Why Are Rich Countries Democratic?

Ricardo Hausmann

MAR 26, 2014
Newsart for Why Are Rich Countries Democratic?
CAMBRIDGEWhen Adam Smith was 22, he famously proclaimed that, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Today, almost 260 years later, we know that nothing could be further from the truth.

The disappearance of Malaysia Airlines Flight 370 shows how wrong Smith was, for it highlights the intricate interaction between modern production and the state. To make air travel feasible and safe, states ensure that pilots know how to fly and that aircraft pass stringent tests. They build airports and provide radar and satellites that can track planes, air traffic controllers to keep them apart, and security services to keep terrorists on the ground. And, when something goes wrong, it is not peace, easy taxes, and justice that are called in to assist; it is professional, well-resourced government agencies.

All advanced economies today seem to need much more than the young Smith assumed. And their governments are not only large and complex, comprising thousands of agencies that administer millions of pages of rules and regulations; they are also democratic – and not just because they hold elections every so often. Why?

By the time he published The Wealth of Nations, at age 43, Smith had become the first complexity scientist. He understood that the economy was a complex system that needed to coordinate the work of thousands of people just to make things as simple as a meal or a suit.

But Smith also understood that while the economy was too intricate to be organized by anybody, it has the capacity to self-organize. It possesses an “invisible hand,” which operates through market prices to provide an information system that can be used to calculate whether using resources for a given purpose is worthwhile that is, profitable.

Profit is an incentive system that leads firms and individuals to respond to the information provided by prices. And capital markets are a resource-mobilization system that provides money to those companies and projects that are expected to be profitablethat is, the ones that respond adequately to market prices.

But modern production requires many inputs that markets do not provide. And, as in the case of airlines, these inputs rules, standards, certifications, infrastructure, schools and training centers, scientific labs, security services, among others – are deeply complementary to the ones that can be procured in markets. They interact in the most intricate ways with the activities that markets organize.

So here’s the question: Who controls the provision of the publicly provided inputs? The prime minister? The legislature? Which country’s top judges have read the millions of pages of legislation or considered how they complement or contradict each other, much less applied them to the myriad different activities that comprise the economy? Even a presidential executive cannot be fully aware of the things that are done or not done by the thousands of government agencies and how they affect each part of society.

This is an information-rich problem, and, like the social-coordination challenge that the market addresses, it does not allow for centralized control. What is needed is something like the invisible hand of the market: a mechanism for self-organization. Elections clearly are not enough, because they typically occur at two- or four-year intervals and collect very little information per voter.

Instead, successful political systems have had to create an alternative invisible hand – a system that decentralizes the power to identify problems, propose solutions, and monitor performance, such that decisions are made with much more information.

To take just one example, the United States’ federal government accounts for just 537 of the country’s roughly 500,000 elected positions. Clearly, there is much more going on elsewhere.

The US Congress has 100 senators with 40 aides each, and 435 representatives with 25 aides each. They are organized into 42 committees and 182 subcommittees, meaning that there are 224 parallel conversations going on. And this group of more than 15,000 people is not alone. Facing them are some 22,000 registered lobbyists, whose mission is (among other goals) to sit down with legislators and draft legislation.

This, together with a free press, is part of the structure that reads the millions of pages of legislation and monitors what government agencies do and do not do. It generates the information and the incentives to respond to it. It affects the allocation of budgetary resources. It is an open system in which anybody can create news or find a lobbyist to make his case, whether it is to save the whales or to eat them.

Without such a mechanism, the political system cannot provide the kind of environment that modern economies need. That is why all rich countries are democracies, and it is why some countries, like my own (Venezuela), are becoming poorer. Although some of these countries do hold elections, they tend to stumble at even the simplest of coordination problems. Lining up to vote is no guarantee that citizens will not also have to line up for toilet paper.

Ricardo Hausmann, a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is a professor of economics at Harvard University, where he is also Director of the Center for International Development.

