State Capitalism and the Threat to Democracy

Over the past two decades, a renewed economic phenomenon has taken the global stage - state capitalism, in which sovereign countries pour huge resources into companies that come to dominate the fields they enter. It is particularly prevalent in Asia. Joshua Kurlantzick, a Senior Fellow at the Council on Foreign Relations, has written State Capitalism: How the Return of Statism is Transforming the World, a timely look at the phenomenon and its dangers to democracy and the economic order. Asia Sentinel is privileged to print this excerpt from the book, which is to be published by Oxford University Press in April.

State capitalism poses five types of threats to democracy, global security, and the global economy.

One of the fears about state capitalism is that the state’s control of the economy, in democratic nations, will inexorably lead to state control of politics and a reduction in democratic freedoms. These fears are not totally misplaced. But when Western writers, politicians and other opinion leaders examine state capitalism, they tend to take an undifferentiated approach, treating all state capitalists alike, rather than examining each country in some more detail.

In Ian Bremmer’s work on state capitalism, such as his book The End of the Free Market and his subsequent articles on state capitalism, he, like most Western analysts, tends to fall into this undifferentiated approach. He and others often suggest that state capitalism will inevitably erode a country’s democratic freedoms or prevent a country from becoming democratic.

It is true that in state capitalist nations, leaders often have greater access to state funds, more potential largesse to hand out to supporters, and wider leverage over some of the most important companies in their countries. In part, maintaining democracy as state capitalism becomes entrenched depends, in some countries, on the commitment of individual political leaders to democratic norms even as they gain control of more economic tools—potentially too thin a reed upon which to base democracy.

Of course, presidents, prime ministers, and other politicians in new democracies always have a potentially larger role to play in democracy’s survival than in more established democracies. More established democracies do not have to contend with the public’s memory of—and possible nostalgia for—an authoritarian period. Additionally, they have the benefit of institutions like the judiciary, the civil service, the press, and others to mediate political tensions and prevent political rollback.

For example, Corazon Aquino and Fidel Ramos’ personal commitment to democratic norms in the face of multiple coup plots and other threats helped entrench democracy in the Philippines. Whether or not nations are state capitalist or free market, leaders in young democracies often display some of the same traits as autocrats who came before them; the democratic leaders may come from longtime opposition parties and have all the paranoia and, sometimes, almost-autocratic instincts, born of trying to keep their parties alive in the past.

And emerging democracies’ weak institutions naturally may offer more possible opportunities than developed democracies for elected leaders to use aspects of the state’s economy to entrench their political power.

Still, in democratic state capitalists the government’s control of so many major companies offers politicians much more potential power than in non-state capitalist young democracies. The state’s control of so many companies vastly increases the potential for politicians’ abuse of economic tools.

As we have seen, though some leaders such as Brazilian leader Lula de Silva could boost state economic intervention while holding back their own instincts for using state companies to amass personal power, others could not resist the temptation to seize more political control as they gained power over the economy.

Thailand is a prime example of the potentially corrosive impact of state capitalism on democracy. In Thailand in the early 2000s, former Prime Minister Thaksin Shinawatra coupled interventionist economics with an increasingly autocratic political style that only became more authoritarian as Thaksin directed the Thai economy. Like many other state capitalists, he seemed to believe that as long as he delivered strong growth, he and his party would remain popular, and he should be able to use economic institutions to bolster his party and his own personal power.

Indeed, as the Thai government under Thaksin took back more and more influence over the economy, Thaksin had increasing leverage over the largest banking, agricultural, cement, and construction companies. He pushed those companies over which he had control to use their advertising budgets, which were critical to Thailand’s print media, only on those newspapers, magazines, and websites that backed him and his party.

Songpol Kaoputumtip, a former top editor at the Bangkok Post, one of the two leading English-language newspapers in Thailand, said that the few reporters at the Post who were writing articles investigating Thaksin’s family business, or his dictatorial control of his party, soon were told by top editors to move on to other subjects, lest the Post lose critical advertisers. It was a more delicate means of controlling the paper’s coverage than the tactics once adopted by Thai military juntas, which would simply close newspapers down or force the media – at gunpoint – run flattering articles.

Nevertheless, the leverage of advertising dollars was powerful, and for much of Thaksin’s time as prime minister, the Bangkok Post’s normally vocal political reporters and columnists remained docile. Most other Thai-language and English-language media outlets became even tamer on Thaksin’s watch, with only a small number of elite outlets, with low readerships, continuing to seriously investigate his administration.

Similarly, Thaksin used his government’s control of the economy to reward allies in the judiciary and the civil service. Traditionally, the Thai judiciary and civil service had maintained a degree of independence from political leaders, even during periods of military rule. But when Thaksin was charged early in his tenure with concealing his assets, he was acquitted by Thailand’s top court in a very close decision. Following the verdict, several of the justices alleged that they had faced intense pressure from Thaksin’s allies to acquit him, and promises of rewards such as jobs at state companies.

Later, as Thaksin became more entrenched, he began purging formerly independent government agencies. The government, which had increased state spending and taken control of many of the largest companies, would dangle the possibility of cushy, retirement-age jobs at state-owned or state-linked companies for civil servants, as long as they supported whatever policies Thaksin promoted.

