WASHINGTON, DC — In a report released today by the Center for International Private Enterprise (CIPE), mounting evidence of foreign investments – especially from China and Russia — exploit fragile and emerging democratic states by taking advantage of weak institutions and poor governance structures.
The report describes the corrosive effect that state-driven and private capital from authoritarian nations have on democratic institutions and private enterprise, and recommends actions countries can take to reduce risk. CIPE coined the term “corrosive capital” to describe this financing, which lacks transparency, accountability, and market orientation.
The comprehensive report, written by a team of CIPE experts and titled “Channeling the Tide: Protecting Democracies Amid A Flood of Corrosive Capital,” was released Thursday on Capitol Hill in an event featuring CIPE Executive Director Andrew Wilson and Sen. Cory Gardner (R-Colo.), Chairman of the Senate Foreign Relations Subcommittee on East Asia, The Pacific, and International Cybersecurity Policy.
“By empowering these domestic reform constituencies to demand better governance,” Wilson said, “democracy programming can harness the positive effects of all capital, regardless of origin, and strengthen democratic institutions that safeguard the interests of citizens.”
This CIPE paper sheds light on ways that authoritarian countries exploit fragile economies’ dependence on foreign assistance in the form of capital, including foreign direct investment, economic development, and commercial loans. The flow of corrosive capital into emerging markets, and the resultant degradation of transparency and rule of law, puts companies that are held to higher compliance standards at a disadvantage.
Only by making significant policy reforms can countries protect themselves and their citizens from the harmful effects of corrosive capital. Emerging democracies need local projects that address local governance gaps so that the continued receipt of Chinese and Russian capital becomes less disruptive to weak democracies.
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.