Why did democracy happen in Brazil but not in Saudi Arabia?

Research paper plans:

My topic is the effects of economic globalization on democratization. Why did economic globalization lead to democratization in (country X) but not Saudi Arabia? I am still in the process of digging through the information out there to pick a country where globalization did lead to democratization – Brazil is currently the frontrunner, though. If necessary/if more analysis is needed, I will use China as a middle-ground example – they have opened economically and now we are starting to see calls for democratization.

Preliminary hypotheses include:

• globalization promotes economic growth. This, in turn, strengthens and enlarges the middle class, promotes education and reduces income inequality, all of which promote democracy.
• globalization increases the demand of international business for democracy. Since democracies rarely fight each other, commercial interests pursue democratization as a means of peace and stability. Authoritarian countries that open their economies face increased pressure from international business to democratize. *unless that authoritarian regime is backed by oil money.
• globalization reduces the incentives of authoritarian leaders to cling to power.
• globalization reduces information costs, increasing contacts with other democracies and making the pro-democracy INGOs more effective.
• globalization pushes the authoritarian regimes to decentralize.
• globalization promotes domestic institutions that support democracy.
• globalization intensifies the diffusion of democratic ideas.

Important to note the hypotheses that globalization obstructs democracy as well:

• globalization reduces state policy autonomy, and policies are instituted to please foreign investors instead of the common people.
• globalization produces more domestic losers than winners, at least in the short run, simultaneously diminishing the state’s ability to compensate the losers financially.
• globalization enables the fast movement of money between countries, leading to increased balance of payment crises and unstable domestic economic conditions.
• globalization deepens ethnic and class divisions and diminishes the national-cultural basis of democracy (i.e. we’re all equal because we’re all American).
• globalization enables the state and MNCs to control the information that reaches the public domain.
• globalization degrades the concept of citizenship, a fundamental aspect of a stable and healthy democracy.

**these hypotheses were formulated by numerous authors’ research, and were condensed into two tables in this article from JSTOR: http://www.jstor.org/stable/4092267?

I will use these hypotheses to analyze the democratization process in the case studies I choose.

Saudi Arabia – freedomhouse.org

-State built on relationship between religious elites and Al Saud ruling family – no new players in 200 years.

• weak traditions of constitutional government
• formally unconstrained by organized interests, they still care about reputation and the inclusion of their population in patronage systems.
• political consultation only granted to select few, not involving the masses – the masses are not generally concerned or involved in policymaking, but are only threatened with repression as a last resort, so they can speak out for democratic changes
• cries for democracy have not been widespread or taken seriously because of the nature of the regime, especially funding
• the state is mainly financed through international oil rents, and there is no domestic taxation, so citizens have very little bargaining power
• the state has saved/accumulated the equivalent of three complete national budgets, so there is no immediate fear of a fiscal crisis that might lead to calls for change/democratization
• politics based on patronage, both through subsidized public services and broad state employment, and informally through princely networks of privilege in business and in government
• major institutions under royal control such as the Ministries of Defense and Interior and the National Guard are given healthy shares of the national budget which is used for procurement, building housing compounds, operating special hospitals and educational institutions, and large-scale employment

Additional sources:
http://www.jstor.org/stable/25124006?

http://www.jstor.org/stable/10.2307/4177500?

https://freedomhouse.org/report/countries-crossroads/2012/saudi-arabia#.VIj50mTF92c

https://freedomhouse.org/report/countries-crossroads/2012/brazil#.VIj3kmTF92c

http://www.globalization101.org/what-saudi-arabia-thinks-about-globalization-3/

http://www.globalization101.org/what-brazil-thinks-about-globalization-2/

http://www.jstor.org/stable/10.2307/40209083?

http://www.jstor.org/stable/10.2307/422444?

EU position paper

Representing the European Union, informed by the European Commission, I come to defend all EU member nations on the basis of free trade, economic liberalization, and competition. We firmly support the Whirled Trade Organization’s commitment to promote free movement, encourage world trade, defend the agriculture and automobile industries, and protect international finance through free market mechanisms. The EU, being the world’s major player in global trade, stands behind the Whirled Trade Organization in its multilateral efforts to encourage economic exchange across borders.

