This article was originally published in the Summer 1992 issue of the Harvard International Review.
During the past twenty years, two great tidal waves of change have swept across the world. One is the shift from authoritarian systems—military governments, personal dictatorships and communist regimes—to democratic political systems. This wave of democratization began in 1974 in southern European nations such as Portugal, Greece, and Spain. It then moved to Latin America in the later 1970s and early 1980s, with shifts to democracy occurring in Ecuador, Peru, Argentina, Brazil, Uruguay, El Salvador, Guatemala, Chile, and other Latin American countries such as Mexico, Panama, and Paraguay beginning to move in a democratic direction. At present, Cuba is the only Latin American country that has not been touched by this wave. Meanwhile, the democratization wave had moved on to Asia, with transitions away from authoritarian rule occurring in the Philippines, Korea, Taiwan, Pakistan, and Bangladesh. In 1989, the communist regimes in east-central Europe collapsed and were replaced by democratic systems, and now similar changes are occurring in some, if not all, of the former Soviet republics. Apartheid is ending in South Africa, and the major political forces there are negotiating a new democratic constitution. In four other African countries, elections have been held for the first time in years and long-term dictators have been voted out of office. In the Middle East, Turkey made its latest shift to democracy in the early 1980s, and some movement in a democratic direction has occurred in Jordan and Algeria. Overall, more than twenty countries have made the transition to democracy since 1974, and many others have moved toward more open politics, even if they have stopped short of truly popular elected governments. Democratization clearly has been a global phenomenon.
The parallel and simultaneous movement toward economic liberalization has also been a global phenomenon. This trend involves efforts to reduce the economic role of the state, to rely more on markets to allocate goods, to privatize state enterprises, to eliminate government regulations, license requirements and subsidies, to reduce tariffs and other trade barriers, to cut government spending, to balance budgets and to curtail inflation. Economic liberalization occurs in various forms and hence it is difficult, if not impossible, to produce a list of countries than can be said to have fully liberalized.
With a few exceptions, however, almost every country in the world has been affected by this trend. In the industrialized world, it was epitomized in the goals and policies of the Thatcher and Reagan governments—although the American trend toward deregulation gained traction during the Carter Administration. Encouraged by the World Bank and IMF, most countries in the Third World, including India, Brazil, Argentina, and Mexico, have made some movement toward economic liberalization. Among communist countries, China took the lead in introducing major economic reforms at the end of the 1970s. Now all the east-central European countries and most of the former Soviet republics are moving in a similar direction. Even Vietnam has taken some small steps toward opening up its economy. In the communist world, only Cuba and North Korea appear to be relatively unaffected, and signs of change are even now beginning to appear in North Korea.
The question I wish to address concerns the relations between these waves of political democratization and economic liberalization. Do they stem from the same causes? How do they resemble or differ from each other? Do they reinforce each other or do they conflict with each other?
How can the simultaneous appearance of these two trends in the early 1970s be explained? There seem to have been several principal general causes of the shift toward democracy. These included, first, the inherent problems of legitimacy confronting non-democratic systems in the contemporary world. By and large these systems have to rely on performance legitimacy: that is, their ability to produce desired results which include both law and order and economic development. The worldwide stagflation in the 1970s caused many authoritarian regimes to lose legitimacy as a result of poor economic performance. Through the two oil shocks, the Organization of Petroleum Exporting Countries (OPEC) inadvertently gave democracy a big boost.
Second, while the stagflation of the 1970s weakened authoritarian systems, the two decades of extraordinary economic development preceding 1974 had produced the economic and social bases for the introduction of democratic systems. Throughout the world, except for Africa, societies had become wealthier, more literate, better educated, urbanized, and had developed substantial middle classes. Most of the countries that made the transition to democracy in the 1970s and 1980s were at the upper middle levels of economic development. Indeed, as of 1974, one could have predicted with reasonable accuracy which countries would democratize during the coming years by simply fingering those countries at or about to reach that level of economic development.
Third, among the first twenty or so countries to democratize, that process was greatly aided by the changed role of the Catholic Church. Historically the Church was often allies with authoritarian regimes. In the early 1960s, this changed with the Second Vatican Council and an influx of new liberal clergy and lay activists in many countries. By the early 1970s, in country after country the Church had emerged as the most effective opponent of dictatorships both right and left. Portugal and Spain were among the first countries to democratize; the heavily Catholic continent, South America, was swept by democratization; the Philippines, Asia’s only Catholic country, was the first to democratize in East Asia; Poland and Hungary, the two Catholic countries in east-central Europe, led the way in that part of the world.
