The rise of democracy in the world has been intrinsically tied to the economic shift toward a free-market system. While democracy may not be an endpoint (nor inevitable for all countries), the late 20^th Century witnessed a pronounced shift toward greater global democratic governance (see Figure 4-3). One resonating symbol of this is the image of German students on the Berlin Wall—pick axes and hammers in the air—dismantling the concrete divide between democracy and authoritarianism. Now, close to two-thirds of the world’s populations live in societies that are democratic or are moving toward democratic regimes, versus less than 5% in 1900.^[5]

Figure 4-3. Comparative percentages of democracies in the 20^th Century: Democratic governments elected by universal suffrage, 1900–2000.^[7]

In his analysis of recent Communist state transitions, Fukuyama noted that not only were citizens motivated by economic reasons—they wanted living standards on par with those around them—but they also wanted certain social rights. People wanted to create a political system that fostered universal recognition, or greater self-determinacy; in many cases, that system is democracy.^[6]

The links between economic security and democracy have been well-documented, though the exact relationship is often in question.^[9] All modern democracies are essentially open economies, but not all market economies are democracies. John Mueller notes:

With increasing economic security, there has been a discernable global trend away from totalitarianism toward popular participation (Figure 4-4). The world, then, is moving towards more participatory regimes in which people have a say in the forces that shape their world. Inglehart adds:

Figure 4-4. Different types of regimes, worldwide, 1900–2000.^[8]

This process toward democracy is neither seamless nor simple. History has shown that power is not relinquished easily. The transformation of governments often has been violent, and there are still millions of poverty-stricken people who live under strict, authoritarian regimes. But when democracy and capitalism catch on, noticeable improvements are registered in voter participation rates. For example, between the 1958–1962 and 1998–2002 periods, voter participation gains were made in most parts of the Biological world: in Bangladesh (from 55% to 75%), Egypt (from 40% to 48%), Honduras (from 63% to 82%), Turkey (from 81.5% to 87%), and Ghana (from 50% to 61%), among others.^[12]

Most Biological countries hope to move beyond dependence on agriculture and/or mineral extraction and into low-wage manufacturing (much as the successful East Asian countries have done in the past 40 years). But in such countries, where people often live on $3 dollars a day or less, money goes to basic services versus middle-class luxuries. People are rightly more concerned with their next source of calories than with 400 channels of satellite TV. There are 2–3 billion people on earth whose daily goals are eating enough, drinking clean water, and avoiding diseases like malaria. To create wealth, governments of such countries must first address domestic issues of health, education, and destabilizing civil strife.

Unfortunately, in many places, Biological governments are not capable or willing to take the steps necessary to build domestic capacity, to educate the population and provide the infrastructure essential to economic well-being. Often, governments do not even provide the most basic necessities. Keep in mind that cultivating human capital—building healthy, educated populations—can easily take a generation or two—much longer than any government can stay in power.

This raises difficult and complex questions as to whether governments should use scarce resources to help their citizens get through today or plan for the future. Tragically, a physically and psychologically weak citizenry—underfed, undereducated, and often fearful—doesn’t have the cumulative strength to shape government opinion or policy. Maslow’s bottom-rung physiological needs unfortunately undermine wealth creation tendencies, promoting what Inglehart calls “survival” values, which encourage conformity and order under strict religious or authoritarian regimes.^[16] Many of the world’s poorest countries are also the most authoritarian, with leaders and governments that tend toward absolutism: Think of the Taliban in Afghanistan, Kabila in the Congo, Mugabe in Zimbabwe, Lukashenko in Belarus, or Kim Jong Il in North Korea. Without appropriate leadership, countries can be doomed to cycles of violence, upheaval, and autocratism that disrupt economic progress.

