Markets and Democracy

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J ournal USA

U.S. DepArtment o StAte / JUne 2008

VolUme 13 / nUmber 6

h://www.aica.gv/uicais/juausa.h

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About This Issue

J ournal USA 1

T

he World Bank’s Commission on Growth andDevelopment recently released a report analyzing the actors that make or economic growth in

developing countries. The group o international experts,including two Nobel Prize winners, ound that one key is “credible, inclusive, and pragmatic governments.”Other actors the commission identiied were “the quality o the debate” in a country on public policy, vigor inighting corruption, and equality o opportunity — allcharacteristics popularly associated with democraticsystems.

The chart makes a similar point. Place the top 20countries listed in the Index o Economic Freedom next tothe top 20 in the Index o Democracy, and what do yousee? Much overlap. Thirteen countries appear on both lists.

There would appear to be, at a minimum, an associationbetween a productive ree market and a democratic ormo government.

Michael Mandelbaum, author o the new book Dcacy’s Gd na , is more emphatic. “The principalsource o political democracy,” he writes in this issue o Jua USA, “is a ree-market economy. While therehave been, and continue to be, countries that practiceree-market economics but not democratic politics, nocountry in the 21st century that is a political democracy

lacks a ree-market economy.” Yet an article last year by public policy proessor Robert Reich in the respected journal ig picy is titled “How Capitalism Is Killing

Democracy.”Clearly, the connection between markets anddemocracy is not a straight line. Since Adam Smith’s AIquiy i h Causs ad nau h Wah nais appeared in 1776, such big economic thinkers as Max Weber, Joseph Schumpeter, and Lester Thurow havebeen debating this complex relationship. Is it possible tohave ree markets without democracy? Which developsirst? Can the powerul, universal incentive o economicgrowth lead to greater democracy in countries that are notdemocratic?

The international experts in this issue oer some

answers to these questions, and point out such relevantvariables as opportunities or wealth creation, the role o social trust, and concepts o “voice” and accountability.Our goal, however, is not to resolve a centuries-old intellectual debate but to deepen our readers’understanding about the nuances o what is undeniably a matter o importance or everybody in the world today.

— th edis

Countries Ranked High forOpen Markets and DemocracyCountries in boldface type appear on both lists .

1. Hong Kong

2. Singapore

3. Ireland

4. Australia

5. United States

6. New Zealand

7. Canada

8. Chile

9. Switzerland

10. United Kingdom

11. Denmark

12. Estonia

13. Netherlands

14. Iceland

15. Luxembourg

16. Finland

17. Japan

18. Mauritius

19. Bahrain

20. Belgium

Source: Heritage Foundation and The Wall Street Journal

Top 20 Countries inIndex of Economic Freedom

1. Sweden

2. Iceland

3. Netherlands

4. Norway

5. Denmark

6. Finland

7. Luxembourg

8. Australia

9. Canada

10. Switzerland

11. Ireland/New Zealand

13. Germany

14. Austria

15. Malta

16. Spain

17. United States

18. Czech Republic

19. Portugal

20. Belgium/Japan

Source: The Economist © The Economist Newspaper Limited 2007.

All rights reserved.

Top 20 Countries inIndex of Democracy



Te Rts f Mder Demcrc Michael Mandelbaum, Professor of American

Foreign Policy, Johns Hopkins University School of Advanced International StudiesLiberty and sel-government are the two parts o democracy. Free markets come irst and make theright conditions or democracy to emerge.

Elstic Demcrcies d GlbliztiChan Heng Chee, Singapore’s Ambassador tothe United StatesCountries can have varying degrees o reedom anddemocracy. Open markets are necessary but notsuicient or democracy. Recent experience suggeststhat open markets precede democracy.

OppOrtunities fOr Wealth

Te Rts f Mder CpitlismBruce Scott, Professor of Business

Administration, Harvard Business SchoolCapitalism and democracy typically did not arisetogether in history. Whether they can continue todominate the world’s systems o commerce andgovernment raises a new question.

Mretizti Witut Demcrtiztii CiKellee S. Tsai, Professor of Political Science,

Johns Hopkins University Don’t expect democracy to emerge in China any time soon. A booming economy and rising incomesmight just bolster the readily adaptive communistgovernment instead.

Free Mrets d Demcrc: TeCub Experiece

Oscar Espinosa Chepe, EconomistDecades o oppression by a centralized governmenthave ground down Cuba’s economy. Withoutreedom, Cuba’s people can never compete in a globalizing economy.

rOle Of sOcial trust

Demcrc, Free Eterprise, dCfidece

William A. Reinsch, President, NationalForeign Trade CouncilFree markets tend to bolster democracy. Sometimesdemocracy bolsters ree markets, sometimes not.

Mret Ecm WitutDemcrc i te Gulf

Jean-Francois Seznec, Visiting AssociateProfessor, Georgetown University The Gul states have mostly ree markets butnot ree elections. The rulers share the beneitso economic expansion but not political power.

Demcrc d Cpitlism: TeSeprti f te TwisIvan Krastev, Chairman, Centre for Liberal StrategiesThe ear was that Central Europe wouldembrace democracy and reject marketeconomics. The case now is that CentralEurope has accepted ree markets but growndissatisied with democracy.

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Te Effects f Etic StrifeDoh C. Shin, Professor of PoliticalScience, and Christopher D. Raymond,

Graduate Teaching Assistant, University of MissouriResearch shows that political and economicreorms reduce ethnic conlicts, even incountries where a minority ethnic groupdominates the economy.

VOice and accOuntability o Demcrc d Develpmet:Rejectig te ExtremesDaniel Kaufmann, Director of Global

Governance, World Bank InstituteIn the long term, reedom o speech and pressplus democratic government accountability make a positive dierence in economicdevelopment.

Will Freer Mrets Led t MreDemcrtic Gvermet i Russi?

Anders Åslund, Senior Fellow, Peterson

Institute for International EconomicsRussia has turned back toward authoritariangovernment despite its economic boom, level o education, and relatively open society. Thereason is corruption.

Bibligrp d Filmgrp

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liy ad s-gv a h w as dcacy, micha madau says. aks c is ad ak h igh cdiis dcacy g, h says. madau is h Chisia A. H ss Aica ig icy a h Jhs Hkis Uivsiy Sch Advacd Iaia Sudis i Washig, D.C., ad h auh Democracy’s Good Name: The Rise andRisks o the World’s Most Popular Form o Government (puicAais, 2007).

Over the past three decades democracy has enjoyeda remarkable rise. In 1900 only 10 countriescould be counted as democracies. By mid-century

the number had increased to 30, and 25 years later itremained there. By 2005, however, 119 o the world’s 190countries were democracies. How did this happen? Theplace to begin to answer that question is with a properunderstanding o democracy itsel.

For those who use the term — and that includes

almost everyone — democracy is a single, integrated,readily identiable political system. Yet historically, as Idescribe in my book Dcacy’s Gd na: th ris ad risks h Wd’s ms pua Gv ,democracy came about through the usion o two politicaltraditions that, until well into the 19th century, werenot only distinct but were widely regarded as completely incompatible with each other.

The two political traditions are liberty, which is

oten called reedom, and popular sovereignty, or sel-government. Liberty belongs to individuals, while popularsovereignty is a property o the community as a whole.Liberty involves what governments do or, more accurately, what they are orbidden to do to their citizens — they areorbidden to abridge individual reedoms. Sel-government,by contrast, has to do with the way those who governare chosen — they are chosen by all the people. Sel-government thereore answers the question who governs, while liberty prescribes rules or how those who govern may

J ournal USA 4

The Roots o Modern Democracy Michael Mandelbaum

Freedom of speech and other freedoms in South Korea followed free markets.

© A P I m a g e s / A h n Y o u n g - J o o n



J ournal USA 5

do so, rules that impose limits on what they may do.The two component parts o democracy have

dierent histories. Liberty is the older o the two. Itdeveloped in three stages. Economic liberty, in the ormo private property, dates in the Western Europeantradition rom ancient Rome. Religious liberty in thistradition — reedom o worship — emerged largely romthe split in Christian Europe caused by the ProtestantReormation o the 16th and 17th centuries. Politicalliberty came later than the other two — 18th-century

Britain was the irst place where something resembling modern political liberty could be seen — and it involvesthe absence o government control over speech, assembly,and political participation.

Popular sovereignty burst upon the world with theFrench Revolution o 1789, which brought orth theidea that sovereign power should reside in the peopleas a whole rather than in hereditary monarchs. Since itis impractical or all o the people to govern themselvesdirectly all the time, a vehicle or popular sovereignty has

developed: representative government, with the peoplechoosing their representatives in ree, air, open electionsin which all adults have the right to vote.

Until the second hal o the 19th century, it was widely believed that popular sovereignty would crush

liberty. I the people gained supreme power in thesocieties in which they lived, it was thought, they wouldseize the property o the afuent and enorce politicaland social conormity on everybody. Two classic workso 19th-century political analysis, the French aristocrat Alexis de Tocqueville’s two-volume study Dcacy i Aica and the Englishman John Stuart Mill’s essay “On Liberty,” address precisely this danger. By the 20thcentury, however, it was clear that liberty and popularsovereignty could coexist peaceully, as they now do inmany countries around the world.

Social S afety Net

One important reason or the successul mergero the two was the development, at the end o the19th century and in the early decades o the 20th, o government programs o social protection — old-agepensions, unemployment insurance, and health carebenets — that came to be known, collectively, as thesocial saety net, or the welare state. Since every citizen isentitled to these benets, the welare state, in eect, madethe distribution o property universal, which in turn hasmade the institution o private property more acceptablethan it would otherwise have been.

