Democracy under stress

Front matter

Barbara Budrich Publishers

Democracy under stress

Ursula J. van Beek Edmund Wnuk-Lipinski (eds.)

PART I: Global economic crises and their political impact

Collapse. The story of the international financial crisis, its causes Stan du Plessis

The impact of the Great Depression on democracy n... Dirk Berg-Schlosser

PART Il: The economy and democracy

3:

Table of content

PART Ill: An authoritarian response

China and the crisis in historical perspective 2.0.0... ccccecesseeseeteeeeees

Chinese crisis management: consolidated authoritarian capitalism

Han Sang-Jin and Lii Peng

PART IV: Towards a new global configuration in liberal democracies oo... eeeecceescceessececeessececeesceceessseeceseeeesteseeeens

Global solutions? Searching for democratic approaches to a new

Christer Jonsson

Foreword and acknowledgments

This book is the third in a series produced by the Transformation Research Initiative (TRI) team based at Stellenbosch University in South Africa, www.sun.ac.za/tri. It differs sharply from its two predecessors in that it has no common theoretical framework or shared empirical data. In fact, the authors do not necessarily all agree with each other and they sometimes even offer differing viewpoints. This is because what follows is an initial exploration and conceptualisation of a complex global phenomenon whose origins are as yet poorly understood and whose outcomes and long-term consequences cannot at this point be more than speculation.

The TRI team members are greatly indebted to the Stellenbosch Institute for Advanced Study (STIAS) for initiating and supporting the project institutionally, and to the Tercentenary Bank of Sweden Foundation in Stockholm for providing seed funding.

List of contributors

Dirk Berg-Schlosser Professor, Institute of Political Science, Philipps-University Marburg, Germany

Stan du Plessis Professor, Department of Economy, Stellenbosch University Stellenbosch, South Africa

Pierre du Toit Professor, Department of Political Science, Stellenbosch University, Stellenbosch, South Africa

Sang-Jin Han Professor, Department of Sociology, Seoul National University, Seoul, South Korea

Professor (Political Science), Faculty of Social Sciences, Economics and Business Administration, University of Bamberg

Bamberg, Germany

Christer Jönsson Professor: Department of Political Science, Lund University, Lund, Sweden

Bernard Lategan Professor (Theology) Stellenbosch Institute for Advanced Study (STIAS) Stellenbosch, South Africa

Peng Lü Doctor. Research Fellow: Institute of Sociology, Chinese Academy of Social Sciences (CASS), Beijing, China

10 List of contributors

Philip Mohr Professor: Department of Economics, University of South Africa (Unisa) Pretoria, South Africa

Ursula J. van Beek Professor, (History) Department of Political Science, Stellenbosch University, Stellenbosch, South Africa

Edmund Wnuk-Lipinski Professor (Sociology), Collegium Civitas, Warsaw, Poland

Laurence Whitehead Professor (Political Science and Economy), Nuffield College, Oxford University, Oxford, United Kingdom

Two things are infinite: the universe and human stupidity; And I am not sure about the universe.

Albert Einstein

This book is a cautionary tale about the September 2008 financial ‘earthquake’ and the global tsunami that followed. The worst of the panic might be over, but does this mean it is back to business as usual? Hardly. The earthquake exposed fault lines we can afford to ignore only at our own peril. In fact, the need to understand what happened, why it happened and what the possible long-term consequences could be, have turned into the most burning questions of our time, and certainly not only for economists.

The earthquake

At the epicentre of the global earthquake was the bankruptcy of Lehman Brothers in September 2008. This initial seismic event sent out shockwaves that triggered the global financial and economic crisis and plunged the world into the turmoil of the Great Recession. Since the originating event, unemployment rates in all the major liberal democracies, which were affected the most, are higher now than they were before 2008, and the level of their public debt has risen dramatically. Coupled with unwieldy budget deficits and poor growth prospects, the economies of these countries could well be weakened for years to come. The bleak reality is that the prospects for global economic growth predicted by most pundits in the midst of the short-lived burst in the market upswing in 2010 are very unlikely to be realised. The optimism that lulled governments, and the public, into believing the worst was over is now giving way to the realisation that the crisis is in fact not over, but has merely been delayed by stimulus packages and debt-shuffling from the private to the public sector on an unprecedented scale.

