Capitalism without democracy leads to instability – Soros

September 18, 2002
Singapore Democrats

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Billionaire-financier, George Soros, spoke on the need for democracy to take root in the world even as capitalism spreads through the process of globalisation. Does this carry a lesson for Singapore? The speech given at the State of the World Forum 2000 in New York on 5 September 2000 is reproduced below.

I realize that conferences such as this one are meant for general discussion, rather than to achieve any specific outcome. But today I should like to break this mold. I should like to find a way to mobilize civil society — not to destroy international institutions, but to strengthen them.

Right now, there are two potent forces aligned against international institutions: one is the NGOs which protested against the WTO in Seattle and the World Bank in Washington, and the other is the U.S. Congress which refuses to fund international organizations and seeks to rein them in. Congress has even failed to fund its share of the World Bank’s debt
forgiveness initiative for heavily-indebted poor countries.

The Seattle protestors and the Congressional majority are strange bedfellows. NGOs ought to be protesting against those members of Congress who are blocking debt relief, not against the World Bank which is proposing it.

This morning I should like to explore what went wrong. First, I want to explain why we need to strengthen our international institutions, and, second, why civil society needs to be actively engaged in the process.

We live in a global economy dominated by international financial markets. Given the decisive role that international capital plays in the fortunes of individual countries, including the United States, it is appropriate to talk of a global capitalist system.

But while we can speak about the triumph of capitalism in the world, we cannot yet speak about the triumph of democracy. Capitalism and political freedom do not necessarily go hand in hand. There is some correlation. Rising standards of living and the formation of a middle class tend to generate pressure for freedom and democracy; they also tend to support greater political stability. But the connection is far from automatic.

Repressive regimes do not relax their grip on power willingly and they are often aided and abetted by business interests, both foreign and domestic. Perhaps the greatest threat to freedom and democracy in the world today comes from the formation of unholy alliances between government and business. We can see this in many countries, such as Fujimori’s Peru, Mahathir’s Malaysia and Mugabe’s Zimbabwe. The unholy alliance is particularly prevalent in countries where natural resources, such as oil and diamonds , are at stake. It is particularly disturbing that the collapse of communism in the former Soviet Union has lead not to democracy and open society but to robber capitalism.

The fact is that capitalism is very successful in creating wealth, but it does not assure freedom, social justice and the rule of law. Business is motivated by profit; it is not designed to safeguard universal principles.

Most businessmen are upright citizens; but that does not change the fact that business is conducted for private gain and not for the public benefit. The primary responsibility of managements is to the owners of the business not to some nebulous entity called the public interest. If we care about universal values such as freedom and democracy, we cannot leave them to the care of market forces; we must establish some other institutions to safeguard them.

All this is almost too obvious to be stated, yet it needs to be said because there is a widely held view that the markets will take care of all our needs. It used to be called laissez-faire in the nineteenth century but I have found a better name for it: market fundamentalism. Market fundamentalists hold that the public interest is best served when people are allowed to pursue their own interests. This is an appealing idea but it is only half true. Markets are eminently suitable for the pursuit of private interests, but they are not designed to take care of the common interest.

Maintaining stable and competitive markets is itself is one such common interest. Market participants compete not to preserve competition but to win; if they could, they would eliminate competition.

The protection of the common interest used to be the task of the nation state. But the powers of the state have shrunk as global capital markets have expanded. When capital is free to move around it will avoid any state that seeks to impose taxes and regulations. Since capital is essential to the creation of wealth, governments must cater to its demands, often to the detriment of social goals. This holds true for all governments, even the United States.

Global capitalism has much to recommend it. Private enterprise is better at wealth creation than the state and free competition on a global scale has led to an acceleration in productivity. Moreover, states often abuse their power; globalization offers a degree of individual freedom that no state could provide.

But there is a downside. Global financial markets are inherently unstable; free competition creates and reinforces inequalities both on the national and the international level; and collective interests ranging from the preservation of peace to the protection of human rights and the environment receive short shrift. People who live under repressive regimes do need outside assistance; often it is their only lifeline; yet it is not in the interest of any one country to provide it. The United States has been more concerned about human rights than most other countries; but it cannot and should not act as the policeman of the world.

It would be wrong to entrust the protection of universal principles to any single state. Whenever there is a conflict between the common interest and self-interest, self-interest is bound to prevail. This point was well-understood by our founding fathers when they devised the checks and balances of the Constitution of the United States. So the best way to safeguard universal principles is to strengthen international institutions and establish the international rule of law. That is the first point I wanted to make.