Combining social welare with liberty and popularsovereignty made democracy attractive. So, too, did thecourse o modern history, in which democracies becamethe richest and most powerul countries in the world —Great Britain in the 19th century and the United Statesin the 20th. Nothing succeeds like success, and becausethe most successul countries in the world in the secondhal o the 20th century — Western Europe and Japan,as well as the United States and Great Britain — weredemocracies, others sought to imitate them.

It is one thing to aspire to establish a democraticsystem o government, however, and quite anotheractually to create one. Here a dierence betweendemocracy’s two components is relevant. Popularsovereignty is a political principle that is relatively easy to implement. Free elections can be held quickly andinexpensively almost anywhere.

Liberty, however, is ar more dicult to establish. Itrequires institutions, a ull-fedged legal system oremostamong them. It requires people with the skills and

Bastille Day in Paris celebrates the birth of popular sovereignty.

© A P I m a g e s / M i c h e l L i p c h i t z



J ournal USA 6

experience to operate these institutions. Liberty canonly fourish in a society in which the values supporting these institutions, such as respect or the rule o law, are widespread. These institutions, skills, and values cannotbe called into existence quickly and cannot readily be

imported rom abroad. In Great Britain, or example,they evolved over many centuries. This raises the questiono where they come rom. How do societies that lack theinstitutions and practices o democracy manage to getthem?

The principal source o political democracy, asI explain in Dcacy’s Gd na , is a ree-marketeconomy. While there have been, and continue to be,countries that practice ree-market economics but notdemocratic politics, no country in the 21st century that isa political democracy lacks a ree-market economy. Mosto the countries in which democracy appeared in the

last quarter o the 20th century, particularly in SouthernEurope, Latin America, and East and Southeast Asia,had had at least a generation’s worth o experience inoperating a working market economy.

M arketS foSter DeMocracy

Free markets oster democracy in our dierent ways.First, at the heart o every ree-market economy standsthe institution o private property, and private property is itsel a orm o liberty. A country with a working reemarket, thereore, already has a major component o political democracy.

Second, ree markets generate wealth, and many studies have shown that the wealthier a country is, themore likely it is to be governed democratically. Wealthy people have the time or the political participation thatdemocracy requires and that poor people lack. Wealthcreates what has historically been the social backbone o democracy: a middle class.

Third, the ree market is the core o what socialscientists call civil society, which consists o theorganizations and groups in a society that are separate

rom the government, such as labor unions and religiousand proessional associations. Civil society stands betweenthe government and the individual. It restrains thegovernment’s power and provides social space or activity independent o the government. The organizations o civil society rely on a ree-market economy or the undsthat sustain them. There can be no democracy withoutcivil society and no civil society without a unctioning ree-market economy.

Fourth, the ree market cultivates two habits that are

essential or democratic politics. One is trust. Citizens ina democracy must trust the government not to abridgetheir rights, and minorities must trust the majority notto harm or persecute them. In a ree-market economy,buyers and sellers must each trust that the other willulll the terms o the bargains that they strike; otherwise,commerce will not take place.

The other market-ostered habit that is crucialor democracy is compromise. In act, democracy may be dened as the political system in which peaceulcompromise rather than violence or coercion settles thekinds o dierences that are inevitable in any society.People learn to compromise through the everyday activities o a ree-market economy: The buyer and theseller must always compromise on the price o theirbargain since the seller will always desire to be paid morethan he receives and the buyer will always wish to pay lessthan he gives.

Beginning in the last third o the 20th century, theree market came to be regarded virtually everywhere asthe best orm o economic organization or producing prosperity. All societies want to be prosperous, so almostall o them have established, or tried to establish, ree-

market economies. Because the rst tends to promote thesecond, the spread o ree markets has done more thananything else to make possible the remarkable rise o democracy the world over.

th iis xssd i his aic d cssaiy c h viws icis h U.S. gv.

China has moved to protecting private property, itself a form of

liberty.

© A P I m a g e s / E u g e n e H o s h i k o



J ournal USA 7

Cuis ca hav vayig dgs d ad dcacy,accdig Cha Hg Ch, Siga’s aassad h Uid Sas. o aks a cssay u suici dcacy; wih h xci Idia, c xic suggss ha aks cd dcacy, sh says. this ssay was adad h S 18, 2007, aks a h Cg Wiia ad may i Wiiasug, Vigiia.

A nglo-American democracy is based onthe United Kingdom’s parliamentary model or the separation o powers o the

American political system. Its proper unctioning assumes the existence o reedom o speech,reedom o assembly, ree elections, and the ruleo law. Any country that calls itsel a democracy must adhere to all o these elements.

But around the world, democracy iselastic. You can have more democracy or lessdemocracy, and you can have greater or lesser

degrees o reedom. Malaysia and Singapore areless democratic than Japan and South Korea butmore democratic than Thailand and Egypt.

My view is that markets are necessary butnot suicient or democracy. We have neverseen a country that is democratic that does nothave some degree o open markets, and we havenever seen a country that is totally closed to theoutside world that is not also authoritarian ortotalitarian. Myanmar has hardly any marketsreally and no democracy. North Korea has nomarkets and no democracy.

Which comes irst, markets or democracy? What is or should be the sequencing?

the four tigerS

Observing political developments in Asia, I would say markets come beore democracy. Theour tigers — South Korea, Taiwan, Hong Kong,and Singapore — were authoritarian and becamemore open systems with adoption o an export-oriented, market-based economy. All became

highly successul economically, achieving average growth o 8 to 9 percent a year over a decade or two.Entering world markets requires discipline, rule

o law, transparency, and access to inormation. Thesechanges lead to a prosperous middle class to serve as a irmoundation or a stable democracy. Countries that embracethe world economy also embrace globalization, leading todemocratization and equalization.

Compare the paths o Russia and China. The SovietUnion under Mikhail Gorbachev chose gass (openness)

Elastic Democracies and GlobalizationChan Heng Chee

Singapore prospered in textile and other industries before moving toward

democracy.

© A P I m a g e s / W o n g M a y e - e



J ournal USA 8

beore sika (economic restructuring), hastening the Soviet collapse. But today Russia has become morecentralized, and the United States is uncomortable that ithas retreated rom democracy.

China chose sika irst. Since 1978 China hasbeen going through breathtaking economic growth. Themiddle class is growing, the Internet is buzzing, and socialreedoms are allowed. Foreign travel is allowed, and ideaslow in along with oreign direct investment. I believethe Chinese political system will change to cope withthe economic system that is ast evolving. Competitiondemands it. Chinese democracy may not look like Anglo-American democracy, but elections, ree speech,responsiveness to the people will come.

India is one country in Asia where democracy came irst and the opening o markets later. Now India is opening its markets and participating in the world

economy in ull measure. It will boom. India may bethe rare exception where democracy became successully established beore markets.

the u.S. r ole

Since the end o World War II, the United Statesand its European allies have endeavored to set up anopen and air global trading system and a stable system o

currency exchange. Internationalagreements have led to hugegrowth o trade, banking, andinance throughout the world.They allow newly independent

and sovereign countries that buy into this system to develop andprosper without having to think about resorting to conlict toachieve their economic goals.

In tandem with openmarkets and open trade,the United States led in thepromotion o democracy. Forcountries to accept and succeed with the democratic experiment,open markets were seen as

essential. The United States keptits markets open while exporting capital markets and technology.In Asia, when we think o America, we think o democracy and ree markets.

Since the Cold War, the United States and Europe setout to promote democracy and human rights along witheconomic deregulation in authoritarian and totalitarianregimes. This was the Washington consensus. In Asia we link the aggressive promotion o this consensus ashastening and contributing to the 1997 Asian inancialcrisis.

I believe the United States is still interested inpromoting democracy. But paradoxically, the UnitedStates is turning protectionist. I the United States wantsto see democracy lourish it cannot close its markets. New democracies will be choked o i they cannot work andprosper through being productive and play by the globally established rules o the game.

When the Chinese students stood up against theauthorities in Tiananmen, they erected a Statue o Liberty as their icon. That is because the United States stands

or reedom and liberty. That is what you export. I theUnited States were to become protectionist, I wonder what icon would be held up. It cannot be what the UnitedStates wants as its image.


China’s economic system is fast evolving. Will its political system change too?

© A P I m a g e s / E l i z a

b e t h D a l z i e l



J ournal USA 9

Caiais ad dcacy yicay did ais gh ihisy, accdig buc Sc. Whh hy ca ciu dia h wd’s syss cc ad gv- aiss a w qusi, h says. Sc is pau WhiChig ss usiss adiisai a Havad busiss Sch ad h auh a hcig k cad Capitalism, Democracy and Development, u-ishd a his ya y Sig Vag.

A t least since the 1835 publication o Alexis deTocqueville’s remarkable Dcacy i Aica ,the United States has been known or its

particular marriage o capitalism and democracy —decentralized decision making in both the economic andpolitical realms.

Although there is no consensus denition o capitalism, since 1990 it has become the near-universal

economic system,encompassing China andIndia, though not Cuba or North Korea.

Democracy isstill more dicult todene, and the numbero democracies varies

depending upon thedenition used. YaleUniversity politicalscientist Robert Dahlcalculates that morethan hal the 200United Nations membercountries, with perhapstwo-thirds o the world’spopulation, couldbe characterized asdemocracies.

Thus capitalism,though imprecisely dened, has achieved

near-total dominance in the global economy, anddemocracy has become the normative model i muchless dominant in act: China has built a hugely successulcapitalist system but still maintains an authoritarianregime.

We need to dene capitalism and democracy withmore precision beore we can predict whether they will continue to dominate as systems o commerce and

government. First, there are varieties o capitalism; theU.S. variety diers rom the European, or example, withEurope’s stricter market regulation and more egalitarianincomes.

