Introduction & Summary

There is an alarming trend occurring worldwide that threatens democracy and free market principles. A growing volume of evidence indicates that many forms of capital emanating from authoritarian nations are having a corrosive effect on democratic institutions and private enterprise in recipient countries. The largest impact is seen in emerging markets and fragile economies.

China and Russia are among the most assertive donor nations offering funding and development assistance that appear to, not only exploit governance gaps in countries with weak or corrupt structures, but also make the gaps wider. In many cases, citizens in the recipient countries have no voice in the lending and spending deals, huge agreements are not well-documented, and countries have lost ownership of key resources to the donors. In short, few benefit and there is little oversight. It is also important to analyze patterns associated with foreign investment in developing democracies. China’s overseas investments and funding pledges have increased by more than eleven thousand percent since 2001. Foreign investments by Russia appear to be on a much smaller scale and often are not well-tracked, but seem highly strategic and typically leverage propaganda to amplify results.

The Center for International Enterprise (CIPE) uses the term “corrosive capital” to more clearly label financing that lacks transparency, accountability, and market orientation flowing from authoritarian regimes into new and transitioning democracies. This report by CIPE outlines top areas of concern to our experts on the ground and global partners, and is supported by new proof and examples that show how “corrosive capital” is making fragile states more vulnerable to economic or political manipulation, and thus endangering democracy. The report also lays out potential actions to help mitigate the damage to foundations of democracy.

CIPE chose the term “corrosive capital” carefully, as the wording clearly reflects the wide-ranging effects opaque capital can have on developing democracies. These effects range from the relatively benign consequences associated with “high risk” capital (that may tolerate a degree of corruption) to highly corrosive government-directed investment and finance, which advances authoritarian foreign policy goals at the expense of local institutions and western geo-political interests. The term “corrosive capital,” therefore, recognizes that as with chemical acidity, authoritarian capital can have its own “pH” level when it comes to its effect on democratic institutions.

CIPE’s approach to combatting the effects of corrosive capital centers around identifying specific governance gaps in countries where democracy is at risk, then working with local partners to design and implement local projects to help close the gaps, as well as foster dialogue among civil society, the private sector, and lawmakers. Frequent examples of governance gaps include: uneven enforcement of local labor and environmental regulations, unreliable rule of law, insufficient checks and balances over government decision-making and expenditures, and ineffectual or inactive civil society.

In the 2017 report Sharp Power: Rising Authoritarian Influence, the National Endowment for Democracy (NED) identified the subtle effect of the strategic use of soft power tools by authoritarian states on democratic institutions worldwide.  Corrosive capital, in its higher states of “acidity,” has become an effective instrument to complement these efforts. Consequently, there is a pressing need in weak democracies for local projects that reduce the disruptive effects of corrosive capital. The goal of CIPE’s projects, and others, is not to stem the flow of funds, but rather to create institutional safeguards in the recipient countries that make the continued receipt of potentially corrosive capital less disruptive to democratic governance and rule of law.

Proven policy responses to the threat posed by corrosive capital do exist and can be implemented at the local level. They include improved standards of informed consent by governments taking on foreign debt, greater transparency and fairness in public procurement, improved disclosure of sovereign debt, and higher standards for budget transparency. Policy advocacy by civil society, including the business community and other stakeholders, is an effective strategy for pushing governments to implement reforms that improve accountability and transparency, while creating a fair playing field for all businesses. By empowering these domestic reform constituencies to demand better governance, democracy programming can harness the positive effects of all capital, regardless of origin, and strengthen democratic institutions that safeguard the interests of citizens.

CIPE’s approach to combating the effects of corrosive capital centers around identifying specific governance gaps in countries where democracy is at risk, then working with local partners to design and implement local projects to design and implement local projects to help close the gaps, as well as foster dialogue among civil society, the private sector, and lawmakers.

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