Summary
The engagement of Americans abroad is a powerful tool to promote freedom and peace. Economic activity ­­ businesses and farmers exporting, investing, purchasing ­­ is an important element of engagement. Democracy and human rights are strongly associated with free markets, open trade and investment, and rising living standards. American economic engagement helps increase incomes and empower the middle class. Americans also bring with them American values ­­ the inherent worth of the individual, freedom, and the rule of law.

A wave of economic liberalization and democracy has swept the world in the last decade. In country after country a prosperous economy has helped to foster democracy and human rights. The record of unilateral economic sanctions, in contrast, has been poor. The United States should promote economic engagement in countries where democracy and freedom have not yet emerged, rather than cut off one of America's most powerful agents for change.

Our policy is... the revival of a working economy
. . . to permit the emergence of political and
social conditions in which free institutions can exist.

-- Secretary of State George C. Marshall, 1947

The freer the flow of world trade, the stronger the tides
of human progress and peace among nations.

-- President Ronald Reagan, 1985

We can only preserve our security and our well-being
at home by being strongly involved in the world
beyond our borders.

-- President Bill Clinton, 1997

When President Reagan linked open trade to peace, and when President Clinton called for active involvement in world affairs, both stood firmly in the mainstream of American post-World War II policy. Like their predecessors, they recognized that open trade and investment and the accompanying economic prosperity promote political freedom and peace in the long-term.

Secretary of State George C. Marshall, having commanded the U.S. Army during World War II, knew firsthand the cost of war with repressive, totalitarian regimes. He and other American leaders recognized that those regimes arose out of the Great Depression, or were reinforced by it. The Marshall Plan was adopted to promote economic recovery based on a simple principle: free institutions flourish in successful free market economies.

The post-war economic reconstruction of Europe and Asia is one of the enduring triumphs of American foreign policy. In the aftermath of World War II, America did not repeat its earlier mistakes by withdrawing into isolationism and protectionism. Instead, America helped rebuild Europe and Asia. Not only through the Marshall Plan, but by creation of the GATT, the World Bank, and the International Monetary Fund, American leaders have helped construct the framework for free markets and an open global trading system.

This paper analyzes the importance of developing international economic relationships as an element of an overall policy of engagement to promote U.S. interests and values abroad. The first section of this paper demonstrates how free market principles and rising incomes promote democracy, freedom and human rights, and documents the point with examples in Latin America, Eastern Europe and Asia. The second section shows the impact of American business and agriculture when engaged overseas. The final section shows that economic engagement is the best strategy for America to promote its values in the world.

I. Free Enterprise and Economic Growth Promote Freedom, Democracy and Human Rights

A. The relationship between free market reforms, rising living standards and social change. A growing, diversified economy is one of the pillars of democracy. Repeated studies have shown a strong relationship between economic growth and the development of democratic institutions.¹

The sociologist Seymour Martin Lipset summarized the relationship between economic growth and democracy as follows:

One of the most powerful factors that alters political beliefs and values and increases the prospects for stable democracy is socioeconomic development. . . Overwhelmingly, the weight of the evidence confirms a strong positive relationship between democracy and socioeconomic development and that this relationship is causal in at least one direction: Higher levels of development generate a significantly higher probability of democracy and of stable democracy.²

Market-oriented economic development causes social changes that impede authoritarian rule. These include widespread education, the opening of society to the outside world, and the development of an independent middle class. The result is a growing sector of educated and skilled citizens in business, the professions, education, and the government.

This growing middle class has profound long-term political implications. Authoritarian governments frequently draw their power from a relatively narrow elite, such as the old land-holding classes of Latin America, or the political cadres of former communist countries. A well-educated, independent middle class does not depend on the state for economic advancement, and thus is far more free to challenge political control. A government faced with this change must seek the support of the middle class and must respond to middle class demands for greater political freedom, the rule of law, and the elimination of corruption.