Second, discussions o democracy tend to ocuson processes or citizen participation while neglecting to consider whether that participation actually assuresdemocratic outcomes. President Abraham Lincoln’s1863 address at Gettysburg called the Civil War a testo whether “government o the people, by the people,

The Roots o Modern CapitalismBruce Scott

Ending border controls, as here at the German-Polish border, signals freedom of movement, a requirement

of capitalism.

©

A P I m a g e s / Z b z i s t a w R o w a l e w s k i

Opportunities for Wealth



J ournal USA 10

or the people” would endure. As Lincoln implied,government by the people does not assure government orthe people. As Lincoln was speaking, the United Stateshad already enjoyed almost a century o government by the people yet had turned a blind eye to slavery, as though

blacks were not people. It had turned an almost equally blind eye to the political rights o women.

Furthermore, the U.S. constitutional model dividessovereignty among three branches o government— legislative, executive, and judicial — while mostother democratic regimes ollow the British precedent,concentrating sovereignty in the popularly elected lowerhouse o the legislature.

DefiNiNg c apitaliSM

Following is an attempt to provide an operational

denition o capitalism, to show how it arose in history,and to suggest some conditions avorable to — andperhaps even essential or — democracy.

Many economists dene capitalism more or lessas a system o property rights coextensive with marketsor production and consumption o goods and services,governed by the “invisible hand,” to use Adam Smith’samous metaphor, which sets prices in line with demandand supply.

I preer some political scientists’ denition o capitalism as a system o governance that originates withstate permission or non-state actors to exercise economicpower, subject to a set o rules and regulation. Under thisdenition, capitalism depends upon a delegation o powerrom the state to economic actors and upon the coercivepower o the state to design, monitor, and ultimately enorce market regulation. The pricing mechanismcoordinates supply and demand within a given marketramework, while the visible hand o government enorcesthe ramework and keeps it up to date.

While the state needs to be accountable orits legitimacy, that accountability need not be to a democratically elected government in order or capitalism

to fourish. Venice, perhaps the earliest example o sustained capitalism (since at least beore 1200), was nodemocracy; it was essentially a constitutional monarchy,its seven islands having ormed a voluntary uniongoverned by an elected duke.

Capitalism emerged well beore large-scaledemocratic states, and political scientists see the existenceo decentralized market-based decisions in the economy as a prerequisite or decentralized political power throughdemocracy.

While democracy at the level o cities seems to daterom ancient Greek and Roman times, no democraticstates were clearly apparent beore De Tocqueville’sobservations on America, and his American exampleis the one case where some would argue that the two

systems o democratic government and capitalism grew up together starting about 1630.

The historian Fernand Braudel, who dated theorigins o capitalism to 1400-1800, admitted that he wasunable to dene capitalism, yet he recognized importantly that it was a system o economic relationshipsincompatible with eudalism, another system o economicrelationships. Trade in goods and services did exist inmany eudal contexts, such as those o the Aztecs, theIncas, Japan o the Shoguns, imperial China, India, andthe Ottomans.

ceDiNg power

Capitalism requires ree movement and employmento labor and the right to buy and sell land, which werenot compatible with eudalism. It recognizes that interestpayments are a legitimate return on capital, and itprovides the right or non-state actors to mobilize capitalthrough legal vehicles such as partnerships, joint stock companies, and the modern corporation. All o thesereedoms imply not only an end to eudalism, but alsothe willingness o the sovereign state to cede such powerto non-state actors.

This concept makes clear that capitalism emergedin Europe long beore elsewhere, with the exception o the United States, where European settlers brought many ideas and institutions with them.

Why did capitalism emerge in Europe? There is nosingle answer, but an important and distinctive elemento the European experience was nearly continuous warare in the 16th and 17th centuries. This political-military competition placed great strains on the existing political units in Europe, which have been estimated tobe as many as 500 in 1500 and as ew as 40 by the end o

the Napoleonic wars in 1815 and 25 in 1940. As with economic competition today, the chancesor survival o a political entity then were much higheri it had an eective army, and the size o the guns andarmies got dramatically larger over the centuries. Politicalentities that would survive needed money or at leastborrowing power. Decentralization o power to would-be entrepreneurs and traders was a potential source o income or those rulers who would tolerate decentralizedpower. And constitutional monarchies, which borrowed



J ournal USA 11

money with the consent o parliaments, had much lowerborrowing costs.

The historic preconditions or capitalism seemto have been competitive threats to sovereignty andautonomy on the one hand and accountable governmenton the other. Japan, China, India, and the OttomanEmpire had neither or centuries.

The preconditions or democracy seem to includecontrol o the military and police by elected ocials; a state with a monopoly o coercive power, including thecoercive powers o the courts and the power to providesecurity or persons and property; the existence o markets or production and consumption; and acceptanceo Enlightenment values, notably the notion that ultimatepolitical authority is vested in human institutions thathave been derived rom human reasoning.

A number o conditions avor continuance o

democracy, including rising incomes, avoidance o

excessive inequalities inthe distribution o wealthand power, a strong and well-mobilized middleclass, and an accepted

code o ethics, balancing individual sel-interestagainst the responsibilitieso citizenship.

Other conditions canthreaten democracy. Oneo these is large sources o unearned income, suchas so-called mining rentsrom oil. Nigeria andVenezuela are examples.The unearned income

becomes a huge sourceo wealth and patronageor government leadersand thus a springboard tounaccountable power.

Building theunderlying conditions to support democracy takesdecades, and starting prematurely may not hasten theprocess, as evidenced in Bosnia, Kosovo, Iraq, Lebanon,and the West Bank. A number o European countries,such as Britain and the Netherlands, were well governedlong beore they became democracies.

Constitutions and elections do not alone necessarily signiy democracy, as evidenced in contemporary Nigeria,Venezuela, and Zimbabwe. Constitutions and electionscan be manipulated by elected leaders, and ocusing on the establishment o these procedural aspects o government by the people may, in act, delay its creation,let alone the creation o government or the people, which is more dicult still.


Handcuffed opposition demonstrators raise their hands in Venezuela, where democracy is slipping away.

© A P I m a g e s / H o w a r d Y a n e s



J ournal USA 12

D’ xc dcacy g i Chia ay i s,K S. tsai says. A ig cy ad isig ics igh jus s h adiy adaiv cuis gv- isad, sh says. tsai is ss iica scic a Jhs Hkis Uivsiy i bai, mayad.

I

n 1978 China did not even keep ocial statisticson private businesses because they were illegal andnegligible in number. Merely three decades later, the

private sector represents the primary engine o growthin the Chinese economy. In 2008 there are more than34 million private businesses, employing more than 200million people and accounting or 60 percent o thecountry’s gross domestic product.

The spectacular pace o private-sector developmenthas led many observers to speculate that the country is developing a capitalist class that will demanddemocracy. This expectation is based on the logic thatan increasingly prosperous merchant class will overthrow

the authoritariangovernment inthe spirit o “notaxation withoutrepresentation,”thereby reenacting thepattern o democraticdevelopment in

Great Britain and theUnited States.

Yet thisconventional wisdomabout the causalrelationship betweenree markets andpolitical reedomdoes not t thesituation in present-day China. Privateentrepreneurs are notacting collectively topush or democracy,

and those who have persisted in criticizing the ChineseCommunist Party are censored, repressed, or exiled.Instead o political liberalization, the spread o marketorces has bolstered authoritarian resilience and regimedurability in China.

c apitaliStS DiviDeD

China’s private business owners do not constitute a

distinct “capitalist class” that shares a common identity and interests. Sidewalk peddlers and restaurant ownershave dierent concerns rom real estate tycoons andowners o Fortune 500 corporations. The newly mintedmillionaires and billionaires have amassed their wealthunder the current political system. The street hawkers andhousehold actory owners are too busy toiling to considerhow a democratic transition might alleviate their day-to-day complaints.

But even the middle tier o capitalists — that

Marketization Without

Democratization in China Kellee S. Tsai

Chinese entrepreneurs have amassed their wealth under Communist Party rule. © A P I m a g e s




J ournal USA 13

might appear to share an economic interest in politicalparticipation to ensure rule o law and protection o private property rights — lacks common ground. Theirdiering social and political identities inhibit class-basedcollective action.

Given the relatively recent introduction o marketizing reorms, China’s private sector comprisespeople rom widely varying backgrounds. Some privateentrepreneurs are ormer peasants who abandonedcommunal arming to establish commercial businessesearly on in the reorm era. Some are ormer stateemployees who entered the private sector because they were laid o or underemployed. Others are marginalizedintellectuals or disenchanted ormer bureaucrats whogave up on politics to make a decent living. And a goodnumber o private entrepreneurs are Communist Party members who have leveraged their political connections

or preerential access to bank credit, land, and other stateassets.

These types o dierences inhibit class ormationand class-based collective action. Indeed, very ew private entrepreneurs regard themselves as “capitalists,”preerring, instead, to identiy with their ormeroccupations.

chiNa fragMeNteD

The argument could be made that China’s dividedcapitalist class is merely a short-term phenomenon.Perhaps the next generation o private entrepreneurs will develop more coherence as a class and decide that a democratic regime type would better serve their interests.Perhaps they would unite to initiate a democratictransition. While plausible, this scenario remainsunconvincing.

First o all, in my surveys o private entrepreneurs,most indicate that they would preer their children— or more typically, one child — to become well-educated, white-collar proessionals or governmentocials rather than toiling business owners. In most

cases, today’s capitalists do not aspire or generationalcontinuity in their commercial pursuits. To the extentthat entrepreneurial parents succeed in getting their way,private prot is merely a transitional means to achievea more respectable orm o livelihood. To the extentthat today’s private businesses are passed on to the nextgeneration — which would be a slim minority giventhe high turnover in business registrations — it is stillunlikely that they would coalesce into a pro-democraticpolitical orce.

