Capitalism and Democracy

August 7, 2014

David Brooks’ NYT Op Ed of August 5 addresses the challenges facing democracy and capitalism in the developing countries of Africa, and by implication, anywhere in the world. The hoped for “Fourth Wave” of democracy across developing countries in Africa, Asia, and the Middle East is not progressing well. See the Council of Foreign Relations brief of 2013 (cited below). Brooks begins by calling for “democratic capitalism,” as in the case he cites of a Kenyan entrepreneur who built a successful company from scratch–a kind of Horatio Alger of Africa story, in a country which is a seemingly regressing democracy. He concludes with a prediction that autocratic developing countries will end up like Putin’s Russia. With different language, another favorite of mine, Fareed Zakaria, makes similar statements in his “GPS” of August 3, 2014, both in response to a recent speech by the Prime Minister of Hungary.

Here is an excerpt from Brooks’ article: “On July 26, for example, Prime Minister Viktor Orban of Hungary gave a morbidly fascinating speech in which he argued that liberal capitalism’s day is done. The 2008 financial crisis revealed that decentralized liberal democracy leads to inequality, oligarchy, corruption and moral decline. When individuals are given maximum freedom, the strong end up stepping on the weak.” I can find no scholarly definition of “liberal capitalism,” so I’ll go with Yahoo’s definition: “capitalism based on free market economics.” Since Brooks doesn’t define it for us, I’ll have to assume this is also what he is referring to as “democratic capitalism.” So, basically, we’re talking about a democratic government which allows free trade with open borders. It starts to sound like the prescription of the Washington Consensus, which did not result in favorable outcomes for many developing countries on which it was imposed by the IMF in the 80s and 90s.

I am an admirer of both Brooks and Zakaria. But these arguments leave me unsatisfied. First, there is an assumed connection between democracy and capitalism–they don’t necessarily go together. Second, this warning doesn’t effectively deal with the realities of developing nations. Third, there are no prescriptions for just how these nations are to develop “democratic capitalism,” except the prediction that autocratic governments will prevent it. And, how to prevent autocratic governments, since the American public seems fed up with militaristic interventions around the world?

Consider China, arguably a great example of the advantages of an effective autocracy. China knows how to make decisions and get things done.  And, as Brooks acknowledges, credible polls show most Chinese citizens strongly support their autocratic government, at least as long as the economy keeps growing. There are many other examples, especially during early stages of development. Consider S. Korea, which could hardly be called a democracy under the autocratic presidency of Park Chun-Hee (1962-1979). This was a period of autocratic human rights abuses, but clearly also a period of amazing economic growth, and Korea certainly has not ended up looking like Putin’s Russia. I leave open the obvious question: is a period of autocracy sometimes a reasonable price to pay for outcomes like those of present day China and Korea? Before answering, consider that there are no economists who have found a path to poverty reduction without economic growth.

On the other hand, to my regret and embarrassment, the US has been vividly displaying major flaws in liberal democracy–we can’t get things done, This is very costly.  Many scholars attribute China’s performance advantage vs. India in recent decades (3-5% stronger annual growth) in large part due to the burdens of India’s democracy vs. China’s autocracy, i.e., the costs and delays in trying to reach agreement between different constituencies in India, a weight China does not carry.

Some will say there are huge problems with autocracies–human rights, corruption, inequality, environmental damage, and others. But it’s easy to find comparables in regard to all these categories of problems in countries which are democratic. India is one good example, abundant in all those elements. Zakaria particularly calls out a few objectionable behaviors of “illiberal democracies”: nationalism, religion, and domination of the media. But consider some of the near equivalents in the US: attitudes toward immigrants; attitudes toward muslims, and religious attitudes toward abortion; and the media domination by wealth interests after the Citizens United Supreme Court decision. Consider our Civil War and our civil rights abuses to African American citizens–all in the growth period of arguably the world’s most successful democracy. In fact, perhaps the US only arrived at democracy in 1965 with the Civil Rights act, and it’s still far from well functioning.

We are only better by a degree, and perhaps only at a point in our short history. There are other democracies performing better than us. The US does not rank at the top by the best accepted international gauges of pollution, human rights, corruption or inequality. See below rankings.

China and the US now have in common a dedication to capitalism, but China’s version involves a great deal more government control of banks and businesses than does the US version. We have regulations. They have downright state control. Although those controls are weakening as a result of joining the WTO in 2001, a significant portion of the Chinese economy is still made up of state owned enterprises. The comings and goings of foreigners are still controlled far more than in other developed countries.  China cannot yet be called a “free market, open borders” economy. And, it is ridiculous to suggest that China’s “not free, not open” economy performed poorly for Chinese across the last 30 years. It has been one of the most stunning economic success stories of all time. For example, in that short period of time, according to the World Bank, it has reduced the percentage earning less than $1 per day from 65% of its vast population to less than 10%!