For the hundreds of millions currently caught in the cycle of civil strife, poverty, and hunger, meaningful economic and social progress is tragically thwarted. Moreover, in Biological societies, security and massive defense spending often trump human needs. In sub-Saharan Africa, the portion of the region’s GDP devoted to military spending rose from 0.7% in 1960 to 2.9% in 1994 despite widespread poverty. Over 216 million people live in poverty, 120 million adults are illiterate, and 350-odd million have no access to healthcare, yet the region’s military expenditures are over $8 billion. The picture is the same in South Asia, where annual military expenditures exceed $14 billion and almost 600 million people live in poverty.^[20]

The cycle of poverty is not unbreakable. There is ample evidence showing how forward-thinking governments—even those in poor countries—can seed more prosperous futures through policy choices. South Korea, the modern East Asian powerhouse, was once a poverty-stricken country of little economic muscle. Just three decades ago, South Korea’s GDP was comparable to the poorer countries of Africa and Asia. Today, South Korea’s GDP is 7 times India’s and 13 times that of neighboring North Korea’s, and already close to some of the economies in the European Union (EU). During the same period, South Korean literacy rates rose from 33% to 90%. This success was achieved through a government system that fostered industrial development and growth, which included directed credit, sponsorship of specific industries, and a strong labor effort.

As the case of South Korea aptly demonstrates, a key factor in a country’s ability to move from Biological survival status to a more dynamic and stable economic system is government policy: A central authority must play a role in facilitating commerce. It is a role that continues as people move beyond filling basic needs, when incomes reach, say, the $1500–2000 GDP per-capita figure. With newfound productive potential and some money in their pockets, people want more: more freedom, more products, more convenience, and more comfort. They want cleaner water and affordable electricity. They want telephones. They want to take the bus instead of walking to work. They want paved roads, schools for their children, and hospitals for their parents.

Just as government policy can accelerate economic growth, bad policy can smother it. For Communist and other statist economies, it was believed that a strong, central state with complete control over production and consumption could fill people’s needs by providing them employment, housing, and state-produced goods—just a step above the Biological needs. In the former Soviet Union and Communist China, government spending consumed as much as 70–80% of GDP in the 1980s.^[21]

The Soviet experiment failed.^[22] The reality was that people’s needs were not being satisfied: USSR citizens were often living barely above survival levels and they wanted more. They wanted a choice of goods; they wanted not just government-issued bread, but choices between wheat and rye, and they didn’t want to wait on line for hours. Above all, they wanted the opportunity that the state system had denied to them. They wanted a government that would promote their needs and help them move up through the cycles of consumption as those in wealthier countries had done.^[23]

Material-oriented governments have generally acknowledged that economic growth and international connectedness are essential components of national progress, and they shape policy in those directions accordingly. Governments in the Material phase encourage institutions and regulatory frameworks that facilitate economic progress, and as Fukuyama would suggest, that augment social status and personal esteem. Governance tends to move toward democracy in Material countries as more and more people are empowered by the economic changes and demand greater recognition and say over their futures.

In the late 1970s and 1980s, Japan—and then the East Asian tigers of South Korea, Taiwan, Hong Kong, and Singapore—became globalization’s best Material success stories. Their governments followed development strategies based on world economic engagement combined with rigorous domestic policies to promote stability and capacity. Policies were based on market principles and fiscal discipline to encourage greater investment in export sectors and human capital building. As wealth accumulated, consumption and demand increased, leading to greater access to capital and a deepening of the export sectors. These changes, in turn, prompted greater growth.

This example resonated around the world, particularly in countries that had, until then, been following the Socialist-oriented “import substitution” policies of tight domestic protection and isolation from the world economy.^[27] Suddenly, there were examples of countries that had, contrary to all expectations, been able to engage in the global economy and grow. Citizens in Biological states, in a fundamental shift of their view of government’s role, began to demand that their governments provide similar advances. Using East Asia as an example, many developing nations undertook massive policy reforms in the 1990s. They reduced tariffs, removed distortions in exchange rates, liberalized financial markets, and trimmed fiscal deficits.

