World on Fire World on Fire World on Fire

by Amy Chua

  The first and most familiar strategy for wealth-spreading is redistribution through tax-and-transfer programs. As discussed in chapter 9, not a single Western nation today has anything close to a laissez-faire economic system. Yet laissez-faire markets are precisely what the United States, along with powerful international institutions like the IMF, have been promoting for decades throughout the non-Western world.

  In the West, strong redistributive measures such as progressive taxation, social security, and unemployment insurance, as well as antitrust and financial regulation, temper the harshest effects of capitalism. In the non-Western world, it is equally imperative to try to spread the benefits of markets. There is no good reason why, in some of the poorest countries in the world, the tax rate for the very wealthy is effectively zero. At a minimum, when exporting Western market institutions, the advanced countries should also be working toward the creation of the social safety net programs and tax-and-transfer institutions familiar throughout the Western nations.

  Unfortunately, the realistic redistributive potential of tax-and-transfer policies in the developing world is limited, at least in the near future. To put it bluntly, there is not enough to tax, and nearly no one who can be trusted to transfer.12 While Westerners take sophisticated tax systems for granted (and complain about them all the time), establishing the institutions and practices necessary to effectuate tax-and-transfer programs is immensely difficult in countries where the state is weak, money scarce, and corruption pervasive.

  A second strategy for spreading market wealth was recently proposed by Hernando de Soto in The Mystery of Capital: give the poor in the developing world formal, legally defendable property rights. Specifically, de Soto advocates integrating extralegal businesses into the formal property system and giving squatters legal title rather than evicting them. Based on de Soto’s proposals, countries like Peru (de Soto’s home country) and the Philippines have implemented bold new titling programs, attempting to debunk the prevailing view in the developing world that capitalism is a “private club,” only benefiting the West and the already-rich.13

  A passionate and brilliant champion of both capitalism and the poor in the Third World, de Soto has managed to capture the imaginations of influential figures like Margaret Thatcher and Milton Friedman, along with millions who are currently excluded from globalization’s benefits. Insofar, however, as de Soto believes that mere “titling,” combined with a market economy, can eliminate poverty quickly and on a large scale, his proposals are probably idealistic. Some of the new “titled” communities established on de Soto’s model are located in remote areas and still lack sewage and basic infrastructure. More broadly, de Soto’s book does not account for the fact that the existing property rules do not seem to have impeded wealth accumulation by certain ethnic groups—market-dominant minorities—many of whom began with no property at all. As a result, while de Soto’s proposals are eminently worth pursuing, I fear that a mere change in formal property rules may not substantially alter the realities of entrenched poverty and the current extreme ethnic maldistributions of wealth. Nevertheless, by drawing international attention to the urgency of trying to expand popular participation in the market system, and by offering a concrete way of doing so, de Soto has performed a tremendously important service and represents a courageous step in the right direction.

  A third strategy for spreading the benefits of free markets involves finding ways to give the poor majorities of the world an ownership stake in their country’s corporations and capital markets. In the United States, a solid majority of Americans, even members of the middle and lower-middle classes, own shares in major U.S. companies, often through pension funds, and thus feel that they have a stake in the U.S. market economy. This is not the case in the non-Western world, where corporations are often privately owned by single families belonging to a market-dominant minority group and where extremely few members of the general population have any stake in the corporate sector.

  If this state of affairs could be changed—if large numbers of the “indigenous” population had an ownership stake in their society’s capital markets—the benefits might be considerable, economically and politically. As Columbia Law School professor John Coffee has put it,

  “Encouraging equity markets to develop and encouraging dispersed ownership may . . . imply not only efficiency gains but also a more open society, one less dominated by banks” and “crony capitalism” and “more attractive to entrepreneurship.”14

  Fourth, a more controversial strategy for addressing the problem of market-dominant minorities consists of government interventions into the market, consciously designed to “correct” ethnic wealth imbalances. Such ethnic-based interventions on behalf of an economically disadvantaged group are known as affirmative action programs in the West. Particularly in the United States, these programs have been the subject of increasingly bitter criticism in recent years.