This Isn't the Return of the Cold War. It's Worse.

by Michael Kimmage

March 24, 2014
photo credit: OLGA MALTSEVA/AFP/Getty Images

Crises compel analogies, and since Moscow’s current foe is Washington, and Washington’s is Moscow, an irresistible set of analogies has arisen. A New cold war?asks a USA Today headline. A Bloomberg headline referencesCold War Ghosts.” CNN intones a “Cold War-style Conflict.” In the more sober words of a New York Times headline: “If Not a Cold War, a Return to a Chilly Rivalry.” But the Cold War analogy obscures more than it clarifies.

Both Putin and Obama are working off of new foreign-policy scripts, and the imaginative distance between them will make it almost impossible for them to communicate with one another. Ironically, there was greater room for negotiation between Moscow and Washington, in the final years of the Cold War than there may be in the years to come.

Throughout the Cold War, the U.S. proudly led the West. The West was a military alliance, embedded in NATO, and it was a family of sorts, an expression of Franco-American, German-American, and Anglo-American kinship. The West embodied ideals as well, a Plato-to-NATO sensibility and narrative, in which the Soviet Union was the latter-day Persia. Its Asiatic despotism beautifully framed America’s defense of Hellenic liberty. Before proclaiming himself a Berliner, Kennedy addressed his West Berlin audience in Latin. Civis romanus sum, he told them in the summer of 1963, your Western kin from across the Atlantic.

The Soviet Union was, by contrast, the birthplace of international communism. After World War II, Stalin imposed Soviet communism on Eastern Europe, just as communism was establishing itself in China

In the 1960s and 1970s, Moscow looked to Latin America, the Middle East, and Africa for the revolution’s onward march; in Europe, Soviet communism was falling on hard times. The Soviet Union could not match the West’s allure in states under Soviet control (Poland, Czechoslovakia, Hungary) and within the Soviet Union itself (the Baltic Republics). By 1991, the Soviet Union had been destroyed, in part, by Eastern Europe’s hunger to join the EU and NATO.

Twenty-three years later, the U.S. is still the leader of NATO. Yet it is no longer the leader of the West, a phrase that President Obama and Vice President Biden have avoided in the past few weeks because it has never figured in their foreign policy. Their emotional connection is to the international community. As Obama put it in his March 17 statement about Ukraine: “from the start, the U.S. has mobilized the international community in support of Ukraine to isolate Russia for its actions and to reassure our allies and partners.” 

Speaking in Vilnius, on March 19, Biden contended that “the world is changing and rejecting outright [the Russians’] behavior.” Obama has de-territorialized American foreign policy. International law and the global court of public opinionnot the regional interests of the U.S. and the EU—will militate against Russia’s territorial ambitions in Ukraine and in Eastern Europe as a whole.

In Ukraine, Obama has no global war to win for the West. Therefore, the U.S. will bestow no Marshall Plan on Ukraine. It will conduct no Berlin airlift into Sevastopol or Simferopol—or into Donetsk or Kharkiv or Odessa. The containment doctrine, if it ever applied to the situation in Ukraine, has already shown itself to be obsolete. Crimea will belong to Russia, and the U.S. will not send troops to Ukraine as it did to Korea and Vietnam.

The Plato-to-NATO narrative has long ago fallen from fashion in American intellectual and political culture. Were it to be revived, it could not easily accommodate Ukraine, which is more post-Soviet than indigenously Western. During the Cold War, the U.S. made financial and military sacrifices for allies considered to be under threat. In the future, the U.S. may support Ukraine as a member of the international community, but it will make no serious sacrifices on its behalf.

Meanwhile, Putin’s Russia has shed communism, and it has shed internationalism. Putin’s March 18 speech on Crimea was a historically grounded appeal to Russian nationalism. It is necessary, he argued, “to refute the rhetoric of the Cold War and to accept the obvious fact: Russia is an independent, active participant in international affairs.” A participant in international affairs is not equivalent to a member of the international community. Where Obama sees an international community, Putin sees a forest of colliding national interests in which the American national interest is the most aggressive. Russian prestige, Russian territory, and the status of Russians outside Russian borders are Putin’s concerns, and there is no Cold War logic behind them.

