Building Democratic Governance and Market Reforms: Experiences of the Center for International Private Enterprise
|This article is based on a presentation given to the "Conference on Post Cold War Initiative for Peace Building and Democracy: Enhancing the Role of Parliament and the NGOs" sponsored by The Committee to Aid Democracy for Peace Building (Japan), The Diet League to Aid Democracy for Peace Building (Japan), Yukio Ozaki Memorial Foundation (Japan), and The National Endowment for Democracy (United States) on November 13-14, 2002, in Tokyo, Japan.
Additional information is available at www.cipe.org.
One of the more interesting debates today is the question of democratic sequencing. That is, do countries have to meet the pre-conditions necessary to establish a liberal democratic order before holding democratic elections or can countries become liberal democracies through the process of democracy? While this may seem to be a somewhat academic issue, in reality it is now the key debate in many foreign policy issue areas. Put simply, should the international community encourage and support countries in adopting elections, constitutions, and other democratic processes no matter their level of income or history? Or should countries be encouraged to build their levels of economic development, establish property rights, build laws to protect basic human rights, and craft a sound governmental process prior to holding democratic elections. The fact is that most countries need to build the institutions of a market economy at the same time as they develop democratic governance as these are essentially two sides of he same coin. Without a functioning market system, the process of democratic governance can’t be consolidated. Likewise, without a democratic process, institutional reforms are unlikely to succeed.
In recent years, many countries have opted for the course of building a democratic government through the process of holding elections, adopting laws on press freedom, and crafting reforms in the rule of law to guarantee human rights. Yet the record of democratic consolidation is not all that promising. Of the 140 countries around the world that have been characterized as electoral democracies, less than half meet the broader test of democratic governance. That is, encouraging full citizen participation in parliamentary processes, ensuring the rights of redress for wrongful government action, guaranteeing property rights, providing legal enforcement of contracts, and a host of other essential aspects of the day-to-day functioning of democratic systems. In short, there exists a democracy deficit that stands between the adoption of democratic political processes and the consolidation of a democratic system of government.
The Center for International Private Enterprise (CIPE), together with our partner organizations in over 80 countries, has developed a whole series of initiatives that strive to eliminate the democracy deficit. CIPE was launched in 1983 as one of the four core institutes of the National Endowment for Democracy. CIPE is also affiliated with the United States Chamber of Commerce, the world’s largest business federation, whose membership base includes over 3 million companies, individual local chambers across the United States, trade associations, and 95 American Chambers of Commerce located around the world.
Since our founding CIPE has supported over 700 projects in more than 80 countries through our programs of grants and technical assistance. In addition, we’ve held training programs for business associations, think tanks, and economic journalists in every region of the developing and transitional countries. We also sponsor a multi-media communications program called the Economic Reform Feature Service. Our field offices at the moment are in Russia, Romania, Bosnia, Montenegro, and Egypt.
MISSION AND GOALS
Within the world of democracy promotion foundations, CIPE’s mission is unique. In general terms, we are focused on the interrelationship between democracy, free markets, and private enterprise. During the early and mid 1980s, it was often difficult to persuade decision makers and many of our fellow foundations that there was a direct and important relationship between democracy, markets, and private enterprise. Today, the relationships are much more obvious, following the collapse of communism, the Asian and Russian financial crises, and the growing importance given to subjects such as corporate governance and anti-corruption.
Dangerous Myths of Development
Despite the progress that has been made in gaining a better understanding of the complexities of building market-oriented democratic societies, there are three dangerous myths loose in the international development community that can be used to illustrate how much further we still have to go.
The first myth is the belief that once private enterprise constitutes a substantial portion of an economy, it has become a market economy. History abounds with examples of where this has not been the case. The Philippines under Ferdinand Marcos and Indonesia under Suharto are classic examples of economies that were capitalist, based on private enterprise. But they definitely were not open-market systems. Economists call this type of behavior "rent seeking". The rest of us call it corruption and cronyism. Simply stated, the greater the degree of systemic corruption in a society, the less its economy functions on market principles, and the greater the danger to democracy.
