How Capitalism Will Save Us (10 page)

F
ree-market critics love to hold up the crime and corruption of post-communist Russia as emblematic of the fundamental immorality of unbridled capitalism. Yet Russia’s economy is hardly a democratic free market.

In 2009 the Heritage Foundation, the noted free-market think tank, gave Russia’s economy a 50.8 percent rating, calling it “mostly unfree.”
¹⁸

Putin’s authoritarian “managed democracy” is more intrusive in the economic lives of its citizens than that of his predecessor, Boris Yeltsin. True, things have improved since the lawless 1990s. The Russian economy is growing. There are privately owned businesses and an increasingly affluent middle class. The tax code has been drastically simplified. Steps have been made toward the creation of Western-style property rights. But there is still not the kind of rule of law and property-rights protections that we take for granted in the United States. Nor does Russia’s court system effectively mediate disputes.

Russian economist and political leader Grigory Yavlinsky has noted:

“We do not have independent courts in Russia. … The law enforcement

system is corrupt and has been transformed into an instrument of revenge and the grabbing of property.”
¹⁹

It is still not easy to launch a new business in that country. According to the Heritage Foundation, getting a new business license still involves plenty of red tape, taking “much more than the world average of 18 procedures and 225 days.”
²⁰

Small wonder that Yavlinsky, while acknowledging reforms, has derided his nation’s system as “phony capitalism”: success or failure in the Russian marketplace depends on political favors, i.e., paying bribes and protection to officials or their cronies. The contrast with Western-style democratic capitalism, he says, is “stark.”

We discuss later in this chapter that Russia’s oil wealth has helped to create this appearance of affluence—the “phony capitalism” described by Yavlinsky. Russia’s corruption is the product not of free markets, but of an authoritarian government that hasn’t permitted them to flourish.

F
reedom House, the nonpartisan organization that monitors political rights around the world, in 2008 announced a disturbing finding: for the first time in years, there had been a “setback in global freedom” in one-fifth of the world’s countries. Yet many of the backsliding nations, such as the former Soviet Union, had instituted free-market reforms. Other countries, like China, continue to have “closed” political systems despite economic liberalization. According to the organization, this decline continued as of 2009.
²¹

These and other developments have been held up as evidence that free markets don’t bring free societies after all. The
New York Times
declared that “both liberal and conservative intellectuals, even once ardent supporters, have backed away” from a belief in capitalism as a democratizer.

Then there are those like Yale law professor Amy Chua who maintain capitalism actually hurts poor nations. She wrote a book with the incendiary title
World on Fire: How Exporting Free Market Democracy Breeds Ethnic Hatred and Global Instability
.

Chua claims that instead of planting the seeds of democracy in struggling countries, capitalism in fact makes things worse, exacerbating ethnic conflicts and widening the gap between rich and poor. She points to nations like Nigeria, that, despite having open markets, continue to experience bloody tribal conflicts and have failed to establish democracy.

Chua’s perspective is no doubt partly shaped by personal tragedy: her well-to-do aunt, a Chinese businesswoman living in the Philippines, was stabbed to death by her chauffeur. For some people, her arguments may appear compelling. Yet they reflect a poor understanding of the history of democracy and an ignorance of Real World economics.

No, capitalism does not magically turn nations into American-style republics overnight. But political scientists have documented the relationship between free markets and free societies.

Cato Institute analyst Daniel Griswold has found that “the most economically open countries are three times more likely to enjoy full political and civil freedoms as those that are economically closed. Those that are closed are nine times more likely to completely suppress civil and political freedoms as those that are open.”
²²

Griswold cites research showing that since the nations of the world began to liberalize their economies in the mid-1980s, the percentage of democratically elected governments surged from 40 percent to over 60 percent today.
²³

When you think about it, the link between economic and political liberty makes sense. Free markets not only demand, but teach, the skills needed for political self-governance. Griswold explains, “Economic freedom and trade provide a counterweight to governmental power.”
²⁴
That is because under capitalism you, and not government, are responsible for most day-to-day economic decisions, from how to raise money to start a business to how to take care of the maintenance of your home.