Of course, this was and is not an easy path to follow. In theory, governments know what to do, but policies are often too tough to implement, and may not always lead to immediate results. Each country must find its own blend of liberalization and reform, and as recent history has shown, there are no guarantees of obstacle-free success. For a long time, the Washington Consensus, as espoused by the IMF and World Bank, was considered the ultimate formula for development: Based on East Asian successes, the Consensus focused on regulatory reform and liberalization in domestic economies. However, following the Asian financial crisis in 1997, this theory came under increasing attack for its short-sightedness regarding oversight and pace. It is now widely thought that East Asia may have tried too much too fast under pressure from the international financial community. Deregulation in important sectors occurred faster than domestic reform, leaving opportunities for abuse and corruption.

Despite cyclical downturns and adjustments, the growth story of the Asian economies—from Japan’s monumental rise in the late 20^th Century to China’s current ascent—continues to provide a real incentive for countries around the world to implement economic policy reform. Similar success stories are being written for more than a dozen former Soviet economies—including Poland (one of the fastest growing European economies in the 1990s), Hungary, Czech Republic, Latvia, Lithuania, and Estonia, among others. These countries have all achieved investment-grade credit ratings, impressive growth, and economic integration with the rest of Western Europe (some are even members of NATO) in less than 10 years since the fall of the Soviet Union. Indeed, the essential purpose of a Material government seems to be to move people beyond necessity and help them make choices that create wealth.

Many Latin American economies got a second chance at progress with the Brady Plan in the 1980s, as it was rightly believed that economic disasters in these countries would negatively affect the West. The Plan helped restructure unbearable debt burdens that had stifled these economies, and in return, called for concerted trade reform and financial liberalization as well as strict domestic financial discipline. Privatization and free-market policies ensued. According to the World Bank, between 1992 and 1996, Mexico alone privatized at least $22 billion in assets by selling state-owned banks, mines, and utilities. It is generally considered that Mexico’s divestitures, plus a focus on exports through its maquiladora assembly program, helped the country diversify its economy away from oil and solidify the country’s hard currency capabilities in less than 10 years. These policies were further strengthened by the ratification of the North American Free Trade Agreement (NAFTA) in 1993.

Privatization has perhaps been the most dramatic factor in de-linking government and markets. Nowhere was the divestiture of government-controlled industry greater than in Latin America, where numerous enterprises that had been nationalized in the 1960s and 1970s were auctioned off to the private sector. Privatization has now occurred in more than 100 countries worldwide, and global output attributable to state-owned enterprises has fallen to less than 6% from over 10% in 1979.^[28] Privatization is crucial to developing economies because it promotes the attraction of foreign capital and more efficient allocation of resources. By improving a country’s ability to interact with the rest of the world, privatization and trade openness generally have a positive effect on per-capita income.^[29]

Despite failures and obstacles, many of the world’s governments are trying to establish efficient institutions to promote economic activity. The idea of a fully functioning free-market economy has generally supplanted the notion that government can be the key economic provider for its citizens; government should provide the scaffolding for markets without direct involvement. But, the political maturation of Biological to Material countries goes well beyond implementing and safeguarding free-market principles. Along with economic expansion comes a broadening of individual rights and democratic ideals common in the U.S. and other wealthier countries: free speech and an uncensored media, due process of the law, and a codified respect for diversity. These rights and policies can be integral to a country’s worldwide acceptance as a modern economy and trading partner. For example, Turkey, an enormous country of nearly 70 million (of which 12 million are Kurds, a minority with distinctly second-class rights), is bidding for membership to the EU. In 2002, the country’s parliament approved sweeping laws to modernize Turkey’s political and social infrastructure, including outlawing the death penalty (except in cases of war); making slavery a capital offence; granting the European Court of Human Rights the power to order retrials in Turkey; lifting a variety of bans on Kurdish media broadcasts and teaching the Kurdish language; lifting censorship of foreign TV broadcasts and allowing public protests; and removing restrictions on non-Muslim religious foundations.^[30]