  Whatever the merits of these criticisms in the West, it is important not to confuse apples with oranges. In the West, affirmative action policies are intended to benefit disadvantaged ethnic minorities—African-Americans in the United States, aborigines in Australia, or Maori in New Zealand, for example. By contrast, affirmative action policies in countries with a market-dominant minority are intended to benefit disadvantaged majorities—for example, blacks in South Africa, Quechua and Aymara Indians in Bolivia, or the 80 percent indigenous pribumi majority in Indonesia. This is a rather major difference.

  For one thing, even putting aside questions of justice, a situation in which the great majority of citizens in a country live in extreme poverty, while a tiny ethnic minority controls most of the nation’s wealth, is extremely unstable, particularly when combined with sudden democratization. For another thing, affirmative action programs in these countries, if voted in by a majority of the population as is the case in South Africa, represent a democratic outcome—and therefore an outcome that it would be awkward for, say, the IMF or the United States to overturn in the name of markets. In any event, Western policymakers, especially American policymakers, have to be careful not to project their own negative feelings about affirmative action or identity politics onto societies where the conditions and demographics are totally different.

  Indeed, many Americans are unaware that other countries, including a number of Western countries, have pursued ethnically based affirmative action programs—some with notable success. Canada, for example, has had considerable success addressing the problem of a market-dominant minority at the provincial level. In Quebec, aggressive affirmative action policies in the 1960s helped raise the economic status of the severely economically disadvantaged 80 percent French Canadian majority vis-à-vis the market-dominant English-speaking minority, who historically controlled Quebec’s banks, insurance companies, trade, and manufacturing—indeed, the virtual entirety of the modern economy.15

  But conditions in Quebec forty years ago were considerably more propitious than those prevailing in the non-Western world today. (Quebec was part of a prosperous, industrialized country and the recipient of generous federal funding from the Canadian government.)16 A much more relevant example for today’s developing countries is Malaysia’s affirmative action program for its indigenous Malay majority. Following the 1969 race riots in Kuala Lumpur, which were similar in many respects to those that recently erupted in Indonesia, the Malaysian government adopted the “New Economic Policy” (NEP), aggressively seeking to achieve “national unity . . . expressed as the improvement of economic balances between the races.” At that time indigenous Malays, or bumiputra, represented roughly 62 percent of the population but owned a minuscule 1.5 percent of the country’s capital assets.17 Along with foreign investors, Malaysia’s entrepreneurial Chinese minority controlled all of the country’s most lucrative, large-scale commercial enterprises, both agricultural and nonagricultural.18

  To redress these extreme ethnic wealth imbalances, the Malaysian government adopted sweeping ethnic quotas on
corporate equity ownership, university admissions, government licensing, and commercial employment. It also initiated large-scale purchases of corporate assets on behalf of the Malay majority. After 1976, under what was effectively compulsory corporate restructuring, many Malaysian Chinese companies were required to set aside 30 percent of their equity for Malay interests—typically with no choice about the identity of their new Malay “business partners.” More recently, privatized entities, and companies seeking to list on the Kuala Lumpur Stock Exchange, were required to have a bumiputra shareholding of at least 30 percent.19

  In many respects the results of the NEP have been impressive. While the NEP has not lifted the great majority of Malays (particularly in the rural areas) out of poverty, it has helped to create a substantial Malay middle class. Between 1970 and 1992 the percentage of Malays occupying the country’s most lucrative professional positions went from 6 percent to 32 percent. The proportion of bumiputra doctors rose from 4 percent to 28 percent; dentists from 3 percent to 24 percent; architects from 4 percent to 24 percent; and engineers from 7 percent to 35 percent. In the corporate sector the bumiputra ownership share of corporate stock at par values jumped from 1.5 percent in 1969 to 15.6 percent in 1982 to 20.6 percent in 1995. There is no possibility that free markets could have produced such results.20

