic growth already demonstrate (Kurlantzick, 2016; Musacchio & Lazzarini, 2014). In fact, these emerging economies are not simply representing the future upheavals in the international system but are also increasingly serving as paradigms to other developing nations to view state investment as a way to encourage the economy beyond what is possible under free-markets (Kurlantzick, 2016). According to this view, governments should help firms develop new capabilities either by reducing capital constraints or by reducing the costs of research and development, or by coordinating resources and firms to pursue new projects with high spill overs (Musacchio & Lazzarini, 2014). The successful example of China validates that the creation of new capabilities within the national economy sometimes requires the “helping hand” of the state to mitigate all sorts of market failures (Musacchio & Lazzarini, 2014). In a period of severe crisis for the global economy, state capitalism provides an alternative economic thinking that could potentially challenge free-market capitalism. Evidently, vigorous debates exist in academia over the nature and potential implications that this form of state-directed capitalism has with regard to the economic and the political environment. The existing literature focuses on the dramatic revival that state capitalism has undergone in the last two decades, sharpened by the international financial crisis which made clear the need for better government not necessarily less, to serve the needs of modern-day markets. Most of the research on the topic demonstrate that an accelerated participation of the state in the economic and production process has proved to be the most viable solution needed for developing countries to economically catch-up with the rest (Grinder & Hagel, 2014).

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7 | P A G E However, some western scholars view the rise of state capitalism, particularly in the case of China and Russia, as an attempt by authoritarian governments to embrace the capitalist system by engineering a limited form of economic liberalization, that increases efficiency while still allowing them to maintain control over the economy and extend their political influence (Bremmer, 2009; Aligica & Tarko, 2012). Subsequently, they raise significant doubts about the models’ ability to capitalise on its success in the long-run and provide a democratic environment open to international markets and exchange.

Nonetheless, China and Russia are but two examples of a new era of state capitalism far larger in scope today. Several nation-states have adopted a state capitalist model for running their economies, even though nearly all discussions and debates in the west have been solely focused on the aforementioned examples alone (Musacchio & Lazzarini, 2014). In reality, today’s spectrum of state capitalists consists of countries with different characteristics and distinctive approaches to this economic model. It includes democratic and developed states like Norway, autocracies in the Gulf region such as the United Arab Emirates and countries that lie somewhere in the middle, for example Singapore (Brady & Beckfield, 2001). Recent forms of state capitalism encompass countries which have based their state intervention on government control over natural resources like Russia and Venezuela and countries that are relatively poor in natural resources such as China and India (Kurlantzick, 2016). In the cases of China and India, both countries have used the state’s capacity to build up certain sectors of the economy, encourage innovation and structure a production based on other comparative advantages such as labour, in the absence of natural resources (Kurlantzick, 2016; Chatterjee, 2017).

The motivation for this thesis commence from a continued interest in exploring the broad continuum of state capitalist countries, with a particular focus in the case of Norway. Before undertaking any discussions regarding the relative merits of contemporary state capitalist applications to the market, it is necessary to evaluate if some set of expectations that arose from the existing understanding of this concept can sufficiently explain the evolvement and effects of this model in the Norwegian context. For that purpose, this thesis seeks to explore the impact that state capitalism has had on the political and economic environment of Norway after the national elections of 2005. This study argues that the

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8 | P A G E Norwegian case provides evidence that a more centrally planned economy does not necessarily undermine some key characteristics of developed countries as the application of state capitalist policies can encourage the growth of an open economy. Moreover, the example of Norway shows that state capitalism can coexist with the development of a democratic environment that can provide the necessary check and balances for those accountable in power. Despite expectations, the case under research challenges the perception that state capitalism could only be successfully implemented in authoritarian states, or in states with an authoritarian past, as a way-station on the road to free-market capitalism. On the contrary, although states conventionally utilise the market primarily for political gains, the case of Norway shows that governments are becoming more sophisticated as they realize that a direct state involvement can encourage the long-term success of the economy.

1.3 OUTLINE

This study proceeds as follows. To undertake a meaningful discussion about contemporary applications of state capitalism and their relative merits, it is therefore important to first examine how other researchers have defined the aforementioned concept as well as how they have elaborated on its main characteristics. For that purpose, the second section, following the introduction, examines the existing academic understanding on the topic and describes the theories that explains why the research problem under study exists. A special attention is given on certain deterministic propositions that have been assigned to state capitalist countries, heavily shaped by some negative opinions concerning the direct involvement of the state in the economy. Numerous scholars have criticized the effects of state capitalism vis-à-vis the economic and political environment (Bremmer, 2012; Rothbard, 1997; Aligica & Tarko, 2012). Therefore, these propositions are presented in the form of two sets of expectations that assert a negative relationship between the evolvement of state capitalism and the economic and political effects. The third section is dedicated on describing the broad philosophical underpinnings to the chosen research methods that will guide the following chapters, in which the empirical results are reported and analysed. The

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9 | P A G E methodological section is an attempt to present the academic basis for all the choices made in this thesis. It will justify the chosen design of the research to be carried out, that is the nature of data that will be collected and methods used to approach the case of Norway in order to answer the question under research. The theory underlying this thesis is discussed in the last three chapters where the research results are reported and further analysed. In the last three sections, this thesis will explore why Norway is a case of state capitalism as well as if the two sets of expectations, derived from the theory, are verified in this particular case. Three sub-questions will guide the upcoming analysis in order to approach the main research question of this thesis.

 Why is Norway a case of state capitalism?

 Did the strategic effort of the state to encourage the development and growth of the economy prove to be successful?

 What are the consequences of government officials’ direct engagement in the economy for the political environment in Norway?