Fourth, outside actors helped the process along. These included the European Community with respect to the southern and eastern European countries. The United States in the Carter and Reagan Administrations helped the process with respect to Latin American and east Asian countries. Furthermore, while Gorbachev probably did not want the east-central European countries to democratize, he did allow it to happen.
Finally, there is what might be called the demonstration effect or snowballing phenomenon. Once one country democratizes, people in other countries think, “Hey, if they can do it, why can’t we?” There is also learning about how to do it. After the east-central European dictatorships collapsed in 1989, democratization became a worldwide fad. Government and opposition leaders across the globe felt that they had to move in a democratic direction, or at least had to appear to be doing so.
Were those five factors also responsible for the simultaneous movement toward economic liberalization? By and large the answer has to be “no.” Economic liberalization appears to stem independently from related but separate causes. Of crucial importance in the movement toward liberalization was the change in thinking in the economics profession in the 1950s and 1960s. Up until that time, planning, socialism, governmental regulation, public enterprise, the welfare state, and Keynesianism, were the dominant themes of economic policy. The dominance of this view was well reflected in the pessimistic future which Joseph A. Schumpeter saw for capitalism in his classic book Capitalism, Socialism, and Democracy. By the 1960s, however, neoliberalism was beginning to become the new dogma among economists. This trend was spurred on by the increased taxation required for the welfare state and the manifest inefficiency of governmental planning and public enterprises. The new doctrine soon caught on in international economic institutions. The World Bank, which had promoted planning and the public sector in the 1950s, had become a great proponent of competition, privatization, and markets by the 1970s. Along with the IMF, it emerged as a powerful external actor inducing countries to liberalize their economies. By the 1980s, liberalization had become the widely accepted nostrum for economic ills across the world.
Similarities and Differences
What are the similarities and differences between political democratization and economic liberalization? First, they resemble each other in that each limits governmental authority and the power of the state. At least in theory, democratization makes the state apparatus both subordinate and responsible to civil society. Political leaders who want to get into power or to remain in power have to pay attention to the popular will. Liberalization, in turn, reduces the role of the state in the economy. Democratization requires political freedoms from the state—freedom to speak, organize, and protest; liberalization requires economic freedom from the state—freedom to own property, to work, invest, produce, and consume without intrusive state regulation. Democratization increases the control of society over the state; liberalization reduces the control of the state over society.
Second, however, is the question of the relation of these trends to overall global processes of economic development and social modernization that have been at work in the world since the beginning of the Industrial Revolution in the eighteenth century. Alexis de Tocqueville and others have said that democratization is the inevitable trend in modern society. In fact, the modern world has seen three major waves of democratization: the first beginning in the early nineteenth century in America and culminating at the close of World War I; the second beginning with the Allied victory in World War II and ending in the early 1960s; and the third beginning in the 1970s. Between these democratization waves, reverse waves back toward authoritarianism occurred in the 1920s and 1930s and again in the 1960s. The reverse waves, however, were weaker than the democratization waves, and the general tendency in the modern world has been toward the expansion of democratic government.
Can the same be said with respect to economic liberalization? That appears to be more uncertain. From the late eighteenth to the mid-nineteenth centuries, the overall trend was certainly toward the freeing of economic activity, the weakening of mercantilist state controls and the breakdown of the lingering remnants of feudal or comparable restrictions, such as slavery, on the movement and use of labor, capital, goods, and resources. In the late nineteenth century, however, demands arose, in part as a result of democratization, for expanded state activity to set minimum welfare standards in industrialized societies, to protect elements of the population against exploitation, to cope with downturns in the business cycle, and to insure that the industrial economy would be responsive to the security needs of the nation-state. War and the threat of war enhanced the economic power of the state. In addition, throughout the industrializing world, socialist and then communist movements appeared, promoting much greater or even total state control of the economy. By the 1930s, more economic planning, welfare programs, government regulation, and nationalization of industry were all seen as the wave of the future in most societies. In the 1960s, all of this began to change. The question necessarily arises: Is this recent shift away from state control and toward economic liberalization simply a temporary interruption, an economic “reverse wave” of a longer term trend toward the growth of state power? Or is it the beginning of a long-term secular decline in state economic activity? Does not the global movement toward democratization generate popular pressures for the state to be more actively engaged in both productive and redistributive activities? It seems plausible to think of democratization as being historically “progressive”, but would one say that the contraction of state economic activity or its expansion is historically “progressive?”
