Chapter 4: Political Economy and Democracy

Up until a few years ago, most theories of democracy were essentially political economic theories; that is, most theories of democracy asserted a strong relationship between the economic structure of a nation and its ability to become democratic. However, in the 1980s and 90s, in the so called "third wave" of democratization, so many countries with so many different economic systems have experienced some form of democratization that theories which propose economic prerequisites for democratization have been called into question. New, more purely political theories have been advanced which focus on elite agreements and negotiations as the core of the transition to democracy. Still, many scholars continue to suspect that successful consolidation of third wave democratic regimes depends heavily on political economic strategy and structure.

I. The Relationship Between Democracy, Liberalism, and Capitalism

In Chapter One some basic differences between liberal democracy and social democracy were explored. In this chapter the focus will be on the differences between liberal democratic and social democratic theories of political economy, the differences between the East Asian developmental state and western theories of political economy, and the relationship between democracy, capitalism, and development.

One of the central issues of the political economy of western societies is the relationship between democracy, liberalism, and capitalism, a difficult philosophical problem that has been hotly debated since the emergence of such systems in the modern world. Contemporary North American and Western European political economies are often labelled liberal democracies, capitalist democracies, or even liberal, capitalist democracies. These three elements are so inextricably intertwined in western political economies that many have asserted that there is a natural affinity between them; that liberalism presupposes both democracy and capitalism, that capitalism nutures liberalism and democracy, and that democracy is the political system that best fits a capitalist economy.

But there is plenty of evidence that the relationship between capitalism and democracy is not so smooth or simple. Cases of capitalist economies co-existing with dictatorships abound all across the non-western world and were also common in Europe before the mid-20th century. Many have argued that dictatorships are actually more favorable for the early stages of capitalist development. Some of the most dynamic capitalist economies in today's global markets emerged from dictatorships and only experienced democratization relatively recently. Japan, Germany, Italy, South Korea, and Taiwan are examples of this pattern.

Even in the paragon cases of liberal capitalist democracy, the relationship between liberalism, democracy, and capitalism has often been uneasy. The French Revolution demonstrated that popular mass movements were not necessarily favorable to liberal society, but rather could pose a serious threat to civil liberties. The writers of the American constitution were openly hostile to popular government and universal suffrage because they feared its effects on liberty and property. In the 19th century struggles over extending the suffrage, Britain conservatives, liberals, and radicals all generally shared the view that popular democracy was a threat to capitalist economic relations. Conservatives and many liberals feared that universal suffrage would lead to working class majorities which would sweep aside the privileges of property. Socialists supported universal suffrage because they basically shared the view that democracy was a threat to the power of capital.

Fears of monolithic working class majorities overrunning civil liberties and private property have proven unfounded, but even today tension between democratic rule and capital can be seen, especially in the attack on the welfare state. Economists and philosophers from Frierich Hayek to Milton Friedman have argued that the taxes and regulations of the welfare state are a violation of the rights of property owners and a serious drag on economic growth. Conservative administrations from those of Margaret Thatcher in Britain, Ronald Reagan in the United States, Helmut Kohl in Germany, and Jacques Chirac in France have cut back on welfare state benefits in attempts to revive sagging capitalist economies.



II. Political Economic Theories of Democracy

At the risk of oversimplication, three major historical perspectives on the political economy of democracy can be identified: 1) libertarianism, 2) classical social democracy, and 3) modernization theory.


Libertarianism is a strong version of liberal democracy. It argues for a minimal state and maximal reliance on economic markets, following Jefferson's dictum that "the government that governs least governs best." (Hayek, Friedman, Nozick, Buchanan and Tullock) Libertarians define government as the sphere of coercion, because behind every law or regulation is the potential for the state to imprison or otherwise sanction violators. In contrast, they define markets as the sphere of freedom because in every market transaction parties voluntarily and freely exchange their goods and services. Freedom is better than coercion, so market mechanisms are almost always ethically superior to government decision making.

Libertarians also argue that markets are nearly always more economically efficient than governments. Markets are driven by consumer preferences and competition between producers. Therefore markets produce the mix of goods and services consumers demand and competition between producers ensures that this optimal mix is provided at the lowest possible possible price. Government decision makers, on the other hand, are not constrained either by consumer demand or competition with alternative providers, so their allocation decisions can never be as efficient as those emerging from markets. This is what many, perhaps most famously Ronald Reagan, have called "the magic of the marketplace."