The world is now seen as more unstable in many key areas than it has been for many decades. At the time of writing, in the US a state budget crisis is looming; in the Middle East the Arab Spring is breaking up calcified autocratic orders, but the direction of political change is far from certain; and in Europe the profoundly serious situation in Greece and the shaky state of economic affairs in other peripheral, especially Southern European, countries raises the likelihood that the euro might not survive in its current form. There is even the possibility that the European Union project as a whole could be undermined and a more fragmented Europe will be less able to deal with the mounting global challenges.

The drama unfolding since 2008 ended the unquestioned supremacy of the model adopted by the rich developed democracies and firmly embedded after the Cold War; their seemingly ever-progressing economic development, which was the envy of the rest of the word, has now lost its shine. Economic progress has given way to a sustained decline in the trajectory of affluence, ending thereby the strong popular conviction that democracy and robust economic development necessarily go hand in hand. And there is also the risk that confidence in democracy itself might start to erode.

Against this trend, the economic strength of the more crisis-resistant emerging countries has been bolstered and has begun to crystallise into political power, as illustrated, among other things, by the upgrading in the course of the crisis of the G20 to a venue for heads of state. The global earthquake tilted the political axis of the globe away from the centre, with the result that established liberal democracies lost their monopoly on influence in global affairs. The question now is who will wield influence and in what way. The even more pertinent question is whether democratic principles can and will be applied, or whether different criteria will be used when deciding the fate of the world.

So far the crisis has not proved to be the earth-shattering event that was feared originally. The experience of the Great Depression in the wake of the 1929 stock market crash has not been repeated, nor has there been a similar degree of political upheaval: no young democracies have failed as yet, as was the case with many such fledgling democracies in the interwar period; nor has the economic downturn proved to be as deep as it had been in the 1930s.

Nevertheless, the crisis has taken a heavy economic toll on most countries and has profoundly changed the world in ways we have yet to understand. For one thing, a strong state is now believed to be better equipped than a weak one to sustain a fragile recovery, even as fiscal pressures force governments to unwind their stimulus packages. But are all states, or even most of them, up to the task? Not according to the 2010 state capability index compiled by the Economist Intelligence Unit (EIU) and based on 12 indicators that were thought to capture the main conditions likely to show whether or not a particular state has the ability to deliver. Of the 163 countries surveyed only 34 were classified as having highly capable states, and another 38 were classed as moderately capable; more than half of the countries were found to have either weak or very weak states.

At the same time polls show falling public support for capitalism, especially in the USA, the country that used to be the very epitome of free enterprise. And significantly, this is in sharp contrast to China, which has now emerged as one of the strongest supporters of capitalism. These sentiments suggest a shifting relationship between political systems and the free market in a context in which the success of China’s state-capitalist model is becoming an advertisement for many developing countries.

Why and how?

The search for answers to the question as to why a calamity occurred starts with an attempt to identify and understand its causes, with a view to hopefully help avoid similar such occurrences in the future. But the causes of far-reaching events are inevitably multiple and hard to untangle. What triggered the downturn following the Wall Street crash on that fateful ‘Black Thursday’ on 24 October 1929, for example, still remains a matter of much controversy. Among many other specialist opinions, historians tend to emphasise structural factors such as massive bank failures and the crash itself, while economists point more often to monetary policies, especially the contraction of money reserves that resulted from policies adopted by the US Federal Reserve, or the decision by Britain to return to the Gold Standard at pre-World War I levels. While there will undoubtedly be prolonged and detailed future debates, it is already becoming quite clear that the most recent crisis, like the one before it, had many points of origin. The US Bipartisan Commission created in 2009 and the US Congressional Research Service between them identified no fewer than 26 different causes of the crisis, while according to the CEO of the ill-fated Bear Sterns ‘everybody messed up’: the government, the rating agencies, Wall Street, the commercial banks and the regulators.