It should be emphasized that many different types of market economies are possible, and there are real distinctions between the institutional structures in different countries. But all market economies share a common feature: a competitive system where the rules are the same for all participants. The key institutions include firm property rights, anti-trust regimes (or competition policy), contract enforcement through rule of law, strong corporate governance systems, and freely flowing information (transparency). Together they create the framework for a competitive market system where freedom of entry and exit are guaranteed. Furthermore, only fully functioning democratic governance system can sustain such a system over time.
The second myth is grounded in the common misconception that the business community or the private sector in general is a homogeneous monolith that either supports or opposes certain policies or leaders. This is not the case. In fact, most countries have several business communities, each with its own interests and objectives. In the economy of a single country there can be the state sector, the private sector, and the informal sector. Even within the private sector, there might be firms and entrepreneurs who work mostly in international trade, while others are engaged in producing solely for the domestic market. Clearly, these two groups will not always support the same policies. Nor will they always favor market-oriented reform.
Firms created behind protectionist trade barriers—and with strong links to and benefits from government—tend to support the status quo. Often they also are quite anti-democratic. Conversely, firms that have been locked out of government favors, including small entrepreneurs and those engaged in international trade, are quite often the leaders behind the demand for change. Because the business communities are so diverse, it is wiser to form partnerships with business associations, think tanks, foundations, and other business organizations that have a vested interest in an open economy and a democratic political system.
The third myth is the most dangerous and is often called the market fundamentalists' view. It is the belief that markets will spontaneously emerge if government stops intervening in the economy. This is far from true. The government must underwrite and guarantee consistent, fair rules and laws so that a strong market economy may emerge. Further, government institutions and self-regulating organizations have key roles to play in ensuring that the rules are enforced. Credible, fair bank supervision is but one of the most obvious of these functions. Without binding rules and structures that govern all players, anarchy follows. Business then becomes nothing but “casino capitalism” where investments are only bets: bets that people will keep their word and that companies will tell the truth; bets that workers will be paid; and bets that debts will be honored. Conversely, recent experience suggests that these myths could be discarded and the sterile debate between those who espouse neo-liberalism and those who attack it as misguided market fundamentals should be ended. In fact, three general observations about how democracy and markets interact should be the focus of discussion.
Democracy and the Market – Mutual Support
Contemporary history has shown that countries with democratic, market-based systems are best equipped to respond to the challenges of globalization. Specifically, there are four essential aspects of democracy that have proved to be crucial to long term economic and social development.
- A stable democratic system is the best guarantor of political stability, which is
essential for long term economic growth and private sector investment.
- Democratic values such as transparency and accountability are essential for effective
and responsive government and for efficient and prosperous economic activity. (The
financial crises Asia and Russia experienced in the late 1990s are cases in point.)
- Sound legal and regulatory codes backed by the rule of law must exist if business is to
thrive in a market economy.
- Decision making procedures that allow for participation and feedback from the
private sector, civil society, labor, political parties, and other citizen groups have to
be established. Without systems of feedback and accountability, governmental
regulatory processes, budgeting, and other aspects of day-to-day governance loose
touch with the very people and groups they were established to serve. (Examples
include comment and notice periods, public hearings, and pre-publication of proposed
The Democratic Deficit
Market-oriented reform and democratic development are mutually reinforcing factors that can, in the best circumstances, lead to a virtuous circle of development and stability. But if that is true, why then is not to be found more often? How is it that an entire decade of reforms in Latin America are threatened or that countries throughout Africa and the Middle East can’t seem to find a way into the virtuous circle that brings citizen support for more reform?
One answer may be found in how democracy and market reforms are thought of by most Western sources of funds and by their advice to counterparts in emerging markets and developing countries. To begin, there is a long-standing consensus that democracy requires free and fair elections, motivated and informed citizens, well built political party structures, a vibrant by self-disciplined media, civil society, and (most recently) the support of the business community. Yet there is one absolutely vital missing ingredient: the day-to-day decision making processes by which a country governs democratically.