Although Libertarianism is based primarily on economic theory, most libertarians think of themselves as democrats. One condition of economic freedom is freedom from arbitrary rulers. Because electoral democracy allows people to choose their leaders it can act as a check on arbitrary government power because it gives the people the chance to vote out governments that impose onerous burdens or interfere with individual liberty. Most libertarians believe that democratic governments are better than other forms of government at protecting basic human rights and thus basic economic liberties. Some libertarians even see elections as a kind of pseudo-market with voter preferences acting as a kind of stand-in for consumer preferences and competition between political parties as a kind of a stand-in for competing enterprises.

Basically, however, libertarians distrust government, even democratic government. Churchill once said, "Democracy is the worst form of government, except for all the others." Libertarians generally think all government is bad, even democratic government. Libertarians not only favor minimal government, they have very minimal conceptions of democracy. Libertarians fear concentrated political power, even under elective governments. Elective governments are often responsive to populist demands for welfare state services and controls on corporations. To libertarians, the primary duty of a democracy is to protect human and economic rights. Electoral institutions may further that end, but to a libertarian, any more expansive ideas of democracy tend toward populist interference in market freedoms and must be rejected.

Critics of libertarianism argue that markets are not always optimal allocators of goods and services and more importantly for democratic theory that minimal government and minimal conceptions of democracy are inadequate to realize true democracy. There are several situations where markets will not yield an optimal mix of goods and services, often labelled market failures. Prominent examples of market failure are: 1) externalities (when third parties are affected by economic transactions, such as the victims of pollution), 2) public goods (when free riders can enjoy goods and avoid paying), 3) monopolies, cartels, and other cases of market power, 4) imperfect information, 5) macroeconomic instability (such as chronic unemployment, inflation, exchange rate volatility, etc.), 6) intergenerational inequities (future generations do not participate in markets), 7) international inequities (rich countries have much greater market power than poor countries), and 8) maldistribution of income, wealth, and power (markets do not respond to need, only effective demand based on dollars) (Musgrave and Musgrave, Stokey and Zeckhauser, Hughes).

But arguments about the economic efficiencies or inefficiencies of markets are peripheral to the issue of democracy. The core question for democratic theory is whether the Libertarian concept of minimal government is truly democratic. Democratic critics of libertarianism focus on the massive inequalities of unregulated capitalism and argue that such massive inequality makes democracy difficult or even impossible. Because of the concentration of wealth in a few hands, libertarian societies do not even meet their own criterion of providing a fair allocation of economic well-being. Those without money, education, position, marketable skills, etc. are effectively closed out of markets, while those with the wealth skew production to serve their demands which are backed by dollars. Moreover, unregulated capitalism produces selfish, deformed individuals who are not concerned with the well-being of the community and are not ready or willing to participate in public life as true citizens. "Rule by the people" is not possible because unregulated capitalism does not produce a community of citizens but a mass of consumers.

Classical Social Democracy

Historically, the most comprehensive and sustained democratic critique of the effect of the massive inequalities of capitalism came from social democrats such as Bernsetin and Kautsky. Classical social democracy employed Marxian class analysis to democracy in capitalist societies, although it rejected Marx's concept of violent revolution in favor of democatic means of constructing socialism. Marx asserted that in every age the ruling ideas are the ideas of the ruling class. Social democrats claimed that in capitalist society the idea of democracy has been turned into the practice of "rule by capital" rather than "rule by the people," or as Michael Parenti put it in the title of his textbook on the American political system, "democracy for the few."

Classical social democrats held that in fact capitalists are few while the majority are wage earning workers. Following Marx, they maintained that the interests of the capitalist class in high profits and private control of enterprises are fundamentally antagonistic to the interests of workers in decent living standards and workers' control of their own destinies. When the formal political equality of democracy is played out in a socio-economic context where most of the political resources are controlled by the small but generally cohesive capitalist class, the majority of workers usually lose out. Only when workers unite behind a working class political party can the rights of the majority be asserted and true democracy realized. Leninists asserted that only violent revolution and proletarian dictatorship can defeat the captialist class. However, social democrats held that since workers are the vast majority, they could seize control of the state through the democratic process and guide a gradual transition to socialism.