Third, a significant difference exists in our knowledge about these two processes. Since Tocqueville, political scientists have studied democratization extensively and produced a variegated body of literature on the subject. There has been a lot of experience to study, and the past two decades have seen an explosion in democratization studies. As a result, political science has developed a considerable understanding of the conditions for democratization, the processes by which it occurs, and its consequences. Nothing quite similar exists with respect to economic liberalization largely because experience with it since the mid-nineteenth century has been so limited. Until this decade, no command economy had become a market economy, and few, if any, statist economies had become less statist. As a result, economists have had relatively little to say, few theories to offer, and fewer lessons to expound on how to move from a state-dominated to a market-dominated economy. This is particularly true with respect to the problems of dismantling totally state-controlled command economies like those that existed in the communist societies. As Paul McCracken put it, commenting on the problem of moving the east-central European economies into market economies, “Maybe you can’t get there from here.” In contrast, political scientists feel reasonably confident that they do know how to get from an authoritarian to a democratic political system.
Fourth, a related factor concerns the differences in the difficulty of making these transitions. At an institutional level, democratization is much easier than economic liberalization. The rudimentary elements of democratization are achieved if reasonably fair, open, and inclusive elections are held in which parties and candidates compete relatively equally, the votes are counted honestly and the winners form a government. The consolidation of a new democratic system may require more long-term changes in values and attitudes and the institutionalization of democratic behavior patterns. Yet the election of rulers is the core of democracy, and it can be introduced relatively quickly and easily.
In contrast, economic reform, particularly when it involves the dismantling of a command economy, is much more difficult and requires sustained effort over a long period of time. It is much easier to organize elections than to organize markets. While the shift from an authoritarian to a democratic political system can occur quickly, and even relatively painlessly, the shift from a heavily state-controlled economy to a market economy is far more painful and time consuming.
Fifth, the differences in the institutional problems of introducing elections and markets are compounded by the differences in their political costs and benefits. Democratization may impose costs on those who opposed it or who benefited significantly from the authoritarian regime. A significant majority of “third wave” democratizations, however, were initiated by groups holding power in authoritarian regimes and hence even they saw the costs and risks of democratization to be limited. Overall, democratization tends to produce immediate and widespread benefits for large portions of the population: hence the frequently commented upon phenomenon of the “euphoria” that accompanies almost all democratization movements. Economic liberalization, on the other hand, may produce some immediate benefits for a few groups which are able to take advantage of new opportunities and make money. It is also very likely, however, to impose widespread and often severe economic penalties on much larger groups. Subsidies are ended, taxes are raised, budgets are balanced, workers are discharged, businesses go bankrupt, prices rise, wages fall, and production declines. Enormous economic costs must be paid in order to achieve a promised long-term economic nirvana that seems to recede indefinitely into the future. In democratization, the sequence of dominant public attitudes might be described as first euphoria, then disillusionment, and finally resignation and acceptance. In the case of economic liberalization, the sequence is first apprehension and fear, and then frustration and resentment. Since the major processes of liberalization are still underway, the next step is uncertain. One possible final stage could be anger, protest, and revolt; the other is passivity and acceptance.
Finally, the level of economic development relates differently to democratization and liberalization. Democratization occurs most frequently and easily in countries that have reached the upper-middle income levels of economic development. Economic and social conditions are then favorable to a broadening of political competition and participation. Economic liberalization, however, is easier in countries at lower levels of economic development. Countries that are still primarily agricultural will have fewer large state-owned industries employing numerous managers and workers, vested bureaucratic interests, and substantial groups benefiting from and dependent on subsidies, tariffs, and market entry constraints. A society with economic conditions that make democratization easier is thus also likely to have political conditions that make liberalization more difficult and, conversely, a society where political conditions facilitate liberalization is also likely to have economic conditions unfavorable to democratization.
How They Affect Each Other
How does democratization affect liberalization, and liberalization affect democratization? First, there is the proposition that I have already advanced: economic development promotes democratization. Wealthy countries, with a few exceptions, like the oil rich states, are democratic countries. Poor countries, with a few exceptions, such as India, are nondemocratic countries. Transitions to democracy are heavily concentrated among countries at the upper-middle income level of development.
