A Question of Linkage: Capitalism, Prosperity, Democracy...

A Question of Linkage: Capitalism, Prosperity, Democracy...

Mini Teaser: The simultaneous explosion of economic growth in still-authoritarian China and economic collapse in increasingly democratic Russia rekindles an old debate.

by Author(s): Irwin Stelzer

The simultaneous explosion of economic growth in still-authoritarian China and economic collapse in increasingly democratic Russia rekindles an old debate concerning the relationship between democracy, capitalism, free markets, and economic development. There can be little doubt that the economy and the polity interact with each other, but the nature of that interaction is elusive.

We begin with the conventional, conservative formulation. Crudely stated, it goes something like this. Market capitalism is the greatest engine for economic development the world has ever seen, what Peter Berger calls a "horn of plenty that heaped...immense material wealth and an entrepreneurial class, on the countries in which it originated." By creating a thrusting entrepreneurial class, impatient with government restrictions on its adventures, and a middle class clamoring for consumer goods, education and choice, capitalism creates counterpoises to government authority, eventually forcing the acceptance of democratic institutions. In short, by producing economic wealth and an entrepreneurial class, capitalism inevitably produces democracy. And since democracies don't start wars or have expansionist proclivities--forget, for the moment, Theodore Roosevelt and imperialist Britain--capitalist-democratic development contributes to security and to world peace.

There is much to be said for this view, especially that portion that relates prosperity to market capitalism. Certainly, it seems to be validated by our own recent experience. Entrepreneurial capitalism became more dominant in the America of Ronald Reagan than it had been before, and job growth and record-breaking prosperity followed. In Britain, Margaret Thatcher reversed almost four decades of socialism--only the pace, but not the direction, of increasing government involvement in economic affairs changed when pre-Thatcher Tories alternated with Labour as Her Majesty's ministers--and changed her country from the sick man of Europe into one positioned for long-term, non-inflationary growth. Meanwhile, the Soviet economy was shown to be like the Wizard of Oz--an imposing facade, but impotent and powerless at its core. Put these events together and you have an unassailable proof that capitalism produces a level of economic welfare that a planned economy simply cannot emulate.

Add to that the apparent relationship between capitalism, prosperity, and democracy, and you have reason for self-satisfaction with the American political-economic system, at least in the broad. After all, in recent years a more-or-less free market capitalism in Chile, South Korea and Taiwan has produced, first, prosperity and, then, democratization. In Russia it may be the other way around: democratization (glasnost) preceded economic restructuring (perestroika). No matter: it all comes out well in the end--capitalism, democracy and prosperity march hand-in-hand into a bright, and therefore secure, future. Knowledge (or faith) that this is so informs several aspects of domestic and foreign policy.

Swings and Roundabouts

Unfortunately, all is not as simple as it first seems: the linkages between economic and political structures, and between economic structures and economic performance are not quite as clear as the foregoing recitation suggests. And because they are not, we may have to do more to secure ourselves from external threats than wait for some inevitable historical tide to produce prosperity, democracy and world peace.
Consider America's experience. Nicholas Eberstadt, in his Foreign Aid and American Purpose, points out that, in 1787, when America adopted its Constitution, "life expectancy in the United States was almost certainly significantly lower than in sub-Saharan Africa today." And per capita income some one hundred years later was "substantially lower than the figures currently imputed to such places as Algeria, Jordan, and Mexico." Yet America, poorer than many totalitarian countries are now, opted for democracy and made a spectacularly good go of it. Many years later, Cuba, then enjoying a standard of living far above those of nearly all its Latin American neighbors, embraced Fidel Castro's totalitarian socialism. "...[M]aterial prosperity might be desirable for a variety of reasons," concludes Eberstadt, "but it is neither a prerequisite for free and democratic rule nor a guarantee against those forces that might undermine such rule from within." To which his colleague at the American Enterprise Institute, Joshua Muravchik, would say, Amen. "...[W]e should not expect we can create democracy by fostering development," writes Muravchik in Exporting Democracy: Fulfilling America's Destiny, "the relationship between economic and political development is too indeterminate."

Certainly, the experiential evidence concerning this relationship is ambiguous--totalitarian China is in the midst of a boom, undemocratic Singapore prospers, while newly somewhat-democratic Russia is on the brink of economic collapse. So democracy is no guarantor of prosperity, nor its absence a guarantor of poverty. On the other hand, there are pathetically poor dictatorships, and immensely prosperous democracies. No linkage is evident.