  By creating a small but visible Malay economic elite and by bringing Malay participation into important economic sectors—for example, the construction, rubber, tin, shipping, and communications sectors (all formerly dominated by foreign investors or Chinese and Indian Malaysians)—the NEP has helped promote a sense among the bumiputra that a market economy can benefit indigenous Malays, and not merely foreign investors and entrepreneurial “outsiders.” According to Prime Minister Mahathir, who frankly concedes that the NEP has tended to favor elite, well-connected Malays, the NEP serves an important symbolic function:

  [I]f these few Malays are not enriched the poor Malays will not gain either. It is the Chinese who will continue to live in huge houses and regard the Malays as only fit to drive their cars. With the existence of the few rich Malays at least the poor can say their fate is not entirely to serve rich non-Malays. From the point of view of racial ego, and this ego is still strong, the unseemly existence of Malay tycoons is essential.21

  Today, in addition to a number of Malay tycoons, some of Malaysia’s best doctors and attorneys are Malay—a fact acknowledged even among the Chinese, who just thirty years ago made no secret of their contempt for Malays.22

  Neighboring Indonesia provides a useful counterpoint. The massive capital flight and ethnic violence suffered after 1998 by Indonesia contrasts sharply with the situation in Malaysia, where the Asian financial crisis produced no anti-Chinese backlash or rioting, no ethnic confiscations, and very little capital flight. While the comparison between Malaysia and Indonesia has its limits,* there is a strong consensus that Malaysia’s systematic market interventions over the last thirty years have helped improve the country’s ethnic relations.23

  At the same time, the accomplishments of the NEP should not be overstated. It is unclear how well the NEP would have fared in the absence of the extraordinarily dynamic growth rates of the 1970s and 1980s. More critically, the NEP has failed to achieve some of its most ambitious objectives. Despite inflated official claims, for example, the NEP has not succeeded in “eradicating poverty,” one of its major goals.24 Further, even after decades of sustained governmental intervention, the Chinese minority remains starkly economically dominant vis-à-vis the bumiputra majority. To repeat: Market dominance is surprisingly intractable, and resistant to government-sponsored “corrective” ethnic policies. Worse yet, there is always the danger that government affirmative action policies will exacerbate rather than ameliorate ethnic conflict, by entrenching ethnic divisions.25

  For all these reasons, it would be irresponsible to champion affirmative action as the one-size-fits-all solution for developing countries that have a market-dominant minority. This is not to say that the NEP or Quebec’s ethnic preference programs cannot be helpful models. But in the deeply divided societies of the non-Western world, government leaders are themselves ethnic partisans; indeed, they are often the chief instigators of ethnonationalist sentiment. Sadly, there is a slippery slope between narrowly tailored, ethnic preference programs of limited duration on one hand, and vicious, confiscatory, often murderous “group-payback-time” programs on the other. In their own minds, Zimbabwe’s Robert Mugabe, Serbia’s Slobodan Milosevic, and Rwanda’s Hutu Power leaders were all conducting a form of “affirmative action” on behalf of a long-exploited and humiliated majority.

  Democracy: Against Hypocrisy

  and Beyond Majority Rule

  When I recently visited Bolivia, I noticed enthusiastic political slogans (“MNR!”) spray-painted on the roofs and walls of tiny dirt-floor houses, even in isolated desert villages. When I mentioned these to my Quechuan guide Osvaldo, he dismissed them with a wave of his hand. “The people in those houses can’t even read,” he laughed bitterly. “But if they let the government paint those slogans, they get a sack of potatoes, or maybe some sugar.”