It’s been 22 years since Francis Fukuyama’s famous proclamation in 1992, with the fall of Russia, that the world had achieved the end state of history with the victory of liberal democracy and free market capitalism, a statement from which he has now distanced himself. Indeed, the world did not subsequently sharply move to adopt our version of liberal democracy with our imposed attachment of free capitalism, and among countries which did try, many did not fare well. When we urged our form of “democratic capitalism” on them, we forgot to tell them that when we were in the same early stage of growth, we controlled our economy much as China has done, to protect infant industries, and even today we are two-faced, still subsidizing farmers in the US, at the expense of poor farmers in Africa. Many new democracies have floundered, while a few autocracies (e.g., Rwanda and China) have fared spectacularly.

This is not to say that China’s form of rule is better than ours or that it will last. Scholars I respect predict that it will be necessary for China to move gradually toward democracy to sustain its long term growth. However, it is almost impossible, in my opinion, to make the case that a democratic Chinese government could have accomplished as much as China has, under autocracy, across the last 30 years. Its growth has been astounding, and hundreds of millions have been brought out of poverty. This is something to think about, because the China of thirty years ago is the approximate stage at which many African countries are now starting to grow.

I’m strongly in favor of democracy and also capitalism. I only seek to remind of three things:

(1) Neither democracy nor capitalism are without their flaws–and we are certainly demonstrating some of the flaws here in the US at this time. Democracy requires a high degree of fairness in electing officials and in their unbiased influence in their jobs. Among other things, our politically gerrymandered election districts and our allowance of big corporate and billionaire spending distort the fairness of our democracy.

Our form of capitalism could also do with some adjustments. A good start would involve simplification of regulations and tax codes and gradual re-balancing of the inequality pendulum, which is moving us toward the type of oligarchy that Brooks and Zakaria fear of autocracies. The people need to control government and government needs to control capitalism. Left unchecked, capitalism will indeed sacrifice the lesser privileged to the benefit of the capitalists, as Orban says (and as Karl Marx predicted).

(2) We are prone to forget that we and most other developed countries were not “open” capitalist countries in our beginnings. Most developed countries imposed strong controls over foreign engagement on home soil, for a long period of developmental history, in order to protect fledgling industries. Only now can we rail for openness, so that our vast corporations can advantage themselves as they wish in foreign countries. This is not always in the best interest of the developing nations or the world as a whole. We need to concern ourselves with the economic welfare of the world, not just the US.

(3) We have not fared well in our foreign relations by attempting to either impose or glorify our preference, especially for a combination of democracy and capitalism. Our seemingly arrogant approach only tends to weaken our relations with other countries and add tension. This is evident in the Muslim world just now, where our “better than thou” approach, taken with our interventionist wars and quasi military intrusions, has only fueled hatred and heightened terrorism.

One thing I learned well in my study of globalization: There are few, if any, universal prescriptions that can be applied across the board to all countries at all times. Maybe we should work to restore the quality of our democracy and our capitalism before we proselytize about it. Victor Orban’s speech should not be so discounted. His outlook provides legitimate and dire warnings for the continuance of trends in our valued forms of democracy and capitalism.

References:

World Bank on China’s poverty reduction record: http://www.worldbank.org/en/news/feature/2009/04/08/poor-areas-poor-people-chinas-evolving-poverty-reduction-agenda

Council of Foreign Relations Brief: http://www.cfr.org/kenya/democracys-decline-case-kenya/p30116


Kicking Away the Ladder: The “Real” History of Free Trade,  Ha-Joon Chang, Foreign Policy, 30 December 2003


David Brooks: http://www.nytimes.com/2014/08/05/opinion/david-brooks-the-battle-of-the-regimes.html?hp&action=click&pgtype=Homepage&module=c-column-top-span-region&region=c-column-top-span-region&WT.nav=c-column-top-span-region&_r=0


Negatives ratings for US:
Where #1 is best:
18th in world pollution (http://www.statisticbrain.com/countries-ranked-by-air-pollution/)
18th also in human rights (http://www.ihrri.com/contry.php) Some surveys rate US much worse (higher number in ratings: http://www.globalresearch.ca/the-us-is-the-worlds-worst-human-rights-violator/5377997)
Corruption: US ranks 19th (http://cpi.transparency.org/cpi2013/results/)
Income inequality: US ranks #62, slightly better than China, slightly worse than Russia (http://www.indexmundi.com/facts/indicators/SI.POV.GINI/rankings)
Where #1 is worst:
Wealth inequality, US is 4th from bottom (http://inequalityforall.com/fact-4/)
Note: Other rating sources may have different results. These are offered not for endorsement of methodology, but as illustrative that US does not rank at the top of any of these troublesome indicators.

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