In the late 1980s, as many poor nations struggled to repay debts, creditors coordinated to reschedule and forgive debt. The French Ministry of the Economy, Finance, and Industry became an important center for negotiations, helping ensure that creditors shared similar losses. These meetings became known as the Paris Club. In 1996 the International Monetary Fund (IMF) and World Bank launched the Heavily Indebted Poor Country (HIPC) initiative. Instead of the previous case-by-case approach, this program provided systematic help to poor nations with writing down their debts. However, nations could only receive debt relief when they passed or made substantial progress towards meeting explicit criteria concerned with poverty alleviation and budget reform. The program received a huge boost under the Millennium Goals program. From 2006 onwards many HIPCs saw very large reductions in their debt. We will have to wait to see the consequences of these programs. However, it is useful to look back at some of the largest debt-relief efforts prior to 2000. It is particularly illustrative to observe how important the nature of governance is. Even though creditors carefully chose those nations that they thought would behave sensibly, in the wake of debt relief many nations started increasing debt again.
As a percentage of debt, the largest debt reliefs prior to 2000 were given to Ethiopia in 1999 (42 percent of debt), Yemen in 1997 (34 percent), Belarus in 1996 (33 percent), Angola in 1996 (33 percent), Nicaragua in 1996 (30 percent) and Mozambique in 1990 (27 percent). 17 With the exceptions of Angola and Nicaragua, each of these nations promptly started reaccumulating debt. For instance, after a series of small debt reductions, in 1999, with the forgiveness of $4.4 billion, Ethiopia had its debt reduced to $5.7 billion. But by 2003 this debt had risen to $6.9 billion. Despite the forgiveness of $589 million of debt in 1996, Belarus’s debt has steadily risen from $1.8 billion in 1995 to over $4.1 billion in 2005. Even though debt-reduction programs vet candidates, these examples suggest that in many cases for-giveness without institutional reform simply allows leaders to start borrowing again.
FIGURE 4.3 Mozambique’s Debt and Forgiveness
Democrats also like to borrow but they are not as profligate as autocrats. They prefer lower levels of indebtedness than autocrats. Democratization promotes successful debt reduction, as the history of Mozambique and Nicaragua illustrate. In 1990, 27 percent of Mozambique’s debt was forgiven. The result was the further accumulation of debt. By the time Mozambique democratized in 1994, debt was over $8 billion. However, this debt has gradually been reduced, as seen in Figure 4.3, aided in part by further forgiveness.
The HIPC program has received much criticism for its slow pace in reducing the debt of poor nations. Our criticism of HIPC is the opposite. These programs are actually too eager to forgive debt. Debt forgiveness simply allows autocratic leaders to start borrowing more money. As we’ll see a little later, financial crises are one of the important reasons leaders are compelled to democratize. Debt reduction, however, relieves financial pressure and enables autocrats to stay in office without reform, continuing to make the lives of their subjects miserable.
It is no wonder that autocrats love debt relief. But how does debt relief look to those who would like to improve governance and who want to start, as we do, from understanding how leaders behave rather than engaging in wishful thinking? We depart for the moment from looking at governance through a leader’s eyes and instead turn our attention to how to change an autocrat’s vision. That is, we turn for the moment to thinking about how we can use the logic of dictatorial rule to give autocrats the right incentives to change their government for the better. We wonder, can we create a desire by at least some autocrats to govern for the people as the best way to ensure their own political survival?
Debt reduction might work in democracies. Since such nations want to reduce excessive debt anyway, debt reduction clearly helps speed the process. But as can be seen in Figure 4.3, Mozambique was already tackling its debt problem prior to large scale forgiveness in 2001 and in 2006. Therefore, we advocate a conservative approach of little or no debt relief as a way to improve the quality of governance and the quality of life of people currently living under wretched, oppressive regimes. We know that debt relief allows autocrats to entrench themselves in office. Debt forgiveness with the promise of subsequent democratization never works. An autocrat might be sincere in his willingness to have meaningful elections in return for funds. Yet once the financial crisis is over and the leader can borrow to pay off the coalition, any promised election will be a sham. For democrats, debt relief, while helpful, is unnecessary. By eliminating debt relief for autocrats we can help precipitate the sorts of rebellions seen in the Middle East in 2011, rebellions that, as discussed later, may very well open the door to better governments in the future.
