In addition to the impact of the introduction of New Public Management, neo-liberal policies have also indirectly, and unintentionally, increased corruption by promoting trade liberalization, which weakens government finances, which, in turn, makes corruption more likely and difficult to fight.[14]
Also, deregulation, another key component of the neo-liberal policy package, has increased corruption in the private sector. Private sector crookedness is often ignored in the economic literature because corruption is usually defined as the abuse of public office for personal gain.[15] But dishonesty exists in the private sector too. Financial deregulation and relaxation of accounting standards have led to insider trading and false accounting even in rich nations – recall cases like the energy company Enron, and the telecommunications company WorldCom and their accountancy firm Arthur Andersen in the ‘Roaring Nineties’ in the US.[16] Deregulation can also increase the power of private-sector monopolies, which expands the opportunities for their unscrupulous purchasing managers to take bribes from sub-contractors.
Corruption often exists because there are too many market forces, not too few. Corrupt countries have shadow markets in the wrong things, such as government contracts, jobs and licences. Indeed, it is only after they made the sale of things like government offices illegal that today’s rich countries could significantly reduce profiteering through the abuse of public office. Unleashing more market forces through deregulation, as the neo-liberal orthodoxy constantly pushes for, may worsen the situation. This is why corruption has often increased, rather than decreased, in many developing countries following liberalization pushed by the Bad Samaritans. The extreme racketeering seen in the process of liberalization and privatization in post-communist Russia has become notorious, but similar phenomena have been observed in many developing countries.[17]
In addition to corruption, there is another political issue that occupies an important place in the neo-liberal policy agenda. It is democracy. But democracy, especially its relationship with economic development, is a complex and highly charged issue. So, unlike on issues like free trade, inflation or privatization, there is no united position on it among the Bad Samaritans.
Some suggest that democracy is essential for economic development, as it protects citizens from arbitrary expropriation by the rulers; without such protection, there will be no incentive to accumulate wealth; thus the USAID argues that ‘[e]xpanding democracy improves individual opportunity for prosperity and improved well-being’.[18] Others think that democracy may be sacrificed if it becomes necessary in defence of a free market, as evidenced by the strong support offered by some neo-liberal economists to the Pinochet dictatorship in Chile. Still others think that democracy will naturally develop once the economy develops (which, of course, can be best achieved by free-trade, free-market policies), because it will produce an educated middle class that naturally wants democracy. Yet others sing the praises of democracy all the time but keep quiet when the undemocratic country in question is a ‘friend’ – in keeping with the realpolitik tradition represented by Franklin Roosevelt’s famous comment on the Nicaraguan dictator, Anastasio Somoza, that ‘he may be a son of a bitch, but he is our son of a bitch’.[19]
Despite this diversity of views, there is a strong consensus among neo-liberals that democracy and economic development reinforce each other. Of course, neo-liberals are not unique in holding such a view. But what distinguishes them is their belief that this relationship is mainly, if not exclusively, mediated by the (free) market. They argue that democracy promotes free markets, which, in turn, promote economic development, which then promotes democracy: ‘The market underpins democracy, just as democracy should normally strengthen the market’, writes Martin Wolf, the British financial journalist, in his renowned book, Why Globalisation Works.[20]
According to the neo-liberal view, democracy promotes free markets because a government that can be unseated without resorting to violent measures has to be restrained in its predatory behaviour. If they don’t have to worry about losing power, rulers can impose excessive taxes with impunity and even confiscate private property, as numerous autocrats have done throughout history.When this happens, incentives to invest and generate wealth are destroyed and market forces distorted, impeding economic development. By contrast, under democracy, the predatory behaviour of the government is restrained and thus free markets can flourish, promoting economic development. In turn, free markets promote democracy because they lead to economic development, which produces wealth-holders independent of the government, who will demand a mechanism through which they can counter the arbitrary actions of the politicians – democracy. This is what the former US president Bill Clinton had in mind when he said in support of China’s accession to the WTO: ‘as China’s people become more mobile, prosperous, and aware of alternative ways of life, they will seek greater say in the decisions that affect their lives’.[21]
Leaving aside for the moment the question as to whether the free market is the best vehicle for economic development (to which I have repeatedly said no throughout this book), can we at least say that democracy and (free) markets are, indeed, natural partners and reinforce each other?
The answer is no. Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of ‘one man (one person), one vote’. The market runs on the principle of ‘one dollar, one vote’. Naturally, the former gives equal weight to each person, regardless of the money she/he has. The latter gives greater weight to richer people. Therefore, democratic decisions usually subvert the logic of market. Indeed, most 19th-century liberals opposed democracy because they thought it was not compatible with a free market.[22] They argued that democracy would allow the poor majority to introduce policies that would exploit the rich minority (e.g., a progressive income tax, nationalization of private property), thus destroying the incentive for wealth creation.
Influenced by such thinking, all of today’s rich countries initially gave voting rights only to those who owned more than a certain amount of property or earned enough income to pay more than a certain amount of tax. Some of them had qualifications related to literacy or even educational achievement (so, for example, in some German states, a university degree gave you one extra vote) – which were, of course, closely related to people’s economic status anyway and were usually used in conjunction with property/tax conditions. So, in England, the supposed birthplace of modern democracy, only 18% of men could vote, even after the famous 1832 Reform Act.[23] In France, before the introduction of universal male suffrage in 1848 (the first in the world), only around 2% of the male population could vote due to restrictions regarding age (you had to be over 30) and, more importantly, payment of tax.[24] In Italy, even after the lowering of the voting age to 21 in 1882, only around two million men (equivalent to about 15% of the male population) could vote, due to tax payment and literacy requirements.[25] The economic qualification for suffrage was, then, the flip side of the famous colonial American slogan against the British, ‘no taxation without representation’ – there was also to be ‘no representation without taxation’.
14
See chapter 3 for the effect of trade liberalization on government finance in developing countries.
16
J. Stiglitz (2003),
17
See the articles in the special issue on ‘Liberalisation and the New Corruption’ in
20
M. Wolf (2004),
21
As cited in J. Bhagwati,
22
N. Bobbio (1990),
24
S. Kent (1939),
25
M. Clark (1996),