After reporting and further analyzing the findings, a conclusion will follow in which the research results are connected to the discussed theory and thesis argument. The questions asked in the formulation of the research question are answered explicitly.

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2. THEORETICAL FRAMEWORK

The aim of this chapter is to provide the necessary scientific justification to the theoretical propositions that will guide the upcoming empirical analysis. The theoretical framework presented below will outline what theories and ideas exist in relation to the key concept of state capitalism as well as how the existing knowledge on the topic can be segregated into explicit theoretical assumptions, which will guide the methodological discussion in the following chapters. The first part of the theoretical framework is dedicated on exploring how other researchers have defined the key concept of state capitalism as well as some characteristics that constitutes a country as state capitalist. From the theoretical insights of Murray Rothbard and Ludwig von Mises, two influential thinkers from the Austrian School of Economics, who were writing at a time when the leftist doctrine was dominating the economic understanding in western countries, to efforts made by contemporary scholars such as Ian Bremmer to provide a contextual analysis over the relative merits of recent state capitalist applications Apart from gaining an important understanding on the key concept of this research, the first part also aims to provide a clear definition of state capitalism that will be used throughout the case-study of Norway. The second section identifies some plausible explanations that can be derived from the relevant scholarly literature to explain the inclination of some countries, like Norway, towards state capitalism. At last, the third section provides two negative effects that scholars have attributed to state capitalism, derived from economic critiques and negative political assumptions about the application of this model.

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2.1 DEFINING STATE CAPITALISM

2.1.1 EARLY ATTEMPTS

Murray Rothbard, an American heterodox economist, used state capitalism interchangeably with the term state monopoly capitalism to describe “the economic

partnership between governments and big businesses in which the state intervenes on behalf of large capitalists against the interests of consumers” (James: 57). State capitalism,

in his view, provided the necessary protection to a number of business against competitive market forces. Rothbard understood state capitalism as a repressive welfare state monopoly system that made use of the coercive apparatus of the government — the State — to accumulate capital by expropriating the production of others through violence and oppression. As Rothbard (1997) noted, throughout history states have existed as instruments for organized exploitation. It doesn’t matter who or which group of people gain control, the result is always the coercive use of power by a ruling class and professional bureaucracy. Therefore, such coercive use of power by the central authority along with the favouring of certain private interests could not but undermine the effectiveness of the state to solve market failures and attract foreign investments. Rothbard, therefore, criticizes the industrial policy view in that the state is incapable of promoting development and growth in the economy (James, 1972; Rothbard, 1997). Ludwig von Mises, another famous liberal economist, understood state capitalism as a failed attempt by socialist intellectuals to reinvent the role of the state in the economy. According to his research, state capitalism did not differ in any essential way from the classic ideal of egalitarian socialism. On the contrary, it was just a repetition of the long-lasting promises for a socialist planned economy that would equally distribute the means of production (von Mises, 1979). The fact that he rejects any definition shows that he did not observe any fundamental differences from the socialist rhetoric for greater state control over the economy (Grinder & Hagel, 2014).

The fact that Rothbard and von Mises addressed the topic of state capitalism with scepticism should not be surprising. Both economists were writing at a time when the Keynesian approach to the field of economics has started to be criticized by many

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12 | P A G E intellectuals (Grinder & Hagel, 2014). Rothbard and von Mises are part of a revolutionary free-market approach to the field of economics, introduced in the beginning of the eighteenth century. According to those free-market thinkers, rational economic actors acting in their own self-interests could deal with information and price goods the most efficiently (Eichengreen, 2007). On the contrary, heavy government involvement leads to cartelization as industry after industry is regulated (Grinder & Hagel, 2014). Such perceptions benefited even more from the economic failures of the Soviet Union under the communist regime. By the early nineties, the triumph of free-market capitalism promoted the belief that governments only role in the economy is to ensure that the rules of the game are played effectively (Aldcroft, 2001).

2.1.2 RECENT ATTEMPTS

Ian Bremmer is one of the most recent experts to engage with the emergence of state capitalism in the twenty-first century. He writes at a time when the global recession has done considerable damage to western free-market countries’ ability to lead by example. Bremmer defines state capitalism as “a system in which the state functions as the leading

economic actor and uses markets primarily for political gains.” (Bremmer, 2012).

According to his view, recent forms of state capitalism have enabled authoritarian leaders and governments to successfully compete in international markets by extending their own political and economic leverages. They manage to do so by the use of a variety of intermediary institutions that strengthen the strong ties between the state and the business environment. Governments use various kinds of state-owned enterprises, legal entities that are controlled by the state, to manage the exploitation of resources that they consider of outmost importance to the growth of the economy (Bremmer, 2009). Furthermore, they use sovereign wealth funds, state-owned trust funds run by political officials, to invest their extra cash in ways that can maximize the state’s profits (Truman, 2010). In addition to that, state capitalists tend to exploit gas and oil corporations, as they accommodate the necessary power for a government to become the dominant actor in the economy and control substantial parts of a country’s production process (Bremmer, 2012). At last, promotion of national champions, corporations formed and funded by the state to compete in international markets, generate profits and advance the interests of the nation

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13 | P A G E Although, in his analysis Bremmer acknowledges that state capitalism has undergone a dramatic revival over the last few decades, he questions the long-term sustainability of this model. By focusing on the examples of China, Russia and the Arab monarchies of the Persian Gulf, he concludes that state intervention under state capitalism is driven by the rent-seeking or political motivations of state officials (Bremmer, 2012). In cases like Saudi Arabia, we notice today an over exploitation of scarce resources that lead to domestic inefficiencies, while in cases like Russia an unfair competition with the firms chosen by the government (Kurlantzick, 2016; Gershmand & Thurner, 2016). To summarize, Bremmer’s investigation underlies the political implications of state capitalism, as he found that officials use the structure of the state not according to public but private interests and that leads to market inefficiencies. The sources of inefficiency also lies on the fact that politicians use their economic power to benefit politically connected capitalists. However, this is partially because Bremmer pays little attention to the variety of state capitalism and focuses mainly on common examples such as China and Russia. Consequently, he fails to distinguish a broader spectrum, which also includes countries whose type of state capitalism does not undermine the best aspects of free market capitalism and can coexist with individual’s economic and political freedoms (Kurlantzick, 2016).