Our active involvement with the WTO allows more EU products to reach new markets at competitive prices, boosting economic growth and creating jobs. In this regard, the WTO has our full support for resolutions I, II, and III. We may be able to reach an agreement of resolution IV, on the basis that my colleagues here may accept a few proposals. First, the European Commission allocates around 50 million euros annually in support of promotional campaigns highlighting the quality, nutritional value, and safety of our farm products. We will not promote the restriction of GMOs or any other processes that are not demonstrated to be unsafe for human consumption, and this is not a direct subsidy for the agricultural industry – we only cover roughly half the cost of these campaigns. Second, our “Food Distribution programme for the Most Deprived Persons of the Community” was established in 1987. In 2010, over 18 million people benefitted from this program. We would ask that this program not be terminated on the basis of resolution IV, so that we may continue to provide for those who need our assistance. Third, we ask that, due to the confusing and conflicting nature of this resolution for the existing policies in both the EU and, if I’m not mistaken, several other representatives here today, the agricultural industry may be removed from resolution IV altogether. Not only will restricting agricultural subsidies cause confusion on the basis of what constitutes an agricultural subsidy, but also it will subject farmers to the extreme volatility of the industry and discourage them from practicing sustainable farming techniques for which they are rewarded with subsidies. Farmers are incapable of responding to market conditions with decisiveness. Market lags are only exaggerated in agriculture due to the nature of the industry – farmers have to lay down their crops months and months in advance of knowing the conditions of the market in which their products will be sold. We have stated and will continue to state that we are fully committed to free trade and competition, but it is in our best interest to continue with the agricultural policies we have in place to protect our farmers and our agricultural industry more broadly.

The European Commission has been committed to promoting competition and liberalization within the EU and in international trade. Opening markets up, especially to international competition, has provided our citizens with new and improved choices and products. We have seen lower prices and increased efficiency as a result of market liberalization, and have thus become more competitive in the global market. We will join the WTO in continuing to support this type of action.

We will also continue to support the free and open flow of capital, as noted in WTO resolution V. Free capital movement promotes competition, integration, openness, and efficiency in financial markets. This opens up more options financially for both citizens and companies and gives them a wider range of freedoms. The result, at least in theory, is the optimal allocation of resources. Citizens will be able to conduct financial operations abroad that may be more beneficial to them than those conducted at home. Companies will be able to finance operations where money is cheapest, and in turn create growth and increase job opportunities for our citizens. Governments, too, will be able to find money where it is cheapest, lowering borrowing rates and increasing their capacity for public spending. Finally, the open flow of capital, and the opening up of markets more generally, will provide countries with direct investment benefits in the form of industrial knowledge, strategic cooperation, and innovation resulting from competition.

On behalf of all European Union member nations and the European Commission, we thank you.

note: The European Commission, the EU’s executive body, represents the interests of the EU as a whole, without concern for the interests of individual states. Their policy stances can be found on their website:
http://ec.europa.eu/policies/index_en.htm

This post is meant to help me get some thoughts together and reflect on some topics we’ve covered this year as I try to come up with one final question for my final research. Some things that are catching my attention:
1. We talked about the way in which politics tend to follow economics. As economies become more liberal or opened, politics follow suit. As an example, we talked about the Chinese middle class. As it continues to grow, those people are likely to demand more liberal or open policies of their government. Have we seen this? Aren’t we seeing it in Hong Kong right now? But, is this always the case? We said OPEC countries are an exception to this rule. They are not building a stronger middle class, at least in some part due to the fact that the people there don’t really have ties to the government. The government gives them their share and they both leave each other alone. Is this the only exception? What factors might affect the rate at which the economy liberalizes and what factors might affect the time it takes for the people to start making their demands?

2. Are US jobs REALLY at risk of being outsourced? How much of a risk is there? Are most US workers in “non-tradeable fields” as Freeman suggested?

3. What are the advantages of a market-led economy? What about a state-led economy? (not talking Mao’s China here)…market-led economies are better at price control, and they promote innovation and allocative efficiency. These factors help to maximize output and therefore consumer well-being. But state-led economies better correct inefficiencies, internalize potential externalities, possess developed infrastructure, and work under rule of law. However, Wolf told us that state-led economies can’t plan, can’t implement, can’t get people’s preferences, can’t get prices right, can’t adjust to new technology, can’t control foreigners, and war? whatever…

4. What about the history of one country pegging its’ currency to that of another state? What types of outcomes have we seen in these types of situations? Is it always bad, always good, or sometimes a little of each? What exactly are the outcomes of this kind of policy? Think Argentina – investor confidence; think East Asia – export-led growth. But what about other cases?

5. One last thing that interested me is something that I asked about in class once, and though I thought I got it then, I’m still not sure I really do. When does decreasing inflation become deflation? What does that process tend to look like? Is there a pattern, or perhaps some red flags that could have been caught? Should we really not fear inflation, as Krugman suggests, but be afraid instead of deflation?