Cold War analogies exaggerate the contemporary stature of Russia and the U.S alike. Washington and Moscow are no longer what they were from 1945 to 1991, the pivot points of international politics

However local Cold War conflicts could be, they always radiated outward. Angola mattered, to Moscow, for what it signified about Moscow’s relationship to Washington, and Pakistan mattered, to Washington, for what it signified about Washington’s relationship to Moscow. The Cold War forced the U.S. and the Soviet Union into expansionary attitudes and postures, lest the actual expansion of one’s enemy culminate in a diminution of one’s own powerloss of face might mean losing the war. Since 1991, Moscow and Washington have been free to explore the pleasure of non-action. Moscow has accepted Estonia’s entry into NATO, Tallinn being some 224 miles from Saint Petersburg; and the U.S. has chosen to absent itself from many crisis zones, while contemplating a reduction in defense spending.

In addition, the Cold War binaries cover up the most interesting binary to have emerged from Ukraine. Reacting to the same crisis, Putin and Obama have committed themselves to two irreconcilable visions of international politics. In Putin’s, solidarity flows from the ethnos, from the language, religion, and history of a particular people formed into a state. The rhythm of international politics is set by the assertion of power; and the international community is, at best, a fiction. In truth, it does not exist; behind it are states who participate in international affairs as they see fit, and never out of pure altruism. Least altruistic of all is the United States

As emphasized in a Russian Foreign Ministry response to a March 5 State Department fact sheet on Ukraine, which opens, remarkably, with a quote from Dostoevsky’s Notes from the Underground: “The U.S. does not and will never have the moral authority to teach others about international norms and respect to other countries’ sovereignty. What about the bombings of former Yugoslavia and the invasion of Iraq on false pretenses?” 

In the rival vision, the international community, and America’s leading role within it, is fully real. It has values that are real, and these values encourage democracy, rule of law, human rights, and a free media. The international community has recognized Ukraine’s will to be a part of the international community. Over time, and with the help of the EU and the U.S., Ukraine will draw closer to the international community until one day it exists seamlessly within it. An assumption that the drift of history is liberal, toward democratic and international norms, and away from nationalist recidivism, underlies American foreign policy in general. As Obama’s recently retired ambassador to Moscow, Michael McFaul, writes about the prospects of Putinism, “the U.S. … will win this new conflict in Europe. Over the last century, democracies have consolidated at a remarkable pace, while autocracies continue to fall.” 

Soviet-American communication was never easy during the Cold War. Yet after the Cuban Missile Crisis it became possible. The U.S., which had refused to recognize the Soviet Union for the first 15 years of its existence, came to appreciate the leverage and security that high-level contact provided, and the Soviet Union had practical needs—for money, for grain—that made the U.S. an attractive partner. By the late 1960s, Soviet and American leaders could look beyond the capitalist-versus-communist moral fervor of the early Cold War. In the 1980s, Gorbachev put up with Reagan’s anti-communist jokes, while Gorbachev’s Leninism did not inhibit a friendship from evolving between the Soviet General Secretary and the American president.

By comparison, the current tension between Russian nationalism and American internationalism will offer less room for diplomatic maneuvering. Obama sees the nationalism of Putin as illegitimate, a flashback to the age of Bismarck, a lynchpin of autocratic government and an unacceptable bridge of influence between Russia and ethnic Russian or pro-Russian constituencies in Ukraine—or anywhere else in the former Soviet Union. Nationalism is Moscow’s path to isolation from the international community. Putin sees the internationalism of Obama as illegitimate, a coded language fabricated to mask the realist agenda of the U.S. and the EU, which is to push Europe’s border as far eastward as it will go. Internationalism is Washington’s path to Eurasian dominance. Russian-American communication will only be possible when one or the other side gives up on its vision of national and international affairs.

Putin’s Reality Check for Europe

Joschka Fischer

MAR 24, 2014 
Newsart for Putin’s Reality Check for Europe

BERLINFor far too long, the West has harbored illusions about Vladimir Putin’s Russiaillusions that have now been shattered on the Crimean peninsula. The West could (and should) have known better: Ever since his first term in office as Russian president, Putin’s strategic objective has been to rebuild Russia’s status as a global power. 

To this end, Putin used Russia’s energy exports to recover gradually the territories lost when the Soviet Union collapsed a generation ago. Ukraine has been at the heart of this strategy, because, without it, the aim of a revived Russia is unachievable. So Crimea was just the first target; the next will be eastern Ukraine and persistent destabilization of the country as a whole.