Lipset wrote:

Economic development also tends to alter the relationship between state and society, to increase the number and variety of independent organizations that check the state and broaden political participation, and to reduce corruption, nepotism, and state control over jobs and opportunities to accumulate wealth. Finally, economic development thrusts a country into ever greater cultural and economic integration with a world whose most desired markets, capital, goods, technology, and ideas are controlled primarily by democracies.³

Henry Rowen, a Stanford University professor and a former Assistant Secretary of Defense, has demonstrated graphically the relationship between economic development and political freedom. He plotted the relationship between living standards and freedom in Asian countries, which shows a strong correlation between per capita income and freedom:⁴

Rowen noted:

There is a compelling logic behind the statistical relationship. Growing wealth is accompanied by increased education, the building of business and government institutions with some autonomy, and the formation of attitudes that enable democratic governments to survive when they have a chance at power. Spain, Portugal, Chile and Argentina, in addition to Taiwan and Korea, all made the transition to democracy when they were within this [$5,000 to $6,000 per capita] income range.⁵

The wave of economic opening and privatization in recent years has accelerated economic growth, and also has had direct effects on freedom. Privatization of government enterprises, as well as opening an economy to foreign direct investment, establish alternative job opportunities and permit the accumulation of wealth outside the state. If, as is almost always the case, private enterprises are more efficient, more responsive to customers, and come closer to world-class manufacturing and service standards, they put intense competitive pressure on the remaining state-owned enterprises, further eroding state power.

The political benefits of such reform can be quite direct. As Henry Rowen wrote: "The message is clear: Once a totalitarian regime ventures down the path of market reforms, it loses control of its information organs." Professor Pei Minxin of Princeton University described the impact of such changes in China:

The most compelling case here was the introduction of home satellite dishes to increasingly affluent Chinese customers in the early 1990s. Using imported hi-tech components, Chinese manufacturers began to mass-produce home satellite dishes . . . .

The infiltration of liberal Western ideas undermined official doctrines. Simultaneously, it legitimized liberal democratic values, giving ideological support to the fledgling pro-democracy movement . . . .⁶

In short, opening an economy to the outside world vastly expands the flow of information. The internet, television, books, newspapers, copying machines, foreign magazines, all the various forms of popular entertainment and intellectual thought begin to flow, spreading ideas like democracy, human rights, and the rule of law. These ideas fall on fertile ground an expanding and assertive middle-class that is skeptical of, and threatened by, corruption, abuses of power and kleptocracy.

B. Economic Growth and Freedom in Latin America, Eastern Europe and Asia. The relationship between economic growth and freedom has proven itself repeatedly in recent years:

Latin America. Latin American countries were burdened for decades with authoritarian governments, but those regimes have been swept aside by democracy. Democratization proceeded amidst the opening of economies to the outside world through the adoption of free trade policies and the attraction of foreign investment, especially through the privatization of state-owned enterprises. Chile was the pioneer. Chilean free-market reform measures contributed to the replacement of military control by a democratic government in 1990. Each country's progress has been different, and significant problems remain in many, but democracy and greatly increased economic engagement have proceeded together in Argentina, Bolivia, Mexico, Colombia, Peru, Brazil, Uruguay and Ecuador.⁷

Eastern Europe. Economic development also played a significant role in the advance of freedom in Eastern and Central Europe. The collapse of the Soviet power in the late 1980s was hastened by international engagement at many levels: the spread of Western ideas and information, external pressure from world leaders such as Pope John Paul II, and support for internal agents of change, such as Poland's Solidarity. The fall of central communist control created a window of opportunity for the former Soviet satellites and for the newly independent republics. Some countries -- Poland, Hungary, Slovenia, the Czech Republic -- successfully implemented democratic reforms. Others -- Bulgaria, Romania, Belarus, Moldova -- encountered far more difficulty.

A key distinction between the two groups was the extent to which a large, diversified private sector could quickly emerge and function in the world economy.⁸ Where conditions permitted privatization and reform to proceed rapidly, diverse opportunities for foreign investment became available, and local entrepreneurs explored a wide range of prospects for new businesses. These developments in turn solidified the emergence of a middle class with a considerable stake in both economic and democratic reform.