The trouble is that most international institutions don’t work well. This is because they are associations of states and, as Cardinal Richelieu said, states have only interests, and no principles. This finds expression in their behavior within international organizations. Whatever the faults of a state bureaucracy, they are multiplied in an international bureaucracy. The United Nations is ill-suited to safeguard universal principles because it is subject to the whims of its members. This can be seen in the record of the UN in protecting human rights from Bosnia to Rwanda and Sierra Leone.

There is a serious mismatch between current political and economic conditions. We have a global economy but our political arrangements are still firmly grounded in the sovereignty of the state. How can the needs of a global society be reconciled with the sovereignty of states? That is the crucial problem that faces us today.

I believe it can be solved only with the help of civil society. It may be true that states have no principles but democratic states are responsive to the wishes of their citizens. If the citizens have principles, they can impose them on their governments. That is why we need the active engagement of civil society in support of international law. That is the second point I wanted to make.

From the point of view of international law, the World Trade Organization is perhaps the most advanced of our international institutions because it has binding judicial power. The NGOs that protested in Seattle did have a valid point about the WTO: its rules pay no attention whatsoever to important issues like the protection of the environment or labor standards. But the solution to this problem is not to destroy the WTO but to establish similarly binding rules regarding these issues.

I recognize that this will be a difficult process. Labor and environmental rules cannot be establish by fiat because they would be resisted by the less developed countries. Many of them feel that such rules would merely serve as a vehicle for rich-country protectionism.

The WTO was established by a protracted process of haggling. A similar process is needed to establish environmental standards. On labor issues, the ILO has already begun to develop such rules. But in contrast to the WTO, the ILO is a purely consultative body.

The protestors in Seattle came mainly from rich countries. Instead of seeking to disrupt and destroy the WTO, they ought to be agitating for the wealthy countries to provide positive economic incentives which would enable the poor countries to comply with environmental and labor standards.

For instance, the most effective way to eliminate child labor would be to provide financial assistance to support universal education in the developing world. The governments of poor countries could increase their own spending on education if they had debt relief from the World Bank and other international financial institutions. I hope you all agree that there should be such debt relief, without any further delays.

As you probably know, Congress has blocked debt relief by refusing to pay its share to the Inter-American Development Bank and the World Bank. Not a good example of compassionate conservatism. Here is an issue around which civil society could be mobilized, but most people are not even aware of it.

The global capitalist system has produced a very uneven playing field. The gap between rich and poor is getting wider. But the U.S. Congress is dead-set against creating a more even playing field. Since the Asian financial crisis, the emphasis has been on eliminating the so-called “moral hazard” associated with the IMF rescue packages. But any lender of
last resort activity creates a moral hazard. So using the moral hazard argument is merely a code word for leaving financial markets to their own devices. Since financial markets are inherently unstable, giving financial markets free reign means imposing instability. And how much instability can societies tolerate?

The Meltzer Commission, established at the request of Congress, recommends reducing the scope and power of the IMF. Undoubtedly, that would reduce the danger of excessive lending to emerging markets, but in my opinion the next crisis is likely to come from the opposite direction: from inadequate capital flows to less developed countries.

The Meltzer Commission also recommends that the World Bank be converted from a lending agency to a grant-giving agency aimed at the poorest countries of the world. That may sound good but the way that the Meltzer Commission would go about it is by downsizing the World Bank and returning the unused capital to the shareholders in what would be an unprecedented resource-transfer in the wrong direction. It would rob the poor to help the rich; a kind of Robin Hood in reverse.

I would advocate a different set of reforms for the World Bank.

First, the World Bank should be allowed to deal directly with businesses, local governments and NGOs. At present, all loans have to be guaranteed by the governments of the recipient countries, and that is a recipe for corruption and abuse of political power.

Second, the Bank should be insulated from political pressure from the governments of the rich countries, which often press for projects that benefit their export industries more than they do the people in developing countries.

And third, there should be term-limits for World Bank staff. At present the Bank is staffed by highly qualified people, mainly from Third World countries, whose primary goal is not to have to go home.

But these are not the sorts of reforms that are contemplated. Congress is dominated by an anti-regulatory, market-fundamentalist majority. And the protests in Seattle and Washington have played right into their hand.

There will be another World Bank meeting at the end of September in Prague and it is almost inevitable that there will be some rioting because television is a hot medium and it invites violence.

But there has to be a way to mobilize civil society in favor of international law and international institutions. I am convinced it is the most important task that confronts us today.

John Sweeney and Lori Wallach and many others of you know far more than me about organizing civil society. That is why I was so pleased to be able to address you this morning. I hope you will give this problem some thought and discuss it in the course of this week, and out of these discussions a new direction will emerge.

Thank you.