At a superficial level the common denominator of the two periods preceding the onset of both the 1929 and the 2008 financial meltdowns was a sense of ‘the good times’, especially in the United States, where both the crises originated. Rapid industrial/economic growth along with high consumer demand and elevated aspirations characterised both the ‘Roaring Twenties’ and the two ‘feel good’ decades of growing prosperity associated with the progress of globalisation after the end of the Cold War. There was ample evidence of enormous wealth, excess, expanding credit and recklessness in speculation on the soaring stock markets in both instances when the world came tumbling down.

But the devil, of course, is in the detail, as the respective chapters by Stan du Plessis and Dirk Berg-Schlosser aptly illustrate. While excess and greed played a role, so did the incentives that created the credit-fuelled bubble, in the US property markets in particular, and the concurrent gearing in the US financial sector that led highly geared banks first into a position of weakness and then into failure on so massive a scale that policy intervention became indispensable. The reason why the problem was not contained locally but spread to the rest of the world was that the modern banking system relies on globally interlinked financial markets and that the world economy has become tightly integrated not only into the financial system across the world but also into the flow of goods and services across boundaries.

Some instructive comparisons have been made in this volume between the current crisis and the one that triggered the Great Depression. For example, in contrast to the present situation, of the 15 European countries in the inter-war period that could be described, albeit in some cases at a stretch, as parliamentary democracies only eight survived; the other seven fell victim to circumstance and turned to more authoritarian forms of rule, especially to fascism that set them on the slippery slope towards World War II. Reminiscent of the more current woes, international trade fell sharply during the Great Depression along with all major economic indicators, while unemployment rose steeply. The severe budget cuts and other austerity measures, which most of the hapless governments of the day had implemented, did not prevent the crisis situation from deteriorating even further. Instead the measures were met with strong social and political responses as large numbers of people took to the streets in often peaceful, but sometimes also violent, protest — a situation not dissimilar to the developments witnessed lately in Greece.

The most significant positive difference between then and now has been the avoidance of the ‘beggar thy neighbour’ policy implemented by nearly all central banks in the 1930s. This policy, which put short-term domestic interests above longer-term considerations of international cooperation and stability, can be contrasted with the current efforts to coordinate, at the regional and global levels, policies meant to counter the adverse effects of the crisis, even if the efficacy of these efforts is sometimes doubtful. There is also a major difference between the young democracies of the inter-war period and the well established liberal democracies of today. In the 1930s other political alternatives were at hand in the form of ‘anti-system parties’ spread across the political spectrum from left to right. They posed a real threat to the democracies that were as yet not fully consolidated, because they carried the considerable potential for non-democratic or anti-democratic alternatives to emerge, and emerge they did. In contrast, no coherent extremist social and political forces or reactions have so far materialised in the developed democracies of today, while the general structural and political-cultural conditions continue to favour the persistence of democracy. But the situation is less clear in the case of the younger ‘Third Wave’ democracies. As Berg- Schlosser notes, their continuing democratic future could be more dependent on policy and actor effects, and this makes them more comparable to the unconsolidated democracies of the 1930s.

For this very reason the democracies of the Third Wave are of particular interest in this book as its aim is not only to come to grips with how the crisis happened and how it was handled in the short term, but also to hypothesise about its possible long-term consequences, especially with regards to the future of democracy. One of the speculative questions posed in this volume is therefore whether the global crisis and its aftermath might bring on the reversal or further expansion of the Third Wave of democracy.

Political systems and the economy

The Great Recession accentuated the emerging global division into democratic and authoritarian capitalisms. China’s economic success, in particular, started to undermine the once almost unshakable belief in political science that democracy and economic progress went together, whereas an autocratic regime was more likely to show poor economic performance. It is now also far less clear whether democracy increases the probability of economic success, or rather — and this is more likely — produces an improvement in the living standards of broad segments of a society, but only when good economic performance is already in place. And this leads to the question of whether the model of authoritarian capitalism might become a more attractive alternative to liberal democracy of the Western type, which is combined with a market economy, but is also ‘encumbered’ by the whole package of civic values such as human rights, the role of an individual in society, etc.