Asia. Two dramatic examples of the success of engagement in Asia are Taiwan and Korea. Both were governed by autocratic governments through the 1970s and into the 1980s, but underwent tremendous economic growth during that time, promoted to a great extent by U.S. trade and investment. Both are now prosperous, stable democracies. (A detailed analysis of the relationship between engagement and democracy in Korea is set out in the Appendix.) There are promising signs of change even in countries that are still far from democratic. In China, observers believe that as many as 100 million people (some estimates are two, or even three times larger) may move from the interior of China to the coastal provinces.⁹ If this happens, it may be the largest internal migration in world history.¹⁰ The attraction of the coast is engagement: it is in the coastal regions that Western businesses are trading with and investing in China, and creating economic growth. The workers will earn more on the coast than in the interior. They will encounter Western businesses and social practices, and they will spend some of their increased income on Western books, newspapers, magazines, movies and television, all of which are widely available in those regions.

II. The Impact of American Business and Agriculture in Developing Countries

The growth and diversification of lesser developed economies does not take place in a vacuum. Development requires investment, capital equipment, worker training, infrastructure, education, technology, and markets. American engagement is particularly important. The United States is both the largest investor and the largest trader in the world.¹¹ When they are free to operate in a country, American businesses and agricultural concerns transplant American values and culture to the host country. As Debora Spar of Harvard University put it:

American firms' normal business procedures incorporate a sort of grassroots meritocracy and openness not found in many host-country companies. U.S. and Western multinationals reward employees based on performance, not out of patronage or other non-professional considerations. They tend to treat local unions respectfully, demonstrating to populations lacking in basic freedoms that representation and negotiation are concepts that can work. Multinationals emphasize training and workplace benefits, further reinforcing the idea that every individual has intrinsic potential and human dignity. ¹²

This phenomenon reflects prevailing U.S. management practice, but there is an even more compelling force at work. The self-interest of the American businesses and agricultural interests drive them to make significant contributions to the economic and social fabric of the host country. American interests face a number of different demands that necessitate such contributions.

Rule of Law. While business focuses on making a profit, it also requires adherence to certain values and rules. American companies seek certain assurances when operating in foreign countries, including respect for the rule of law (honoring contracts, arbitration of disputes, objective legal systems, etc.), protection of intellectual property rights, and restraints on conduct that generates commercial uncertainty (corruption and nepotism). Absent such conditions, it becomes more difficult for a host country to attract investors and the lack of the rule of law accordingly constrains its economic development.

Infrastructure development. The success of global businesses depends significantly on efficient operating systems. These include manufacturing, procurement, internal communications, transportation and distribution systems. When a facility is established in a developing country -- whether it is a branch office for marketing and servicing U.S.-made equipment, a manufacturing facility or a distribution terminal for agricultural produce -- developed-world operating systems must be put into place. This frequently entails investment that has significant benefits to the locality, such as telephone systems, roads and health care facilities or even food production. This type of infrastructure development can serve a country's most basic needs. In Nigeria, for example, Phillips Petroleum is participating in a $5 million agricultural project designed to promote sustainable agricultural practices and boost local food production. That project has organized over 300 agricultural cooperatives and women's associations and trained more than 3,000 farmers.

Competition for skilled labor. Western enterprises need capable local managers to operate effectively in the developing world. Skilled and educated individuals frequently are in short supply, so there is intense competition to recruit them, and considerable support for their education and training. Procter and Gamble has gone so far as to found a business school in China, together with Beijing and the Northwestern University Kellogg School of Business. Graduates of the school may be recruited by the company, but they also are free to engage in other pursuits.

The educated class from which such executives can be drawn is usually the class that is most opposed to a corrupt and repressive government. For the same reason, corporate independence from such a government frequently is essential to successful recruiting: the very fact that the corporation is American, and brings with it American values and practices, is a powerful draw. U.S. businesses work hard to meet those expectations, and to fulfill the desire of their local executives to be associated with an institution that is making a positive difference in their country.