Social democrats have been a major political force in Europe, often governing or being partners in governing coalitions in northern and western European democracies. There is no major social democratic party in the U.S., although there are social democratic tendencies in the left wing of the American Democratic Party, particularly among black political activists. Even in Scandanavian countries like Sweden, where the social democratic party has dominated the political landscape for most of the 20th century, social democrats would not argue that they have completed a transformation of society.

Until recently, social democrats have been overshadowed by the more politically powerful progeny of Marx, the Leninists. The experiences of Soviet style Marxism have shown the limits of Marx's theories democracy, state ownership of the means of production, and rule by the proletariat. Djilas was only the most prominent among many who demostrated that Leninist revolution replaced the capitalist elite with a party elite, not true popular rule. In Soviet style polities, state ownership did not mean worker control, communist parties did not represent workers interests, and the workers state did not serve the majority of the people.

Classical social democrats who rejected the methods and practices of Leninism can no more be blamed for the excess of Leninism than the liberal democrats who defended civil liberties can be blamed for the death camps of Nazi Germany. Contemporary social democrats have tried to learn from the mistakes of doctrinaire Marxism. They seek to develop a more complex analysis of capitalist society and the capitalist state, including a deeper undertanding of the concepts of property and ownership. They try to incoporate a wider array of groups struggling against the hegemony of corporate capital, such as environmental and women's groups. Most importantly, they have learned to put greater stress on the democratic elements of their creed.

The Welfare State

The welfare state can be seen as a middle ground between Libertarianism and Social Democracy. Libertarianism and Social Democracy can be seen as two poles, with most western political economic theorists falling somewhere in between. Most advocates of the welfare state accept the primacy of the market, but seek to contain its negative effects and protect its worst victims. More conservative advocates of the welfare state take a paternalistic attitude toward those unable to cut it in the marketplace. More liberal advocates of the welfare state try to respond to social democratic criticisms of capitalism by ameliorating its worst effects through regulations, government provision of public goods such as education, and income transfers.

Modernization Theory and the Correlates of Democracy

Libertarianism, Classical Social Democracy, and the Welfare State are essentially western political economic theories, born out of the experiences of western societies. Despite their fierce differences, they all assume an existing capitalist system. But what about non-western societies, nations who are struggling with the problems of creating a modern economy and a functioning polity? What does democracy mean in a traditional society jolted by the eruption of an alien global system into their lives?

Post-World War II social science research into democratization in the non-western world focused on the economic, social, and cultural prerequisites of democracy, the so-called correlates of democracy (Lispet, Almond, Jackman). It was thought that modernization was a complex process that involved evolution of economic and social as well as political systems, with economic development usually preceding political democracy. Large cross-national quantitative studies showed that at any one point in history the probability that a polity had a democratic government was highly correlated with levels of industrialization, income, education, etc.

The correlates of democracy thesis put special emphasis on the middle class as an agent of democratization. In a striking parallel to Marx's theory that the economic emergence of the wage worker inevitably led to the political formation of working class consciousness and eventually to socialist revolution, many modernization theorists argued that industrialization caused the formation of a middle class and a vocal pluralistic civil society which inevitably led to demands for political liberty and democratic rights which eventually triumphed over traditional autocracy.

The global wave of democratization in the 80s and 90s, which spanned a wide range of societies in vastly different stages of economic development called into question the correlates of democracy thesis. If societies as diverse as Thailand, Bangaldesh, South Africa, and Haiti, many of them quite poor and with small middle classes, could democratize, how could economic development be seen as a prerequisite for democratization?

The correlates of democracy theory has also been criticized for its unilinear, ethnocentric, pro-western bias. It tends to assume that there is only one path to the modern world and to democracy, the path that western nations took. Implicitly, it measures the development of other societies by the degree to which their social, cultural, economic, and political conform to the patterns of the so-called advanced western nations.

Yet the correlates of democracy thesis persists.