In their book Reinventing State Capitalism: Leviathan in Business, Brazil and Beyond, published in 2014, Musacchio and Lazzarini explore the evolvement of state capitalism in developing countries like Brazil over the last fifteen years. They define state capitalism as “the widespread influence of the government in the economy, either by owning majority or

minority equity positions in companies or by providing subsidized credits and/or other privileges to private companies” (Musacchio & Lazzarini: 2). In their analysis, the authors

demonstrate forms of involvement through which the state works closely with private investors in the domestic economy. These forms differ from previous eras of state involvement when governments acted as insurers for large corporations that often ended up bailing out. In addition to that, they also differ from traditional models where governments own and manage SOEs as extensions of the public bureaucracy with limited autonomy and transparency. According to the above definition that the authors ascribe, recent forms of state capitalism reflect an economic model which reappeared state

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14 | P A G E involvement in the economy under three disguises. First, the state acts as a majority shareholder by owning and managing domestic corporations. This is the most common method for public institutions to retain control over key sectors of the economy such as the oil industry. Second, state acts as a minority shareholder and thus, retaining just enough influence to the decision-making as the majority of the shares are distributed among private ventures. At last, governments can further intervene to the economy in the form of indirect investors seeking to invest in high-risk companies through sovereign wealth funds, either by owning majority or minority equity positions in companies or by providing subsidized credit and other privileges to private companies (Musacchio and Lazzarini, 2014).

Instead of trying to prove that state investments in terms are universally superior or inferior to purely private investment, Musacchio and Lazzarini saw things in a different way. They demonstrate empirical forms of involvement in which public and private capital successfully coexist. Although the authors goal was to examine the conditions that will make state capitalism more prevalent –if certain key contingencies are present- their focus on Brazil offers little basis for generalizing the findings. Nevertheless, their research in Brazil emphasized that state capitalism was born not out of economic necessity, but out of an ideological preference for state intervention in the economy or a nationalistic policy to keep foreign investors out. Consequently, they provide a path-dependency view by “emphasizing that state capitalism is often born out of necessity and its resilience of state

has been a result of complex historical processes, and inherited institutional conditions that are difficult to change” (Musacchio & Lazzarini : 57,58).

Kurlantzick was the last to address the topic of state capitalism today. He rejected any single definition as he noticed the large variety that this economic model offers. However, he defined modern state capitalists as “as countries whose government has an ownership

stake in or a significant influence over more than 1/3 of the largest by profit companies”

(Kurlantzick: 27). By owning one-third of the largest corporations by profits, governments can exert far greater control over the corporate sector than they do in more free-oriented countries like the United States and the United Kingdom. Generally, in today’s state capitalist models the government sees itself as having a direct role to play in managing the

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15 | P A G E economy and guiding the corporate sector. This is why simply having an interventionist government does not mean that you have a state capitalist model. In that respect, national governments that run a significant number of state-owned companies like Greece and Spain cannot be considered state capitalists because below this one third level of government ownership that Kurlantzick sets, the economy is still determined primarily by the free market forces (Kurlantzick, 2014). By setting the bar to this level, Kurlantzick disqualifies many developed economies like France and Japan, whose government are relatively interventionist but do not micromanage the economy and corporate sector to the extent that modern state capitalists like China, India, Russia or Singapore do (Kurlantzick, 2016).

2.1.3 CHOSEN DEFINITION

The first part of the theoretical framework examines some early and recent attempts from the part of six scholars to describe the nature and characteristics of state capitalism. From the given definitions it can be argued that there is a great variance among the approaches that researchers have chosen to employ when analysing this economic model. Some experts have based their analysis on general ideological underpinnings around which this model has evolved to challenge free-markets, while others have narrowed down their approaches and explored state capitalism in specific case-studies contexts. By doing so, they have underlined the complexity of recent state capitalist applications as they differ from previous eras of state intervention. Furthermore, the first part of the theoretical framework specifies four key variables, Bremmer identifies them as intermediary institutions, which are present in contemporary state capitalist countries:

 State-owned enterprises  Oil and gas corporations  Sovereign Wealth Funds  National Champions

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16 | P A G E It is thus important to highlight the need to examine, during the process of this thesis, how these variables or intermediary institutions might differ and under what circumstances in the case of Norway.

For the purpose of this research, state capitalism will be defined as

“The widespread influence of the state in the economy, either by owning majority or

minority equity positions in key sectors of the domestic economy or by providing subsidized credit to private companies”.

The chosen definition is almost identical to the one Musacchio and Lazzarini assign when

examining Brazil. There are two main reasons for the selected conceptualization. The first is that the chosen definition underlies the widespread influence of the state in the economy, the main difference between state and free-market capitalism, which stands for greater private involvement. Furthermore, the second is that it acknowledges the complexity that this state involvement entails. As already mentioned in the introduction, state capitalism promotes public rather than private capital as the driving force to economic success. From a state capitalist perspective, economic success involves a direct influence for the side of the state to the economy, so that it acts as the principle actor in the market. The state manages to exert greater control by the use of the four intermediary institutions, as previously identified. In recent state capitalist applications, the state controls these institutions either by owning majority or minority equity positions. The decision as to whether retain a minimum or significant stake really depends on the nature of the sector and the economic strategy of the state. At last, the above definition mentions a public-private interaction on the economic level, mostly in the form of financing. As we will see in chapter 4, the widespread influence of the state in the economy also involves the financial support to certain private entities, in which sometimes it retains a minimum stake. The provided financial assistance aims at developing specific corporations that have the potential to promote national interests internationally.