The first answers to the various questions emerge from the chapters by Ursula Hofmann-Lange and Philip Mohr. They both pursue the topic of the complex relationship between political systems and the economy, but look at this through the different lenses of their respective disciplines of political science and economics. What becomes evident from the political science perspective is that the democratic system requires a careful balancing of the concepts of liberty and equality. The in-built tension springs from the model’s essential need for a market economy, which per se implies inequalities of wealth, and the concurrent necessity to ensure the equality of its citizens not only in terms of political rights, but also in terms of the responsibility of democratic governments to reduce socioeconomic disparities. This contradiction is democracy’s inherent weakness. The strength of a democratic dispensation is greater political flexibility, whereby inefficient governments can be voted out of power without the threat of a decline in regime legitimacy and the possible consequent risks of political instability. In that sense democracies are generally better equipped than authoritarian political systems to weather economic crises.

But are democracies also better at guaranteeing economic success? The recent revolutions in Tunisia, Egypt and Libya showed once again how authoritarian leaders tend to exploit their political power to amass private fortunes in collusion with large private enterprises. Since neither side of the pact has an interest in ending the mutually profitable relationship, the ousting of the old leadership alone will not suffice. And if the old networks are left in place, while there is no legal framework of market regulation needed for a properly functioning market economy and the tradition of the rule of law is weak, then there can be no development of a competitive and successful market economy, despite democratisation. On the other hand, some authoritarian governments, notably China, promote the liberalisation of their national markets and stimulate economic success without democratising their political system. Market liberalisation and the consequent improvement of living conditions may in turn contribute to stabilising authoritarian political systems, at least in the short run.

Seen through the eyes of an economist, further complexities emerge. First, there is the fact that all economic systems are mixed systems, even if a particular form of ownership (collective: socialism or private: capitalism) usually dominates, or particular coordinating mechanisms such as tradition, command and the market prevail. Each type of ownership and each mechanism has its strengths and weaknesses, and each form of economic system has its adherents among economists. The dividing line lies between those who believe, as John Maynard Keynes did, that market economies are inherently unstable as they are subject to business cycles in the form of booms and recessions, and therefore governments have a role to play. Classical economists, conversely, are of the opinion that markets are inherently stable and that it is in fact governments that are responsible for creating business cycles. They advocate a hands-off approach. The recent crisis gave Keynesianism a massive boost when, after two decades of market fundamentalism, the urgent need for discretionary monetary and fiscal intervention became essential.

The two schools of economic thought are only part of the story. The other part deals with the specifics that impact on economic performance and can determine its success or failure, such as factor endowment, politics, history, geography, culture and attitudes of people in a particular country. Although some economists think that universal economic laws cut through time and space, there are others, such as Mohr, who devote attention to path dependence, recognising that a country’s current and expected performance is shaped by the route it had followed to arrive where it is today. The Chinese economic success, for example, which confounds many economists, would be hard to understand without taking into account the salient features of the Chinese people and their history. Equally, there is a wider range of developing countries, particularly the BRIC countries (Brazil, Russia, India and China) from whose perceived success one can also distil lessons to look for guidelines.

The crisis that shook the world 17 Responses to crisis

At the core of the global crisis has been finance. The trigger was the liberalisation of the capital market that opened the door to a free flow of speculative money as from the 1990s. This dynamic has been unfolding largely beyond the effective control of national governments, which nevertheless had little option but to step in when the inevitable crunch came. Ironically, while the measures governments instituted staved off the worst scenarios, the faulty global financial architecture remained essentially unchanged, and in time much of critical popular sentiment turned from global to local: from hostility towards banks and speculators to apportioning blame to individual governments.