As Thaksin used his economic power to consolidate his political power, the impact on political freedoms in Thailand was severe. A country rated “free” by Freedom House in the late 1990s, one of the only in Asia to receive that designation, was downgraded in the 2000s to only “partly free.” In rankings of freedom of speech, press, Internet, and assembly, by groups like Freedom House, Reporters without Borders, and the US State Department, Thailand plummeted even further.

Thaksin’s sister Yingluck, who won an election as prime minister in 2011 but was generally considered a stand-in for her brother, combined interventionist economics and an autocratic political style as well. Her interventionist economics further undermined democracy and sadly set the stage for a military coup that erased democracy in Thailand entirely.

Under Yingluck, the government took control of the rice sector, one of the most important in the country, which for years had been the largest rice exporter in the world. Buying up Thai producers’ rice crops and promising a guaranteed rice price ran up huge budget deficits and led to Thailand being warned by credit rating agencies that they would downgrade the country’s sovereign rating. But the rice buy allowed the government to use outlays for rice crops as a tool to promote Yingluck’s party – the rice policy understandably remained very popular with farmers, since the state was lavishing money on them. Although it was a government program, and theoretically nonpartisan, somehow the Shinawatra party’s logo, and Yingluck advertisements, would be handed out at events related to the rice scheme.

Meanwhile, the government continued to use state firms’ advertising budgets and other powers to pressure the media, while looking the other way as state companies essentially paid favorable media outlets for coverage. Thailand fell from being a nation with one of the freest media climates in Asia in the 1990s, down to number 135 of 179 nations ranked in Reporters without Borders’ 2013 rankings of global press freedom.

In the 2013 and 2014 Freedom House global surveys of Internet freedom, Thailand ranked among the 10 least free nations in the world, alongside highly repressive states like Saudi Arabia and Syria. No one, of course, doubted that Yingluck had been fairly elected; like her brother, she had won a massive victory and enjoyed a large base of support in Parliament. In one high-profile speech, Yingluck vehemently defended electoral democracy, arguing that Thailand had descended into political crisis because the army and other elites had not respected voters’ wishes by deposing her brother.

Yet at the same time she continued to curtail the media through draconian laws limiting freedom of speech and press, and sued a prominent political cartoonist for defamation, chilling the climate of speech even further.

The deteriorating climate of civil liberties, the government’s use of state enterprises as piggy banks for supporters of the prime minister’s party, and the amassing of massive debt to fund state companies, all contributed to making it easier for Bangkok middle classes, elites, and the Thai military, to overthrow Thailand’s elected government in May 2014.

Of course, not all of the demonstrators who helped foster the environment that sparked the coup had noble reasons for gathering in the sweltering Bangkok streets. Many of the middle class and elite men and women who held large, often violent street demonstrations in the six months before the coup did so not because they were angry at the state’s control of the economy, at wasted spending, and at the elected government’s disregard for the opposition and the rule of law.

Many gathered to shut down Bangkok and undermine the elected government simply because they detested Thaksin Shinawatra and his family, and they could not tolerate the increasing political power of the poor majority in Thailand, a development they had never anticipated. Some demonstrators called for democracy to be abolished and replaced by long-term military rule or an absolute monarchy.

But the use of state enterprises and state spending to favor cronies of Thaksin and then his sister Yingluck, and the increasingly authoritarian use of state monies to dominate political opponents, did indeed drive some of the demonstrators’ anger. These real grievances about how Thai governments were using state money and allegedly fostering corruption, also provided some degree of legitimacy in the eyes of the outside world to the demonstrations that led up to the coup, even if some significant percentage of the demonstrators were motivated primarily just by disdain for the rural masses.

In fact, after the military launched its coup in May 2014, a coup that clearly had been planned well in advance (not simply, as the military claimed, a spur-of-the-moment operation conceived after Thai politics reached an impasse), the putsch received significant support, at least at first, from a relatively wide spectrum of Thais, though not from hardcore Thaksin supporters.

Many Thais, including even some liberal and reform-minded men and women, were willing to tolerate the coup at first because they thought the military would actually use its immense powers to crack down on corruption, including corruption at state enterprises, which had been used as political tools and personal piggy banks for politicians.

These reformists wound up bitterly disappointed. The junta quickly realized that, though some of the Thaksin-era use of state enterprises for political gain had been unpopular with Bangkok elites, overall, as in India, statist economics remained extremely popular with most Thais. Although the junta was not elected, it also wanted to minimize any potential opposition to its rule. So while army leaders claimed that their coup would allow for serious political and economic reforms, the coup leaders simply evicted Shinawatra allies from leading Thai state companies and replaced them with military cronies or military men themselves.

Generally, they left Thai-style state capitalism in place. The military regime even launched a Thaksinesque proposal to spend US$75 billion on new massive infrastructure projects, funded largely by the state and designed to boost the fortunes of many leading Thai state companies as much as to actually improve Thailand’s infrastructure.

The junta’s projects, as Thaksin’s had been, were expressly designed to inject revenues into a handful of state companies favored by the government, according to multiple Thai officials and Thai politicians with intimate knowledge of the junta’s workings. In this case, the favored state companies, which would benefit from no-bid contracts, were ones where the junta had installed current or former military men on the boards, and which also had the closest links to the royal family, whose holdings extended across Thai companies.