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2.2 DIFFERENT VIEWS AND EXPLANATIONS FOR THE

EMERGENCE OF STATE CAPITALISM

Two possible explanations can be derived from the theoretical framework for countries inclination towards state capitalism. From a social democratic perspective, the state emerges as a mechanism to control and run the economy in order to ensure that the needs of the citizens are taken care of, and can benefit from redistribution policies that aim to reduce the inequality gap that market forces generate. On the other hand, according to the path-dependence view the resilience of state capitalism has been a result of complex historical processes and inherited institutional and economic conditions that are difficult to change. In any case, both perspectives understand the emergence of state capitalism as a complex process of sociocultural particularities, located within the country level.

Figure 2 Key determinants of state capitalism

Social Democracy Path-dependency

State

Capitalism

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18 | P A G E 2.2.1 SOCIAL (DEMOCRACY) VIEW

A social view is often adopted on the rhetoric of left-wing political parties and leaders particularly on emerging market economies. They are primarily advocating for the strategic importance of state-owned enterprises to economic policies that target the redistribution of economic gains to constituents and the preservation of the welfare state (Eichengreen, 2007). From a theoretical standpoint, the social view constitutes an integral part to the implementation of economic policies in countries that draw a long tradition of adherence to social democratic values. Social democracy is a distinctive body of political thought that supports economic and social interventions to promote social justice within the framework of a capitalist economy (Jackson, 2013). As an ideology, it advocates that a de-regulated market system characterized by laissez-faire capitalism generates inequality and oppression. Consequently, social democrats have historically asserted democratic control over the commodifying power of markets by promoting greater state involvement in the economy (Fitzpatrick, 2003). Nowadays, social democratic policies are committed to representative democratic values, income redistribution, welfare state provision and greater state regulation in the economy. Social democracy thus, does not reject but opts for a capitalist system that can lead to greater democratic, egalitarian and solidarity outcomes. Social democracy is often associated with the set of socioeconomic policies that became prominent in Northern and Western Europe—particularly in the Nordic countries during the nineties (Fitzpatrick, 2003;Brandal et al, 2013).

2.2.2 PATH-DEPENDENCE VIEW

The path-dependence view understands the importance of specific components in the country level that leads to the pervasive presence of the state in the economy (Musacchio & Lazzarini, 2014). These components are not dependent simply on current conditions but are also outcomes of specific historical preferences or inherited conditions (David, 2000). Under the path dependence view, state capitalism tends to thrive on countries that historically had an ideological preference for state intervention in the economy (Musacchio & Lazzarini, 2014). In certain cases, it might not only be about preferences but about inherited conditions that presupposed a direct state involvement in the economy. If we look at countries that are rich in natural resources, for example Venezuela or the Arab states of

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19 | P A G E the Persian Gulf, we see that their central governments are empowered with significant economic influence (Kurlantzick, 2016). Consequently, the path-dependence view emphasizes that state capitalism arises as a result of complex historical process and inherited conditions that sometimes are difficult to overcome. For countries that historically have had a large public sector and a strong central authority it might be easier or even more cost effective to continue along an already set path than to complete change it (North et al, 2009). Therefore, when trying to explain the emergence of state capitalism in a particular context, it is important to take into account particular preferences of the past along with current conditions.

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2.3 NEGATIVE CONSEQUENCES

The theoretical framework also identifies some negative effects towards the economic and political environment, attributed to the emergence of state capitalism. From a neoclassical perspective certain critiques are derived about the inability of the state to successfully promote an industrial policy that can be economically successful and beneficial. In addition to that, there are negative assertions about the effects of this economic model to the political environment, such as an increase on political wealth, as it is expected that state capitalism will result to a promotion of state official’s private interest over public. Both effects and negative assertions are further explored in Chapter 5 and 6 in an attempt to evaluate if they hold true in the Norwegian case.

Figure 3 Effects of state capitalism to economic & political environment

economic failure in the long-run (industrial policy view) Political disruptions (political view)

State

Capitalism

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21 | P A G E 2.3.1 INDUSTRIAL POLICY VIEW

The industrial policy of a country refers to the long-term strategic efforts to encourage the growth and development of the domestic economy (Yülek, 2015). Such efforts usually have a clearly defined outcome, which is to give an advantage and leverage over certain important enterprises within the domestic market (Graham, 1994). The main actor to achieve these outcomes is the government; it has the legal capacity and economic ability to generate policies aimed at improving the competitiveness and capability of firms. State policies are usually decided upon a national economic strategy that sets how resources will be allocated to reach an optimal outcome (Glykou & Pitelis, 2011). Imports and exports substitution is a classic example of how governments try to reduce foreign dependency by boosting the local production. More contemporary industrial policies include measures such as support for linkages between firms and support for upstream technologies (Krugman & Wells, 2013). Although these types of strategies could be beneficial in the short-term, sometimes industrial policies are seen, especially in the long-run, as harmful because governments lack the required informations and incentives to successfully determine the spill-over effects from promoting certain sectors above others (Beugelsdijk et al, 2009). While countries in East Asia like Hong Kong, Singapore and South Korea provided successful examples of state interventions and protectionist measures, in regions such as Latin America and Sub-Saharan Africa industrial policies have failed to encourage sustainable economic growth (Harrison et al, 2009; Glykou & Pitelis, 2011).