Capitalists operating in similar sectors and at similarbusiness volumes have dierent complaints and politicalviews due to local variation in policy environmentstowards the private sector. Just as the identities o China’sbusiness owners vary signicantly depending on their

backgrounds, their actual operating experiences also vary regionally.

Certain localities are known or oering particularly hospitable conditions or private businesses. A notableexample is Wenzhou in the southern coastal province o Zhejiang. Well beore the central government legalizedprivate enterprises, Wenzhou’s local ocials werealready permitting its destitute armers to run retailestablishments and small actories.

In contrast, other localities have systematically discriminated against private capital throughout thereorm era. Local governments in areas that inherited

large state or collective sectors rom the Mao era (1949-1976) have been more reluctant to give privateentrepreneurs access to key resources (e.g., bank loans)needed to run their businesses. Similarly, localities thathave received substantial inusions o oreign directinvestment continue to treat oreign investors moreavorably than their domestic counterparts.

China’s capitalists thus ace dierent types o challenges depending on what part o the country they are operating in, and their capacity or policy infuencevaries accordingly. Autonomously organized tradeassociations in Wenzhou work actively to advocate onbehal o their members, while business associations inother localities are dominated by the government and lesshelpul or business owners. In this sense, the internaldemographic ragmentation o capitalists is mirrored inthe spatial variation or private economic activities. I disgruntled entrepreneurs in one locality became morepolitically assertive, then they would ace diculties ingarnering nationwide support or their demands.

r epreSSeD DiSSeNt

Private entrepreneurs are not the only segmento Chinese society that aces territorial limitationsor organized political action. Farmers, workers, andintellectuals who harbor grievances ace similar challengesin mobilizing cross-regional support.

In recent years, the numbers o mass protests anddemonstrations have increased signicantly: Ocialstatistics indicate that there were 58,000 protests in2003, 74,000 in 2004, and 87,000 in 2005. Althoughincreased population mobility and the spread o new



J ournal USA 14

communication technologies have eroded some o theorganizational barriers o the pre-reorm era, theseprotests have remained limited to particular localities.

The only movement that posed a potentially seriouschallenge to the regime was the short-lived China Democracy Party (CDP). In 1998 local party committeeso the CDP were established in 24 provinces and cities.But authorities promptly detained, arrested, or exiledCDP leaders, which eectively thwarted urther eorts toestablish a central-level CDP.

The subsequent crackdown on Falun Gong practitioners in 1999-2000, the quarantining o citizens

during the 2003 SARS outbreak, and the swit repression

o Tibetan protestors in 2008 provide urther evidencethat Beijing retains the capacity to control its populationduring times o crisis.

coMMuNiSt r eSilieNce

Observers who expect a democratic transition inChina see that the spread o market orces has beenassociated with a host o destabilizing eects, including the conspicuous rise in income inequality and increasedopportunities or ocial corruption. While the incidenceo protest has been increasing, however, capitalists — theexpected class carrier o democracy — are notably absentrom these outbursts o discontent. Furthermore, ew o the protests have been directed at challenging the ChineseCommunist Party’s monopoly on political power. Eventhe attempted establishment o the CDP occurred

through standard administrative channels — that is, within the rules o the current political system.

Ultimately, market reorms in China underauthoritarian rule have generated unexpectedly high rateso economic growth, which have beneted a broad cross-section o society. The beneciaries o this authoritariancapitalist mode o development are not inclined to clamoror political reorms that might destabilize society and jeopardize continued growth.

Moreover, throughout its 87 years o existence,the Chinese Communist Party has demonstrated a remarkable ability to redene and reinvigorate itsel through dramatic shits in ideology, membershipcomposition, and policy objectives. Thus ar, the adaptiveturn to marketization has proven to be the party’s sourceo legitimacy rather than downall. For these reasons,contemporary China continues to elude the popularassociation o economic reedom with politicalreedom.


China’s Communist Party has adapted to and, so far, prospered with

economic reforms.

© A P I m a g e s / G r e g B a k e r



J ournal USA 15

Cua dissid cis osca esisa Ch says ha dcads ssi y a caizd gv has gud dw Cua’s cy. Wihu d, h says, Cua’s - ca v c i a gaizig cy.

A ter almost 50 years o totalitarianism in Cuba,

the loss o reedom — especially the violation o the reedom o movement in the market — hashad devastating eects on all aspects o Cuban society. Theprocess that began in 1959 and created so many illusions,in time, turned into an oppressive system that blocked thecountry’s progress.

With the pretext o establishing a system o “harmonious and proportional development,” thecountry’s ree market was replaced by a centralizedplanning mechanism copied rom the Soviet Union, based

on a harsh willulnessthat created multipledistortions and anenormous waste o resources. This state o aairs was maintained

until the end o the1980s thanks to colossalsubsidies, which inally sank Cuban society intothe worst crisis in itshistory, a situation stillnot overcome.

One could ask, What was the initialreason to displace thecountry’s ree marketas the essential toolor the distribution o resources, replacing it with bureaucraticcentralized planning? Why is the system

maintained despite the repeated ailures o centralization?The answer to these questions is that the system is basedon the interests o a group o people whose only pursuit ismaintaining absolute power over Cuban society. For thesetotalitarian objectives, the system’s political proitability isobvious, regardless o the levels o misery, backwardness,

and degradation they produce.

ecoNoMic freeDoM loSt

The same explanation shows the reasons or the massconiscations o properties in Cuba — ar more than thosein other countries that suer rom centralized systems —as well as or the attempts to banish all traces o economicreedom. This strategy was aimed at exercising strictcontrol over the population by converting the citizens

Free Markets and Democracy:The Cuban Experience

Oscar Espinosa Chepe

In 1959 Fidel Castro started a repressive regime that has brought catastrophe for Cuba.

© A P I m a g

e s




J ournal USA 16

into entities with no rights, entirely dependent on the all-powerul state.

The economic, social, political, demographic, andenvironmental consequences have been catastrophic orCuba, without mentioning the damage to the people’sspiritual values, severely eroded by a crisis whose endcannot be seen. To this must be added an enormous anddangerous dependence on Venezuela.

At the economic level, a process o human andmaterial decapitalization has aected society as a whole.Cuba, in the past a rich, sel-sustaining agriculturalcountry, according to oicial data, imports today 84percent o its basic ood requirements, mostly rom theUnited States. The once major sugar provider to the world now buys sugar abroad. These dislocations occur while more than 50 percent o the arable land remains

abandoned and overrun by brambles. At the same time,due to the low wages — about $20 per month, on average— the population is driven to crime in order to survive. As a result, according to United Nations data, Cuba hasbecome the nation with the highest prison population in

the world in relation to its inhabitants.

hiNtS of chaNge

Cuba is a sad example o the consequences o nothaving reedom. And Cuba could well all even urtherbehind as the rest o the world grapples with globalizationand market integration. While those orces createenormous developmental possibilities, they also requirea signiicant increase in competition, in which eiciency,productivity, and creativity play an increasingly importantrole. It is impossible to promote these elements in societies

ruled by ear, where reedom o association and reedom o speech are prohibited, thus preventing the debate and theree exchange o ideas needed to identiy better options orprogress.

The situation is so obvious that even within theCuban government, one is beginning to hear voices,however hesitant and incoherent, in avor o introducing structural transormations and conceptual changes in thesystem, especially in the economy. Hints can be ound inspeeches made by General Raúl Castro, who on February 24, 2008, became president o the Council o State andpresident o the Council o Ministers.

Perhaps the hinted changes will begin a gradualprocess toward reorms, bringing the Cuban peoplereedom. I newly awakened hopes were again rustrated,however, social instability would be the probableoutcome.


© A P I m a g e s

General Raúl Castro, succeeding his brother, has hinted at changes, at

least for the Cuban economy.



J ournal USA 17

Accdig Wiia A. risch, aks d -s dcacy. Sis dcacy ss aks,sis , h says. risch is sid h naia ig tad Cuci ad a h advisy U.S.-Chia ecic ad Scuiy rviw Cissi.

L

ooking around the world today, we see thatmany o the most prosperous countries alsoboast the most dynamic democracies. Countries

such as Chile, Ireland, and the United States are vibrantdemocracies with largely ree markets. Countries such asBurma and North Korea are marked by dictatorships andrigid, command economies.

While there are exceptions to any rule, economic andpolitical reedoms tend to go hand in hand. In many casesa country’s engagement with the world is an importantharbinger o both economic and political reedoms.

In particular, global economic engagement isan important oundation or democracy. Trade and

competition promote growth, which builds wealth andcreates a larger middle class. In turn, this larger middleclass demands more o its government, which can nolonger rely on the support o a small coterie o elites. Atthe same time, trade exposes ineciencies in bloatedstate-run enterprises, urther limiting the ability o stateocials to dole out jobs and avors.

Economic despair, on the other hand, osters theconditions in which demagogues can become dictators,

as the period between the two world wars highlighted alltoo well. President Harry Truman and Secretary o StateGeorge Marshall understood this when, in the wake o the Second World War, they laid out a plan to rebuildEurope. “The revival o a working economy,” Marshallsaid, would “permit the emergence o political and socialconditions in which ree institutions can exist.”

Beyond creating a prosperous economy, the increasedengagement o global businesses can also supportdemocratic ideals. For example, global companies are

Democracy, Free Enterprise, and Confdence

William A. Reinsch

As democracy erodes in Russia so does free-market competition in some sectors.

© A P I m a g e s / A l e x a n d e r Z e m l i a n i c h e n k o

Role of Social Trust



J ournal USA 18

in many cases prohibited by law rom oering bribes orengaging in corrupt practices.