Taxation, resource extraction, and borrowing are the foremost ways of acquiring funds for enriching a coalition. Discussions that portray taxation differently are either window dressing to make the process seem more palatable or are making arguments based on how people would like the world to work. Leaders tax because they need to spend on their coalition. Successful leaders raise as much revenue as they can. The limits of taxation are: (1) the willingness of people to work as they are taxed; (2) what the coalition is willing to bear; and (3) the cost of collecting taxes.
Having filled government coffers, leaders spend resources in three ways. First they provide public goods. That is, policies that benefit all. Second, they deliver private rewards to their coalition members. This mix of private and public benefits differs across political systems, and it’s worth noting that any resources left over after paying off the coalition are discretionary. Leaders therefore have a third choice to make about spending money. They could spend discretionary money promoting their pet projects. Alternatively, and all too commonly, as we shall see, they can hide them in a rainy-day fund.
5
Getting and Spending
AT LAST, A NEW RULER HAS SHAKEN UP THE COALITION that first brought him to power and he has the right supporters in place. Money is coming in thanks to the taxes being levied. Now comes the real task of governing: allocating money to keep the coalition happy—but not too happy—and providing just enough to keep the interchangeables from rising up in revolt. As we have seen in North Africa and the Middle East in the past few years, and as we saw in Eastern Europe in the 1980s and 1990s, this can be an awkward tightrope to traverse for any leader. The last few decades encourage us by showing that in time many autocrats fall off that tightrope. It is really hard to strike just the right balance between benefits for one’s coalition and for the mass of interchangeables.
Any new incumbent who wants to be around for a long time needs to fine-tune the art of spending money. Of course, he can err on the side of generosity to the coalition or to the people—but only with any money that is left for his own discretionary use after taking care of the coalition’s needs. He had better not err on the side of shortchanging anyone who could mount a coup or a revolution. Shortchange the wrong people and any leader’s fate will confirm our abuse of William Wordsworth’s famous line: “Getting and spending, we lay waste our powers.”
Thus we turn to the essential question of all democracies: how to allocate resources aimed at providing policies of benefit to everyone in a society. These public goods come in a variety of different forms depending on the tastes of those in a position to demand such policies. Those in such a position, of course, are the incumbent’s essential backers. Different groups of essentials will have different baskets of public goods–oriented policies in mind. Some will want to spend more on a social welfare safety net; others on education; still others on benefits for the elderly or for the young; benefits to the arts and so forth. Although all of these are of interest and will be touched upon, however briefly, we are especially interested in core public benefits like education, health care, and such freedoms as a free press, free speech, and freedom of assembly.
Although security against foreign invasion certainly is a central pub
lic good, we leave consideration of foreign threats to a later chapter and focus here on domestic policy choices. For now, let’s have a look at how public goods can help society as a whole and how they help entrenched leaders.
Effective Policy Need Not Be Civic Minded
To balance between spending policies that benefit the masses and those that favor the essentials, leaders would do well to reflect on those parts of Thomas Hobbes’s philosophy of government, which we touched on briefly in the introduction. He had a lot right, but Hobbes’s ideas about government weren’t infallible. While he realized that anyone who enriched society would avoid a revolution such as the one he lived through in England, he failed to distinguish between what it takes to keep the people at bay and what it takes to keep essential backers from betraying their leader—whether that leader is Hobbes’s Leviathan, Plato’s Philosopher King, Rousseau’s General Will, or Madison’s factionridden representatives of the people. Hobbes was sure his Leviathan had to be a benign ruler. That, so Hobbes seems to have thought, was the way to prevent a revolution such as he experienced. Without a ruler who enriched his people, Hobbes feared that for many, life would be, in his well-coined phrase, solitary, nasty, poor, brutish, and short.