The financial ‘earthquake’ of September 2008 sent flood waves first and foremost across the most developed democracies, so much so that some have dubbed the problem a crisis of the rich nations. But the troubled waters did not stop there as the ripple effects spilled over to the rest of the globe. Given the uneven stages and severity of the contagion, responses varied widely over time, space and political systems, while counter-measures have been sought at both national and international levels. The wide variation of measures trying to cope with the crisis as well as an assessment of the results this has produced have been captured in this volume by Laurence Whitehead and the co-authors Sang-jin Han and Peng Lii. They unveil, respectively, the democratic mechanism employed by the leading old democracies, and the responsive policies deployed by the authoritarian Chinese regime.

At the national level democracies have an in-built safety-valve mechanism to address citizen discontent in the form of democratic alternation. This allows for a peaceful change of leadership that helps both renew public authority and bolster political responsiveness to economic challenges at a time of economic stress. In the United States and the United Kingdom, the two countries most accountable for the crisis, democratic alternation did take place and proved to be a powerful mechanism of political accountability. But in both cases the alteration had limited effectiveness as an error-correcting mechanism to help redress past errors by holding failed officeholders to account, or to institute improvements to economic policy-making to guard against similar relapses in the future. This is because the concentration of political energies on a corrective agenda is harder to sustain in the long run. Once the worst of a crisis is over, other issues distract the attention, while competing parties and lobbyists are likely to dilute the initially strong reform impulse by highjacking it to suit their own particular interests.

In the absence of the safety-valve mechanism democracies have at their disposal, the immediate response to the crisis by the authoritarian Chinese regime was to implement a policy of extreme Keynesianism. Even though the Chinese economy was far less affected by the crisis than were the economies of the developed countries, in November 2008 the Chinese government launched the rollout of the largest (as a share of GDP) stimulus package in the world, amounting to some US$586 billion; six months later well over half of the budget was already allocated. The giant scope of the project along with its swift implementation showed the strong capacity of a state unrestrained by electoral considerations. While the main aim of the package was to make up for the fall in exports by spurring domestic demand, the selective preferential targeting of recipients suggested a concurrent political aim, which was to mollify workers in the major sector of the Chinese economy to forestall any labour challenge to the regime.

The tentative conclusion one could draw from the two analyses is that in the longer run China, its multiple internal problems notwithstanding, is likely to be much less affected by the crisis and might even benefit from it — not only because of the softer impact that the financial and economic crisis has had on its economy, but also because of the response policy, which might have initiated a correction of the hitherto unhealthy imbalance of the Chinese economy in favour of exports. It is as yet hard to see if any long-term benefits might accrue to the developed liberal democracies in the wake of the crisis, given that much of the initial impetus to institute corrective reform has been lost.

In the international arena, similarly, major global decision makers did what they thought was best to stabilise the immediate crisis situation. But, as Whitehead notes in this volume, “established interests in many countries had regained their confidence and veto power, and any potential coalition that might have existed in favour of major curbs to the dynamics of financial globalisation had begun to splinter.” And so the concerted response to the crisis, so robust to begin with, has been left unfinished. Little wonder then that another international banking crisis is now moving to the fore of the international agenda. And the insolvency of Greek banks is merely the tip of the iceberg as many banks in other euro zone countries are not only overly indebted, but have the transparency of their declared assets questioned. This situation gives rise to serious concerns about a new contagion spreading not only to more countries in the euro zone but also to areas well beyond the European common currency.

Quo vadis democracy?

A financial crisis has much wider ramifications than just precipitating the need to put one’s fiscal house in order. The heavy impact on the economy and economic actors comes to mind first, but harmful knock-on effects put at risk social protection, public health, education programmes and food security, as well as affecting individual households; all these factors hold the potential to set off destabilising social reactions. And then there is the feedback loop. This is because a financial crisis is not only a causative factor that sets off a damaging chain reaction, but it is also a symptom. It is a symptom of poorquality governance and regulation, and of profligacy, although this issue goes to the much deeper level of underlying values, attitudes and beliefs. These crucial elements are highlighted in this volume by Pierre du Toit.

