more than government departments in emerging markets; the assumption was that, as the economy matured, the government would close or privatise them. Yet they show no signs of relinquishing the commanding heights, whether in major industries (the worlds ten biggest oil-and-gas firms, measured by reserves, are all state-owned) or major markets (state-backed companies account for 80% of the value of Chinas stockmarket and 62% of Russias). And they are on the offensive. Look at almost any new industry and a giant is emerging: China Mobile, for example, has 600m customers. State-backed firms accounted for a third of the emerging worlds foreign direct investment in 2003-10.In this sectionWith the West in a funk and emerging markets flourishing, the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustainable model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller companies to merge to form national champions. South Africa is also flirting with the model.This development raises two questions. How successful is the model? And what are its consequencesboth in, and beyond, emerging markets?The law of diminishing returnsState capitalisms supporters argue that it can provide stability as well as growth. Russias wild privatisation under Boris Yeltsin in the 1990s alarmed many emerging countries and encouraged the view that governments can mitigate the strains that capitalism and globalisation cause by providing not just the hard infrastructure of roads and bridges but also the soft infrastructure of flagship corporations.So Lee Kuan Yews government in Singapore, an early exponent of this idea, let in foreign firms and embraced Western management ideas, but also owned chunks of companies. The leading practitioner is now China. The tight connection between its government and business will no doubt be on display when the global elite gathers in the Swiss resort of Davos next week. Among Westerners there, government delegates often take the opposite view to those from the private sector: Chinese delegates from both sides tend to have the same point of view, and even the same patriotic talking-points.The new model bears little resemblance to the disastrous spate of nationalisations in Britain and elsewhere half a century ago. Chinas infrastructure companies win contracts the world over. The best national champions are outward-looking, acquiring skills by listing on foreign exchanges and taking over foreign companies. And governments are selective in their corporate holdings. Overall, the Chinese state has loosened its grip on the economy: its bureaucrats concentrate on industries where they can make a difference.Let a thousand mobiles bloomYet a close look at the model shows its weaknesses. When the government favours one lot of companies, the others suffer. In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billionmore than Chinas 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better