Second, economic liberalization and reform generally promote economic development. This is not always the case: the Soviet Union in the 1930s and east-central European countries in the 1950s achieved very high rates of economic growth with command economies. In the contemporary world, however, state ownership, control, and regulations have generally hindered economic development. It should also be noted, however, that in some of the countries with the highest rates of economic development, most notably Japan and South Korea, the state has played a very important guiding and facilitating role. Yet, still, economic development is more likely to occur with less state economic control than with more.
Third, economic reform requires a strong, authoritative, although not necessarily authoritarian, government. Economic liberalization imposes special hardships on some groups in society and general hardships, such as higher prices, on almost everyone. Political opposition to economic liberalization will be strong, and it will probably be even stronger in more economically developed societies than in more backward societies. Economic liberalization requires either an authoritarian or a democratic government with both the will and the power to put through reforms.
Fourth, the logic of this argument suggests that authoritarian governments are better positioned than democratic governments to promote economic liberalization. They will be more able to resist popular pressures and vested interests opposed to reform. China, under a communist dictatorship, and Chile, under a military dictator, introduced substantial economic reforms and have been rewarded with enviable rates of economic growth. The price was the suppression of liberty which continues today in China and which was intense during the years that General Pinochet governed Chile. Nonetheless, if a country has an authoritarian regime, it would be lucky if its government used its coercive power to promote economic liberalization. Liberalization, first, then democratization makes a great deal of sense for those who wish to achieve both goals. Opening up the political system first, in contrast, is likely to complicate economic reform. In 1989, Gorbachev’s top advisors told me that they had made a horrible mistake in moving ahead with glasnost and a political opening, which had unleashed all sorts of political forces which were then making it very difficult to move toward economic reform. “We should have first concentrated power and pushed economic reform,” they argued, “and let the political opening wait. Instead, we did the reverse, and now we no longer have the authority to do what is necessary.” Last year, when President Salinas of Mexico visited Harvard, he was asked why he, a graduate of Harvard’s Kennedy School of Government, was not more forthcoming in promoting democracy in Mexico. His answer was that he needed the immediate power he had in the Mexican political system in order to put through economic reforms needed to bring in foreign investment, privatize state enterprises and generally de-statize the Mexican economy. Once that happened, he said, political democratization would be in order.
An interesting debate on this issue occurred among the leaders of the Communist Party in Hungary in the late 1980s. Hungary was already in the forefront among communist countries in terms of introducing private property and markets. Its leaders now wanted to move substantially further, at the same time that they were also beginning to democratize Hungarian politics. They recognized that these two processes would conflict with each other. One leader, Imre Pozsgay, warned of the problems of “worker anarchy” and suggested that meaningful democratic elections be postponed until 1995, by which time the necessary economic reforms would have been implemented. Another leader, Bela Kadar, agreed, “Ideally we should have had the economic reforms first, then moved toward democracy.” He recognized, however, that elections could not be postponed, saying “The first step that is needed is to depoliticize economic decisions.” In a marvelously Hungarian solution—given that Hungary has undoubtedly produced more highly-ranked economists per capita than any other country in the world—he recommended that democratization go ahead but that all major decisions on economic policy be made by a non-elected board of economic technocrats.
If a country has an authoritarian regime and its leaders want to both liberalize and democratize, they should first carry out the necessary economic reforms and then move to democratize their political system. If a country has an authoritarian regime and its leaders want to reform their economy and promote economic development but not to democratize, they can do the first but only at the cost of eventually undermining their authoritarian systems. General Pinochet is gone. Deng Xiaoping remains, but his successors will suffer the political consequences of the extraordinary changes he is bringing in the Chinese economy.
In an ideal world, authoritarian governments would thus bring about economic reforms before they democratized. In the real world, political leaders do not have that choice, as was demonstrated by the case of Hungary, the other central European countries, and the former soviet republics. Since democratization is both institutionally and politically easier than liberalization, it is not likely to lag behind liberalization. Authoritarian political systems are overthrown, elections bring a democratic government to power and that government is then confronted with the issue of how to move from a command or statist economy to one based primarily on market principles. This is the challenge now facing governments in Russia, Poland, Czechoslovakia, and several other former communist countries as well as the governments of many developing countries.