Workplace Operations. The operating and productions systems of American businesses assume that employees are prepared to think and act independently, to show initiative, and to be creative. In the last decade, American companies have rejected traditional hierarchical management systems in favor of flatter organizations that put much greater demands on managers and workers to operate autonomously. When introduced overseas, such systems require fundamentally different organizational systems and ways of thinking, particularly in formerly authoritarian workplaces. Training an individual to spot a flaw on an assembly line, for example, and to stop the entire line to repair it, can require a significant -- and positive -- change. Such an individual may have to overcome an ingrained deference to authority, and may develop an enhanced sense of independence and self-worth.

Local Entrepreneurship. Overseas business operations, especially manufacturing or mineral extraction operations, must develop a base of local suppliers. A common practice is to build a plant (or drill a well) using capital equipment imported from the United States and U.S. technology, and to import key high value-added components. Lower value-added components (which could be anything from water to metal castings to wooden crates) are sourced locally, as are any number of services, including transportation, accounting, cleaning, maintenance, security, construction and legal services. This demand is a powerful incentive to independent local entrepreneurs to establish operations, either independently or in joint ventures with foreign interests. American corporations seek to deal with their local suppliers on the same basis as their suppliers in the United States: they demand such activities as competitive bidding, just-in-time delivery, and joint engineering of components.

III. Economic Engagement Advances Freedom, Democracy and Human Rights

American values and institutions are attractive throughout the world not because of our power, but because of our prosperity and the appeal of freedom. While the shape of a nation's political and economic institutions ultimately reflects the choices of its own people, American policy can support, or hinder, such choices. Through engagement we advance economic growth and transmit fundamental American values.

The United States now has the ability to engage countries that for years were closed to it. The opening of many of the world's economies has created a tremendous opportunity. Poles, Chinese, Slovenes, and Indians all seek American trade, investment, and technology, even though their markets for years were effectively closed to Americans. The World Bank estimates that over 5 billion people -- 87 percent of the world's population -- now live in economies driven by market forces. Just ten years ago the number was only 1 billion.¹³

By exporting, by investing and operating overseas -- engaging -- American businesses, workers and farmers promote freedom. Trade and the acceptance of democracy and free enterprise worldwide has given hundreds of millions of people a chance to grow, prosper and build free institutions and the rule of law. Through engagement, the United States has a rare opportunity to help build the long term foundations for a better world. Change will not be rapid, and there will be reverses. Oppression will continue for years in many parts of the world. But by engaging, the United States contributes significantly to peace, freedom and the rule of law.

Appendix

Economic Engagement and Democracy in South Korea

On May 18, 1980 South Korean special forces killed more than 200 civilians while suppressing pro-democracy demonstrations in the provincial capital of Kwangju. The crackdown provoked a huge outcry in the United States, with calls for the imposition of economic sanctions. The Carter Administration considered both the imposition of economic sanctions and the withdrawal of U.S. troops, but decided that national security imperatives precluded either action. Instead the United States retained open economic relations with a Korea ­­ despite the authoritarian government, the suppression of dissent by intelligence agencies, and documented violations of human rights.

Korea thus became a test case of engagement. The Korean economy continued to grow, Korean students and executives continued to be trained in American universities, and U.S.-Korean trade and investment increased dramatically. In 1982 total trade in goods between the U.S. and Korea was $10.9 billion. By 1995, trade in goods had increased to $48.3 billion.¹⁴ All this took place despite continued unrest and government repression in the 1980s. At the same time, the United States engaged in hard-nosed diplomacy to induce the Korean government to become more democratic. This effort reached a peak in 1987, when the United States made clear that it would not countenance military intervention in renewed demonstrations, and exerted strong diplomatic pressure on the Korean government to hold fair presidential elections.

South Korea now is widely regarded as a legitimate, pluralistic democracy, with widespread freedom of expression and limited human rights problems.¹⁵ Significant problems remain, including issues of corruption and labor relations. But overall, Korea has been a major success.