“Can Foreign Aid Buy Growth?”

The academic study that Easterly references on the first page concluded: “We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies.”

This seems to me the most obvious statement that can possibly be made on growth and foreign aid. Good things happen if you’ve got good policies, but not if you’ve got bad policies.

What’s even worse is that policymakers took that conclusion and readily put it into application in their policies without studying or knowing how the story tends to play out. What defines “good fiscal, monetary, and trade policies”? What if a country has good fiscal and monetary policies, but they have super restrictive trade policies? Can aid to a country be beneficial if they are moving towards good policies, but have not yet reached the point where they can be considered good policies?

This all reminds me of “The End of the Euro” by Johan van Overtveldt and the Maastricht criteria for entrance to the eurozone. In a lot of ways, admittance to the eurozone could be considered a type of foreign aid. It improves economic stability, can foster growth, strengthen confidence in the central bank, encourage investment and innovation, etc. But, as we saw with Greece and several others, countries that didn’t meet all the criteria but were seen as moving in the right direction policywise ended up worse off than anyone could have predicted.

Having thought a bit more on it, I’d like to comment on van Overtveldt’s predictions for the future of the eurozone and the monetary union. Obviously I have hindsight to go off of, whereas he was just using his best judgment to make an informed guess. Either way, his predictions were quite severe and went against all sentiments of the top European policymakers at the time. The quote from Angela Merkel in my last post reflects those sentiments. On the contrary, van Overtveldt’s prediction was that Greece, Portugal, and Ireland would soon have only one option: to leave the monetary union. He points to France, Belgium, Italy, and Spain as the next to drop. Upon the exit of these seven, he predicts that Germany will return to the D-mark, effectively destroying EMU all together.

He predicts all of this, yet earlier in “The End of the Euro” he criticizes the skeptics in the world of finance and banking for always trying to predict who would fail first during the crisis, then predicting who would be next, and so on…
He argued that this type of skepticism only fueled market skepticism and deepened the crisis, yet he goes and does the same thing.

“The End of the Euro” by Johan van Overtveldt.

Overtveldt’s writing in this book is authoritative to say the least. His knowledge of the European Monetary Union (EMU) is extensive and exhausting. What’s even more impressive is his assessment of the problems facing the EU and the eurozone. In his closing, he speculates as to the possibilities for the future of the EU and eurozone (the book was finalized on August 30, 2011, so the crisis was certainly not over).

Just inside the cover, before the pages are even numbered, van Overtveldt inserted a page of quotes from various figures involved in the development of the EMU and the eurozone. One from Angela Merkel, German chancellor, strikes me more than others: “The currency union is our common destiny. It is a question, no more or less, of the preservation of the European idea. That is our historical task: for if the euro fails, then Europe fails.” Having not read the book, you might not quite understand why this quote draws me in over the others that are from such prominent figures in the euro crisis. Since I read the book, I’ll tell you why I’m now drawn back to this one. In a sense, it embodies all of what van Overtveldt tells us throughout his entire book. It comes from Angela Merkel, the German chancellor. Germany played perhaps the largest role in the formation of the EMU and the construction of the eurozone. As Helmut Schmidt said in 1993: “Without a common currency, the D-mark would over time play the leading role and the German banks and insurance companies would accomplish market-dominating position well beyond our borders, producing irritation and envy among others – and with malign political consequences for us Germans” (van Overtveldt 175). The reasoning behind this goes all the way back to the economic consequences Germany faced in the 1920’s as a result of their WWI reparations. Poor management and excessive risk taking in the Central bank led to a major decline in the popularity of democracy and the German government. Many people, Germans included, attribute this as a factor assisting Adolf Hitler’s rise to power. Following WWII, Germany could not be seen as powerful by the other European powers, and they wanted it to stay that way for the foreseeable future. Furthermore, there was the split between East and West Germany. After unification, the German D-mark was arguably the most dependable and strong currency in Europe. When EMU was initiated, it was the prevailing sentiment that France came up with the ideas, and Germany paid for them. As the eurozone fell deeper and deeper into crisis and sovereign default became a real possibility, Germans grew tired of funding other nations that were irresponsible and incompetent.