With some notable exceptions, such as Hernando De Soto1, most theorists and practitioners fail to take apart the black box of governance process to see how they lack democratic values of transparency, participation, fairness, and equity. Similarly, those advocating for market reforms normally fail to include political considerations or the participation of the citizens within the design of the reform program. The heavy concentration on technical experts as designers of reform fails on three levels.
First, it ignores the fact that reforms must incorporate what Dani Rodrik2 calls local knowledge, and ways must be found to mandate public participation in the design of reforms. This is a process which government officials and technocrats rightly fear because it has the potential to dramatically slow down reforms. However if procedures are developed to channel this interaction at several different stages in developing the reforms, the payoffs of superior adherence to the reforms is well worth it.
The weakness in institutional development, the frequent lack of implementation, and the often poorly designed reforms constitutes a democracy deficit that threatens to reverse several decades of progress. This democracy deficit is all the more troubling because it often goes unnoticed amongst the triumphalism that heralds a transition to democracy and the design of market-oriented reforms. To one degree or another, this democracy deficit is affecting nearly every region of the developing world.
Long thought to be a shining example of reform, Latin America has been jarred by economic crises that have led to a resurgence of populism and a broad-based skepticism about supposed ‘market reforms’ that were, in fact, never truly implemented. Central Europe, having seen an inspiring sea-change in the early 1990s, has been the only region to show real growth in the past year, yet the Balkans and Central Eurasia continue to beget leaders who would consolidate their power, rally nationalist fervor, and distort ‘markets’ for personal gain. Socialism, religious extremism, economic crises, and entrenched dictators all plague various parts of Asia. Africa faces the aforementioned problems, as well as simmering conflicts, serious lack of infrastructure, health crises, illiteracy, and an absence of market mechanisms, governance structures, and management experience to address problems effectively. The Middle East, with its own conflicts, wealth disparities, extremists, and repressive regimes, also appears near the bottom of the scale in many aspects of development.
(see table 1)
The gap between the passage and implementation of laws in Russia impedes small business, and entrepreneurs continue to face barriers with inspection, bribery by representatives of regulatory authorities, access to information, registration, and licensing, as illustrated in the Centre for Economic and Financial Research (CEFIR) and the World Bank chart below. However, civil society groups and the business community are increasingly involved in advocacy efforts to minimize this governance gap. In 2002, CIPE sponsored a series of roundtables in St. Petersburg, Ryazan, Kazan, and Kaluga to draw attention to and address the barriers small businesses face and to provide a forum where local business communities could raise these issues with representatives of the local governments. Local chambers then led advocacy efforts pushing for administrative and legislative changes necessary to create a better environment for small business, resulting in:
- Issuance of a Registers of Inspections by two local governments to small enterprises,
- requiring government inspectors to sign in, minimizing the number of “unofficial” inspections. As a result, local governments are currently providing a Register book to every small business.
- Establishment of a Business Center for Small Enterprise by three local governments in response to the business communities’ demands for more access to information specifically relevant to small enterprises.
- Creation of a local Expert Commission for solving disputes between businesses and authorities. To date, this Commission has heard three disputes between the City Administration and local small businesses. All three were resolved in favor of the businesses.
Table 1. Russia: The Reality Gap
|Activity||Legal Mandate||Reality (Average/Mean)|
|Registering Business||5 days||26-29 Days
|Registration Cost||2,000 Rubles||4,692 Rubles
|Number of Offices|
Required to Visit
|Licensing Costs||Not to exceed 1,000 Rubles||16,600 Rubles|
Source: CEFIR and World Bank, Summer, 2002
METHODS AND APPROACHES
There are many different approaches to these issues that have been developed over the years by the National Endowment for Democracy, the German Foundations, and others engaged in assisting with the development of democratic systems. All of us share one common orientation: that we offer support and assistance to the indigenous private groups in the developing world that are leading the way in their countries. In the case of CIPE, our partner organizations include private business associations, policy research institutes (think tanks), private foundations, and occasionally educational institutions. Potential partner organizations are chosen carefully to ensure that they represent the private sector and the views of those seeking an open, democratic market economy. Further CIPE grants and assistance are normally limited to no more than 35 to 50 percent of an organizations operating budget and we also require matching funds of at least 25 percent. These policies are intended to demonstrate that there is local support for the project proposal.