In addition, many companies are voluntarily instituting internal codes o conduct or subscribing toconventions or corporate conduct such as the GlobalSullivan Principles or the UN Global Compact. The morethese kinds o companies are allowed to engage throughtrade and competition, the less bureaucrats or party chiescan sustain themselves or eed a government machinethrough questionable or corrupt practices.

corporate Social r eSpoNSibility

Today there is another important political benet tothe participation o global companies in local economies.Many businesses have instituted corporate socialresponsibility programs to support the communities in which they work. In a number o cases these eorts arenot directly related to a core business but instead ocus onimproving local institutions.

This is particularly true in Arica, where

multinational companies have ounded treatmentprograms or HIV/AIDS, set up post-confictresettlement programs, and established microcreditinstitutions. General Electric, or instance, has partnered with development economist Jeery Sachs to build a series o hospitals across 10 countries in Arica, using GEtechnologies and company volunteers to improve ruralhealth care delivery. These projects help strengthen civilsociety and urther encourage the establishment o reeinstitutions.

More generally, globaleconomic competition ostersgreater engagement with the world, which inevitably leadsto the exchange o inormation,

ideas, and democratic values.U.S. presidents rom FranklinRoosevelt to John F. Kennedy toRonald Reagan have recognizedthe intangible benets openmarkets and engagement haveon the promotion o democracy abroad.

More recently, PresidentsBill Clinton and George W.Bush both agreed that bringing China into the World Trade

Organization would be good ordemocracy. “When individuals

have the power not just to dream, but to realize theirdreams,” Clinton said, “they will demand a greater say.”Bush added that “economic reedom creates habits o liberty” and, with respect to China, “Our greatest exportis not ood or movies or even airplanes. Our greatestexport is reedom.”

Not long ago, the United States and Western Europeexported U.S. ideals through rock music, books, andtelevision to the ormer Soviet Union. In 1987 Billy Joelplayed or audiences in Moscow and Leningrad, telling the Soviet people, “What’s going on in your country now is very much like the ‘60s in my country.” Today, reermarkets mean greater access to the Internet, cell phones,and text messages, which speeds inormation, gossip, andnews in ways that are dicult or any government tocontrol ully. Plugging into the global inormation andeconomic system is good or democracy.

But is democracy good or ree enterprise?This is perhaps a more complicated question, though

one thing is clear. Dictators rarely embrace ree markets.Burma, Cuba, Libya, North Korea, and Zimbabwe are

the least ree economies in the world, according to the 2008 Idx ecic d, produced by th Wa S Jua and the Heritage Foundation. The kind o concentrated authority that allows these political systemsto survive encourages a centralized, command economy that rewards those loyal to the regime and punishes those who are not.

Democratic government certainly has helped bolsterree markets in the United States and around the world.For more than 60 years, the United States has helped

Citizens wait to vote in Denmark, a country blending strong free markets and social trust.

© A P I m a g e s / J o h n M c C o n n i c o



J ournal USA 19

ashion and support a liberal world order based on reetrade and stable global markets. Over about the sameperiod, Europe has lowered its economic barriers andimproved its labor market eciencies ollowing thespread o democracy across the continent.

free M arketS aND Stability

But ree and air elections alone do not necessarily promote ree markets. One problem is that a growing number o autocratic regimes masquerade asdemocracies, where one party maintains virtual controlover government and the economy and where a robustopposition does not exist. Russia under Vladimir Putin,ormer president and now prime minister, is a primeexample o a country where democracy is eroding. As Putin has increased his control over the country,Moscow has asserted greater control over the economy,expanding its infuence over state-owned enterprises suchas Gazprom and using its economic leverage to sendpolitical messages to its neighbors and the world.

Other democratic governments lack the institutionsand support to encourage ree markets. Fledgling governments in places such as Iraq and the West Bank and Gaza, where basic stability and security are ongoing issues, do not have the governance and security structuresin place to promote ree markets in meaningul ways.

Even in more established democracies, backlashesagainst the ree market are not uncommon. In Latin America, a number o politicians have been elected in

recent years based on populist and, insome cases, socialist platorms. In theUnited States, polls show dwindling support or ree trade, while the homemortgage crisis has led to questions about

the consequences o ree markets withoutsucient oversight and regulation.

Democracy appears best able tostrengthen ree markets when it isaccompanied by strong local institutionsand social trust. Denmark boasts one o the most open economies in the world andis a model democracy, but it also embracesa unique social compact known as“fexicurity,” a system that has taken morethan a century to rene and that spendssubstantially on social programs, training,

and benets.The result o the compromise is

that the Danes believe strongly in ree enterprise andglobal trade — even unions embrace outsourcing. Author Robert Kuttner, who has analyzed the Danishcompromise between ree markets and social stability,suggests that these kinds o bargains “have to grow intheir own political soil.”

The key to encouraging the growth o democracy and economic reedom is to oster the local institutionson which both are based.

The United States, its allies, and internationalinstitutions should continue to encourage the rule o law,independent and transparent judicial systems, productivecapital investments, and adherence to internationalhuman rights and legal obligations in order to make itmore likely that governments, however structured, willoperate in a air, humane, and transparent manner.

At the same time, governments, nongovernmentalorganizations, and businesses can all play a role inbolstering the local institutions and civil society groupsthat strengthen democracy and support individualreedoms.

We must engage vigorously in the world with all o the tools at our disposal, particularly through trade anddiplomacy. I we do, we have an opportunity to helppeople around the world become more ree, prosperous,and secure.


By opening up to world markets the Chinese have a chance to open up to ideas.

© A P I m a g e s



J ournal USA 20

th Gu sas hav sy aks u c-is, accdig Ja-acis Szc. th us sha h is cic xasi u iica w,

h says. Szc is visiig asscia ss a GgwUivsiy’s C Cay Aa Sudis iWashig.

Market economies seem to thrive in certainnondemocratic states and yet do not seemto move these countries towards democracy.

Consider the six countries that orm the Gul Cooperation Council (GCC): Bahrain, Kuwait, Oman,Qatar, Saudi Arabia, and the United Arab Emirates.

On the Freedom House scale rom 1 to 7 o reedomin the world, with one being the reest, the Gul countriesscore poorly. Saudi Arabia gets 6.5 because o its limited

civil and political rights. Highest scoring is Kuwait withonly 4.0. Kuwait does have reely contested elections toparliament and reedom o expression, but the primacy o the royal amily is not questioned.

By some measures, however, the Gul states areamong the reest markets in the world.

All Gul countries are market economies. Saudi Arabia ranks a relatively high 23rd on the World Bank’slist o countries or ease o doing business. All GCCcountries are members o the World Trade Organization

Market Economy Without Democracy in the Gul Jean-Francois Seznec

Gulf Cooperation Council countries rank relatively high on free markets, relatively low on civil and political rights. © A P I m a g e s




J ournal USA 21

(WTO). Oman and Bahrain have ree trade agreements with the United States. Taris are low.

None o the countries has income taxes. Corruptionor day-to-day transactions is minimal. GCC country banks and nancial institutions are sophisticated lenders.Restrictions on the sale o goods are limited, except orreligiously orbidden products such as pork and alcohol.

The Gul states also are modernizing their economicstructures and laws to attract private investments, bothlocal and oreign. Today a oreign company can own 100

percent o all its ventures in most GCC countries. It canrepatriate its prots reely, sell assets as it wishes, and pay relatively low corporate taxes.

The Gul countries’ economies are booming.Moving to become less dependent on oil or gas, they areseeking to maximize their advantages o low-cost energy,plentiul capital, and strategic location. They already produce about 12 percent o all the world’s chemicalsand ertilizers. They are increasingly producing moreadvanced chemicals such as ethylene-based plastics. With

access to cheap electricity, they are already large producerso aluminum, and, with uture access to bauxite in Saudi Arabia, they may achieve 20 percent o world productionbeore 2020.

liMitS oN free M arketS

Adherence to ree markets has limits, o course.Contracts are not easy to enorce because o dierentlegal traditions and ew judges with knowledge o international legal practice.

In order to achieve economic development, the Gul countries are investing hundreds o billions o dollarsin inrastructure projects, building industrial cities,railroads, harbors, and airports.

Most o the very large chemical and metalscompanies operating in the GCC today are state owned,

although managed like large Western companies withminimal intererence rom government. SABIC, orexample, is the most protable and astest-growing chemical company in the world with access to raw materials at lowest cost. It is also becoming a researchand development powerhouse and, like its petroleumcounterpart, Saudi Aramco, trains and uses Saudis tocreate knowledge-based industries in the kingdom.

The success o state-owned companies hasdrawbacks. Managers insist they should not have to sharetheir low-cost raw materials with local competitors. Thus, while very large state enterprises create work or theprivate-market economy, they also restrict private-sectorcompetitors rom getting too large.

O course, some interests in the GCC resist reemarkets, including traditional manuacturers andmerchants. The religiously conservative Salas also lobby against ree markets, earing that an open economy invites widespread Western-style education and practices.

ShariNg w ealth, Not power

To achieve their ambitious economic goals, the

governments o the Gul have sought to share wealth, butnot political power, with their people.Saudi authorities have used the stock market to

share the wealth. Many o the 115 companies listed arecontrolled by the state and are usually very protable;these companies will sell perhaps 30 percent o theircapital as stock market shares. Saudis who invest in thesestate-owned companies get good dividends and capitalappreciation on sae investments. Furthermore, theCapital Markets Authority ensures that all the companies

The Dubai International Financial Center reflects the Gulf countries’

openness to investment.

© A P I m a g e s / K a m r a n J e b r e i l i



J ournal USA 22

listed are bona de and that small investors get a chanceto buy shares. Today 50 percent o all Saudis ownshares and hence have a stake in the development o thekingdom.