What we do seem to know is that, at the extremes, decentralized economies work better than centrally planned ones. America is better off than Russia, Chile than Cuba, Taiwan than North Korea, and a market-oriented China than a tightly controlled one. But experience provides a less certain guide when we come to the mid-range of the spectrum, those economies in which governments intervene in economic matters to varying degrees. For many years Japan's combination of private enterprise and government direction, its "state-guided market system," as Chalmers Johnson calls it, was the envy of the world. But now we see that the rigidities--and corruption--created by the bureaucratization of the Japanese economy are taking their toll. Germany, too, was thought to be a model of state-private sector cooperation, especially in the labor field, where its apprenticeship program and labor policies attracted praise from liberal academics such as Lester Thurow, and from administration officials. But it has now become apparent that German labor costs are so uncompetitive that future Mercedes will be made in America.

In short, there are swings and roundabouts, with first this and then that mix of private enterprise and government participation seeming to be optimal, even in a single country. Furthermore, even if one system could be identified as optimal at a given time, it is not clear that it would survive transplantation, as Johnson, in his MITI and the Japanese Miracle points out in the case of Japan: "...other nations seeking to emulate Japan's achievements might be better advised to fabricate the institutions of their own developmental states from local materials...The Japanese learned to cooperate effectively with each other as a matter of national survival...Lacking a comparable consensus on goals, the United States might be better advised to...unleash the private, competitive impulses of its citizens rather than add still another layer to its already burdensome regulatory bureaucracy."

The Need for Modesty

Does this mean that economics can tell us nothing--or nothing very useful--about the relationship of economic structures to economic performance, and of the latter to political institutions? Such a conclusion goes too far, at least if we are modest and appropriately tentative in our conclusions, and do not strive for a spurious exactitude. In short, if we remember that, as Berger puts it, the social sciences "can never do more than provide partial, provisional, and in principle refutable interpretations of human reality."

It seems not unreasonable to suggest that, comparing extreme ends of the spectrum, economies relying most heavily on individual initiative--the market economies--perform better than those which rely heavily on central direction. That is, they grow faster and distribute the fruits of growth both more efficiently and more equitably (to each in accordance with his contribution), and perhaps even more equally. The American millionaire may have more television sets, cars and air conditioners than his poorer brethren, but they, too, will own many of these non-necessities. The poor in the centrally directed economies of Africa and the former Soviet Union, on the other hand, will often not know such luxuries exist, much less contemplate owning them.

Of course, as Mancur Olson warns us in his classic The Rise and Decline of Nations, "...the fact that a country with an unusually high growth rate has this or that distinctive trait provides no justification for the inference that there is a causal connection."

So we cannot conclude with absolute certainty that a country's free markets cause its affluence. But when countries with widely divergent economic structures perform very differently; when the most significant success is had by the most market-oriented (America); when the most cataclysmic failures are experienced by the most centrally planned (USSR); when successful market-oriented economies collapse after adopting central planning (Cuba); and when failed planned economies revive after adopting at least a sufficient number of market reforms to liberate fledgling entrepreneurs from the toils of the planners (Argentina), it seems not unreasonable to conclude that market economies work, and that highly centralized, planned economies do not. At least, we are entitled to elevate such a hypothesis to a rebuttable presumption.

At least, that is, at the extremes--the United States compared with the USSR; Chile with Cuba, etc. Again, when we get to the middle of the spectrum, things get harder. The development of the "Asian tigers" (South Korea, Taiwan, Hong Kong and Singapore) can be cited as proof that market economies--for these countries are claimed as "one of us" by those in the free-market-camp--produce widely distributed prosperity. Alternatively, it might be argued that government intervention, of the sort practiced in Asia, does so, and with less social disruption.

That both free market adherents and those who favor more than a dollop of government intervention claim the East Asian economies as their own should come as no surprise. The economies of the ten East Asia countries grew at an average annual rate of more than 4.5 per cent between 1975 and 1990, while those of other developing countries were stagnant. South Korea, China and Singapore, three countries with governments not known either for their total dedication to free markets or for their devotion to democracy during this period, led the pack. But free market Hong Kong was not far behind. Most of these countries have employed export controls, relied on state ownership, regulated financial markets to keep capital costs low, "picked winners" and in other ways relied as much on a guiding hand as on an invisible one. In short, they have not relied on markets to fuel their growth to the extent that America has. But neither have they attempted to exercise control from the center to the same degree as the former Soviet Union, or as the less developed African states whose state-run shambolic economies are an international scandal.