Since the early 1980s, CIPE’s overall goal of supporting the development of marketoriented democratic systems has focused on four objectives designed to:
- Promote development of legal and institutional structures necessary to establish and maintain market-oriented, democratic societies.
- Support freedom of association for private, voluntary business groups and think tanks in order to increase the business community’s participation in democratic governance.
- Increase support for and understanding of the rights, freedoms, and obligations essential in a democratic private enterprise system among policymakers and the public.
- Implement programs that enhance business knowledge and strengthen the entrepreneurial culture of the private sector.
- Making the case for democratic, market-oriented reform through communications and advocacy programs in multiple languages. Such programs include increased use of the Internet and journalism education and increased efforts to reach international organizations. One common theme has been the need to reform governance systems to create more transparency, accountability, and fairness – key democratic values.
- Creating opportunity through programs that offer entrepreneurship education, develop association leadership and services, and provide leadership development for women. Projects that lower barriers to entrepreneurship and address the needs of the informal sector are especially important.
- Combating corruption and promoting transparency through programs that promote good corporate governance, foster democratic institutions, and enhance the rule of law.
- Advocating economic policy reform by supporting development of National Business Agendas, economic policy dialogues, and in-depth analyses of specific issues such as privatization or tax reform. Such projects seek to mobilize the broad base of the private sector to become more involved in democratic processes, advocate reform, and build coalitions to advance the national interest.
The following section provides a few mini-case studies of successful projects, which are used as training tools and guides for reform efforts in other countries.
Combating Corruption - Serbia
The Center for Liberal Democratic Studies (CLDS) is addressing institutionalized corruption in Yugoslavia and has completed a survey of the Serbian business community about this problem. This survey not only presents a concise picture of the current situation, but also explores the consequences and devastating effects of corruption on society. The survey found that bribery is a regular phenomenon for 53 percent of all businessmen and that there is common prior knowledge as to the amount of bribes paid/received for certain "favors". In addition, CLDS found that 26 percent of total business income was being spent on bribes, and as much as 35 percent of executives’ working hours were spent on bribing activities. The publication and wide distribution of this analysis to both domestic policymakers and international organizations active in Serbia is having a strong impact on policy development to address the problem of corruption. Some of the concrete results to which the project contributed in partnership with the government and others include:
- The Government has established an Anti-corruption Council. This is an advisory body consisting of independent people. The activities of the body, although somewhat controversial, produced substantial impact on public opinion and some pressure on the Government.
- The Government has established anti-corruption inter-ministerial teams. These teams (ministries of police, justice, and finance) investigated corruption cases in the public sector, mostly health and education service. About 600 cases have been brought to justice.
- Government procedures have become more transparent. For example, new legislation on public procurements has been adopted and a new Customs Administration Act has been prepared and is pending in the Serbian Parliament.
- CLDS’s report on Corruption in the Customs Administration is now used in training courses for customs officials.
- Trade Unions have made combating corruption in the Customs Administration one of their priorities following their participation in CLDS’ national conference.
Improving corporate governance is a key part of Colombia's efforts to bolster its weakened democracy by combating corruption and strengthening the rule of law. Confecámaras (the Colombian Confederation of Chambers of Commerce) in partnership with CIPE has developed a legal advocacy program to strengthen corporate governance laws and regulations in Colombia. They have secured stronger corporate governance codes within newly passed labor laws regarding compensation and they have drafted new capital markets legislation in partnership with the Colombian Securities and Exchange Commission that will strengthen protection for minority shareholders, strengthen the role of independent directors on corporate boards and address conflict of interest issues. This legislation will be presented to the national congress in July. Confecámaras has also placed a strong emphasis on educating policy makers, business people, and academics on sound principles of corporate governance and on engaging them to formulate a Declaration of Corporate Governance Principles for Colombian organizations. This document is helping to establish a standard of ethical business practices in Colombia. The response of the private sector to this effort has been dramatic: over 60 Colombian companies have requested assistance in drafting stronger corporate governance procedures within their firms. Now in the second year of the project, Confecámaras is building the foundation of a directors training program and strengthening its education and training efforts for the media.
