11 June 2008

Democracy, Free Enterprise, and Confidence

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

William A. Reinsch

According to William A. Reinsch, free markets tend to bolster democracy. Sometimes democracy bolsters free markets, sometimes not, he says. Reinsch is president of the National Foreign Trade Council and a member of the advisory U.S.-China Economic and Security Review Commission.

Looking around the world today, we see that many of the most prosperous countries also boast the most dynamic democracies. Countries such as Chile, Ireland, and the United States are vibrant democracies with largely free markets. Countries such as Burma and North Korea are marked by dictatorships and rigid, command economies.

While there are exceptions to any rule, economic and political freedoms tend to go hand in hand. In many cases a country’s engagement with the world is an important harbinger of both economic and political freedoms.

In particular, global economic engagement is an important foundation for democracy. Trade and competition promote growth, which builds wealth and creates a larger middle class. In turn, this larger middle class demands more of its government, which can no longer rely on the support of a small coterie of elites. At the same time, trade exposes inefficiencies in bloated state-run enterprises, further limiting the ability of state officials to dole out jobs and favors.

Economic despair, on the other hand, fosters the conditions in which demagogues can become dictators, as the period between the two world wars highlighted all too well. President Harry Truman and Secretary of State George Marshall understood this when, in the wake of the Second World War, they laid out a plan to rebuild Europe. “The revival of a working economy,” Marshall said, would “permit the emergence of political and social conditions in which free institutions can exist.”

Beyond creating a prosperous economy, the increased engagement of global businesses can also support democratic ideals. For example, global companies are in many cases prohibited by law from offering bribes or engaging in corrupt practices.

In addition, many companies are voluntarily instituting internal codes of conduct or subscribing to conventions for corporate conduct such as the Global Sullivan Principles or the UN Global Compact. The more these kinds of companies are allowed to engage through trade and competition, the less bureaucrats or party chiefs can sustain themselves or feed a government machine through questionable or corrupt practices.

Corporate Social Responsibility

Today there is another important political benefit to the participation of global companies in local economies. Many businesses have instituted corporate social responsibility programs to support the communities in which they work. In a number of cases these efforts are not directly related to a core business but instead focus on improving local institutions.

This is particularly true in Africa, where multinational companies have founded treatment programs for HIV/AIDS, set up post-conflict resettlement programs, and established microcredit institutions. General Electric, for instance, has partnered with development economist Jeffery Sachs to build a series of hospitals across 10 countries in Africa, using GE technologies and company volunteers to improve rural health care delivery. These projects help strengthen civil society and further encourage the establishment of free institutions.

More generally, global economic competition fosters greater engagement with the world, which inevitably leads to the exchange of information, ideas, and democratic values. U.S. presidents from Franklin Roosevelt to John F. Kennedy to Ronald Reagan have recognized the intangible benefits open markets and engagement have on the promotion of democracy abroad.

More recently, Presidents Bill Clinton and George W. Bush both agreed that bringing China into the World Trade Organization would be good for democracy. “When individuals have the power not just to dream, but to realize their dreams,” Clinton said, “they will demand a greater say.” Bush added that “economic freedom creates habits of liberty” and, with respect to China, “Our greatest export is not food or movies or even airplanes. Our greatest export is freedom.”

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

Not long ago, the United States and Western Europe exported U.S. ideals through rock music, books, and television to the former Soviet Union. In 1987 Billy Joel played for 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, freer markets mean greater access to the Internet, cell phones, and text messages, which speeds information, gossip, and news in ways that are difficult for any government to control fully. Plugging into the global information and economic system is good for democracy.

But is democracy good for free enterprise?

This is perhaps a more complicated question, though one thing is clear. Dictators rarely embrace free markets. Burma, Cuba, Libya, North Korea, and Zimbabwe are the least free economies in the world, according to the 2008 Index of Economic Freedom, produced by The Wall Street Journal and the Heritage Foundation. The kind of concentrated authority that allows these political systems to survive encourages a centralized, command economy that rewards those loyal to the regime and punishes those who are not.

Democratic government certainly has helped bolster free markets in the United States and around the world. For more than 60 years, the United States has helped fashion and support a liberal world order based on free trade and stable global markets. Over about the same period, Europe has lowered its economic barriers and improved its labor market efficiencies following the spread of democracy across the continent.

Free Markets and Stability

But free and fair elections alone do not necessarily promote free markets. One problem is that a growing number of autocratic regimes masquerade as democracies, where one party maintains virtual control over government and the economy and where a robust opposition does not exist. Russia under Vladimir Putin is a prime example of 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 influence over state-owned enterprises such as Gazprom and using its economic leverage to send political messages to its neighbors and the world.

Other democratic governments lack the institutions and support to encourage free 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 structures in place to promote free markets in meaningful ways.

Even in more established democracies, backlashes against the free market are not uncommon. In Latin America, a number of politicians have been elected in recent years based on populist and, in some cases, socialist platforms. In the United States, polls show dwindling support for free trade, while the home mortgage crisis has led to questions about the consequences of free markets without sufficient oversight and regulation.

Democracy appears best able to strengthen free markets when it is accompanied by strong local institutions and social trust. Denmark boasts one of the most open economies in the world and is a model democracy, but it also embraces a unique social compact known as “flexicurity,” a system that has taken more than a century to refine and that spends substantially on social programs, training, and benefits.

The result of the compromise is that the Danes believe strongly in free enterprise and global trade -- even unions embrace outsourcing. Author Robert Kuttner, who has analyzed the Danish compromise between free markets and social stability, suggests that these kinds of bargains “have to grow in their own political soil.”

The key to encouraging the growth of democracy and economic freedom is to foster the local institutions on which both are based.

The United States, its allies, and international institutions should continue to encourage the rule of law, independent and transparent judicial systems, productive capital investments, and adherence to international human rights and legal obligations in order to make it more likely that governments, however structured, will operate in a fair, humane, and transparent manner.

At the same time, governments, nongovernmental organizations, and businesses can all play a role in bolstering the local institutions and civil society groups that strengthen democracy and support individual freedoms.

We must engage vigorously in the world with all of the tools at our disposal, particularly through trade and diplomacy. If we do, we have an opportunity to help people around the world become more free, prosperous, and secure.

The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.