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World on Fire: How Exporting Free-Market Democracy Breeds Ethnic Hatred and Global Instability

Date: 2003
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Markets only function optimally when there is perfect information. Joseph Stiglitz received the Nobel Prize in economics for proving that when there are asymmetries of information markets fail. Information economics, with its better analyses of labour, capital, and product markets, enables the construction of macroeconomic models that provide deeper insights into unemployment, recessions and depressions, and other problems that have marked capitalism since its beginnings.
Where information is imperfect, another problem arises, a problem whose existence no economic textbook acknowledges – the emergence of market-dominant minorities. Yet it is a fact of economic life everywhere. Economic history shows that throughout history capital accumulation did not occur homogeneously throughout all sectors of the population. Specific groups accumulated capital first, and at times monopolised the process. It was the banking families of Florence – the Peruzzi, the Acciaiuoli, the Bardi, and the Medicis – who accumulated wealth in the Middle Ages. At other times religious minorities – the Protestants, the Quakers, the Jews, the Jain in India, or the Marwari – were in the forefront. Ethnic groups did particularly well – the Diaspora Chinese in South-East Asia, the Indians in the British colonies in Africa and the Caribbean, or the Lebanese after independence. Learned theories have been written about why market-dominant minorities arose. They were mostly coached in ethical terms. These minorities, we were told, were sedulous, and trustworthy, and their behaviour found sustenance in a strong religious ethic – Protestantism, Confucianism, whatever. May be there is a simpler explanation. A market economy is all about division of labour. Division implies that one trusts ‘the other’ economic actors to make their contribution well, and in good time. A market economy is all about mutual trust among strangers, from whom you buy and sell. Trust that ‘the other’ will perform unbidden. Admittedly, competition weeds out bad performers quickly, and only those that play the rules correctly can sustain themselves. If need be, the state will intervene and punish the miscreant. But trust is the core, for if every transaction had to be verified or performance enforced, the costs would outweigh the benefits. Capitalism is about working with strangers – an astonishing feat never before achieved in nature [1]. In a perfect market we can trust all strangers. But what if the market is not transparent? We’ll stick to the familiar – the family, the fellow citizen, the religious or the ethnic group. We can trust them before we can trust the anonymous ‘other’. Such co-operation and collusion has its rewards. In an imperfect market monopoly rents abound. Such clusters of trust attract the rents – capital is more easily accumulated. Such processes, once started, are self-sustaining. Market-dominant minorities emerge. It has taken a woman, and from a minority she, to spell out in writing the obvious fact – as market economies spread like wildfire across the world, market-dominant minorities will emerge. Much of Amy Chua’s book is dedicated to a grand tour of such minorities: the Chinese in South East Asia, the Jewish oligarchs in Russia, the Lebanese and Indians (but also indigenous groups like the Tutsis) in Africa. At times the detail gets to be too much yet at the same time too little: much of it is hearsay, or unsubstantiated gossip. Despite these shortcomings it is important that such information be made available. At times Amy Chua gets too hung up on ethnicity. Though one is sure that market-dominant minorities exist in Latin America, it is not clear that they are always ethnic – even though the excluded majority may consist of Indians and mestizos. Her key finding is that an identifiable minority group will hoard all the wealth. In the fullness of time such dominant minorities will dissolve; or better – market-dominant networks will replace them. While minorities in the U.S. still hold most the wealth – and are increasingly transforming themselves in aristocracies – membership in this group is fairly open. Amy Chua makes the valid point that, for the rest of the world, the U.S. is a market-dominant minority. In the short run, Amy Chua notes, three kinds of ‘blowbacks’ can take place. The first is against the markets. When a minority is able to appropriate much of the capital accumulation, the system will be blamed and thus rejected. One is not far off in arguing that many of those who rail against globalisation do so because they see themselves both excluded from the riches and threatened in their status. Market economies presuppose pluralist societies and a democratic system. Market economies that function badly give democracy a bad name. Authoritarian and totalitarian regimes thrive on discontent of the dispossessed – Russia is a good example. On the other hand, market-dominant minorities may pervert the democratic structures in order to sustain themselves – the Chinese in the Philippines backed Marcos. Ethnic conflict or even genocide may be the ultimate consequence – witness the pogroms against Chinese in Indonesia. Genocide fomented by ethno-nationalistic governments may be the perverse result of ‘too much democracy too quickly’. As the case of Rwanda shows, it was the ‘Hutu’ majority that oppressed and then tried to destroy the ‘Tutsi’. In polite society of economists one does not speak of market-dominant minorities. One does not ask whether they exist, who they are, lest one be perceived to be racist. My personal experience is that as soon as one raises the issue of market-dominant minorities the reaction of the common man in a developing economy is lively. There is widespread awareness of the process; there is deep resentment, but also a certain tolerance, if not resigned acceptance, of it- both the poor and the rich will always be with us. What is to be done? It would be too much to hold Amy Chura accountable for failing to provide the magic formula to resolve the problem. Her contribution is big enough as it is – having had the courage to speak up and break the taboo about market-dominant minorities. Yes, they exist. They are pervasive. Their appropriation of the emerging wealth of the nation is a cancer. Blowback can set back the development process by decades. It can lead countries into economic dead ends – or civil war. Awareness of the phenomenon is a prerequisite. Since the demise of Marxism one is no longer supposed to ask the question: Who benefits? Denial is not the solution, even if nothing can be done about it. Nor are general redistribution programs likely to be the answer. For one, re-distributing what little capital has accumulated may nullify the development process and weaken the engine of progress. The state is notoriously a bad entrepreneur, so expropriation is not the answer. Strong social policies: education and health, however, may be a good place to start healing the wounds created by the process. When hope arrives at last, people’s primary concern is the future of their children. Education and health nourishes and sustains that hope. Education and hope are the prerequisites for a robust and growing economy that will eventually reabsorb the market imperfections that make market-dominant minorities possible and sustain them. Strong policies of education and health will show all citizens that they do benefit from development. It is regrettable that it is precisely these areas that have been under attack as governments try to ‘balance’ their budget and privatise their services. China – the stalwart champion of socialist development – has halved its expenditures in this area. Notes [1] For an in-depth discussion of this issue see: Paul Seabright (2004): The company of strangers: A natural history of economic life. Princeton UP, Princeton; x + 304 pp.
Review by Aldo Matteucci