Two unrelated events hogged the headlines in the last month. On 22nd February Amazon became the third most valuable company in the world, overtaking Microsoft. On 25th February the official news agency Xinhua announced that the ruling communist party is proposing to remove the constitutional provision of “no more than two consecutive terms” for the country’s President and Vice-president. This would pave the way for the incumbent president to continue in the helm of power indefinitely.
The first event is a precursor of the future shape of the world economy while the second one is a forewarning of demise of liberal democracy as we understand today. These two events are also interrelated in the sense that their future trajectories will determine the denouement of the wrestling match that goes on between market power and state power.
Let us first have a closer look of the import of the first event. The Fortune magazine publishes a list of top 500 companies in the world, ranked by their revenues. Financial Times publishes a list of 500 top world companies ranked by their market capitalization. The latest Fortune data pertains to the year 2016 while market capitalization data is up to date as of 31st December 2017. For understanding the trend the time gap between two datasets has no bearing.
Top 10 Companies by Revenue and by Market capitalization:
Top Ten by market capitalization (M-Cap)
Top Ten by revenues
China National Petroleum
Oil & Gas
Royal Dutch Shell
Energy & Petro-Chemical
Johnson & Johnson
J P Morgan Chase
Banking and Financial services
Oil & Gas
The most interesting feature of the above two rankings is that while still infrastructure and manufacturing industries dominate the top rung of the current corporate behemoths, the future potential behemoths are growing up in the technology sector. M-Cap is an indicator of market’s prediction of future growth potential of a company. Amazon’s price-to-earnings ratio, a measure of how expensive a stock is in comparison to its current period earning, is 323 as compared to average ratio of only 22 for S&P 500 companies.
Ignoring Berkshire which is essentially a conglomerate, the only non-technology firm appearing in the top ten companies by M-Cap is JPMorgan, a financial service company. So the market is predicting that the future of market economy lies with companies which are technology driven, technology enabled and most importantly innovation focused. On the contrary, the top companies ranked by currents revenues are enjoying benefits of their access to natural resources protected by concession arrangements with the state. So these companies have to work in close cooperation with the states giving concessions. Managing the states is critical to their existence and profitability. This is in sharp contrast of the business model followed by the emerging giants. These companies using technology are creating an ecosystem of production of goods and services that are beyond the control of the geographically bounded nation states. In fact, these companies have much better understanding and access to actions and thoughts of the citizen of a state, particularly its younger ones than the any nation state has. Facebook was aware of any Russian meddling of US election, if any, than FBI could possibly have. Today, Google has much more information about its Indian users than the Indian Federal Government can ever have, Aadhaar notwithstanding. In 2017, 46.8% of the global population accessed the internet and by 2020 this figure is projected to grow to 53.7%. It is obvious that this growth will benefit much more technology companies than utility, retail and infrastructure companies. We cannot expect exponential growth of companies which are organically linked with exploitation of natural resources.
These technology companies are gradually increasing their footprints beyond their original areas of operations. One study forecasts that the combined market share of Apple, Samsung, and Google (via Android Pay) is expected to reach a user base exceeding 500 million for mobile contactless payments by 2021. Amazon has started its lending business by offering to fund its suppliers. China’s e-commerce giants including Alibaba, Tencent’s and others are now running a lending portfolio over $12 billion. Apple owned US Treasury bonds ($52.6 billion) by the end of July 2017 and ranked 23rd in the list of US Treasury bond holders ahead of Netherlands and Turkey. These technology companies may gradually cut out intermediaries like banks and insurance companies by using Artificial Intelligence and Blockchain technology. Since data is the fuel of 21st century, the owners of data will have more power than any nation state.
How this development is related to the China’s decision to consolidate power of state in a monarchial coterie formed around the current incumbent?
The Chinese communist party has been able to put the country on a sustained high growth trajectory in the last three decades. The country is expected to become the world’s largest economy by 2030. China has used foreign capital and technology liberally in creating its manufacturing base. A World Bank report of 2010 mentioned that “China received about 20 percent of all FDI to developing countries over the last 10 years and over $100 billion in 2008. In terms of share of GDP and investment, FDI accounted for some 2.5 percent of GDP on average over the last five years”. While welcoming FDI, Chinese ruling dispensation did not allow domestic private capital to capture the “commanding height” of the economy. 9 out of top 10 Chinese companies appearing in The Forbes 2000 list of 2017 are all state owned. If China has to establish its position as the first among equals in the international distribution of power it cannot afford to destabilize its own internal economic system built under the watch of party and the state. Till now, USA has been benign bystander, if not an active facilitator, of China’s rise as a global economic power. It was expected that economic growth and prosperity along with greater integration with world economy would slowly but steadily chip away the ideological foundation of the present Chinese political system. But this expectation of US policy makers has been belied. After disintegration of Soviet Russia, the world is witnessing, not the rise of liberal democracy, but rise of two dictatorial regimes under two most focused men who want their nations to occupy the high table of international power structure.
So we have on the one hand two authoritarian states (China and Russia) that carry the legacy of failed communism and other hand we have technology giants who are not fettered to any nation state nor bound by any geography. David Ignatius, associate editor of Washington Post wrote in an op-ed piece that “China is racing to capture the commanding heights of technology and trade.”(here) The forces that will confront China are not the usual suspects- USA, UK or European Union states. This time the war will be fought in cyber space for capturing data about and of the people and the technology companies will have to fight for withering away of states as we know it now. We may recall that Marx desired withering away of states as the final goal of communism. In that sense these privately owned technology companies, rather ironically, would stand for one of the goal of communism as against the ex-communist regimes will stoutly defend the right of nation states. As some author wrote – the last battle will be between communists and ex-communists.
Dr. A.K.Nag was a senior executive of the Reserve Bank of India, the central bank and the monetary authority of the country. He was also one of the main architects of the RBI's enterprise wide data warehouse, a pioneering effort for any central bank anywhere and many other such one-of-its-kind projects.