III. The Purely Political Conceptualization of Democracy

The "third wave" of democratization, which has affected such a diverse groups of nations across the globe, has caused a new wave of theorizing about democracy, which could be called the Political Process school. The Political Process school rejects any strong linkage between a nation's economic system and its potential for democratization. The Political Process school regards the large number of economically less developed nations that have experienced democratization recently and rejects the notion that there are necessary economic, social, or cultural prerequisites for democratization. The Political Process school also rejects the class analysis of classical social democrats, pointing out that neither working class nor middle class political movements were at the vanguard of democratic forces in many of the recent cases of democratization.


IV. Liberal States and Developmental States

The Origins of the Liberal State and the Developmental State

To understand the process of democratization in non-western countries, one must understand the historical and political economic context from which democratization emerges. In East Asia that means understanding the parameters of the developmental state. East Asian states have some common, identifiable features that emerged from both similar cultural and historical experiences and from self-conscious modelling of less economically advanced East Asian nations of what they perceived as their more economically advanced neighbor's successful policies.

Chalmers Johnson first coined the term developmental state in his study of how the Japanese state contributed to the Japanese economic miracle. In recent years he and numerous other scholars have applied the term and the concepts to the so-called 4 tigers--Korea, Taiwan, Singapore, and Hong Kong, and increasingly to other Southeast Asian nations, especially Malaysia and Thailand.

The theory of the developmental state is not a theory of democracy, but rather about a kind of state which is effective in spurring economic development. In fact, many of the states classified as developmental states have been authoritarian states for most of their independent existence and/or retain authoritarian chracteristics even today. But in order to study democratization in East Asia, one must grasp the political economic context in which it is emerging, and that means one must understand the developmental state.

One may begin to comprehend the developmental state by contrasting the East Asian historical experience with that of western Europe, especially with the Anglo-American experience that led to the emergence of the liberal democratic state. In Western Europe and North America capitalist economic development preceded the emergence of the contemporary state. The capitalist class was well formed and the working class had begun to emerge outside the domain of the traditional state. Especially in North America, and to a lesser extent England, an autonomous, pluralistic civil society existed beyond the control of the state. The state was limited in its ability to penetrate or structure independent political formations and quite conscious of its limitations. Although there were notable outbreaks of political violence, most notably the American civil war, for several hundred years there was relative civil peace and thus a climate of tolerance of civil liberties. By the 19th century open parliaments, mass elections, and open political expression and competition--the basic components of liberal democracy--had emerged in North America and England. By the 20th century most of western Europe had adopted similar political institutions.

The historical, political, and economic context in which the East Asian state emerged was radically different. Most East Asian peoples were colonized by western powers or the Japanese. Those that escaped colonization, Japan and Thailand, were almost as radically reshaped by their efforts to escape colonization as those that did not. In the aftermath of World War II all East Asian polities faced either massive material devastation or a wrenching political transformation or both. East Asian polities emerged into nationhood economically vulnerable and politically weak. They were latecomers to the modern world and industrialization, facing a global system designed and controlled by foreign powers.

The problems the emerging East Asian states faced were different than those faced by western powers. In East Asia the indigenous capitalist class was weak and the working class virtually non-existent. Their borders often corresponded to the divisions of the western empires rather than local ethnic demographics, leading to severe ethnic tensions and fundamental questions of the legitimacy of the nation state and governing political elites. Political institutions were fragile and lacked any sustainable basis of legitimacy except for leadership of the anti-colonial struggle. Whereas the basic thrust of democratization in western polities had been to limit the power of the state to intervene in civil society and domestic affairs, the primary task of East Asian state was to create power--the power to be independent and the power to shape society.

The Features of the Developmental State

There are several characteristic features of the developmental state. The developmental state is a strong state which is involved in many facets of society. The developmental state has been characterized as a hard state--that is not easily penetrated by interest groups and certain of its goals and methods. The developmental state is strong relative to the economic and social groups in its domain. The developmental state dominates civil society.

The developmental state is allied with the domestic capitalists. It has a pro-producer bias, sacrificing the short term interests of its own citizen-consumers in the interests of long term development. The developmental state aids key industries and generally favors large, cartelistic corporate groups on the frontiers of its nation's technological capabilities over either foreign multinationals or small scale local companies. It tries to ensure a continuous pool of domestic capital by encouraging savings and discouraging consumption.