Before our eyes, the post-Soviet international system in Eastern Europe, the Caucasus, and Central Asia is being overthrown. Nineteenth-century concepts of international order, based on zero-sum balance-of-power considerations and spheres of interest, are threatening to supersede modern norms of national self-determination, the inviolability of borders, the rule of law, and the fundamental principles of democracy.

As a result, this upheaval will have a massive impact on Europe and its relations with Russia, for it will determine whether Europeans live by twenty-first-century rules. Those who believe that the West can adapt to Russian behavior, as Putin’s Western apologists suggest, risk contributing to further strategic escalation, because a soft approach will merely embolden the Kremlin.

Indeed, whether or not its leaders acknowledge it, the European Union is now in direct conflict with Russia over its enlargement policy since the end of the Cold War. That is because Russia’s re-emergence as a global power requires not just the reintegration of lost Soviet territories, but also direct access to Europe and a dominant role there, especially in Eastern Europe. So a fundamental strategic struggle is now a given. 

From a Western perspective, willful confrontation makes little sense, because the EU and Russia are and will continue to be neighbors. Looking ahead, Russia will need the EU even more than vice versa, because in its Far East and in Central Asia, China is emerging as a rival of entirely different dimensions. Moreover, Russia’s rapid demographic decline and enormous modernization deficit imply the need for a joint future with Europe. But seizing this opportunity is possible only on the basis of the rule of law, not of force, and must be guided by the principles of democracy and national self-determination, not great-power politics.

Instead, Putin has now triggered a lasting crisis. The West’s response will be a new containment policy, mainly taking the form of economic and diplomatic measures. Europe will reduce its energy dependence on Russia, review its strategic alignment and priorities, and scale back investment and bilateral cooperation.

In the short term, Putin seems to have greater leverage, but the weakness of his position will soon become apparent. Russia is completely dependent, economically and politically, on its commodity and energy exports, which go primarily to Europe. Lower European demand and an oil price that no longer suffices to sustain Russia’s budget stand to hobble the Kremlin very quickly.

Indeed, there is reason to believe that Putin may have overplayed his hand. The collapse of the Soviet Union at the beginning of the 1990’s was caused not by the West, but by a wave of secession, as nationalities and minorities, seeing the party-state weakened, seized the opportunity to break free. Today’s Russia has neither the economic nor the political strength to regain and integrate the lost Soviet territories, and any attempt by Putin to press on with his plan would impoverish its people and lead to further disintegration – a bleak prospect.

Europeans have reason to be worried, and they now have to face the fact that the EU is not just a common market – a mere economic community – but a global player, a cohesive political unit with shared values and common security interests. Europe’s strategic and normative interests have thus re-emerged with a vengeance; in fact, Putin has managed, almost singlehandedly, to invigorate NATO with a new sense of purpose. 

The EU will have to understand that it is not acting in a vacuum in its eastern and southern neighborhood, and that, for the sake of its own security interests, the conflicting interests of other powers there cannot simply be ignored or, worse, accepted. The EU’s enlargement policy is not merely some expensive, expendable annoyance; it is a vital component of the EU’s security and outward projection of power. Safety comes with a price tag.

Perhaps now there will be a reassessment in the United Kingdom of the costs of an EU exit. And maybe there will be a realization on the Continent that European unification must move forward more quickly, because the world – and Europe’s neighborhood in particular – has turned out to be not as peaceful as many, above all the Germans, perceived it to be.

The EU peace project – the original impetus for European integration may have worked too well; after more than six decades of success, it had come to be considered hopelessly outdated. Putin has provided a reality check. The question of peace in Europe has returned, and it must be answered by a strong and united EU.

Joschka Fischer was German Foreign Minister and Vice Chancellor from 1998-2005, a term marked by Germany's strong support for NATO’s intervention in Kosovo in 1999, followed by its opposition to the war in Iraq. Fischer entered electoral politics after participating in the anti-establishment protests of the 1960’s and 1970’s, and played a key role in founding Germany's Green Party, which he led for almost two decades.