Whether the East Asian countries represent a new model for a "middle way" to economic prosperity, or whether the extensive intervention by their governments will in the end prove to have reduced consumer welfare and ossified the protected producer sector, we do not know. Nor do we know whether their mix of markets and intervention would work in other less stable, less homogenous, less disciplined and less cohesive societies--indeed, whether it will continue to work in their own. On this point, the evidence demands a Scottish verdict--we don't know enough to identify an optimum mixture of free markets and government participation that will, in all places and at all times, maximize growth. Indeed, we do not know whether there is a universally valid mixture. But what we do know is not trivial.

Within that portion of the spectrum occupied by Western industrial countries, America's relatively greater reliance on markets produces economic results superior to those obtained by Europe's more interventionist governments. Incomes are higher, inflation lower, and unemployment significantly less--largely because labor and other markets are more open and flexible here. Doubters need only compare the Reagan boom with Eurosclerosis.

In this country, in our time, government intervention in markets destroys wealth--witness the gains in productivity and welfare following the deregulation of our energy, transportation and communications industries.

Finally, we have learned--to our regret--that democracy is not a necessary predicate to economic growth. Harvard's Andrei Shleifer calls "the emergence of the secure-property-rights dictator" a "puzzle," and cites the example of Chile under Pinochet as "striking." And so it is--as are South Korea and Taiwan. When per capita income soars, inflation remains tame and unemployment is almost non-existent--all while political dissidents disappear and torturers thrive--one must concede that serious authoritarianism, capitalism and prosperity can co-exist.
Fortunately, we know something else: that prosperity creates pressures for democratization. Thus, John Helliwell, of Harvard and the University of British Columbia, concludes from an analysis of data for 125 countries in the years 1976 to 1985, that the higher the level of a nation's per capita income, the more likely it is to have a high degree of democracy. And no wonder: an emerging middle class will demand a share of political power, and an entrepreneurial class freedom from government restrictions. That is what happened in Chile, South Korea, and Taiwan; apparently was likely to happen in Hong Kong before it was abandoned to the communist Chinese; and is what everyone hopes will happen in China itself. Entrepreneurs have direct dial telephones and fax machines, devices that eventually become the capitalists' equivalent of the old-line revolutionaries' bombs and bullets.

So, although democracy is not a pre-condition, and indeed may impede economic development in the early stages of a nation's growth--that is precisely at the time at which incomes are often being redistributed radically and income inequalities are becoming more visible--some form of capitalist, more-or-less market economy does seem to be a necessary pre-condition for that prosperity. Capitalism, Irving Kristol reminds us in his Two Cheers for Capitalism, "does deliver on its promises... does improve people's standard of living...." And, although we may not be able to establish a causal relationship between that prosperity and democracy, or argue compellingly that capitalism is a sufficient condition for a liberal society, we can say, with Kristol, that "a capitalist order is...peculiarly congenial to a large measure of personal liberty...[T]hough capitalism may not be a sufficient condition for a liberal society, it does seem to be a necessary condition of it." Gabriel Almond goes further, concluding from an extensive review of the literature, that "the historical, the logical, and the statistical evidence for this positive relation between capitalism and democracy is quite persuasive."

Implications for Policy

Therefore, political reform--democratization--does not seem to be a necessary predicate to economic reform; economic reform--a movement away from centralized control--does seem to be a necessary predicate to economic growth and prosperity; economic reform and its attendant prosperity seem to favor political reform, though not always, not everywhere, not in invariant proportions. And nothing is forever. Prosperous democracies can regress to authoritarianism, either in the face of economic difficulties, or of a different ideology that seems to respond to the grievances that accumulate even in prosperous democracies. So, too, capitalist market economies can, sometimes in one leap, sometimes in tiny steps, become centrally planned ones.

More, we do not know. But knowing that we do not know with certainty what links exist between economic and political structures, and between political structures and prosperity, is itself a valuable bit of knowledge. For it permits us to question two foreign and security policies that have gained consensual acceptance: stepped-up aid programs, and the hollowing out of our military.