The Confederation of Colombian Chambers of Commerce (Confecámaras) and CIPE have worked together to pioneer a project entitled Probidad, designed to reduce and prevent corruption at the local level. This program unites the business community in an effort to improve transparency and accountability in the public procurement of goods and services. The success of Probidad can be seen in the level of confidence that has been established between public and private sectors in their business transactions. Confecamaras was able to modify the Procurement Law by helping local business associations publish and distribute the draft legislation and solicit comments from them.
President Alvaro Uribe of Colombia is also using many of the Confecámaras recommendations in his anticorruption initiatives and to formulate his Executive Decree, which establishes new standards for government procurement. These include:
- Mandatory publicizing of the terms of reference for public bids.
- Public hearings and review of qualified bids according to the established terms of reference.
- Oversight of the procurement process by civil society groups.
- Development of a website to make the procurement process more transparent.
The Tashkent Business Club (TBC) in Uzbekistan organized a roundtable discussion with the business community to develop a National Business Agenda for small- and medium-sized enterprises. This Agenda addressed the key concerns of the business community including barriers to market entry, the quality of governmental services, double taxation, and the conditions of the banking system. Since presenting the Agenda to a number of governmental officials, TBC has secured a number of new decrees and changes in law including some initial tax reform measures, the beginnings of regulatory relief and lowering of market barriers, and improved conditions for the informal sector. The Business Club is continuing their advocacy efforts with local media by publishing case studies on the problems of family firms and by working with local TV, radio, and print media.
Building the Base of Business Knowledge - China
CIPE has been sponsoring the independent China Center for Economic Research (CCER)in Beijing since 1999 in its efforts to expand and improve the quality of its electronic economics information network (CENET), by developing new sections and new material to be added, connecting more universities, and attracting more users to access the network, particularly young economists and economics students. The CENET website now receives more than 3,000 hits daily, up from 750 in 1999. CCER is also laying the groundwork for a private association for Chinese economists, with the mission of promoting academic freedom and more open debate over policymaking in China. It would be the first voluntary association of this kind in China.
The Informal Sector and Property Rights – Institute for Liberty and Democracy
CIPE has been a long time supporter and partner of Hernando de Soto’s work in looking at the causes and solutions for the vast informal sectors that exist outside of the formal-legal economies. As is now widely acknowledged, de Soto’s Institute for Liberty and Democracy (ILD) has changed the terms of debate on the issue. Further, by demonstrating that much of the cause of this extra-legal sector is the sheer impossibility of conforming to the maze of duplicative rules and regulations generated in most developing countries, de Soto also developed a very practical series of reform measures. These included administrative simplification programs, the creation of simplified business registries, innovative ways of granting and guaranteeing land title, and many others. These programs are described in detail on CIPE’s website at www.cipe.org or at www.ild.org.pe.
Supporting the Informal Sector – Senegal
A large informal sector weakens democracy, hinders necessary reforms and excludes millions of citizens from the political and economic system of a country. In Senegal, the Union Nationale des Commercants et Industriels du Senegal (UNACOIS) is the largest business association with 100,000 members from shopkeepers and petty traders to small-scale industrialists, 70 percent of whom operate in the informal sector. UNACOIS is working to educate its members on fiscal, economic, and regulatory issues that present barriers to business and keep many small enterprises from entering the formal economy. UNACOIS is also publishing brief papers on customs duties and regulations, general tax code, the code governing small business, and basic information on starting and running a formal small business. In addition to providing its members with information that may otherwise be too technical or complex, UNACOIS is implementing a new communications strategy to take their members' concerns to government officials, improving the flow of information between the public and private sectors as a first step towards a more hospitable business environment.