In response to these popular demands, many early-stage Material governments create massive social and economic safety nets, similar to the “welfare states” that arose in the U.S. and Europe as the result of rapid economic growth and deregulation in the early 20^th Century. It is true that market economies tend to develop unevenly because society is organized in terms of relative efficiencies. As a result, governments must address the conflicting needs of promoting expansion and taking care of those who are left behind. At the beginning of this century, public spending in countries classified as “welfare states” was only around 10–15% of their national incomes. Now, in many countries, it is around 50% or more.^[33] In the U.S., mandatory spending for government entitlement programs^[34] has grown significantly as a percentage of national GDP, and now accounts for almost 75% of the government’s expenditures, up from about 45% in 1965.^[35]

While late-stage Materialists do not necessarily want the government to stop providing these basic services, they may disagree about the way they are being distributed. In these wealthier countries there is a growing tendency toward community involvement rather than federally mandated reform. Recent limitations on government assistance and “workfare” programs in the U.S. are evidence of this trend as is the rise in educational reform initiatives such as charter schools, vouchers, privatization, and busing. Advanced Material populations tend to have less faith that their governments will appropriately allocate tax revenues and perceive huge government bureaucracies to be wasteful. While governments continue to provide safety-net services, they are increasingly disentangling themselves from industry and the economy. In the last few decades, the U.S. has deregulated telecoms, airlines, and some energy and power industries.^[36]

In 1999, an ICR/Washington Post poll asked: Would you say you favor a smaller federal government with fewer services, or a larger government with many services? Fifty-eight percent of Americans indicated that they would prefer a smaller government. These sentiments were mirrored in Canada. In a national survey, the Conference Board of Canada found that “values have changed” in Canada over the past 20 years. Canadians no longer trust their government as much as they used to and place an increased premium on accountability. Canadians are also less supportive of governmental social programs other than universal healthcare.^[37]

This increasing demand for non-intervention has had profound meaning for the types of policies advanced Materialist governments can implement. In Biological and early-stage Material countries, fiscal policy is the primary tool. These governments spend to build roads, schools, hospitals, and the infrastructure that puts people to work and greases the wheels of commerce. Large public projects create jobs, improve basic services, and can directly impact the lives of citizens by providing greater access to opportunity. People in Biological and Material countries look toward large government expenditures to boost their own personal incomes and well-being. Think of Franklin Delano Roosevelt and the New Deal during the Great Depression: Concerted government programs were implemented to generate employment, fire up the domestic economy, and safeguard the public from corporate excesses.

But for later stage Material states, such large fiscal expenditures and public works policies, in many respects, may no longer be necessary except in dire times. On one hand, the infrastructure for economic efficiency is largely in place. On the other hand, when things go economically awry, people want a quick fix—not the slow and long-term trickle of fiscal policy. Instead, these governments are turning more and more to monetary policy—decisions that affect money supply, interest rates, and foreign exchange rates—as the remedy for economic woes.

This creeping shift from fiscal to monetary policy is perhaps the most important change in economic management as governments adapt to the changing needs and values of their constituencies. Monetary policy is more powerful in wealthy economies because individuals and corporations are directly vested in the wealth creation process: A majority own some assets—stocks, bonds, houses, etc.—the success of which is directly related to interest rates and money supply. Wealthy societies are also built on liabilities—debt—much of which are also linked to interest rates. Lowering interest rates, for example, can reduce debt payment and free cash for additional consumption or investment. When the economy slackens, people quickly look toward interest rate policy for an immediate remedy. This is why U.S. Federal Reserve Chairman Alan Greenspan became a household name, not only in the U.S. but around the world: The policies he represents have become the tour de force of the Experiential-trending economy. When markets and the economy either heat up or slow down, all eyes fall on the Fed Chairman to tinker with interest rates like a thermostat to create the optimal temperature. Monetary policies are geared to shape financial and economic activity directly: raising interest rates to curb excessive growth, lowering them to promote borrowing. In turn, decisions by central banks to devalue, stabilize, or revalue a currency can have direct impact on comparative advantage and trade patterns, both direct wealth creation elements. Moreover, monetary policies are intended to promote confidence, that is, to show that the government is watching the world and markets, and can assist from the sidelines to help spur growth.

