OpEd: The Biggest Threat to Democracy No One is Talking About

11.21.2018 | Andrew Wilson

This Op-Ed originally appeared in The Diplomatic Courier.


A tide of corrosive capital has swept the world over the past decade. Public and private money from authoritarian states has been flowing into fragile democracies and emerging markets. Like water flowing through cracked concrete, many of the funding deals exploit and weaken governance fissures in accountability and transparency. Numerous recipient countries are now left with unsustainable debt and expanding corruption, making them even more susceptible to external geopolitical influence. We are just starting to understand the full scope of the corrosive capital tide and its impact.

Much like acidity levels, the harmful nature of corrosive capital in various countries may be assessed using a modified pH scale. Capital with lower acidity may be in the form of a private investment that takes advantage of petty corruption and weak labor standards. The most acidic and potentially damaging investments often involve funding related to key sectors of the economy, such as energy or media, that can be used to sway public opinion or political decision-making that is counter to the best interests of a nation. Russia is one of the most assertive donor nations offering funding and development assistance of this kind. Meanwhile, we see the corrosive effects of Chinese state lending mostly in the public sector and infrastructure programs of recipient nations.

Many examples are at hand. Macedonia is weathering another political crisis over the government’s attempts to change the official name of the country. A recent referendum on the issue failed to garner enough voter participation to pass. It is widely accepted that Russian-owned local media was key to influencing voters to stay home. Why? The proposed name change would help move Macedonia closer to European integration. Russia also uses its ownership stakes in European energy distribution as a not-so-subtle cudgel to influence pro-Russia energy policy in the region. Meanwhile, Chinese state lending and development practices are the most visible manifestation of corrosive capital’s impact on democratic institutions. Sri Lanka has learned this through the recent loss of the Hambantota Port to Chinese control. Pakistan, now caught in a different debt trap, is appealing to the IMF for a bail out.

As an organization that works at the nexus of democracy and markets, the Center for International Private Enterprise (CIPE) is extremely concerned about the effects of corrosive capital. CIPE’s global partners have identified how loans from China and their terms are often kept separate from state accounts and invisible from public scrutiny. Most are commercial loans, and unlike bilateral and multilateral loans from western sources, these loans are often collateralized with local assets. In effect, developing countries are being asked to collateralize the family silver for the international equivalent of a payday loan. The loan may be easy to get and the initial terms are agreeable, but woe unto those who fail to keep up with the payment schedule. These obligations are often taken and reported with scant regard for local laws, making a mockery of the rule of law. The lack of transparency accompanying these projects and loans leads many to speculate about the levels of corruption that they feed.

Certainly, local kleptocrats are taking a “business as usual” approach to their international financial dealings. However, if non-transparent “tied aid” is a prerequisite for finance, citizens lose the ability to see where the funds are flowing when a Chinese bank makes a payment to a Chinese state-owned firm building a local infrastructure project. We know that the costs of these projects often exceed global norms; we know they exploit Chinese labor imported for the task, and we know they often use Chinese materials in their construction. What we don’t know is the true cost of these inputs.

In effect, citizens in recipient countries may be paying for corrupt activities at home and in China, and when the financing comes due, they will be on the hook for these costs. Without local cost control and accountability, citizens are deprived of their right to have a voice regarding financial obligations made by the state on their behalf. What greater loss of citizen sovereignty is there?

While CIPE is not opposed to the right of capital to flow, nor would the organization suggest that there is not a role for Chinese lending in development. It would be naïve to think one could hold back the tsunami of funds flowing into emerging markets and fragile economies. Corrosive capital will have to follow the rules when they are applied, so we must focus our efforts on the quality of governing regulation in recipient countries and enhancing the ability of civil society and citizens to monitor investments, as well as access information to hold their governments accountable for commitments made on their behalf.

We must also recognize that ultimately our own financial markets and corporate competitiveness may be affected when global norms and accepted rules are ignored in emerging markets. There is growing evidence that western firms that play by the rules are losing out to capital from countries that do not. It is not a stretch of the imagination to suggest that we run the peril of entering into a vicious cycle where our existing ethical business norms suffer under the weight of unfair competition from corrosive capital. It is in the interest of those of us who believe in the reinforcing nature of “constructive capital” to shed greater light on the long-term pernicious impact of corrosive capital on the liberal democratic order. Simple solutions are at hand, such as accounting reform and expenditure transparency, and requires political will and business leadership to succeed.

About the author: Andrew Wilson is Executive Director of the Center for International Private Enterprise (CIPE). As one of the four core institutes of the National Endowment for Democracy, CIPE strengthens democracy around the globe through private enterprise and market-oriented reform. CIPE is an affiliate of the U.S. Chamber of Commerce.