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Democracy Talks: Andrew Wilson, Center for International Private Enterprise

Why democracies come under challenge when they fail to deliver economic opportunities for their citizens — and why American businesses succeed in nations that embrace democracy, the rule of law, and a competitive environment.

Article by William McKenzie, Lindsay Lloyd, and Christopher Walsh April 28, 2020 //   16 minute read

Andrew Wilson is executive director of the Center for International Private Enterprise, an organization devoted to promoting democracy around the world through private enterprise and market-oriented reforms. Through working to establish the rule of law with its partners, the center helps expand political and economic freedom for individuals and nations alike.

Wilson spoke with the Bush Institute’s Lindsay Lloyd, Chris Walsh, and Bill McKenzie about the relationship between open societies and open markets. He makes the case for why democracies come under challenge when they fail to deliver economic opportunities for their citizens. And he contends that American businesses succeed in nations that embrace democracy, the rule of law, and a competitive environment, which is why the United States should help create those conditions abroad.

You wrote recently about how long-term damage ensues when a democracy fails to deliver for its citizens. What is the relationship between the economic health of a country and its democracy or its aspirations for a democracy?

In places that are going through a transition from an authoritarian state to a democracy, citizens are often confused that democracy quickly equates to economic growth and prosperity. Somehow this transition happens immediately when you cast a ballot.

Of course, we know that’s not true. Much of the thinking about economics and democracy tends to point to the causality going in the other direction. Markets, and the needed freedoms for consistent economic growth, often contribute to better governance and democratic development over time. I tend to think that the values of democracy and the values of a market are mutually reinforcing. They form a virtuous cycle of growth and freedom.

I tend to think that the values of democracy and the values of a market are mutually reinforcing. They form a virtuous cycle of growth and freedom.

When I first started working at the Center for International Private Enterprise (CIPE) 20-odd years ago, we were working in Central and Eastern Europe and saw the clearest patterns that the failure of democracy to provide economic growth challenged the viability of the transition. There was a general pattern that came about over time.

A shock therapy of democracy and economic reform would occur in places like Poland, Slovakia, or Romania. You would have this initial rush of freedom but without the attendant growth. You had the pain of economic reform, where people lost jobs and savings were wiped out. And you had inflation and macro-economic pain.

But you didn’t have the concurrent development of governance that would support economic growth. You didn’t have anything that was going to pass the goods of economic growth down to the ordinary voter. People did not see the benefits of democracy.

Instead, you had the quick entrenchment of a communist elite into a remodeled or refashioned oligarchic elite. In Slovakia, for instance, the reformed communists, if you will, got swept back into office. In Bulgaria, socialists were swept back into office under the guise of being good democrats.

If democracy is not delivering the goods in short order, and you have the dislocation that tends to occur, democracy in its nascent form can come under threat.

If democracy is not delivering the goods in short order, and you have the dislocation that tends to occur, democracy in its nascent form can come under threat.

Do you think the phenomena that were seeing today with illiberal populist regimes in places like Poland and Hungary are a consequence of the failure to make democracy work for a majority of the population?

Two factors are in play in Central Europe. One is the overall failure of globalization to deliver the growth of trade and small and medium enterprises in some markets. As a result, you see dislocation in some elements of the electorate.

The other factor is a Europe-wide phenomenon of trying to figure out the balance between the need for local democracy and the need for broader institutions. You see that with Brexit, and it’s playing out all over the world, just differently in Central and Eastern Europe.

The institutions of democracy were never that strong to begin with in Central and Eastern Europe. This region may have had some cultural connection to democracy, but the actual institutions were not strong or robust. The institutions of society were less resilient when pressures were exerted on these societies. They were less able to absorb shocks than established democracies in Western Europe.

Does the populism arising in places where democracy hasn’t delivered fast enough alarm you? Or do you think this is just people expressing their frustration with international institutions, open trade, and the flow of ideas and people across borders? And that this is a phenomenon that will work its way through the system?

A Hungarian economist wrote about how reform is not a straight line, it’s a wave. You have surges of liberalization, then troughs of pushback, and then another surge of liberalization. Overall, the trend line is upwards but not linear.

I tend to subscribe to this point of view. I think we are in one of those linear periods. But there is now a competition of ideas and approaches coming from authoritarian states that don’t share our values. We need to pay greater attention to the challenge this poses.

I am an optimist and think we will pull out of this. But it will require those of us who are engaged in the global debate about democracy, and the future of a private sector-led economy, to be more alert and deliberate.

I am an optimist and think we will pull out of this trough. But it will require those of us who are engaged in the global debate about democracy, and the future of a private sector-led economy, to be more alert and deliberate.

How does the United States make the case for supporting democracy abroad while we are in this trough and isolationist pressures are building at home and around the world?

First, the case has to be made that globalization has brought an unprecedented period of growth and stability in our world and that the liberal democratic order constructed after World War II with American rules has served American companies very well abroad. They have brought Americans unprecedented, sustainable prosperity.

If we’re going to argue for its continuation, we need to be realistic that globalization does put strains on economies. What are often seen as the failures of globalization are really failures of domestic policies to respond to those strains. We have failed to respond to the competitive pressure that globalization has put on us. We have not adequately reeducated our workforce, upgraded our infrastructure to be globally competitive, and addressed other issues that have put pressure on our society. That’s a domestic policy failure.