At the heart of the matter is the social and physical context within which the modern Western consumer-oriented lifestyle and liberal culture have evolved. The origins of this culture can be traced back to the post-World War II ‘baby boom’ generation, whose values were formed during — and found expression in — the counterculture movement of the 1960s, which coalesced around the issue of the US involvement in the Vietnam War. The denunciation of war was the particular focus, but with it came the rebellion against an established cultural code and the rejection of many norms of restraint. Tolerance became the hallmark; equality was extended from political rights to such areas as sexual orientation and gender relations, and progress came to be viewed as an increasing ‘quality of life’ trend.

The wave of prosperity enjoyed by Western societies in the last 50 years served to entrench these values. A crisis-induced reversal of the trajectory of affluence could have far-reaching effects, not least in that it could undermine the liberal values of trust and tolerance that guard against ethnic nationalism with its concurrent attitudes of prejudice, racism and xenophobia. This applies especially to the integration of migrant populations into existing societies, which was already a problem prior to the crisis and not only in multicultural societies, but even in such mono-cultural environments such as Germany or the Netherlands. The deeply shocking images of the carnage perpetrated in Norway in the summer of 2011 is an uneasy illustration of the problem of waning tolerance, which could give rise to the emergence of illiberal democracies, and not just at the edges but at the very core of the liberal democratic zone.

At the global level the subject that warrants most attention is the rise of China. The phenomenon of this rise, already remarkable for its dynamic nature before the crisis, moved to the centre of the world stage as the Great Recession unfolded. One of the authors in this book and its co-editor, Edmund Wnuk-Lipinski, goes as far as to consider the possibility of a new global bi-polarisation in the making, with China in one of the two key positions and the world divided into democratic and authoritarian capitalisms. When the earlier, ideologically defined, bipolar order ended in 1989 with the collapse of the Soviet bloc, liberal democracy was declared the ultimate winner set to conquer the whole world. But this was not to be. Looking at the world today, as Edmund Wnuk-Lipinski noted in this volume, it is safe to say that it was capitalism rather than liberal democracy that has won the day, as the whole of the global market economy is now capitalist, distinguished only by different solutions to the various local economic problems, from liberal in the US, to welfare state capitalism in the EU, to a mixture of state and private capitalism in China. In this context the growing economic clout of the latter is being watched with increasing concern by some countries, especially the United States. But China’s evident prosperity is also being watched, and most likely with growing hope, by some formally democratic or authoritarian peripheral countries whose development paths have not been success stories either in economic or political terms. And China might become an example to follow not only for them, but also for some liberal democracies, particularly those that are relatively young and perform poorly economically. This possible adoption of the ‘Chinese model’ is the more pessimistic of the two scenarios offered in the conclusions to this volume.

The question is whether China is part of the problem or part of the solution to the problem. A recent BBC survey revealed that China becoming more powerful is viewed with apprehension in all of the 27 countries surveyed, and especially in the G7 countries. Also, negative popular perceptions in 2011 were up from 2005, when the last poll was conducted. The attitudes of European leaders belied these popular sentiments in June 2011, when red carpets were rolled out in European capitals to receive China’s Prime Minister, Wen Jiabao. This is in contrast to American leaders, who view China much more warily, but in the midst of the euro zone financial woes European leaders undoubtedly have a greater vested interest in Chinese investments than do their American counterparts. It could also be that they are better informed about China and are thus less uneasy about letting China in.

Bogeyman or saviour, China is here to stay and needs to be studied objectively to be understood better. In this volume a deeper knowledge of the country is sought via its history. China’s journey from being a proud ancient Empire, through colonial exploitation and the later ravages of revolutions and chaos, to a poor Third World country and then back to a position of power tells its own story: the story of survivors who adapt to changing circumstances. Therein lie many lessons, but two are particularly pertinent to the discussion in this book. The one is that there is much to be learnt from the Chinese practice-based epistemology, which calls for distilling lessons from experimentation to feed innovation as the basis of progress. The other lesson is that learning selectively from China is very different from trying to imitate wholesale a culturally peculiar authoritarian form of governance. And among the countries most likely to try this would be those with the most to lose: poor defective democracies that would be unlikely to replicate China’s economic success, but would be sure to destroy the last vestiges of democracy their citizens still have as their meagre means by which to keep some kind of check on their governments.