Gul governments ear, however, that sharing politicalpower with their people could bring development to a screeching halt. The ew reely held elections in the Gul have given absolute majorities to the Salas. To balanceSala gains, GCC kings and emirs have appointedconsultative councils, comprising technocrats who give a stamp o participatory approval to economic policy anduncontroversial laws.

Lack o judicial independence demonstratesanother divide in the Gul states between sharing wealthand political power. Government-appointed judgesrule in cases o Islamic amily and criminal law butlack competence in commercial law. The Saudis haveestablished a parallel legal system called the Board o

Grievances to handle commercial cases.

Yet the powerulremain beyond thereach o the courts.The Saudi Board o Grievances does not

consider disputesinvolving princes andgovernment ocials;rarely are such casesadjudicated on merit.

Growth o ree markets,both promotedand hampered by autocracy, has donelittle to eect politicalreorm in the Gul

states. The ree-market economiesare sustained by theunquestioned politicalcontrol o their

leaders. Even in Dubai, the entrepreneurial center o theregion, the word o the ruler is the rule o the land.

The Gul governments are not o the people, by the people, or the people. They are governments o theew or the benets o the many. This is a ar cry rom what Western democracies have achieved, but it is homegrown.

Democracy cannot be imposed rom the outside.Ongoing economic changes in the Gul may beindicating that, over time, the rulers there will allow notonly market reedom but also political reedoms suchas political parties, ree speech, and independence o aneducated judiciary. Ultimately, promoting economicparticipation and reorm may still promote democracy.


Western-style construction, but not Western-style democracy, is on the rise in Dubai.

© A P I m a g e s / K a m r a n J e b r e i l i



J ournal USA 23

Accdig Iva Kasv, h a was ha Ca eu wud ac dcacy ad jc ak cics. H says h cas w is ha Ca eu has accd aks u gw dissaisid wih dcacy. Kasv is chaia h C lia Sagis iSia, bugaia.

Today historians are tempted to writethe history o the post-communisttransitions in Central and Eastern

Europe as a story o the irresistible attractionbetween democracy and capitalism. But 20 yearsago many eared that it would be a horror story.

While political theorists tended to agreethat democracy and capitalism are naturalpartners and that ree-market and competitivepolitics strengthen each other in the long run,the ear was that the political and economicreorms needed to transorm East Europeansocieties would block each other.

How can you give people the power to do what they want and then expect them to choosepolicies that will lead initially to higher prices,higher unemployment, and increased socialinequality — this was the dilemma o the post-communist transitions.

In the view o the German sociologist ClausOe, “a market economy is set in motion only under pre-democratic conditions.” And leading

Polish political scientist and Solidarity activist Jadwiga Staniskis was convinced that “as long as theeconomic oundations or a genuine civil society do notexist, the massive political mobilization o the populationis only possible along nationalist or undamentalist lines.”

In short, Central Europe was seen as doomed tochoose between market socialism and authoritariancapitalism. Happily, sometimes what does not work intheory does work in practice.

Central and Eastern Europe succeeded in a

simultaneous transition to market economics anddemocracy. It was a magic mix o ideas, emotions,circumstances, and leadership that made the successpossible.

Support for ecoNoMic chaNgeS

The legacy o communism was reormers’ natural ally in transorming Central European societies. People werepatient and endorsed reorms because they were impatient

Democracy and Capitalism: The Separation

o the TwinsIvan Krastev

Voters in Romania and elsewhere in ex-communist Europe have accepted free

markets but have grown restive with politics.

© A P I m a g e s / V a d i m G h i r d a




J ournal USA 24

to break away rom communism. The early 1990s was a surreal time when trade unions were advocating or jobcuts and ex-communist parties were eager to privatize theeconomy.

There was anger against capitalism, but there

was neither a party nor even political language able tomobilize the losers in the transition. Communism haderoded the capacity o society or collective action along class lines. Any criticism o the market was equated withnostalgia or communism. Anti-communist counter-elites, because o their ideology, and ex-communist elites,because o their interests, both supported economicchanges.

The popular longing or a “return to Europe,”strengthened by the attraction o the European Unionand NATO (North Atlantic Treaty Organization),allowed societies to reconcile the redistributive instincts

o democracy with the need or long-term vision andpatience as a pre-condition or economic success. It worked dierently in dierent countries, but Euro- Atlantic integration secured continuation o economicreorm and ensured against political backlashes.

The success o post-communist transitions led a new generation o political theorists to rethink the chances orthe simultaneous emergence o democracy and capitalism. What had been viewed as historical luck was thendeclared a natural law. Democracy and capitalism wereno longer viewed as a happy couple but rather as identicaltwins.

SkepticiSM about DeMocracy

The tendency was to ignore the tensions betweendemocracy and capitalism. But it is enough to look atthe experience o countries such as Russia, China, orVenezuela to be skeptical about the natural tendency o capitalism to lead to democracy and the natural tendency o democracy to support capitalism.

The experience o Central Europe also needs somerethinking. A year ater the Central European democracies

became members o the European Union, the region was shaken by the rise o populism and nationalism.Dissatisaction with democracy is growing, and, according to the global survey Voice o the People 2006, CentralEurope, contrary to all expectations, is the region o the world where citizens are most skeptical about the meritso democracy.

All over the region publics distrust politicians andpolitical parties. The political class is viewed as corruptand sel-interested. The transition was an unqualied

success or Central Europe but led to rapid socialstratication, painully hurting many while elevating a privileged ew.

Many lives were destroyed and many hopes werebetrayed in the time o transition. The act that the major winners o the transition were the educated and well-connected members o the old regime did not help makeit acceptable. The post-communist democracies are now viewed as a triumph not o egalitarianism but o anti-egalitarian communist elites and anti-communist counter-elites.

The external constraints imposed on the accessioncountries by the European Union were essential or the

success o reorms but contributed to the perception thatthey were democracies without real choices.Twenty years ago theorists eared that the newly

emerging democracies might lack a taste or capitalism. What we see now is that most people in Central Europehave more trust in the market than in the ballot box.


Trade union members like these in Poland view themselves as losers

in the post-communist transition.

© A P I m a g e s



J ournal USA 25

rsach shws ha iica ad cic s duc hic cics, v i cuis wh a iiy hic gu dias h cy, accdig Dh C. Shi ad Chish D. rayd. Shi is ss iica scic,ad rayd is a gadua achig assisa, h a h Uivsiy missui a Cuia, missui.

A t the beginning o 2007, Kenya was consideredone o Arica’s most successul democracies; at theend o the same year, Kenya was in chaos. Ethnic

violence erupted in the country ater incumbent PresidentMuwai Kibaki was declared the winner o the highly disputed presidential election held on December 27, 2007.

The Luo, the ethnic group supporting losing candidate Raila Odinga, have long resented the wealthand power o the Kikuyu, the ethnic group o Kibaki.Many Luo accused Kibaki and the Kikuyu o engaging in

electoral raud, and in the months ollowing the election,their violent protests led to the death o as many as 1,500people and the displacement o 250,000.

This outbreak o ethnic violence in the wake o a reeand competitive election in one o Arica’s most successuldemocracies has rekindled the debate about whethercertain types o developing countries should pursue the

simultaneous establishment o democracy and capitalism.For decades, conventional wisdom has said thatdemocracy and ree markets work together to promoteeconomic prosperity and to improve citizens’ quality o lie. At least one research paper has argued that combining ree markets with democracy in countries where an ethnicminority is economically dominant can produce a highly explosive situation because ree markets and democracy oten avor dierent ethnic groups: The ormer avors a minority, while the latter avors the majority.

The Eects o Ethnic StrieDoh C. Shin and Christopher D. Raymond

Violence erupted in Kenya, a democratic country torn by ethnic tensions.

© A P I m

a g e s / B e r n a t A r m a n g u e




J ournal USA 26

In countries such as Indonesia and Zimbabwe, wherea small ethnic minority dominates the market with a disproportionate amount o economic resources, orexample, establishing democracy and giving voice to thepreviously silenced majority can spur expression o ethnichatred and resentment against the rich. The ensuing outbreak o ethnic violence, in turn, will likely hinder, i not halt, the development o democracy and capitalism.

craftiNg a teSt

We decided to test the validity o the assertion that

attempts to build capitalist democracies in ethnically divided societies, especially those with a market-

dominant minority ail mainly due to outbreaks o political violence.Our tests used two sets o multinational data. From

ethnic diversity data collected by Harvard economist Alberto Alesina and his colleagues, we divide 125countries, all at various levels o political and economictransitions, into three categories based on their ethnicmakeup. These categories are countries without a market-dominant minority and with low ethnic division(42), those without a market-dominant minority and

with high ethnic division (47), and all countries with a market-dominant minority (36).

Using data rom the Bertelsmann TransormationIndex (BTI), we compare the countries’ levels o social conlict and their achievement levels concerning democratic and economic reorms. The BTI measuresthe political and economic status o 125 developing andtransitional countries on an 11-point scale, ranging roma low o 0 to a high o 10. For easy interpretation, wegrouped the scores into two levels, low (0-5) and high(6-10), and then calculated the percentages o countriesalling into each level.

Figure 1 shows the mean levels o social conlictexperienced by each o the three ethnic categories

o countries. The conlict levels are highest (5.3) incountries with a market-dominant minority, ollowed by countries with high ethnic division (4.9) and those withlow ethnic division (3.2).

As shown in Figure 2, 44 percent o those countries with a market-dominant minority experience a high levelo conlict (6 or higher on the BTI scale), 26 percent o those with high ethnic division, and 12 percent o those with low ethnic division. Countries with a market-

0

1

2

3

4

5

6

7

8

Overall BTI Status Scores

Level of Conflict

Countries withMarket-Dominant Minority

High Ethnic Division

Ethnic Makeup

Low Ethnic Division

Average Values

Figure 1: Levels of Conflict, Political andEconomic Reform by Ethnic Makeup



J ournal USA 27

dominant minority experience a signiicantly higher levelo social conlict or violence than other countries do.