How should these new democratic governments go about introducing needed economic reforms? First, these governments have to have unimpeachable electoral legitimacy; that is, they have to be the product of a clearly fair and honest election. They should preferably have achieved a substantial plurality or majority of votes in that election. Once in office, these governments need to exploit this electoral legitimacy before it dissipates and move rapidly to introduce economic reforms.
Second, legislatures will usually not make tough decisions unless there is forceful leadership from the executive. The new democracies thus need executives who are strong enough to provide that leadership but not strong enough to undermine the democratic process. Given the economic hardships and chaos that reform produces, a yearning will develop for a temporary dictator or economic czar. During the past several years, many Russians have said their country needed a Pinochet, and many Filipinos have said their country called for a Lee Kwan Yew. Both Walesa in Poland and Yeltsin in Russia have attempted to expand the powers of their presidential offices. While such expansion may be desirable, too much would be disastrous.
Third, there is also the popular question of whether economic reforms should be introduced all at once—the shock treatment—or whether they should be introduced more incrementally over an extended period of time. The principal promoter of shock treatment is my Harvard colleague, Jeffrey Sachs, who has successfully persuaded the governments of Bolivia, Poland, and Russia to follow this course. After some hesitation, the Czech government is also following a shock strategy. Theoretically, as Adam Przeworski has shown, there are reasons to think that this strategy is more likely to produce desirable results than the incremental approach. So far it has worked reasonably well in Poland and, despite tremendous dislocations and opposition, is at this moment moving ahead in Russia. In the short run shock therapy imposes tremendous costs, but it also produces desirable results.
Fourth, economic reformers must be prepared to accept a certain amount of backsliding and to make modest concessions to groups that either suffer tremendous economic hardships or have sufficient political power to obstruct reforms. One advantage of the across-the-board shock treatment is that it gives the reform government a wider variety of specific measures on which it can make modest concessions without destroying the crucial substance of the reforms.
Fifth, reform leaders can mitigate op- position by co-opting opposition leaders into the reform process. It may be better to have opponents inside rather than out- side the proverbial tent. Yeltsin clearly believes this to be true and has brought several conservative industrial managers and critics of reform into his government.
Sixth, outside assistance is indispensable to the reform process. External resources in the form of loans, grants, and guarantees will be essential. Even more importantly, outside agencies provide indispensable discipline by making these external resources conditional on governments stabilizing their economies, reducing spending, freeing prices, and balancing budgets. The IMF and World Bank are feared and hated around the world for doing just that. However, without the discipline they impose, almost no economic reform efforts would succeed. A final form of external help in some instances is the incorporation of the economy to be reformed into a larger market-based economy. This is already happening in East Germany; it is also about to happen in Mexico; and it is very likely to occur in the coming decade in the Czech Republic, Poland, and Hungary. Difficult as it may be, democracies, even new democracies, can produce economic reforms.
In the US and elsewhere, we hear much criticism of politicians. However, in countries that have had authoritarian governments, it has most often been the leaders of those governments who inaugurated the process of democratization. In other cases, as with Jaruzelski and Walesa in Poland and de Klerk and Mandela in South Africa, this process has involved intense negotiations between leaders of the government and of the opposition. Where economic reforms were inaugurated, political leaders like Menem, Yeltsin, Klaus, Walesa, and Salina have had the political courage to impose short-term costs on their peoples in order to produce long-term gains for their societies. Democratization and economic reform only occur when political leaders choose to make them occur. As a result, scores of societies around the world have moved from dictatorship to democracy and from state-controlled economies toward open economies. The record of the past several decades should give us hope for the future.
Note from the Editor
Samuel P. Huntington (1927-2008), a Harvard academic and foreign policy adviser, was one of the most influential political scientists of the past century and helped shape foreign policy debate for decades. Huntington is famous for his 1992 theory of the clash of civilizations, which posited that in a post-Cold War world, where liberal democracy and capitalist free market economies had prevailed over authoritarianism and communism, cultural identities and religion would become the major drivers of international conflict. His work is seen as prophetic of 9/11 and the ensuing conflict in the Middle East. In addition to his work on religion and culture, Huntington analyzed global democratic patterns, observing that democracy came in three main waves and that the world is converging to a global democratic revolution closely linked to economic prosperity. Huntington’s first wave occurred from 1820-1926, the second wave began after the triumph of the Allies of World War II, and the third wave occurred from 1974-1990. This article, first published in the Winter of 1992, closely examines the relationship between democratization and economic liberalization, offering advice for political leaders hoping to liberalize their countries.