  Democracy in the developing world is often more nominal than real. In many countries the great majority of the impoverished electorate do not have a substantial political voice, whether because of lack of access to information or because the wealthy control the political process through lobbying or corruption.26 This is true even of “success stories” such as the Philippines, where, despite impressive strides toward democracy in the last twenty years, it remains the case that a few landowning, dynastic families along with powerful Chinese business interests continue to dominate the political process.

  In other words, Western triumphalism about democracy in the developing world rests in part on a certain hypocrisy. If universal suffrage were a reality rather than a sham, one might wonder whether most of today’s marketizers, foreign investors, and international organizations would be supporting it. Indeed, even today, there are many within the international community who, at the first sign of a possible trade-off between markets and democracy, make clear that their first commitment is to the former. As a beaming U.S. economist said to me just after Venezuela’s democratically elected president Hugo Chavez was deposed in a military coup (and before he was reinstated), “Democracy is not necessarily the most efficient form of government.”

  It is better to be an open advocate of the priority of markets than to be a self-congratulatory advocate of sham democracy. The difficulty, however, with a genuine commitment to democracy is that, for all the reasons discussed in this book, majority rule in many countries outside the West could indeed produce anti-market, ethnically violent outcomes.

  So what is to be done?

  The answer is that democracy has to mean more than majority rule. Just as the United States should not promote unrestrained laissez-faire capitalism (a form of markets that the West itself has repudiated) throughout the non-Western world, so too the United States should not promote unrestrained, overnight majority rule (a form of democracy the West has repudiated). In the West the primary restraints on the excesses of majority rule take the form of constitutional safeguards: minority protections and guarantees against arbitrary government confiscations. But as with the Western-style welfare state, Western-style constitutional safeguards may not be realistic or adequate outside the West.

  Constitutional protection of minorities and private property require, for example, an independent (and not ethnically biased) judiciary as well as mechanisms through which the judiciary’s judgments can be reliably enforced. But these institutions are notoriously weak in non-Western countries. In Zimbabwe, President Robert Mugabe proceeded with his popular seizures of white land in open defiance of a judicial determination that they were unconstitutional. And in Venezuela, populist President Hugo Chavez, while at the height of his popularity, oversaw the overnight enactment of a radical new constitution to support his anti-market, anti-elite agenda.


  In short, while constitutional safeguards and human rights protections should of course be encouraged in developing and transitional countries, they cannot be relied on as an answer to the problem of market-dominant minorities. On the contrary, outside the West constitutional checks on majority will are often swept away by the very ethnonationalist risings they are intended to forestall.

  Instead of looking for means to check or halt an already aroused hateful majority, the emphasis has to be on prevention. This means first and foremost that the process of democratization must be rethought. Throughout the non-Western world, if democracy and markets are to be peaceably sustainable, democratization cannot be reduced to shipping out ballot boxes for national elections—a process almost calculated to maximize ethnic politics in deeply divided societies. Ballot boxes brought Hitler to power in Germany, Mugabe to power in Zimbabwe, Milosevic to power in Serbia—and could well bring the likes of Osama bin Laden to power in Saudi Arabia.

  Americans often forget that there are many different models of democracy, even within the Western nations. Democracy can vary along a large number of axes: for example, U.S.-style presidentialism versus U.K.-style parliamentarism; first-past-the-post electoral systems versus proportional representation; bottom-up democratization (starting with local village elections) versus top-down democratization (starting with national, presidential elections). These different versions of democracy can have significantly different effects on ethnic politics.

  Finally, it has to be remembered that the democratization process occurring in the non-Western countries is nothing like the democratization process that unfolded in the West. In particular, as discussed in chapter 9, the rapidity of democratization in developing and transitional countries today contrasts sharply with the gradual extension of the suffrage in Europe and the United States. Universal suffrage emerged in the West incrementally, over many generations. By comparison, in the nations of the non-Western world, universal suffrage is being implemented on a massive scale, almost overnight. Limitations on the suffrage are not an acceptable option today. But there are other ways to slow down and stabilize the process of democratization.