The developmental state engages in conscious guidance of the nation's economic development. It engages in indicative planning, following neither the Anglo-American ideal of the neutral, laissez-faire state nor the Leninist model of a command economy. It seeks to indentify profitable niches in which its companies can be internationally competitive and marshals resources to build up successful companies in these industries. It uses such tools as direct and indirect subsidies, government purchases, concessionary loans through either pubic or private banks, and encouragement of cartels, mergers, and intercompany collaboration to promote chosen industries. It uses tariffs, nontariff trade protection, foreign exchange controls, and controls on foreign investment to limit foreign competition to its national champions and assure a high domestic prices and profits in the home market which can subsidize exports at lower, internationally competitive prices. The artifically high domestic consumer prices due to protection of domestic industries are not seen as a loss to consumers and society but as necessary to build up internationally competitive industries. High prices which discourage current consumption are seen as a form of enforced savings, which further aid future development.

The developmental state tries to create an internationally competitive workforce through exhortations about the value of the work ethic and education. It tries to raise the skill levels of workers even as it tries to keep labor costs down by repressing trade unions or ensuring that workers are organized into company unions which dilute the power of organized labor. It subsidizes education, especially in technical fields that have been indentified as key to future national economic growth.

The methods of the developmental state may seem harsh and arbitrary and even authoritarian to western observers. In fact, the developmental state consciously rejects many western theses about political economy and democracy.

The developmental state shares some similarities to the western, liberal state. Like the liberal western state, the developmental state puts heavy stress on economic growth. Like the liberal western state the developmental state allocates a privileged position to big business, especially those that project globally.

But the develomental state rejects other key elements of the liberal philosophy. It rejects the liberal concept of free trade in favor of economic nationalism. The developmental state does not view the international system as open but rather recognizes an international division of labor that puts non-western states in a dependent position and therefore it tries to grow its weak, infant industries through conscious policies of favoritism. The developmental state rejects the liberal notion of a limited, neutral government in favor of state steering of the economy and society. The developmental state rejects the liberal notion of free competition between enterprises, but rather tries to create enterprises that can compete on a global scale by blending competition between companies with cooperation through cartelization...Basically, the developmental state rejects the liberal notion of the free market in favor of a strong state that steers economic development through collaboration between the state and big business and state guidance via indicative planning.

The developmental state also rejects key elements of the democratic side of liberal democracy. Basically, the developmental state is a technocracy in which bureaucrats share a privileged position with big industrialists. Elections may be tolerated or even encouraged to bolster the legitimacy of the state, but popular sovereignty or self government is largely formal, not substantive. The ethic of the developmental state is collectivist, not individualist, in part due to the Confucian heritage of most developmental state, but also due to the nationalistic and sometimes ethnic xxx that animates the develomental state. Individual human rights are less important than economic growth or social harmony in the developmental state. Free individuals, independent social movements, pluralistic social formations and other manifestations of autonomous civil society are perceived by the developmental state as a threat to xxx.

The developmental state is even more opposed to key tenets of social democracy. The developmental state and the social democratic state share one key assumption--that the state should be deeply and actively involved in shaping the economy and the society. But the mid-range goals and methods of the developmental state and the social democratic state are radically different. The developmental state generally rejects the welfare state as a drag on economic growth, a discouragement of the work ethic, and boost to the cost of labor. It rejects independent social movements which challenge the power and prerogatives of the big corporations which are its key allies and the deisgnated engines of economic growth.

The developmental state rejects trade unions as a threat to the power of the corporations and cartels it is trying to foster and as a serious threat to the low wages which allow its less technologically advanced companies to compete in the international market. It rejects environmentalism as a threat to its corporate champions which will lead to higher prices, lower exports, and perhaps most importantly to a questioning of the growth at any cost psychology which drives the developmental state. It rejects feminism as undermining the traditional cultural values which underpin obedience to the state and the corporation and as another threat to unleash wages from strict control. It rejects consumerism as a threat to the protected domestic markets which are critical to the international success of its international champions, to maintaining a favorable foreign trade balance, and to discouraging consumption in favor of savings. Most of all the developmental state rejects the idea that ordinary people should have a say in the decisions that affect their lives. The developmental state is the province of the technocrats, the bureaucrats, and the big industrialists who believe they are the only ones wise enough to shape the nation's destiny.