Free Markets Require Supervision
As Carlos Elbirt, head of the World Bank’s office in Albania, was being evacuated a few weeks ago, an Albanian mob set upon his group of evacuees as they drove to the harbor. What Albert remembered most, he told me, was the thief who showed up, took out a “big, big gun,” demanded the car of one of the evacuees and then sped away.
Ten minutes later, the thief returned and pointed the same gun at the same man, only this time demanded his license and car registration. The thief apparently had an inkling that if real law and order ever came to Albania, he might need the license.
Albania is a tragic, but illuminating, example of the new divide in world politics today: With the collapse of communism, virtually every country now has the same “hardware.” That is, they have all adopted free-market capitalism to one degree or another.
But where they differ is in the “software” - the institutions of governance, be they regulatory bodies, a watchdog press or uncorrupted courts, civil service, parliaments and police. After the Cold War, Albania adopted all the right hardware but it had none of the software.
That’s why it was logical that Albania’s first post-communist, free-market government was brought down by Ponzi schemes. New to capitalism, Albanians were suckered into giving money to funds promising interest rates of 50 percent a month.
The Albanian government, both because it didn’t know better and because many officials were caught up in the Ponzi fever, refused to close these funds before they inevitably collapsed, prompting Albanians to ransack their own country to get their money back. Ponzi schemes are just capitalism without the software. Or, as one senior U.S. official put it to me: “People in Albania are dying today because of a lack of proper banking regulations.”
This is the future. Now that everyone has the same hardware, those countries that get the software right will become “free-market democracies,” run by democratic elites. Those that don’t get the software right will become “free-market kleptocracies,” run directly or indirectly by mafia elites.
Albania today is an extreme free-market kleptocracy. Mexico, Russia, India, Colombia, Brazil and China all have the hardware right but are still short on the software, and given their endemic corruption, it’s not clear whether they will become free-market democracies or free-market kleptocracies.
In other words, they’ve got the roads but will they get the traffic lights? Can they get what Deputy U.S. Treasury Secretary Lawrence Summers calls “the intangible infrastructure” - the rule of law that gives democratic capitalism its content and makes it fair and efficient.
“After the Cold War, the assumption was that countries which adopted the hardware of democratic capitalism would inevitably develop the software. But adopting the hardware is the easy part because there’s no credible alternative model in the world today,” notes Jeffrey Garten, dean of Yale’s School of Management and author of a smart new book on this subject, “The Big Ten: The Big Emerging Markets and How They Will Change Our Lives.” “It’s getting the software that’s the hard part, and whether they get it or not could become one of the biggest foreign policy issues facing America.”
Indeed, if key countries that adopted the hardware of democratic capitalism don’t get the software, it will have a huge impact on world financial markets, on world trade and on the internal stability of some of the world’s most populous nations.
Think about it. What’s our biggest worry about Hong Kong returning to China? It’s not that Hong Kong will become communist - China isn’t communist anymore - but that it will become a free-market kleptocracy, which is where China is headed. What is our worry about Mexico? That its army, bureaucracy and courts are so corrupt they’ll be impossible to reform.
Unfortunately, the Clinton team has yet to develop any coherent plan for dealing with this issue. I’m currently visiting NATO headquarters. I can’t help but think that future historians will laugh loud and long at the folly of the Clinton administration’s spending $40 billion to expand NATO after the Cold War.
Hey, guys, the struggle between communists and democrats is over. We won. Everyone’s got our hardware. It’s the struggle between kleptocrats and democrats that counts now, and for that the United States is wholly unprepared.
xxxx