Figure 1 also shows the mean levels o political andree-market reorms implemented in the three categorieso countries. Countries with low ethnic division havethe highest achievement level o combined political andeconomic reorms (6.9), ollowed by countries with a market-dominant minority (5.4) and countries with highethnic division (5.1). Achieving a high level o politicaland economic reorms (6 or higher on the BTI scale)are 69 percent o countries with low ethnic division, 39percent o those with a market-dominant minority, and30 percent o those with high ethnic division (see Figure2).

the fiNDiNgS

These indings indicate that the high level o socialconlict and violence in ethnically divided societies makesit diicult to carry out political and economic reorms inthose societies. However, contrary to other research, theexistence o disproportionately rich minorities in thosesocieties does not necessarily make it more diicult toimplement those reorms.

How does the achievement o political and ree-market reorms aect ethnic conlict? To explore thisquestion, we divided the 125 transitional countries intoour groups, based on whether their achievement levelsare high on neither, one, or both reorms. The resulting our patterns are the politically and economically unreormed (32 countries), the economically reormed(17), the politically reormed (13), and the politically andeconomically reormed (63). The ourth pattern reers tothose countries that have implemented democratizationand marketization in parallel. According to anotherscholar, these are the countries where ethnic groupsdivided along economic lines would be likely to engagein violent conlict.

For each reorm pattern, Figure 3 shows thepercentages o countries experiencing a high level o social conlict. Contrary to what is expected romother research, the incidence o social conlict is lowest(10 percent) among countries that have successully pursued parallel development and highest (48 percent)among those that have implemented neither o thereorms. Falling in the middle are countries that haveimplemented only one o the reorms; experiencing highlevels o social conlict are 22 percent o the politically

0

10

20

30

40

50

60

70

80

High BTI Scores

High Levels of Conflict

Countries withMarket-Dominant Minority

High Ethnic DivisionLow Ethnic Division

Percentages

Ethnic Makeups

Figure 2: Percentages of Societies With High Levels ofSocial Conflict and Reform Achievement by Ethnic Makeup



J ournal USA 28

reormed countries and 14 percent o the economically reormed.

These indings indicate that as countries transormtheir political and economic systems into successulcapitalistic democracies, they lower their chances o experiencing high levels o social conlict. This inding holds true even among countries with a market-dominant minority.

Our simple analysis suggests that ethnic divisiondoes indeed promote social conlict and violence andthus can hinder the transormation o political and

economic systems. The successul transormation o bothsystems, however, is an eective way to reduce socialconlict and improve the quality o citizens’ lives, evenin ethnically divided societies with market-dominantminorities.

th iis xssd i his aic d cssaiy c h viws icis h U.S. gv .

0

10

20

30

40

50

Fully ReformedEconomically ReformedPolitically ReformedUnreformed

Frequency

Type of Reform

Figure 3: Incidence of High-Level Social Conflictby Patterns of Democratic and Economic Reforms



J ournal USA 29

I h g , d sch ad h ss us d-caic accuaiiy ak a siiv dic i cic dv, Dai Kaua says. Kaua is dic ga gvac a h Wd bak Isiu.

Is economic development impossible withoutdemocracy?

It is easy to assert condently thatdemocracy is a undamental precondition oran ecient market economy and or economicgrowth. Or to state that particular democraticsystems, as we know them in the industrialized

West, are the only way o promoting economicdevelopment in other parts o the world.

But are these assertions based on dogma or evidence? Unortunately, the analysis o theempirical evidence points to a complicatedanswer. This is not an experiment in the hardsciences, but a nuanced challenge in the socialand political sciences.

aMbiguouS e viDeNce

The evidence on the short-term eects o democracy on growth is ambiguous.

More than a dozen serious research papershave investigated the eects o democracy oneconomic growth (cited in the bibliograpy at the end o this Jua USA, maks ad Dcacy .) They present a mixed picture.Utilizing large cross-country samples, a numbero studies ound that, on average, democracy has no major eect on growth (Baum and Lake;Przeworski). Another study, however, which alsonds little direct evidence o democratization

aecting growth rates, does point to somepotentially important indirect eects:Democracy may be associated with higher

levels o human capital ormation, macroeconomic andpolitical stability, and liberalized markets. These, in turn,are conducive to higher growth rates.

Other researchers have ound evidence that a movetoward democratization in highly repressive politicalregimes is indeed associated with higher growth rates(Barro, others). But beyond a certain level o political

On Democracy and Development:

Rejecting the ExtremesDaniel Kaumann

Voice and Accountability

18th-century pirate ships were more democratic and more successful thanmerchant and navy ships of the era.

W a l t D i s n e y P i c t u r e s



J ournal USA 30

liberalization, they say, any urther democratic reormdoes not translate into yet higher growth rates. Tothe contrary, there may be growth deceleration atintermediate levels o political liberalization, according to such research. But then another recent study suggeststhat a transition toward democracy is not associated withslower growth (Persson and Tabellini).

In short, based on these studies, there is no clearlinear and causal link between democracy and growth. Yet there is no strong basis or concluding that politicalliberalization results in growth deceleration either.

Short terM, loNg terM

These studies are generally based in the short tomedium term. Further, we need to keep in mind a basicstylized act in development: Irrespective o the typeo political regime, one expects to see aster economicgrowth in lower-income countries than in industrializedcountries. This is because poorer countries can potentially catch up by applying existing technology rom moreadvanced countries or increased productivity. Onaverage, developing countries typically grow at a higherrate than richer countries. Compare, or example, China

or India with the United States or Germany.Part o the slower growth observed during

political liberalization may actually refect decreasing opportunities to play technology catch-up in anincreasingly industrialized setting, and not the infuenceo the political regime per se. Either way, there appearsto be no compelling positive link between democracy andgrowth in the short term.

But consider the longer term and a broader view o democracy.

Part o the problem may lie in viewing democracy too narrowly as a system that holds elections and thatallows or more than one political party. Many countriesthat did not hold elections 20 years ago are doing so now,

and they generally allow more than one party, even i grudgingly at times.The extent to which these countries hold “ree and

air” elections is, o course, another matter. Furthermore,given recent electoral mishaps in Kenya and Zimbabwe,or instance, the notion o “ree and air” should beexpanded to “clean, ree, and air,” so as to acknowledgemore explicitly the challenges o corruption, vote buying,outright poll rigging, and other orms o subverting electoral integrity, which is only partially captured under

Singapore United States

Afghanistan

BotswanaBrazil

Canada

Chile

China

Costa Rica

Egypt

Equatorial GuineaEstonia

France

Hungary

IndiaIndonesia

Iran

Pakistan

Portugal

2.5

3.0

3.5

4.0

4.5

5.0

-2 0 2

Voice & Accountability

Low

Low High

High

r = 0.63

Sources: WDI 2007 and “Governance Matters VI: Governance Indicators for 1996-2006” by D. Kaufmann, A. Kraay, and M. Mastruzzi, July 2007 www.govindicators.org

Income Per Capita (Ppp)

Figure 1: Voice & Accountability and Income Per Capita, 2006



J ournal USA 31

the notion o “air” elections. Also, given the dominanceo the government’s political and unding machinery insome countries, the existence o more than one party doesnot mean that there is meaningul political contestability.

Neither does it necessarily mean that there is reedomo expression. Indeed, according to Freedom House,the number o countries classied as democracies grew rom 75 (46 percent o the overall global sample) in1990 to 123 (64 percent) in 2006. Yet Freedom Housetells us also that rom 1995 to the present there hasbeen no signicant improvement in press reedom, onaverage, worldwide. The 2007 data suggest that only 37percent o countries have a ully ree press (27 percent ordeveloping countries). Also according to Freedom House,

well over 40 percent o the world’s democracies (andalmost one-hal o developing country democracies) donot have a ree press.

r aiSiNg “v oice”

Consequently, narrow notions o democracy missthe broader notion o “voice” — meaning reedom o expression and participatory voice — and democraticaccountability. In our work measuring governance (the

Worldwide Governance Indicators, or WGI), one o the six indicators we construct — voice and democraticaccountability — is based on this broader denition.Our research, as well as that o other academics, suggeststhat there is an important causal link rom improvedgovernance to higher levels o income.

Figure 1 shows the link between voice anddemocratic accountability on one side and income percapita worldwide on the other. In contrast to the short-term studies cited earlier, this link can be interpreted asa long-run trend. The evidence suggests that, while theshort-term link between ormal democracy and economicgrowth may not be very clear, there is a robust link between voice and democratic accountability, broadly

dened, on the one hand, and economic development,on the other — in the longer term.More speculatively, an important channel through

which participatory voice may promote economicdevelopment is control o corruption: More reedom o expression, transparency, and political contestability may impose important checks on systemic corruption. Andthe importance o controlling corruption or economicdevelopment has been previously shown in studies. The

–2.5

0.0

2.5

-2 0 2Voice & Accountability

C o n t r o l o f C o r r u p t i o n

Low

Low High

High

r = 0.79

Afghanistan

Botswana

Brazil

Canada

Chile

China

Costa Rica

Egypt

EquatorialGuinea

Estonia

France

Hungary

India

IndonesiaIran

Pakistan

Portugal

Singapore

UnitedStates

Figure 2: Control of Corruption and Voice & Accountability

www.govindicators.orgSource: “Governance Matters VI: Governance Indicators for 1996-2006” by D. Kaufmann, A. Kraay, and M. Mastruzzi, June 2007



J ournal USA 32

particular association between voice and corruptioncontrol can be seen in gure 2.