Sooner or later, people realize that if they can vote with their money and choose their refrigerator or automobile, why shouldn’t they have the similar ability to vote at the ballot box and elect their officials?

Truly free markets also require an open flow of information. A Silicon Valley can emerge only when people have the freedom to develop and exchange ideas. Capitalism also fosters democracy by encouraging the growth of a better-educated middle class—people who are more likely to make demands of public officials.

As for Russia and China, it’s true that they remain politically repressive. But both nations allow more personal freedoms than they did under communism. In China, the days of murderous Maoist campaigns like the Cultural Revolution and the Great Leap Forward, which took the lives of tens of millions, are over. People now have property rights to their apartments and the ability to travel. Tens of thousands of entrepreneurs have created new businesses.

The New York Times
reported that China’s growing middle class is increasingly pushing back against authoritarian rule: “The new property owners have poured their energy into everything from establishing co-op
boards to spar with landlords, to organizing real estate market boycotts to force down prices. Others, meanwhile, have begun running for office in district-level elections, where they hope to make the city government more responsive to their needs.”
²⁵

The
Times
quoted a scholar at the China Development Institute who observed “an awakening of awareness on public issues” and civic leaders who see “a steady growth in citizen involvement.” This was clearly the case after the 2008 earthquake disaster in Sichuan Province, which led to an outcry against corruption, which was blamed for the shoddy “tofu construction”
²⁶
that helped cause some seventy thousand deaths and countless other casualties.

In Russia, observers are justifiably alarmed by the crackdowns that have rolled back the democratic reforms that followed the collapse of Soviet communism in the 1990s. Even so, most Russians today have more personal liberties than they ever had in their blood-soaked history. A political demonstration will get you arrested and your head cracked. But you don’t have countless thousands of people being arbitrarily rounded up and sent to the Gulag, as they were under the old Soviet authoritarianism.

The reason Russia hasn’t democratized is because it is still a statedominated economy. Most of the country’s vast wealth comes not from free markets but from revenue produced by its oil and other natural resources. Experts have called this “the Oil Curse.” This resource-driven prosperity creates the illusion of capitalism while preserving the power of oligarchs and an authoritarian government. Like welfare or big inheritances for adolescents, the oil curse removes the incentive for governments to encourage a diversified, entrepreneurial economy.

Russia isn’t the only authoritarian society propped up by its natural resources. Since the new oil boom that started in 2004, huge windfalls have bolstered the economies of not only Russia, but also countries like Iran and Venezuela. These are the countries that are the backsliders—or outright failures—on the freedom index. Their resource-rich “phony capitalism” provides a smoke screen for anti-capitalist, big-government policies.

Take a country cited by Amy Chua—Nigeria. Sure enough, it, too, is beset by the oil curse: it produces 10 percent of the oil consumed by the United States. That’s lots of petrodollars flooding its coffers. Not surprisingly,
the Heritage Foundation/
Wall Street Journal
Index of Economic Freedom rates the country as “mostly unfree.” It lags behind in freemarket essentials, such as property rights, contract enforcement, ease of setting up legal businesses, and sensible taxation. Therefore, Nigeria can hardly be called a free market, and thus it is no surprise the country continues to experience political turmoil.

The Freedom House report on declining global freedom is really no surprise. The plunge in oil prices between the summer of 2008 and the spring of 2009, halting the oil boom in these nations, is a likely reason that political repression increased in these countries.

What free-market doubters fail to recognize is that the road from economic reform to political liberty can be long and not always smooth. Chile is a prime example. In 1973, the radical Socialist government of Salvador Allende sought to turn Chile into a Cuba-style dictatorship. By the time the Allende government was overthrown in a coup d’état by strongman General Augusto Pinochet, the annual inflation rate was 286 percent.