The main criticism that derives from the industrial policy view is that governments are incapable of addressing the faults and distortions of the markets. State involvement is usually perceived as a strategy that among else, undermines private involvement and the private sector (Bremmer, 2010; Levine, 2005). The idea derives from the fact that governments, captured by vested interests, tend to make decisions with regard to electoral or personal incentives. That leads to industrial policies only supporting the rent-seeking elite while distorting the efficient allocation of resources by market forces at the same time (Aligica & Tarko, 2012). Therefore, open economies tend to reject continuous state intervention in the economy as strongly influenced by the mainstream neoclassical economic perspective on industrial policy. It assumes that government intervention should

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22 | P A G E only called in cases of market failure to restore conditions by reallocating efficiently resources and assuring the ‘optimality’ of the market economy, sometimes by bailing out or nationalizing enterprises (Musacchio & Lazzarini, 2014;Glykou & Pitelis, 2011). 2.3.2 POLITICAL VIEW

The political view is associated with the perception that politicians and politically connected individuals might use the structure of the state not according to public interests. Since in the long-run there is no evidence that political officials can regulate the economic activity of a country better than the market itself, scholars and market experts argue that the increasing trend of transferring levels of economic power to the central authority –the State- can lead to economic inefficiencies (Bremmer 2009; Aligica & Tarko 2012). Consequences of promoting personal rather than public interests include overemployment on state-owned enterprises because of selections not based on merit, poor allocation of resources and rent-seeking behaviour6. For instance, recent literature has found consistent empirical evidence over the fact that state financing can be influenced by political factors such as elections cycles and campaign donations (Musacchio & Lazzarini, 2014). The implication is that the allocation of capital by government officials tend to favour certain firms. Sometimes it is because of national strategic efforts to promote certain sectors of the economy while other times it is in exchange for political support either through campaign donations or investment decisions that benefit certain politicians and their constituencies (Musacchio & Lazzarini, 2014).

As a result of the political view, state capitalism is usually perceived as an economic model where governments use various kinds of state-owned companies to manage the exploitation of resources that they consider to be of an outmost importance, use select privately owned companies to dominate certain economic sectors and Sovereign Wealth Funds to salt away and re-invest the state’s profit (Bremmer, 2012). In all three cases, there is a prevailing perception that the state uses the market to create wealth that can be then re-directed according to political and not economic motives. Therefore, state capitalism is

6 _{Rent-seeking refers to the attempt of obtaining economic rent by manipulating the social and political}

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23 | P A G E often identified as a form of capitalism in which the state acts as the dominant economic player and uses the market primarily for political gains (Aligica & Tarko, 2012).

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3. RESEARCH DESIGN & METHODOLOGY

Following the theoretical framework, in this segment of the thesis the methods and operationalization are set out. The research design and methodology chapter will define and support the type of study undertaken in this thesis, describe the chosen approach to examine the research question presented in the introduction, as well as the selected strategies to answer it. This chapter will also provide a detailed account of the variables and data methods applied in this study and how they were collected.

3.1 APPROACH TO RESEARCH PROBLEM

The research question will be investigated by conducting a mixed methods analysis, hereby making use of both qualitative and quantitative approaches. This method will enable us to identify aspects of the recent state capitalist phenomenon more accurately by approaching it from different vantage points. The selected strategy heavily relies on the fact that the research question is driven by certain deterministic propositions and expectations regarding the negative effects of state capitalism to the economic and political environment7_{. Therefore, all methodological choices from data source identification to the} interpretation process are drawn from the provided conceptualization of state capitalism and academic beliefs about its normative implications in the real world. A mixed method approach also gives the opportunity to triangulate some existing data, in an attempt to cross-validate findings that are related to the set of theoretical expectations that are derived from section 2.3.

The argumentation of this paper will be mostly developed by the use of qualitative sources to explore the broad topic of state capitalism, by looking closely to recent implications in the case of Norway. Before empirically assessing the success of state capitalist decisions to the economy, the use of qualitative approaches can help us gain a better understanding of the underlying reasons and motivations that led Norwegians to adopt such a model in

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25 | P A G E the first place. Furthermore, a qualitative approach can provide some clear insights as to how this model has developed over the last twelve years to serve the needs of a highly-advance economy such as Norway’s. Nevertheless, this paper will make use of some necessary quantitative data to quantify and explore the success of the Norwegian state capitalist model in numbers.

3.2 SINGLE CASE STUDY

In order to integrate the different components of this study into a coherent and logical line of argumentation, this thesis will make use of a single case study as research design. In general, a case study is focusing on the relationship between certain events within a specific context (Gerring, 2004). One of the most prominent advocates of case study research Robert Yin (2009), defines it as an empirical enquiry that investigates particular phenomena in depth and within its real-life context, especially when the boundaries between the phenomenon and context are not clearly evident. Consequently, the implementation of a case study design will allow this thesis to narrow down the broad and complex field of state capitalism, into a particular unit of analysis. By shedding light at a specific geographic area, this thesis aims to take part in the vigorous academic discussions about the emergence of new forms of state capitalism in the twenty-first century, by evaluating whether the existing understanding on the topic can sufficiently explain the development of this economic model in certain countries.

More specifically, the unit of analysis in the empirical chapters that will follow is Norway. The evolvement of state capitalism over the last twelve years in Norway will serve as a case study to explore whether certain theoretical assertions and expectations about the economic and political effects function as the existing theory indicates. Instead of discussing on a generic basis the relative merits and implications of the examined form of capitalism, this thesis narrows down its focus to a single country. By doing so, it can be observed and analysed how state capitalism is applied in the political and economic life of Norway. Inevitably this decision leads to the necessity of providing a detailed description

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26 | P A G E of the selected data. The main objective is to present the data in a meaningful way and potentially generate new patterns that could enrich the existing literature.