Democratic Governance and Institutional Reform – Georgia
One of the most important pieces of legislation passed by the Georgian Parliament in its reform efforts is the Administrative Code. Unfortunately, implementation of the Code has been neither swift nor effective. The Partnership for Social Initiative (PSI) conducted a nationwide analysis of public perceptions and understanding of the provisions of the Code and found that 24 percent of business owners had no knowledge of it at all. PSI also found that government agencies do not follow many of the Code's requirements, particularly the Freedom of Information sections. To address this lack of implementation, PSI launched a major initiative to educate businesses and the public about their rights to receive information from government agencies. PSI mobilized a coalition of 70 stakeholders to monitor the implementation of the Code through seminars, television appearances, advocacy efforts, and newspaper articles. In addition, PSI developed a model for accrediting business associations in order to provide each government agency with a list of civil society organizations with specific interests/expertise that could be consulted on key policy and regulatory issues. This process is establishing a productive private-public dialogue and is ensuring transparency in decision-making.
Promoting Democratic Governance
The experiences of the 1980s and 1990s, as well as recent crises across the globe, demonstrate that failure to incorporate democratic governance as part and parcel of political and economic reforms seriously jeopardizes the entire reform agenda and has led to populism, socialism and even terrorism in some countries. In response, CIPE has launched a democratic governance project that will unpack the concept of democratic governance conceptually and programmatically. In a primer and a policy guidebook, CIPE will break down democratic governance into a set of key institutions and essential policy practices. These publications will feature case studies and project examples that will provide business associations, think tanks and other civil society groups with a road map on how to institute democratic governance programmatically and thus address the democracy deficit. Excerpts from the guidebook will be published and distributed through CIPE’s Economic Reform Feature Service. This project will also develop a training module on democratic governance for think tanks. For more information, please email: [email protected]
Leadership Development for Women Entrepreneurs – Africa
African businesswomen contribute significantly to the growing economies of their countries, but not enough of them are ascending to leadership positions from which they can promote economic and democratic reform. In order to promote the inclusion of African women in the process of democratization, CIPE is providing a comprehensive leadership program for African businesswomen This training includes strategic planning, communication techniques, advocacy, and the role of leadership (particularly women's leadership) in community development.
Entrepreneurship Education – Egypt
Through our regional office in Cairo, CIPE has brought together over 200 university students as part of its entrepreneurship education program to consider the core ideas of a market economy including self initiative, risk taking, creativity, rule of law, transparency, and accountability. Students were taught how to develop the full range of elements in a business plan (description of the business, marketing plan, management plan, and financial plan). The issue of competitiveness was highlighted through the marketing plan template. A financial template was also designed to guide students to develop an income projection statement, a balance sheet, and a monthly cash flow projection. Students are paired with young business professionals to provide further mentoring and training through an internship program. CIPE's partner, the Egyptian Junior Businessmen Association, also helped to show the students that anybody with a good idea and the determination to market and sell that idea is an entrepreneur.
The education initiatives are coupled with a communication program where a series of monthly workshops are held on specific topics to further reach out to the youth. The monthly workshops engage the youth in understanding what being an entrepreneur means and also provide them with skills to be able to express their views. Now under development, CIPE’s Arabic website for the youth will provide a platform for the participants to express their opinions in an electronic journal. The website will be a venue for the expression of the views of youth regarding political, economic, and social reform through the establishment of an electronic ejournal. The e-journal will be written by Egyptian youth and moderated through Junior Business Forum, Faculty of Economics and Political Science, Cairo University and the Ahram Regional Press Institute which will provide guidance on communication and distribution. The monthly workshop series for students are on topics such as the role of an entrepreneur in society, institutions needed for a properly functioning market economy, entrepreneurial challenges and how to overcome them, etc. As part of the program, CIPE is also organizing a series of writing workshops for the program participants to improve their abilities to express their views. The products from the writing workshops will be disseminated through CIPE’s entrepreneurship website.
