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  • Democratization and Business Interests
  • John D. Sullivan (bio)

The last ten years have made an enormous difference in the way that people view the issues surrounding economic reform and democratic development. In 1984, the debt crisis was gripping a substantial part of the developing world while most of Latin America was undergoing its democratic revolution. Reactions to these events varied. The debt crisis provoked intense controversy over the use of market-oriented economic reform measures and conditionality. Similarly, the notion of supporting democracy abroad was hotly debated in the United States as the National Endowment for Democracy (NED) was being created. During these years, disagreements bore directly on the question of whether economic reform was compatible with democracy; the question of methods remained subordinate.

Today's debates, by contrast, tend to be over the best strategies and tactics for reform. Such issues are hardly trivial, as can be seen from a comparison of some of the notable successes and failures of recent years. Argentina, Chile, and Poland have become magnets for international investment. Countries that have resisted change—Ukraine, for instance—find themselves sinking further and further into debt and decline. Similarly, it is to be hoped that South Africa's recent success may serve as a model for much of the rest of Africa, including Nigeria. In all these cases, the keys are the strategy chosen for reform and the strength of the domestic constituencies rallied behind it.

Sadly, much of the discussion about strategies and tactics for [End Page 146] economic reform overlooks needed elements or reflects flawed assumptions. One common misconception is the notion that "business" or "the private sector" is a monolith. This leads to the belief that "business" as a whole supports (or opposes) a certain policy or set of leaders, whereas in fact most countries have not one business community but several different and often quite opposed sets of business groups.

Another, less dramatic type of split divides firms that depend upon import protection from those that engage in international trade. In many countries, decades of state protectionism have nurtured "hothouse industries" that cannot compete in world markets but enjoy advantages at home. The influence that bureaucrats enjoy under these arrangements fosters corruption and privilege. The result is a form of state socialism whose major beneficiary is a well-connected business elite. Genuine entrepreneurs and their employees find themselves left in the cold.

Major differences also divide firms that remain in the state sector from those that have been privatized, as well as from those that were always private. Firms lingering in the state sector have obvious incentives to keep pressing for subsidies, protection, and cheap credit. They also can and often do use their large work forces to exert pressure against reform.1 Conversely, private-sector firms tend to support a more open and competitive economy and society.

A final type of split often occurs along the formal-informal or legal-extralegal dimension. In many countries, a vast array of firms whose pursuits are wholly respectable must nonetheless function outside the law. In the Peru of the mid-1980s, as Hernando de Soto has shown, the licensing hurdles facing the average aspiring small-business owner took nearly 289 days to clear.2 Other studies have found that while most countries do not have overt legal barriers to market entry as high as Peru's were, all too many force small businesses into the informal sector with costly taxes and regulations.3 This pattern also seems to be fueling the explosive growth of the informal sector in Hungary and other postcommunist economies.4 A recent survey in Russia, for instance, found that it could take up to six months to obtain all of the permits, stamps, and forms needed to start a business legally.5

Groups ranging from chambers of commerce to trade associations and societies of entrepreneurs normally are the vehicles for concerted political action by the business community. Business also normally provides most of the support for the think tanks, research centers, private foundations, and management schools that play key roles in economic reform and development. Once reform moves beyond the clear-cut task of macroeconomic stabilization to embrace the complexities of...


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