3.2.1 CASE SELECTION

There are several reasons for the selection of Norway as a case study. First of all, by looking at the distinctions among state capitalist countries today, Norway immediately stands out because it is a developed and highly-democratic country vis-à-vis most of its state capitalist counterparts- including countries like China, Russia, Singapore, Malaysia or even Brazil, although it has several characteristics of a developed country. Moreover, Norway serves as an interesting example to explore, because it has been poorly explained so far by other scholars. Most of the analysis on modern forms of state capitalism have been focused on the prominent examples of China, Russia and Brazil. Even though recent attempts have encompassed some complex varieties of state capitalism coming from East Asia countries such as Malaysia and Singapore or secular parliamentary republics such as Turkey, the example of Norway has only be mentioned briefly in some analyses. The most important decision for this case selection however, derives from the fact that Norway deviates from certain deterministic propositions drawn by the existing understanding on recent forms of state capitalism. To be more precise, in the theoretical framework we have explored some negative effects attributed to state capitalism, coming from an industrial policy and political perspective. The effects can be summarized into two set of expectations about the consequences of state capitalism to the economic and political environment:

Expectation 1 (industrial policy view)

 State capitalism leads to economic failure in the long-run because of governments’ inability to promote sustainable growth.

Expectation 2 (political view)

 State capitalism leads to disruptions in the political level because it is an economic model that maximizes political gains by concentrating power in the hands of few. The case of Norway demonstrates surprising values as it over performs relative to the two sets of expectations that arose from the existing conceptualization of state capitalism. As previously explained, the selection of Norway, by reference to the general understanding

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27 | P A G E on this topic, is by construction atypical. Therefore, it will be further explored in relation to the causal relations that the above expectations introduce, in an attempt to probe for new, yet unspecified possible explanations for recent state capitalist applications. The following analysis will show that the case under research not only deviates from the negative relationship propositions concerning the nature and consequences of state capitalism in recent times, but it also provides notable outcomes at both the economic and political level.

3.3 Data gathering

The majority of research consists of secondary sources, including scholarly books and peer reviewed articles that interpret and analyze primary sources on the topic of state capitalism and Norway. Secondary literature is an important part of the descriptive analysis that will be provided for the evolvement of state capitalism in Norway, by evaluating the role, actions and positions of the central authority –state- within the country. Specific data is found in news articles, mainly about the operations of Norwegian companies, or on the websites of state government, such as the Prime Minister office. As far as possible, this thesis have sought to use articles from ‘high quality ‘newspapers only.

In order to analyse why Norway should be considered as a case of modern state capitalism along with plausible explanations for the decision to adopt this economic model, this thesis will make use of qualitative data. Chapter 4 is, thus, presented mainly through secondary academic literature, including peer-reviewed articles and scholarly books that provide knowledge about specific socioeconomic dimensions of Norway. Such dimensions include the development and role of the welfare state and the salient social democratic values that characterize the Norwegian society. A special focus is given on peer reviewed articles to describe significant events of the past, which influence present outcomes and decisions. Chapter 4 also includes the use of electronic sources and written documents, such as annual reports for domestic enterprises and magazine articles that are guaranteed by independent professional journalism.

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28 | P A G E In chapter 5, in order to examine if the first expectation about the economic failures of state capitalism holds true in Norway, this thesis presents secondary and primary data. In the first part, the industrial policy results are analysed through secondary sources, including scholarly books and peer-reviewed articles. Electronic sources and primary data in the form of special reports issued by the government of Norway and international organizations such as the IMF, are also included in the findings to provide a better understanding of the case under research. The second part of the chapter conceptualizes “economic success” with the assistance of scholarly books that set out some key determinants for this concept. In the second part, this thesis also presents some numerical data that are extracted from the World Bank and OECD datasets. The presented data are selected in accordance with the conceptualization of “economic success”. They are, nevertheless, further triangulated with peer-reviewed articles about the role of significant factors in the Norwegian economy, such as natural resources and government spending.

At last, the analysis on chapter 6 corresponds to the second expectation about the impact of state capitalism in the political environment. This chapter provides peer-reviewed articles and secondary literature to examine the structure of the political system and the democratic elements that it entails. In the first section, numerical data in the form of an indicator that measures trust in government is also illustrate to analyze the satisfaction of Norwegian citizens toward the government. The selection of peer-reviewed articles will also facilitate the analysis of the last section of the chapter, where multiple viewpoints will be presented about how the Norwegian Pension Fund works in practice

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29 | P A G E

4. NORWAY & STATE CAPITALISM

The following chapter corresponds to the first sub question of the thesis. To argue that Norway is part of a broader spectrum of modern state capitalist countries, the upcoming analysis investigates whether some of the assigned characteristics to this model, derived from the theoretical framework in chapter 2 are also present in the Norwegian context. Furthermore, this chapter introduces two plausible explanations for the country’s inclination towards state capitalism- the existence of significant natural resources domestically and the consolidation of the welfare state as concept of government. The following analysis, including the use of specific cases and data, is driven by the proposed conceptualization in section 2.1 of the theoretical framework8_.