But, many of the problems that led to the financial crises in the eurozone were a result of German and French head-knocking in the international political arena. Whatever Merkel suggested at a European summit, Sarkozy countered. It was almost always the case that there was a “German” camp vs. a “French” camp. Similarly, as the Germans were often the most influential in determining policy for the eurozone due to their perceived strength and austerity, they also contributed to the deepening crisis by acting on a double standard. As van Overtveldt writes, “On the one hand, Germany pushed the troubled eurozone countries to clean financial and budgetary house on Germany’s terms. On the other hand, Germany opposed the tough rules most others wanted to use when performing the stress tests on the European banks” (171). Troubled eurozone countries struggled to live up to Germany’s austerity standards because they had lost the policy option of currency devaluation as a consequence of EMU. This meant they had to take other policy measures to restrict their spending – measures that would always prove unpopular in a democracy, and therefore complicate the act of getting elected for any politician. Furthermore, the stress tests used to determine the strength of the eurozone Central banks were weak and vague. They cast doubts on the results, and thus on the market. Germany fought against stricter stress tests in order to conceal the fact that their central banking system was not as austere as they would have liked others to think. The Bundesbank had many underlying weaknesses that German politicians preferred to keep off the public radar.

One of the primary goals of EMU was peace on the continent. Europe had been shattered by two world wars and the Cold War within the span of less than a century. During the Cold War, members of the eurozone were able to unite against their nondemocratic enemy, increasing cohesion before EMU. Peace and economic benefits were certainly real consequences of monetary union in the eurozone. But the consequences were also quite real. Many of these consequences or costs can be attributed to the fact that the eurozone does not meet the criteria for an optimum currency area (OCA). Part of this is that monetary union exists, but political union is not even close. This resulted in a crisis that spiraled out of control, aided by “serial incompetence” on the part of eurozone policymakers. They threw money at the problem, which only kicked the can down the road. They constantly denied the seriousness of the crisis, and some policymakers (in Greece, for example) even blatantly lied about the state of their economies. They tried to cure the symptoms of the crisis rather than the disease.

“L’Europe se fera par la monnaie, ou ne se fera pas.” Translation: “Europe shall be made through the currency or it shall not be made at all.”
-Jacques Rueff, French economist and longtime advisor to French President Charles de Gaulle, 1950

Something to think about.

“The Dangers of Deflation” article from the Economist draws many connections to the book by Johan van Overtveldt titled “The End of the Euro”. It seems that, at least from what I’ve read so far, the future of the euro and the European Union relies heavily on Germany. There is a big “core-periphery” relationship that seems to benefit Germany too much and hinder the fiscal and monetary policies of the periphery countries. This relationship seems to be making it more difficult for policy makers in governments and central banks to make the correct policy decisions. According to van Overtveldt, many of the policy miscues can be attributed to the fact that the EU is a monetary union but not a political union. In fact, as they have unified monetarily, they have moved in opposite directions politically. A great quote from van Overtveldt to wrap up the position the EU is in as a result of the core-periphery relationship dominated by Germnay is this one: “Unless the management of the euro is brought more in line with Germany’s culture of stability, Germans will pull the plug and bring about the end of the euro as we know it today.”

Critics of Wolf, watch out. If you are a critic of Martin Wolf’s argument for Globalization, you better not be sensitive. In Chapter 11 of “Why Globalization Works”, he absolutely rips apart every inch of the argument against globalization. In his eyes, if you are one of those critics, you are either stupid, dumb, ignorant, or you must be purposely reporting false realities. You can’t read and understand data, you don’t know the difference between net sales and GDP, you can’t see the obvious. Corporations are not more powerful than countries. In fact, they are much weaker. Their fate lies in the hands of the free consumers. Brands are the ultimate sign of this weakness, for if your brand is associated with negative publicity, regardless of whether the allegations are true or if they even matter, your brand is tarnished. Corporations’ success lies in consumers’ choices. Next, foreign direct investment does not exploit poor countries and their poor workers. Foreign direct investment goes to countries with strong and stable infrastructure – places where investors believe their investments are safe. That could mean investing in Sweden, Botswana, the Czech Republic, or Malaysia. His major exception to this conclusion involves poor countries with a wealth of natural resources. He says investments will always flow to these countries, but often times we find that political instability or corruption causes these investments to harm the country instead of help it.

It seems to me that a common theme has begun to emerge among those who believe globalization works. All the critics are wrong in blaming globalization for the world’s problems. It is politics that has led to the harmful effects of globalization. If only the world had smart leaders, we would have a truly positive sum game. I’m not sure if I buy into this yet, but we will see. Politics is not physics. It is not a science with absolute truths and explanations. Every theory can be proven by one person and disproven by another. As much as Wolf doesn’t want anyone to disprove his theories on globalization, I’m not convinced that his argument is always true. I have a feeling that some of his critics will be better at understanding data and knowing the difference between net sales and GDP. But they better watch themselves. Any slip up made while trying to discredit Wolf’s arguments will not go unnoticed.