The rise of State Capitalism in the post-COVID-19 era The rise of State Capitalism in the post-COVID-19 era The rise of State Capitalism in the post-COVID-19 era

The rise of State Capitalism in the post-COVID-19 era

Christopher Dembik

Head of Macro Analysis

Summary:  With almost every governments in the world stepping in in order to save the private sector, as Germany has done recently with Lufthansa, state capitalism increasingly looks like the coming trend in the post-COVID-19 era. Many governments are forced into this role to avoid massive bankruptcies and layoffs which results in a bigger dose of government control in the economy, for better and for worse.

A very old story

Marxism, which has been the subject of renewed interest since the GFC, defines state capitalism as a social system combining capitalism with ownership or control by the state which basically acts like a single huge corporation. It differs from Communism in the sense that in a state capitalist system, private property continues to exist alongside a big government that dictates the path the economy is heading to. State capitalism has been around for almost as long as capitalism itself. In 1791, Alexander Hamilton, first ever U.S. Treasury Secretary, presented an ambitious project to protect America’s infant industries with tariffs from international competition. It marks the birth of the idea of educative protectionism which will be theorized a few decades later by the German economist Friedrich List after a stay of a few years in the United States.

Since then, there has been a myriad of examples of state capitalism - the Soviet experience of course - but also more recently many emerging countries such as China and Russia, and so-called strategic sectors, notably the energy sector. For some economists, state capitalism is even an indispensable stage in economic development. Historically, economic and financial crises have catalyzed changes toward explicit forms of state capitalism in the West when governments are forced to intervene massively in the economy by political necessity.

In the aftermath of the Global Financial Crisis, Eurasia Group’s president, Ian Brenner wrote a celebrated book in which he claims that the GFC announces the end of the free market. His bold statement turned out to be partially correct. During the turmoil, Western governments had to play a bigger role in the economy as driving force for recovery, but they disengaged themselves very quickly as soon as the economy showed signs of picking up.

This time is different

State capitalism might become a more permanent state of the economy, at least in some countries, due to the nature of the current crisis, which differs from previous ones, mainly for two reasons. First, it is not a “normal” recession. While on average 60% to 70% of businesses are hit in a “normal” recession, the COVID-19 crisis has affected almost 100% of businesses in some countries where strict lockdowns have been implemented. Coronavirus scars and depressive effects will persist longer than most believe. Policymakers, with a massive inflow of liquidity into the economy, have delayed and postponed a lot of pain but they have not eliminated it. The second economic wave is about to start, characterized by massive unemployment and an unprecedented number of bankruptcies. In countries most exposed, the relative share of the private sector in the economy will dramatically decrease, consecutively leading to a bigger public sector which will employ directly or indirectly a big chunk of the workforce. In addition, governments are likely to rely increasingly on quasi-permanent subsidies to protect domestic companies and appease social discontent resulting from the crisis.

Second, another crisis will emerge soon with potential ripple effects more devastating than the coronavirus. CO2 levels in atmosphere reaching a new record and Artic oil spill caused by melting permafrost are two unpleasant reminders that climate change has not taken a break while we were focusing on the pandemic. Many people might consider big government is the only way to tackle the consequences of climate change and especially avoid leaving the poor even farther behind.

The Russian way or the Singapore model

The Russian Federation and Singapore gives us two extreme examples of what state capitalism looks like nowadays. The Russian way is the example not to follow. Since the nationalization of Yukos, the Russian government has taken over part of the private sector to such a level that 55% of the economy is now in the hands of the state and 28% of the workforce is directly employed by the government – the highest level since the mid-1990s. Government’s control over the economy has been characterized by the lack of structural reforms and the increased share of extreme wealth in the private sector. Basically, a new elite close to power has replaced the Soviet nomenklatura.

At the other extreme of the spectrum, Singapore is often rightly presented as the paragon of state capitalism. Since the 1970s it has rejected the laissez-faire system that flourished in neighboring countries and the state has always played a central role in the economy as major shareholder of the domestic industry and commerce. As such, it has managed to successfully build up competitive companies in key market segments like high technology and semiconductors for the benefit of the majority. Between these two extreme paths, there is obviously a middle-ground that can depend, among other things, on each country’s political culture.

Second-order effects of state capitalism

As we have learnt the hard way in the past, there ain't no such thing as a free lunch in economics. There are very important and negative underlying implications of the trend toward state capitalism worth considering. We are very likely to see a growing number of governments resorting to protectionism, through regulations that considerably change the rules of the game, in order to protect their market and their companies from foreign competition. History teaches us it evolves almost every time into a lose-lose situation for the initiating country: job losses, drop in foreign investments, loss of competitiveness etc.

As wealth inequality is likely to jump in the aftermath of the crisis, governments might also be inclined to oppose to market forces of supply and demand by implementing administrative prices. We have recently seen such calls in favor of setting administratively the prices of masks or enacting rent control in some countries. Administrative prices are sometimes necessary, for instance for some medications, but price discovery should be the rule. Otherwise, it will conduct to lower supply and even the development of the black market in some cases.

There is no doubt that there are plenty of good reasons for governments to intervene these days to save the economy. However, we should always keep in mind that this support should ideally be temporary as it implies negative externalities that will weight considerably on the good functioning of the economy.

On the same topic:

The “nationalization” of the bond market is the ultimate rampart against sovereign debt crisis


The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.