4.1 NORWAY AS A CASE OF STATE CAPITALISM

Norway fulfils all key characteristics assigned to contemporary state capitalists by scholars who recently tried to define the nature of this concept. To be more precise, the Norwegian state exerts significant control in the domestic economy by the use of four intermediary institutions, which were previously identified in the theoretical chapter as state-owned enterprises, oil and gas corporations, sovereign wealth funds and national champions9. The case of Norway also fits in the chosen definition that was presented in the introduction (see footnote 11). In fact, the Norwegian state is heavily involved in economic activities beyond the country as it owns shares in some of the most successful enterprises in the national-level. In some cases such as the oil giant Statoil, the state retains a majority control of the shares, while in others cases such as the telecommunication provider Telenor, the state only controls a minority stake, as private investors have a majority control. Overall, the Norwegian state has a de facto power over the corporate sectors as it is directly or indirectly involved in some of the largest companies by turnover in the country. The use

8_{This thesis has defined state capitalism as “ the widespread influence of the state in the economy, either by}

owning majority or minority equity positions in key sectors of the domestic economy or by providing subsidized credits to private companies”

9_{Under state capitalism, the state usually supports the growth of sector-specific enterprises, as part of a}

governmental policy, that have the potentials to successfully compete internationally and promote national interests (Sun, 2005).

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30 | P A G E of public funds to facilitate mergers and acquisitions, is just an example of how public capital has facilitates the growth of specific sectors and consolidated public interests in the heart of the economy. In the following four sub sections, some of the most important intermediary institutions in terms of revenues and participation in international markets are closely explored. A specific interest is given on the role that the state has played to their development from extensions of public bureaucracy to international players in their sectors. 4.1.1 OIL & GAS CORPORATIONS

Statoil is the main exporter of natural resources and most successful Norwegian company by turnover during the last three decades, managed by the Ministry of Petroleum and Energy (Tesfay, 2014). The company grew up along with the emergence of the oil and gas industry, dating back to the late 1960s. It was established in 1972 as a fully owned state enterprise and nowadays, Statoil is one of the world's largest suppliers of energy power in the European market and beyond (Tesfay, 2014). Since the 1980s, the company has undergone several changes, which also included the public offering of equity shares to private interests. During the 1990s, Statoil merged its oil and gas operations with two of the most important Norwegian petroleum companies, Norsk Hydro and Saga Petroleum. Despite the fact that the merger acquisitions resulted in a reduction of public ownership to 62,5% or 1,992,959,739 in total shares, the deal was financially backed by the state (Tesfay, 2014). However, a parliamentary decision in 2009 indicated that the public interest in Statoil should be extended to two-thirds. Consequently, the government steadily built up the state's ownership interest in the company by buying shares in the market during the period from June 2008 to March 2009. In March 2009, the existing government announced that the state's direct ownership interest had reached 67%, and the government's direct purchase of Statoil shares was completed. As of 2005, Statoil is the second largest provider of natural gas to Europe. By revenue, today the corporation is ranked as the world’s eleventh largest oil company and the twenty-sixth largest company, regardless of industry, by profits in the world (Forbes, 2010). This is of significant importance since most of the profits are redirected back to the state. As of 31 December 2015, the Norwegian state

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31 | P A G E retains its 67% direct ownership, while also controlling an extra 3.23% indirectly through the Norwegian Pension Fund, totalling a stake of 70.23% (Statoil10, 2015).

The government policy as a shareholder in Statoil is to ensure that petroleum activities generate the highest possible value for the Norwegian state and its constituents (Dorsey et al, 2015). Since the early 1970s, state ownership has been an important element in the domestic management of petroleum resources. Initially, public participation in petroleum operations was largely organised directly by the state (Hammer, 2010).In recent years however, important developments have taken place, both as regards the organization and the management of state ownership. In 1985 the appointed government established the State Direct Financial Interest (SDFI) - an independent portfolio which included all public exploration and production licenses for petroleum and natural gas on the Norwegian continental shelf (Hammer, 2010). As of 2001, the management of the SDFI licenses has been outsourced to Petoro, a wholly owned company by the state. The company is not an operator of any fields and does not own any of the licenses, instead it monitors, on behalf of the government, Statoil’s marketing and sale of petroleum produced from the SDFI assets (Terdre, 2003). Hence, Petoro acts as an intermediary to secure that the state is achieving an optimum allocation of its oil and gas assets and to ensure that the government obtains its rightful share of the total value (Terdre, 2003; Hammer, 2010).

4.1.2 SOVEREIGN WEALTH FUND

The Norwegian Pension Fund is another central characteristic of the Norwegian state capitalist model. Nowadays, it is considered to be the country’s largest and most significant sovereign wealth fund; a state-owned investment entity that invests in real and financial assets such as stocks and bonds as well as in more sophisticated forms of investments such as private equity funds or hedge funds (Truman, 2010). It comprises two entirely separate funds which are also fully controlled by the state, The Government Pension Fund Global, and the Government Pension Fund Norway, (Reiche, 2010). The Norwegian Pension Fund was established in 1990 in order collect the surplus revenues generated by the oil and gas industries and re-invest them in the economy (Reiche, 2010). Nowadays, it is among the

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32 | P A G E largest sovereign wealth funds globally, although it is not a pension fund per say as it derives its financial banking from oil and gas profits and not pension contributions. The funds’ capital is invested among 9000 companies across 77 countries, including some well-known corporations such as Apple, Nestle and Royal Dutch Shell. Altogether, the Norwegian Pension Fund owns around 1,3% of listed companies worldwide and 2,3% of listed companies within the European region. When it comes at stipulating the domestic economy, the government implements a fiscal rule that stipulates the share of petroleum revenues that may be used to fuel the Norwegian economy. This fiscal rule defines the exact share of the fund value that can be used yearly in the national budget (Dorsey et al, 2015). In addition to that, it is also designed to prepare the economy of Norway for a post-oil future. At last, as we will also see on chapter 6 where this thesis will evaluate the political environment, Norway is the only country among other state capitalist which manage sovereign wealth fund, to have formulated a specific set of ethical regulations and guidelines for investments made by the Norwegian Pension Fund (Reiche, 2010). According to a parliamentary decision, since 2004 an established ethical council monitors and reports to the parliament about the investments made by the Norwegian Pension Fund. 4.1.3 NATIONAL CHAMPIONS

