There’s no such thing as too much democracy

The death this week of two very different political leaders – the Czech Republic’s Vaclav Havel, who helped demolish the Iron Curtain, and the North Korean Communist dictator Kim Jong-il – reminded me of the recent lecture delivered in New Delhi by Malaysia’s ex-Prime Minister Mahathir Mohamad. The lecture, followed by questions and answers at the HT Leadership Summit, is instructive – on how not to do things.

It’s worth hearing him, for there are many subtexts to his comments, which lie in the recent history of Malaysia. You can find the webcast of the lecture here.

Mahathir’s suggestion that India could have been a China but for democracy is along expected lines and should bring no reason to gloat in a country as wedded to political freedoms as India. The 86-year-old has never been a champion of democracy, his version of capitalism nearly bankrupted his dynamic country and he is known for his pretty dim view of the West.

In 1999 and 2000, he threw his formidable political opponent, finance minister and deputy prime minister Anwar Ibrahim in jail on charges of sodomy. It is important to realize that the move, which shocked every democratic nation, also had strong economic reasons behind it.

Ibrahim was Malaysia’s most successful finance minister and the country benefited rapidly from his policies. But the economy fell apart during the 1997 Asian financial crisis. At the HT summit Mahathir blamed currency speculators in particular and the Western financial sector in general. But he neatly sidestepped the view that it was his regime of crony capitalism that was chiefly responsible.

The link between crony capitalism and the Malaysian financial crisis has been carefully studied and quantified. In their widely quoted 2001 report, Cronyism and Capital Controls: The Evidence From Malaysia, academics Simon Johnson and Todd Milton say:

“The initial impact of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically favored firms. Of the estimated $60 billion loss in market value for politically connected firms from July 1997 to August 1998, roughly 9% can be attributed to the fall in the value of their connections. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir. Of the estimated $5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.”

You can find a pdf link to the paper here .

Back in 1997-98, Ibrahim was backing an IMF-supported austerity package, including cuts in ministers’ salaries, to pull Malaysia out from the brink. Mahathir, on the other hand, advocated capital controls and bailout packages for troubled businesses. The reasons for imposing capital accounts controls are exposed in the paper cited above.

Mahathir also told the HT summit that India needs a strong government at the centre. This too is a red herring – one that sits comfortably with ideas of “less democracy” – and misses the point entirely.

Since the end of the Cold War the consistent emphasis has been on good governance, a mixture of good democracy and good capitalism if you like. What instruments of regulation there are (how to promote and protect competition), how they are set up (by governments?), their nature (independent or not? how do you preserve independence?) and how they are enforced (light touch or heavy?) are among the hottest topics today in the aftermath of the financial crisis in the West and, now, the Eurozone crisis.

Of course, crony capitalism did not begin and end with Southeast Asia.

“Many European welfare states that did not learn from their sorry history of cronyism (Greece, Spain, and Portugal, for instance) are already facing potential bankruptcy,” writes James Roberts in a Heritage Foundation background paper on economic freedom, which you can read here.

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