1. Aid to developing countries. It is now widely accepted that aid to developing countries rarely produces the desired results. Whether because the benefits are squandered by statist regimes that prefer building empty stadia, huge cathedrals and roads to nowhere to improving the quality of village water supplies; or because a ruling elite, often including the nation's leading capitalists, expropriates for itself the benefits intended for the impoverished masses; or because the genuinely humane intentions of the donors are negated by Western exporters who convert aid programs into export subsidy schemes, aid rarely works--and for "works" I use Peter Berger's definition: it works if it initiates or contributes to "a process of ongoing economic growth by which large masses of people are moved from poverty to an improved standard of life."

What is less well understood is that, despite the recognized failure of past aid programs, we are about to step up our contributions to them. Of course, since foreign aid has become the policy that dare not speak its name, we have had to find a new name for it. We have done so: global environmentalism. By signing on to the global warming treaty, the United States has committed itself to the tender mercies of a vast new United Nations bureaucracy, one that intends to redistribute income to poorer nations, allegedly so that they may improve their environments. As with more conventional aid programs, so with the new, greener ones: it is impossible to quarrel with the good intentions of the donor-proponents. But is it possible to condemn their naivete, their failure to recognize that the global warming treaty is merely another in a long line of devices designed to redistribute income from North to South; that such redistribution reduces pressures on less-developed countries to get their economic houses in order; and that government-to-government income transfers pass through too many sticky fingers for them ever to trickle down to their intended beneficiaries.

Of course, if aid led to prosperity, and prosperity to democracy and stability, the income transfers contemplated by environmentalists would be desirable. But given the uncertainty of these linkages, the efficacy of their "aid-not-trade" policy--environmentalists were prominent in the ranks of those opposing the North American Free Trade Agreement and are decidedly unenthusiastic about the new GATT agreement--becomes suspect, to say the least.

2. Hollowing out of the military. Experts in these matters, with Dick Cheney perhaps the most prominent, say that we are once again engaged in a "hollowing out" of our armed forces--lowering recruiting standards, reducing training exercises, cutting stores of spare parts and maintenance levels. All of this because we believe that Russia, now that it has replaced total repression with a combination of tanks and ballots--call it "democracy," for purposes of this paper--will begin a virtuous upward spiral to prosperity, peace and democracy. After all, those things do seem to go together, as I have already pointed out.

The problem with such a deterministic belief is that it has a very good chance of being wrong. This, not for the reasons usually given: that the Russian people, beset by plummeting living standards and social chaos, will decide that democracy and economic reform are mugs' games, and reinstall something akin to the old Communist dictatorship; or that the military, shorn of perks and privilege, horrified by the shrinkage of the Russian empire and international disrespect for Mother Russia, will take over; or that a charismatic leader, such as Vladimir Zhirinovksy, combining the most popular bits of fascism, communism, nationalism and anti-semitism, will prevail in a legitimate, democratic election. Any of those things may happen. More likely, however, is a continuation of economic reform, an eventual reversal of the economy's slide, and a resurgent desire to become a world power to protect Russians in neighboring states, and to secure the nation's borders from states increasingly in Germany's economic sphere of influence. In short, a partially reformed and revitalized economy capable of sustaining a military which is in turn capable of supporting the aggressively expansionist foreign policy that the totally socialized economy could not. In other words, prosperity but no peace.

If this formulation is correct--if prosperity and economic development do not inevitably lead to democratization and an abandonment of imperialist yearnings, but are equally consistent with authoritarianism and foreign policy adventurism--we might reconsider the nature of the economic assistance we are prepared to offer Russia. For to strengthen a Russia that is best left weak may prove a mistake that will haunt us for years to come.

After all, if we really believed that prosperity inevitably brings with it freedom and peace, we should lift the world embargo on Iraq, in the hope that the rising incomes that would result would create a middle class yearning to be free--and capable of satisfying that yearning. And we would abandon efforts to link access to American markets to domestic reform by our trading partners. It is fashionable these days to consider such access a benefit we bestow on worthy countries, those that manage their internal affairs in a way we find acceptable. Behave badly, we say, and we will not let you sell to us. Leave aside the question of the cost to American consumers of banning the importation of more efficiently manufactured foreign goods. Consider, instead, the inconsistency of such trade linkages with the belief that economic prosperity is a powerful engine for political reform.

So, given our ignorance about the economic and political consequences of aid we might pause before increasing the flow of aid to developing countries. And given our even greater ignorance about the relationship between prosperity and the political system it might engender, we might rethink our assumption that a more prosperous Russian bear will prove an agreeable playmate, permitting us to embrace it, unarmed. Prosperity certainly means greater strength, but it is less certain that that strength will be used in a benign fashion.

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