Telenor Group, or commonly known as Telenor, stands out from a list of companies that have turned into national champions by the assistance of the state during the last two decades. Telenor is a privately-held multinational telecommunication company, founded in 1977 (Fang et al, 2004). Till 1994, the company was a state-owned entity. In the end of the twentieth century, there were attempts by the government of Norway and the government of Sweden to merge Telenor with its Swedish counterpart Telia but they failed (Fang et al, 2004). Since the beginning of the twenty-first century, the company has been partially privatised and listed on the Oslo Stock Exchange and NASDAG. As of 2014, the government of Norway holds 53.97% of the shares and another 4.66% through the Pension Fund. The partial privatization of Telenor gave the company necessary capital to invest and expand its businesses overseas (Spilling & Rosenberg, 2008).

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33 | P A G E Telenor is currently considered to be one of the world’s largest mobile telecommunications companies with operations in Scandinavia, Eastern Europe and Asia. In addition to that, it is the second largest company listed on the Oslo Stock Exchange as of November 2015 (Spilling & Rosenberg, 2008). Apart from Telenor, Norsk Hydro is another Norwegian company that has outperformed in international markets lately by the financial assistance of the state. Norsk Hydro is an aluminium company, one of the largest worldwide. It operates in 50 countries and is active on all continents with metal production facilities in Europe, Canada, Australia, Brazil and Qatar .It was organized under the Norwegian law as a public company in 1905 to utilize Norway’s large hydroelectric energy resources (Olsen, 2006). During the 1980s, Norsk Hydro was strongly involved in the oil industry of the country.

The first decade of the new millennium, however, encompassed a major restructuring and transformation for the company. In 2004, it merged its fertilizer business with Yara International, a Norwegian chemical company. Moreover, in 2007 the state of Norway decided to integrate Norsk Hydro’s petroleum activities with that of Statoil. Since 2011, Norsk Hydro focused its activities on the aluminium industry and it transformed its business through a series of acquisitions (Olsen, 2006). The company bought all the aluminium assets of Vale S.A, a Brazilian multinational corporation engaged in metals and mining and in 2013, Norsk Hydro developed a joint venture with Orkla ASA, a Norwegian conglomerate (Terdre, 2013).As of 2013, Norsk Hydro is considered to be one of the top players internationally in the aluminium industry.

4.1.4 STATE-OWNED ENTERPRISES

As in every state capitalist economy, Norway’s corporate structure is characterized by a large number of enterprises owned and run completely by the state and the existent government. Statkraft provides an interesting success story of public management that will be further explored on chapter 5 where this thesis will attempt to evaluate the industrial policy of the state. Statkraft is currently one of the most profitable Norwegian enterprises with a strong presence in various international markets. Statkraft is but one example of a

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34 | P A G E variety of legal entities that serve the economic needs of the Norwegian state. It is a leading company in hydro, wind and gas power and it is one of Europe’s largest generators of renewable energy and a global player in energy market operations across more than twenty countries worldwide (Magnus & Midttun, 2000). In 2002, the government of Norway started to introduce significant changes in the relationship between the state and Statkraft. From October 2004, Statkraft was reorganized as a limited liability company, wholly owned by the state11. The corporate group Statkraft AS was established with the strategic goal of becoming a European leader in environmental-friendly energy (Boasson, 2014) Back then, the company acquired a significant number of local power Norwegian plants with the economic and legislative support of the government in order to strengthen the company’s operations. In 2005, Statkraft decided to build two gas-fired power plants in Germany. It was the biggest investment of the company since the 1990s. The idea was that by investing in the German market, the company could develop trading networks and captive power productions on the European continent from a strategic place that Germany is. In addition to that, in 2006 Statkraft decided to expand even more (Amundsen & Bergman, 2007). For that purpose, they opened a subsidiary office in London and built a partnership with the government of England to develop wind power for all the United Kingdom. Following this expansion, in 2008 Statkraft decided to swap its shares in E.ON Sverige AB4 for a third of E.ON Sverige’s hydropower production. Among others, this transaction gave Statkraft 39 hydropower plants and 5 district heating plants in Sweden (Statkraft, 2005). This deal made Statkraft the largest producer of renewable energy in the north region of Europe with activities that expand even beyond Europe.

Overall, the Norwegian state, including all public institutions and pension funds, maintains an ownership stake or a significant influence over some of the most successful national companies. Among the most profitable companies by turnover, the state manages to directly or indirectly be involved in most of them, either by owning major and minor equity positions or by acting as an indirect investor seeking to invest in short and long-term positions. As an illustration, the below table presents the four highest by turnover

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35 | P A G E Norwegian corporations, and the percentage of shares that the state holds. In all but one of these corporations, it is important to mention that the state acts as a major shareholder and thus, exerts significant influence in their management.

Table 1 Best performing companies by turnover and ownership of the state

Company Rank Turnover12 _Sector _{State Equity}

Statoil 637,400 Oil and gas 70,23%

Telenor 104,027 Telecommunications 58,7%

Yara International 85,052 Agriculture 42%

DnB 76,831 Banking 34%

Source: Kapital, biggest business publication in Norway (last update 2014)

The evolvement of state capitalism in recent times : what can we learn from Norway?

Master Thesis Political Science