American business, on the other hand, has been very successful in competing in markets that have democratic values, free competition, and rule of law. We do well when we support countries to develop those systems.

We don’t do as well in markets where we have to compete with corruption, and unpredictable governance. That’s where the Chinese money, or money from authoritarian states, flows in and it’s harder for us to compete. Those are markets with a lot of growth potential, but where the rule of law is weakest or at risk.

We need to say to Americans that this challenge is not just about economic stability. This is also about global security, the competition of ideas, and whose rules we are going to play by over the next 50 years. The way we will advance in an increasingly depolarized world is not through our ability to exhort military influence, but by our ability to shape minds and opinions so people choose the rule of law, choose democracy, and choose our values.

It’s not a Cold War anymore, it’s a competition of values.

You used to hear that as societies developed economically, it was inevitable they would demand democracy, greater accountability from the government, and a greater stake in how the country was run. How do you see the link between democracy and the nations who are becoming more prosperous today?

I don’t think we should be looking at China’s big growth as an example. It is an anomaly. I don’t count China as a market. The commanding heights of the economy are still controlled by the Communist Party. It is a communist state with private ownership.

I would point rather to Kenya, Ethiopia, and states that have slowly been opening their systems. In Ethiopia, the private sector has played a powerful role in pushing to open the state so the economy and private sector can develop.

We need to make the case that the distinction is between having elements of private ownership in a society and a truly functioning market economy. Russia is a privately-owned state, but it’s owned by oligarchs whose interests are not devolving power to people.

In many countries with authoritarian capitalism, the state has been the engine of growth, not the small-and medium-sized businesses. The theory that the private sector is the engine for democracy is predicated on growth driven by small and medium enterprises.

To what extent is the modern pressure on democracies coming from the shift to a more digital, technology-driven economy and the inability of some people to participate in that?

The challenge of Globalization 2.0, or whatever you want to call it, is we are running the risk of having people who can access that economy and people who are left behind. In Globalization 1.0, countries who could formalize the rule of law, improve governance, and lower barriers to entry saw a more robust form of small and medium enterprise development. Now, we are seeing the same pressures work themselves out in the digital economy.

If the digital economy functions well, it allows a new group of people to access the potential gains of globalization and have access to markets. But a series of barriers exist, and we are not dealing with these issues.

As one example, we could see more economic opportunity for women. The lack of broadband is not just a developing nation issue; it’s also a domestic U.S issue. Women entrepreneurs need to be able to get online if they are going to trade online.

We also are failing as a digital economy to create global standards for digital trade. The Chinese have different notions about privacy and the nature of data. Part of being a competitor in a global economy is knowing your corporate secrets are secrets. Things like your data, your customers, and your prices need to be privately held.

But we don’t have those rules globally. If we get those rules right, and we can, then women can trade globally. We’re opening the doors to globalization for a new stratum of people if we get those digital rules right.

How do you see businesses being able to help countries develop democracy?

We are working on a new initiative that recognizes a causality between markets and democracy, and that there is a virtuous circle in “constructive capital.” Investment that is guided by liberal democratic values tends to reinforce structures of good governance in a country because it demands better governance. That in turn creates the incentive for further investment in a market place because there is predictability and rule of law.

Western investors should look for that in terms of a business model and risk management. The “corrosive capital’ flowing from China and other markets puts pressure on many places. We’re seeing this struggle play out, but ultimately companies bring with them well-governed, well-managed, transparent investment. And that brings with it a demand for better, more transparent governance in a country. It also brings with it a better business practice and the notion of competition, which gets injected into the value chain.

Consumer pressure also drives improvement. Western companies have their own costumers asking them to do better and do well. And they have to respond to expectations and the obligations put on them by the existing western liberal democratic order.

Western companies bring international laws and standards with them. I guarantee you that Chinese firms don’t.

As we mentioned a moment ago, you see a rising isolationism in the United States, from talk about “America First” to a desire among some Americans to withdraw from the world. How do you argue that global engagement matters and is a force for good?

First, I don’t think “America First” is inconsistent with the success of American business abroad. American investment abroad brings in profits and contributes to American growth. Creating more competitive environments for American firms abroad is important. And I am not just talking about big business. Small and medium businesses also can learn to sell into these markets.

Second, it’s good for American business to have open and competitive markets abroad. Our businesses are most successful in markets that embrace democracy, rule of law, and a competitive environment. It’s good for us to help create these environments, because we are creating sustainable markets for America exports. It’s not just about American jobs going abroad. These markets are open to the products we create.

Our businesses are most successful in markets that embrace democracy, rule of law, and a competitive environment. It’s good for us to help create these environments, because we are creating sustainable markets for America exports.

And third, when we are engaged globally, we are making sure the world plays by our rules, not somebody else’s rules. And when we are engaged globally, promoting a rules-based order, and exercising a strong American leadership in global institutions, we are creating a stable business environment throughout the world.

A stable business environment is one where everybody is seeing growth. When everyone is seeing growth and when everyone is seeing prosperity we don’t have as many wars, we don’t have as many conflicts. We’re not being forced to send our children overseas to be peace makers. We are letting markets and economic prosperity keep the peace.

The Pentagon has said that if you don’t invest in diplomacy, you better be ready to buy more bullets. The best way to ensure against that is to ensure the rules people are playing by provide for sustainability, prosperity, and democracy. And we need to make sure that we remain competitive in that environment.