Central Command

The third Plenary Session of the 17th Communist Party of China Central Committee on Sunday, Oct. 12, 2008 in Beijing

Li Xueren / Xinhua / AP

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In recent weeks, as the scale of the world's crisis has shifted from worry about buying holiday toys to worry about standing in bread lines, one government after another has stepped into the markets. Attempting to right the financial ship, London, Berlin and now even Washington are buying up stakes in financial institutions. And as governments wade into private business, they have sparked media coverage, particularly among conservatives, warning of a return of Big Brother. WE'RE ALL SOCIALISTS NOW, COMRADE, Britain's Daily Telegraph declared in one headline.

Yet in recent years several states have quietly been remaking themselves into international financial players, on a scale unprecedented at least since the fall of the Soviet Union. Unlike the East bloc, however, the new state capitalists — China, Russia and the Persian Gulf states, primarily — have proven so successful that even before the crisis they caused world leaders to wonder if democratic capitalism might not be the best economic model after all.

Since 1989, economists and world leaders have taken for granted that the only way to grow rich is to open your country — open your economy at home, open your companies to trade with the world, and open up your politics. But the new state capitalists challenge that wisdom. They encourage private enterprise and foreign investment. At the same time, they retain control of certain key industries, like oil or automaking, use state support to grow these industries, and then unleash state-backed firms into the global marketplace. Mostly authoritarian regimes, the state capitalists also keep a lid on politics by using growth to co-opt their middle classes.

Today, China, the gulf nations and other state capitalists have amassed the largest sovereign wealth funds in the world. The world's state oil companies control some 90% of global energy resources. (Many of these companies invited in private investors in the 1990s only to throw them out later.) And by protecting parts of their economy at a time of massive global business consolidation, the state capitalists have built companies capable of competing, and winning, in industries that require scale. According to a study by the American Enterprise Institute research organization, unfree states have grown faster than politically free ones in the past 10 years.

Some developing countries welcome a new model of capitalism. Cambodia, for example, has played the game of global trade; it signed a deal with the U.S. governing its garment exports, a big part of its economy. Now some Cambodian leaders think they should look elsewhere. "Why wouldn't we copy what China did?" one official in Phnom Penh said to me. "We had years of what the U.S. told us to do, and got this" (he pointed at beggars crawling outside a five-star hotel). "Now we go to China and all we see is how far ahead of us they've come." Once wary of directly challenging the West, nations like China no longer are shy about exporting their model. Beijing runs training programs for thousands of government officials from around the developing world, programs that highlight how China is getting rich.

State capitalism is hardly foolproof, of course. In nations with less sophisticated economic management than a place like Dubai, state control could simply revert to cronyism. Because they still rely on trade, the state capitalists are not immune to a global meltdown. Indeed, decreased Western consumer demand will dent China's economy as well as that of any that relies on exports. But the free-market autocrats stand in far better shape than the rest of the world. With their massive cash reserves, current-account surpluses and, often, capital controls, countries like China can better weather a downturn (China probably will still grow by 9% this year). And with no pesky U.S.-style congress to stand in their way, they don't have to worry about anyone vetoing their plans to stabilize their economies.

Actually, they could profit from the crisis. State capitalists already are picking through the carcasses of the West. The West's breakdowns could also mean that many large private investors, needing to find other opportunities, may reinvest capital in markets like China's, which has witnessed a slowdown in inflows in recent months.

In a tacit admission of the state capitalists' success, Western leaders are copying their tactics. After blasting Moscow for forcing its petroleum industry into state hands, Western European states are rushing to nationalize their biggest banks. After America criticized China for using state loans to support its leading companies, the Federal Reserve has started handing out loans to critical U.S. companies.

Maybe we'll all be socialists after all.