Hobbes was only half right. It is true, as Hobbes’s believed, that happy, well-cared-for people are unlikely to revolt. China’s prolonged economic growth seems to have verified that belief (at least for now). Keep them fat and happy and the masses are unlikely to rise up against you. It seems equally true, however, that sick, starving, ignorant people are also unlikely to revolt. All seems quiet among North Korea’s masses, who deify their Dear Leader as the sole source of whatever meager, life-sustaining resources they have. Who makes revolution? It is the great in-between; those who are neither immiserated nor coddled. The former are too weak and cowered to revolt. The latter are content and have no reason to revolt. Truly it is the great in-between who are a threat to the stability of a regime and its leaders. Therefore, a prudent leader balances resources between keeping the coalition content and the people just fit enough to produce the wealth needed to enrich the essentials and the incumbent. We should not be surprised that those countries whose governments rely on few essential backers—that is, those that are least democratic—are the very places where Hobbes’s state of nature is most likely to be an apt description of life for the masses. They are also, as we saw earlier, the places where leaders have the best prospect of staying in control for years and years.
Leaders who depend on a large coalition have to work hard to make sure that their citizens’ lives are not solitary, nasty, poor, brutish, and short. That doesn’t mean democratic rulers have to be civic minded, nor would they need to harbor warm and cuddly feelings for their citizens. All they need is to ensure that there are ample public benefits to provide a high quality of life. They just need to follow the rules by which successful leaders rule, adapting them to the difficult circumstances that any democrat faces: being stuck with dependence on an unruly crowd of essentials to keep them in power.
Just as democrats have no need of being civic visionaries, dictators likewise aren’t bound to make life miserable. It just happens, more often than not, to work out better for them to do so. There are exceptions, but those exceptions tend simply to reaffirm the importance of obeying the rules of politics. As we have noted, it is okay for a leader to spend her pot of discretionary money on trying to bring the good life to her citizenry. By definition, discretionary money is money that is not required to keep the coalition loyal; the coalition has already been paid off before any resources become discretionary. Singapore, for example, has managed through benevolent dictatorship to produce a high quality of material life for its citizens, albeit without many of the freedoms that others hold dear. Maybe Lee Kwan Yew, Singapore’s long-time benefactor, was the embodiment of Hobbes’s Leviathan. But benevolent dictators like Singapore’s are hard to find.
The most reliable means to a good life for ordinary people remains the presence of institutional incentives in the form of dependence on a big coalition that compels power-seeking politicians to govern for the people. Democracy, especially with little or no organized bloc voting, aligns incentives such that politicians can best serve their own self-interest, especially their interest in staying in office, by promoting the welfare of a large proportion of the people. That, we believe, is why most democracies are prosperous, stable, and secure places to live.
Perhaps you doubt that the path to a good life is ensured by the presence of a big coalition. You wouldn’t be alone. Many distinguished economists, even quite a few with the Nobel Prize under their belts, are convinced that the best way to promote democracy is by promoting prosperity. That is why whenever they see an economic crisis looming on the horizon, such as a government so indebted that it is on the verge of default and bankruptcy, they call for debt forgiveness, new loans, lots of foreign aid, and other economic fixes. They resist the cry of people like us who demand improved governance before any bailout money is offered up to rescue a troubled autocratic economy. They are convinced that wealth—and not politics—is the better route to escape Hobbes’s state of nature. Simply reviewing the history of economic bailouts that we began in the previous chapter makes clear that the very forgiveness without political change so eagerly embraced for third-world financial crises is rarely sought when the crisis arises in a society that relies on a large coalition.