What happened between 1980 and 1997? The short answer is that the Korean people demanded democracy and human rights from their government, and had the power to obtain it. Per capita income rose more than 130% from less than $3300 per year to more than $7500 year,¹⁶ and 75% of the Korean population now identifies itself as middle class.¹⁷ These statistics reflect the growing diversification of the economy and urbanization of the population. As one observer noted:

Urban autonomy gave rise to the autonomy of NGOs [non-governmental organizations] and public interest groups . . . . Many of these were advocacy groups, professional organizations, religious groups and civic organizations . . . . Pluralism also has come from . . . the growth of the business community, the rise of incomes of the population as a whole, and the growth of the middle class.¹⁸

Korean democracy has roots in rising living standards, economic diversification and the political activism of the Korean middle class, supported by the United States. In retrospect, the clashes of 1979-80 were a sign that the authoritarian regime's days were numbered. They were a symptom of the increasing incompatibility of economic growth and engagement, on the one hand, and repression on the other. The American policy of continued engagement with Korea, combined with strong pro-democracy diplomacy, furthered the development and diversification of the Korean economy and thus furthered the interests of democracy and human rights.

References

1. Seymour Martin Lipset, Political Man (Johns Hopkins University Press, 1960 and 1981); Henry S. Rowen The Short March: China's Road to Democracy (Asia/Pacific Research Center, 1996); Ronald A. Dahl, Polyarchy: Participation and Opposition (Yale University Press, 1971); and Samuel P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (University of Oklahoma Press, 1991).

2. Seymour Martin Lipset, Larry Diamond, Juan J. Linz, Politics in Developing Countries: Comparing Experiences in Democracy, p. 22 (Lynne Rienner Publishers, Inc., 2d ed. 1995).

3. Lipset et al. p. 22.

4. Rowen, Henry S. The Short March: China's Road to Democracy, p. 68

5. Id., 69.

6. Minxin Pei, From Reform to Revolution: The Demise of Communism in China and the Soviet Union, p. 168-71. Market forces also transformed the print media in China. Pei noted:

   Translations of Western works in the social sciences became available in significant quantities as well....A 1990 study of Shanghai college students indicated that... 56.6 percent said that they had works in Western social sciences and philosophies; 43.2 percent had read Chinese translations of Sigmund Freud, Jean-Paul Sartre, and Max Weber; and 41.2 percent had read Chinese translations of Western literature.... about 41 percent said that China "may borrow" such Western political institutions as "checks and balances" and "parliamentary democracy."

7. The relationship between democracy and the growth of the middle class in Latin America is not pure. There is no question that economic diversification undercut the authoritarian control of the land-holding classes in many countries. At the same time, however, the middle classes on occasion have embraced military governments in times of political turmoil, such as in Argentina and Chile in the 1970s. That fact notwithstanding, both countries have seen the restoration of strong democracy amidst considerable economic growth and an opening to the outside world.

8. This example demonstrates another point: economic diversification and growth alone are not sufficient conditions for democracy. Soviet domination delayed for decades the opportunity of the better-developed countries in Eastern Europe to follow the path to democracy. That opportunity came only with victory in the Cold War.

9. Rone Tempest, "In China, Affluence Spreads Unevenly: Some Live in Caves, Others in Townhouses," The San Francisco Chronicle (July 24, 1995).

10. Carlos Trigoso, "Labor-China: Betting on Enterprise Reform to Make New Jobs" Inter Press Service (July 7, 1995).

11. International Direct Investment Statistics Yearbook 1996, p. 12-17; World Trade Organization Annual Report 1996, Vol. II p. 3.

12. Debora L. Spar, quoted in Novak, Michael, Business as a Calling, p. 160 (The Free Press, 1996).

13. Richard Frank, Managing Director World Bank - Global Trade Conference Keynote address July 12, 1996; U.S. Department of Commerce, Bureau of the Census, Statistical Abstract of the United States, p. 827 (1996).

14. U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business p. 78 (Government Printing Office, July 1996).

15. U.S. Department of State Human Rights Practices Report 1996.

16. International Monetary Fund World Economic Outlook Database.

17. David Steinberg, "The Republic of Korea: Pluralizing Politics," in Diamond, Linz and Lipset, Politics in Developing Countries, p. 403 (1995).

18. Id., 402-03

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