Advocacy Academy – Romania
The Establishment of the Romanian Academy for Advocacy sent a clear message to policymakers that private enterprise would have a voice in helping to set public policy on economic and democratic reform issues. The concept of the Academy is based on successful programs used in democratic countries around the world, which were integrated into building a uniquely Romanian model for advocacy by local business leaders. CIPE expert advisors provided technical assistance throughout each critical strategic phase, and dozens of Romanian executives have received intensive instruction in advocacy technology from CIPE’s Expert Volunteer Consultants and corporate government affairs specialists. More than one hundred and thirty business leaders took part in high-level policy meetings with elected officials in Bucharest to press the legislative proposals of the business community. These coalitions can now lay claim to several policy successes in the Parliament and Executive branch.
CONCLUSIONS AND LESSONS LEARNED
Democracy is not inevitable. People of courage who strive for reform in their countries must seek it. All of our activities and all of our projects operate with the goal of building the institutions of democracy for the future. It is vital, moreover, to keep in mind that building strong local partnerships and providing support for those who are genuinely committed to democratic values is the key to effecting reform in closed societies as well as consolidating democracy in countries where reform is already underway. An integral factor in accomplishing these objectives is to explicitly build greater understanding of democratic governance and its link to the functioning of the market system.
The challenge of globalization has created yet another set of issues that have to be addressed by the international democracy foundations. While the effects of globalization can be debated, it is clear that this process of integrating the world economy and the world communication system is advancing rapidly despite the occasional setback. The developing countries, whether they are closed societies or developing democracies, do not have the luxury of seeking to isolate themselves from the process of globalization. Yet, they are often very unprepared to meet the challenges globalization poses.
Recently a backlash has been building that equates the process of globalization with the dictates of the so-called “Washington Consensus”. In its simplest form the Washington Consensus was a set of policy prescriptions that are associated with the International Monetary Fund, the World Bank, and other development institutions. These policy prescriptions called for lowered trade barriers, balanced budgets, and other fiscal reforms; privatization; and other economic policy changes. Generally speaking, most economists and policy makers realize that the Washington Consensus was far too limited in its view of the world. In the 2002 World Development Report, Building Institutions for Markets, the World Bank recognizes that the key role of institutions--such as property rights, equal access to justice, civil liberties, freedom of information, and a host of other institutions--was not understood or appreciated. Yet the development institutions have stopped short of specifically recognizing that democratic governance and democracy must be seen as the value system that creates and sustains these institutions.
International democracy foundations have a special role to play in working with and supporting the emerging markets and developing democracies to build the self-reinforcing sets of democratic institutions that both create and sustain economic growth and market economies. Often one hears that countries like Indonesia under President Suharto are proof that markets function well under authoritarian regimes. Our view is different. Countries where crony systems perpetuate monopolies, where insider-deals are exempt from the rule of law, where the day-today governance of the country is conducted behind closed doors, and where corruption thrives, cannot be seen as market systems. The existence of large informal sectors or underground economies is prima facie evidence that large portions of the population are locked out of the system and denied access to the rule of law. More importantly, it means that from 30 to 50 percent of the population is also locked out as the country integrates into the global system. This generates large-scale tensions and poses an ongoing threat to the entire society, rich and poor alike.
What is now clear is that the processes of globalization means that developing countries have to build the institutions that allow all of their people to benefit from economic growth and participation. Democratic institutions and the process of democratic governance are an integral part of the overall development of a society. Building these institutions and the values that sustain them is the mandate we have been given.
1 Hernando de Soto, The Mystery of Capital, Basic Books, 2002. See the interview with Mr. De Soto in CIPE’s
Overseas Report available at www.cipe.org.
2 Dani Rodrik, “Institutions for High Quality Growth”, IMF, 2000 available at Dani Rodrik’s home page located at www.ksg.harvard.edu/rodrik.