Bailouts and Coalition Size
The politics of economic bailouts can be quite different in small and large coalition regimes. Bailouts come in many forms: shifts in domestic taxing and spending; loans, whether from banks at home or abroad; debt forgiveness; or foreign aid. Any bailout is accompanied by demands for economic reform, whether the money comes from the IMF, the German Central Bank, or the taxpayers. A big difference between large- and small-coalition bailout recipients is that the former almost always institute reforms and the latter only infrequently do.
Just like debt forgiveness, a bailout in the face of economic stress for autocrats is a way to solve an impending political crisis. When their economy becomes too feeble to provide sufficient money to buy political loyalty, autocrats face being overthrown either by a rival or a revolution. This, in a nutshell, is the story of the politico-economic crises faced by places like Tunisia and Egypt in 2011. A bailout, whether generated from within or through outside loans or aid, can buy off opposition and thwart the threat to the leader’s hold on power. Therefore, during an economic crisis autocrats shop around for bailout money from others to save themselves in the name of relieving their country’s financial woes.
For large coalition leaders bailouts are a curse, or at least a necessary evil. A poorly performing economy is likely to be understood by voters as a policy failure by the leadership, resulting in their being thrown out by the voters at the first opportunity. That was very much a part of the story of the defeat of the Republican Party in 2008 and, when the economy did not turn around fast enough to satisfy voters, the defeat of the Democrats in the House of Representatives in 2010. So the need for an economic bailout strongly signals the voters to find new leaders with new policy ideas. Foreign aid rarely comes to the rescue of democrats, for reasons we explain later. Therefore, financial crises and the need for a bailout are just about always bad news for democrats.
The rich countries of the world faced a severe economic crisis in 2008 and 2009. Both the Bush and Obama administrations sought to stem the worst of the crisis by providing massive financial bailouts to save the banking industries and other large businesses, restore liquidity in the market, and bring the US economy back onto a path toward sustained growth. Much the same was done in Europe. These bailouts were accompanied by regulatory change. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Obama in 2010, is a case in point. Faced with a severe recession, the Congress passed the largest regulatory reform since the presidency of Franklin Roosevelt.
In contrast, in small-coaliti
on regimes, bailouts all too often are the means to preserve business as usual. Economic bailouts in autocracies rarely precipitate a serious review of economic or business policies. They are almost never accompanied by regulatory reform. Consequently, economic crises happen more often than in democracies and, so long as rich nations feel an urge to provide loans, debt forgiveness, or aid, rarely result in betterment for the society although they do result in security for lousy leaders.
Is Democracy a Luxury?
Are dictators and economists right that economic solvency needs to come ahead of political change? Is becoming materially rich the precursor for the luxury of democracy? We think not. There are plenty of well-to-do places that nevertheless suffer under oppressive governments that keep ordinary peoples’ lives as solitary, nasty, poor, brutish, and short as their neighbors in poorer nations. Take a look at just about any nondemocratic oil-rich or diamond-studded regime.
Yes, the world has produced wise, well-intentioned leaders even among those who depend on few essentials, but it neither produces a lot of them nor does it ensure that they have good ideas about how to make life better for others. Indeed, a common refrain among small-coalition rulers is that the very freedoms, like free speech, free press, and especially freedom of assembly, that promote welfare-improving government policies are luxuries to be doled out only after prosperity is achieved and not before. This seems to be the self-serving claim of leaders who keep their people poor and oppressed. The People’s Republic of China is the poster boy for this view. When Deng Xiaoping introduced economic liberalization to China in the 1980s, experts in wealthy Western countries contended that now China’s economy would grow and the growth would lead to rapid democratization. Today, more than thirty years into sustained rapid growth we still await these anticipated political reforms. Growth does not guarantee political improvement but neither does it preclude it. The Republic of China (aka Taiwan) and the Republic of Korea (aka South Korea) are models of building prosperity ahead of democracy. Needless to say, the People’s Republic of China certainly is not fond of promoting either of those countries’ experiences.
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