Yet gures 1 and 2 also show that none o these linksis absolute: Exceptions (outliers) exist, such as Singaporein Figure 2, or example. O course, Singapore, a city state

that has scored very high in key areas o governance otherthan voice, is a special case, not subject to easy replicationin larger countries.

pirate ShipS

Analyzing these types o links in the social sciencesrequires more than examination o vast cross-country aggregate data sets. Examining in-depth country casestudies and microdata are also essential.

More than a decade ago we researched thedeterminants o success o developing country investment

projects nanced by the World Bank. Not surprisingly, weound that the quality o economic policies did matter.More surprisingly, at least or economists, was to nd thatcivil liberties also made a signicant dierence: The morerobust a developing country’s civil liberties, the morelikely an investment project’s chance o success.

“Micro” historical case studies can provideother insights. A just-published gem o a paper by an economic historian, Peter Leeson, compares theinternal organization o merchant, navy, and pirateships in the 1700s. Merchant and navy ships wereabsolute dictatorships, with the captain holding absoluteunchallenged authority. Pirate ships, in sharp contrast,had ormal (oten written) democratic structures andregulations — internal rule o law — dividing authority between the captain and the crew. There were checksand balances on the captain’s authority. And statutesspecied how the spoils o piracy were to be divided.Bottom line: Pirate ships were extraordinarily successulat enabling internal cooperation — among a bunch o bloodthirsty guys with swords. They were very successulenterprises, in sharp contrast with the commonly mutinous conditions in the authoritarian and strie-torn

commercial and navy ships o the day.Is democracy a crucial precondition or ast growth?Or is democratic accountability unimportant to long-term development? Neither, we conclude.

More thaN electioNS

On balance, political and governance institutions

that promote more political contestability, accountability,and checks and balances can make a dierence or

economic development in the longer term. In the shortterm, this link is less clear and not as strong, though otenpresent as well.

Having a broader perspective encompassing the ullgamut o reedom o expression, voice, and democraticaccountability is also important. Narrow denitions o democracy based solely on whether or not elections takeplace (or whether more than one party exists on paper ornot) oten miss the broader participatory voice attributes.

Taking a longer and broader view is also importantgiven the evidence that democratic transitions aredicult. Economic outcomes can vary in the short term

ollowing such democratic transitions, and reversals cantake place. Development is a complex, arduous, andoten ragile process. A number o development lessons,such as macroeconomic stability and low corruption,generally apply, but there is no single template orsuccessul development.

Nevertheless, the evidence suggests that civil libertiesand reedom o expression can lead to a more transparentand better governed system and a more robust andparticipatory economic development. In additionto clean, ree, and air elections and more eectivemultiparty political systems, also important are a robustree press and other communications media. In today’s world, social media innovations such as blogging and textmessaging, complementing community broadcast radioin poor rural areas, are changing the meaning o voiceand democratic accountability, with vast potential to helpimprove governance and development results.

th iis xssd i his aic a hs h auh ad d cssaiy c h fcia viws icis h Wd bak h U.S.

gv.



J ournal USA 33

russia has ud ack wad auhiaia gv, Ads Åsud says, dsi is cic , v ducai, ad aivy sciy. H says h as is cui. Åsud, wh is a si w h ps

Isiu Iaia ecics, is h auh Russia’s Capitalist Revolution: Why Market Reorm Succeededand Democracy Failed (ps Isiu Iaia ecics, 2007).

During the past three decades, democracy hasexpanded extraordinarily in the world. Whatpolitical scientist Samuel Huntington named

the “Third Wave” o democratization, which started inSpain and Portugal in the mid-1970s, has increased the

number o democracies in the world rom 41 in 1974 to123 in 2007, according to the authoritative assessment by Freedom House. For the irst time in world history, mosthuman beings live in democratic countries.

In a seminal article published in 1959, the inluentialpolitical sociologist Seymour Martin Lipset argued that theprobability o a country becoming democratic increased with its level o income, the population’s education, and itsopenness to oreign trade and travel.

Since world income, education, and openness haveincreased greatly in the past three decades, the advance o democracy is not surprising. By and large, democracy andreer markets go together, but the correlation is not all tootight.

Will Freer Markets Lead to a More DemocraticGovernment in Russia? Anders Åslund

Russians continue voting even while retreating from democracy. © A P I m a g e s

Voice and Accountability



J ournal USA 34

Yet in the past ew years, a ew prominent countries

have turned their back on democracy. The outstanding examples are Russia, Nigeria, and Venezuela, and thisarticle ocuses on Russia. Many also point to China, which has grown relentlessly or three decades and even soremains solidly authoritarian.

In a recent article the neoconservative intellectualRobert Kagan argued: “Now it looks as i the richer a country gets, whether China or Russia, the easier it may beor autocrats to hold on to power. More money keeps thebourgeoisie content and lets the government round up theew discontented who reveal their eelings on the Internet.”

Yet it is ar too early to draw such pessimisticconclusions. Unlike Russia, China is still a developing country. Even today, China’s gross domestic product(GDP) per capita at current exchange rates is merely one-quarter o Russia’s. By traditional Lipset standards, we would expect China to be authoritarian.

a coNtraDictioN

Russia, however, is too rich, too educated, and tooopen to be so authoritarian. The aster Russia grows, thegreater this contradiction becomes between an increasingly

obsolete political system and a switly modernizing economy and society. It has become an outlier. At present, Russia’s GDP per capita measured in

purchasing power parities, that is, standard o living, is a respectable one-third o that o the European Union. Only eight countries in the world are richer than Russia andstill not democratic, namely Singapore and seven small oilstates. Russia is both ar bigger and less dependent on oiland gas than any o these other authoritarian oil states.

Numerous political scientists point to Russia’s current

abundance o oil revenues as the main source o itsremaining authoritarianism. In a ine book with regressionanalysis o many countries, University o Caliornia,Berkeley proessor Steven Fish inds three causes orRussia’s authoritarianism, namely too much oil, too little

economic deregulation, and too weak a legislature.The grand old man o Russian history, Harvard

proessor Richard Pipes, emphasizes the country’s strong authoritarian tradition, both in practice and thought. Thecurrent post-imperial nostalgia also contributes, as doesthe post-revolutionary stabilization. Russians are tiredo politics, and they blame their economic hardship inthe 1990s not on the collapse o communism but on thepost-communist democracy. They praise ormer PresidentVladimir Putin or the steady economic growth o 7percent a year since 1999.

The question o whether Russia’s authoritarianism is

sustainable is best answered by clariying its purpose. Since2003, when Russia became truly authoritarian, no reormshave been undertaken, so that was not the goal.

Instead, the most remarkable development hasbeen rising corruption in Russia, although corruptionusually declines when a country grows wealthier, and ithas declined in most other post-communist countries. According to Transparency International, the only country in the world that is both richer and more corrupt thanRussia is Equatorial Guinea, which is hardly a standard worthy o a great, historic nation.

l arge-Scale corruptioN

Credible independent Russian reports, such asVladimir Milov’s and Boris Nemtsov’s pui: th rsus ,record kickbacks rom major inrastructure projects o no less than 20 to 50 percent o the total project cost.Russia’s top oicials steal many billions o dollars romthe state and its corporations every year. A group o KGBintelligence oicers sits at the top o each state corporationand taps it or money while purchasing good privatecompanies with state unding and oreign bank loans.

Presumably, no country has ever seen such large-scale,top-level corruption as Russia does right now. This canhardly go on or very long. The state is becoming just toodysunctional. The situation is untenable even in the shortterm. Any Russian ruler must start a serious anticorruptiondrive, but that can be destabilizing in itsel.

The aggravated corruption took o with theconiscation o the Yukos oil company initiated in 2003.Since then, one big, well-run private corporation ater theother has been renationalized. Curiously, no ideological

President Dmitry Medvedev and Prime Minister Vladimir Putin: Can

authoritarianism last long?

© A P I m a g e s



J ournal USA 35

aim is presented, but the nationalization appears to be a means o state oicials to seize assets cheaply or extractkickbacks.

Thereore, the increased role o the state in theRussian economy has been accompanied with rising

corruption. Freer markets would reduce the corruption,and then the top oicials would not need so muchauthoritarianism. The state channels the oil wealth to itstop oicials, and reer markets would not allow them todo so.

Naturally, this large-scale corruption reduceseconomic growth. At present, both oil and natural gasproduction have started alling. Russia can aord itsextensive corruption only because o the very high andstill-rising price o oil. I the oil price were to moderate,the Russian people would ask where all the money has disappeared, and what many already know would

become evident to everybody.No large state with an educated population has

managed to maintain authoritarian rule or stay socorrupt at Russia’s level o economic development.

th iis xssd i his aic d cssaiy c h viws icis h U.S. gv.Headquarters of natural gas monopoly Gazprom: High energy prices

have helped keep authoritarian rule alive.

© A P I m a g e s



J ournal USA 36

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J ournal USA 37

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FILMoGRaPhy

These documentaries are available rom the StateDepartment Video Catalog 2008:

a O o b (2005)Running time: 60 minutesSynopsis: This documentary challenges the stereotypesand proves Arica cannot be so easily deined. It proilescompanies in Nigeria, Kenya, Ghana, Lesotho, Senegal,Botswana, Uganda, Zimbabwe, and Somalia.

commg hg (2002)Running time: 60 minutes or each partSynopsis: This PBS series tells the inside story o our new world economy, the struggle between governments andmarkets, and the battle over globalization.

t Wom’ bk o bg (1996)Running time: 47 minutesSynopsis: The amous Grameen Bank makes small-business loans to women only. The ilm ollows the daily activities o three women who have taken out loans tound cottage industries.



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