Promoting Human Rights through Economic Development

http://www.freedomhouse.org/blog/promoting-human-rights-through-economic-development

by Kim G. Davis

Member, Freedom House Board of Trustees

The start of President Obama’s second term is an excellent time to reinvigorate and reimagine America’s foreign policy agenda in the area of human rights and economic development. We need a new approach, and we need to do a better job of explaining to the American people the critical importance of an activist and engaged foreign policy.

Last month, Freedom House released its annual survey of freedom around the world. Of 195 countries included in the analysis, 90 were listed as Free, 58 Partly Free, and 47 Not Free. No matter what other priorities or challenges characterize Secretary of State John Kerry’s tenure, he should make clear—early, often, and loudly—that increasing the number of Free and Partly Free countries in the world is a key objective of the Obama administration.

One remarkable aspect of the annual survey is that while the countries listed as Free vary greatly in terms of size, geography, ethnic composition, religious diversity, and history, they all share one common feature: a market-based economy.

That simple fact is inconvenient for many in the human rights arena who are instinctively suspicious of capitalism. It is also somewhat inconvenient for American policymakers who, despite the rhetoric, have neglected the critical role that well-functioning market economies can play in building broad support for a strong civil society and an independent, empowered judiciary. A better understanding of the deep interconnection between economic development, growing market economies, and human rights would serve as a logical strategic overlay to U.S. foreign policy in this area and inform the specifics of the administration’s economic development tactics.

Tension between supporters of human rights and the business community is fairly common, but it often leads both groups to ignore the important underlying principles that unite them. At the most simplistic level, the best guarantor of human rights is a political system grounded in capitalism. A market-based economy can only work with a clear rule of law and an independent judiciary that enforces the legislation regulating corporate behavior vis-à-vis other corporations, consumers, and the state. The same sort of judiciary is necessary to guarantee human rights. A market economy and human rights both set limits on the authority of the state and empower individuals: they are two sides of the same coin.

Human rights activists are often uncomfortable with capitalism. They are tenacious defenders of universal rights and principles of equality. While capitalism is built on the notions of competition and equality of opportunity, it certainly does not envision equality of result. Capitalism creates winners and losers, bosses and employees, landlords and tenants—fundamentally unequal relationships. But those relationships are based on contractual agreements and require rules of the road, enforcement mechanisms, and neutral forums where parties can adjudicate differences. Democracy and capitalism coexist and strengthen each other when the rules that control market activities are written through democratic processes, and at the same time, economic power is not controlled by the government.

Capitalism is the only form of political economy that can produce an independent power center to function as a critical check on government. However, capitalism without democracy will inevitably move toward monopolistic exploitation, cronyism, and the corruption of government officials. (Think China.) And democracy without capitalism is simply authoritarianism waiting to happen, with a stagnant economy as a bonus. (Think Venezuela.)

To be sure, democratic capitalism is as much about the right rules of the road as it is about competition. The very process of drawing and redrawing boundaries around raw market forces promotes a sense of community and legal rights. If individuals are not secure in their property, and if they view the government as controlling their economic fate, then their hold on basic human rights is tenuous at best. Trading political freedom for economic security is always a bad long-term bargain.

U.S. public support for active diplomacy is low and declining, no doubt a consequence of collective exhaustion with the country’s engagements in Afghanistan and Iraq and the protracted budgetary battles in the capital. This exhaustion is intensified by the artless and incorrect use of terms like “democracy promotion” and “nation building” to describe what amounted to misguided military adventurism and poorly conceived strategies for managing admittedly difficult postconflict transitions.

While more than 80 percent of Americans are supportive of efforts to control nuclear proliferation, combat terrorism, and secure the nation’s energy supplies, less than 30 percent believe in promoting economic development abroad and helping other countries build democracies. But the goals most Americans support are best secured not by a narrow focus on short-term security issues, but by long-term, patient efforts to increase the number of capitalist democracies. On the nuclear issue, for example, it is not so much the weapons themselves as the nature of the regimes pursuing them that presents a threat to global security.

One of the most difficult achievements in a developing or transitional country is for the political system to accept reduced control over the economy, especially when the state or political elite has been a participant in and beneficiary of managed economic outcomes. A thriving private sector can smooth the path to this goal while increasing general prosperity, which is why economic development assistance can be such a powerful tool.

As the administration reassesses its foreign assistance strategy, the tactics with respect to economic assistance and development need to reflect the following realities:

1) Economic development or transition is not a sequential process in which business formation can occur only after acceptable levels of physical and institutional infrastructure have been established. In fact, a growing private sector is often an important constituency that can help foster political receptivity to a strong rule of law and other core elements of both capitalism and democracy.

2) Economic growth depends largely on investment and business formation. There can be no robust, growing economy without adequate credit and investment capital for small and medium-sized businesses (SMEs) that have the potential to expand beyond the microenterprise level (“the sewing-machine paradigm”) and create a sustainable business model and source of employment. Furthermore, most external sources of capital, whether the World Bank or various other international development banks, are simply too bureaucratically rigid to respond to the rapidly changing needs of the SME sector. Even the United States, with the most sophisticated and extensive capital markets in the world, struggles to ensure that adequate capital flows into SMEs. Clearly, we should expect this problem to exist in transitional economies, and it should be considered an area of intense focus and great opportunity.

3) There are several impediments to indigenous capital-market development. Almost invariably, commercial banks are content to act as deposit-taking institutions, dispense favors to select government cronies, and invest a large part of their asset base in both domestic and foreign government-issued bonds. Even if these banks were inclined to pursue traditional financing activity, they are often hampered by a lack of trained investment officers and unclear and unstable legal regimes, which undermine the value of enforcement mechanisms, such as foreclosure rights.

4) Economic growth needs to occur as a function of local market participants and not solely in response to grand designs about what sectors of the economy should be encouraged. Often the best economic development strategy is to provide the facilitating financial support and the institutional framework so that the private sector can have access to the necessary capital to fund and grow its businesses.

5) The absence of sufficient capital for the private sector is not an indicator of the absence of commercially viable investment opportunities. It is often true that perception of risk long outlasts the reality of risk, and businesses can flourish even in very fragile environments.

As these five realities imply, economic development is not a simple policy goal to pursue. Of course, neither is the defense of human rights. The critical insight is that in pursuing its foreign policy objectives, the United States needs to recognize the interdependence of these two goals. Human rights are in large part about checking abuses of power, and those same checks can also serve to curb corruption and other manipulations of the market by government officials.

Democratic capitalism is a robust and flexible model. Each version is the unique product of a particular country’s political and economic history, but all versions represent the best guarantor of human rights we know of. Now is the time for the United States to recommit itself to this model. If President Obama and Secretary Kerry can leave office with more countries in the Free column than when they took their oaths, they will have given the world a valuable and lasting legacy.

* Kim G. Davis is a managing director and cofounder of the private equity firm Charlesbank Capital Partners, LLC. He is chairman of the Baltic American Freedom Foundation, a trustee of Freedom House, and a member of the Council on Foreign Relations.