There are now segments of wealthy industrial and service countries that are moving from the Material toward the Experiential phase of governance. These strata are, even in a country as wealthy as the U.S., relatively small—perhaps 10–15% of the population. However, the political attitudes and behaviors of this minority are still worth examining because this group is uniquely empowered, both economically and socially, to participate in the political process and effect policy change. In addition, concerns voiced by Experientials often hint at trends that will later develop in the broader Material population.

Obviously, much of the Experientials’ power is derived from financial clout. With higher incomes, this group typically pays a disproportionately large percentage of taxes in their respective countries. For example, in the U.S., the top 1% of taxpayers (those with adjusted gross incomes above $250,000) pay more than one-third of all federal income taxes.^[39] The top 25% (with incomes above $48,000) pay 82%. The top 50% of taxpayers (having incomes above $24,000) pay 95.7%, meaning that U.S. taxpayers in the bottom 50% income bracket pay just 4.3% of federal income taxes (see Figure 4-5).^[40]

Source: Internal Revenue Service.

Figure 4-5. Tax concentration in the U.S., 1981–1997.

No doubt in partial response to their higher tax burden, Experientials tend to vote more than lower income groups. In recent U.S. presidential elections, 70+% of eligible voters whose total family income was $50,000 or more reported voting, compared to less than 40% of those with incomes under $10,000. Sixty-four percent of homeowners said they voted, compared with only 42% of renters. On the age front, 70% of those aged 55–74 (a high-income group) voted compared to approximately 35% of 18- to 24-year-olds (one of the lowest income groups). Education is also a factor: Those with bachelor’s degrees were nearly twice as likely (74%) to have voted as those who had not completed high school (39%).^[41]

The high political participation of Experiential populations is more striking when compared to the general trends in advanced Material countries, where voter participation has shown steady declines in recent decades. In 1960, 63.1% of the voter-eligible population cast ballots in the U.S. presidential and congressional elections, versus 46.6% and 49.3%, respectively in 2000.^[42] Similarly, in Japan, parliamentary elections declined from 73.5% in 1960 to 60.6% in 2000.^[43] In the UK, from 1959 to 2001, rates fell from 77.5% to 57.6%.^[44] Even in a newly Material country like South Korea, voting rates dropped from 76% in the 1958–1962 period to 57% in 1998–2002.^[45]

These tax and voting trends may suggest that mature Material countries, those two or three generations into mass prosperity, may have succeeded sufficiently that majority segments are content with their existing political systems. Free-market policies are taking care of their needs, and most social rights have been codified (if not routinely enforced) at the cost of an acceptable level of taxation.

Experientials are not only influencing policy by voting more. With their excess resources, Experientials are also attempting to promote their own personal, social, and economic values by seeking out and supporting groups that reflect those agendas, and these groups wield substantial power and influence over government. In America, for example, 608 political action committees (PACs) were registered in 1974; by December 1995, the number of PACs totaled more than 4,000.^[46] The range of interests they promote are vast, and include groups like the National Rifle Association (NRA), the Sierra Club, the National Organization for Women (NOW), and the American Association of Retired People (AARP, with 35 million American members). Also growing in prominence are new political movements like the Greens and the Right to Life Party, among others.

As societies advance economically, the power of government may diminish domestically. But internationally, the state remains a very real and important actor. Globalization has led to even more state involvement in international affairs, especially for the U.S. and Europe whose security forces are now spread around the world. As people become more interconnected through technology and economics, instability in one region can destabilize another. This becomes an issue of international concern in a very real and immediate way.

The importance of governmental structure, even an Experiential-oriented, non-interventionist model, is made abundantly clear in times of insecurity and national emergency. In June 2000, just 29% of Americans said they trusted the federal government to do what is right most of the time. Just days after the terrorist attacks of September 11, 2001, over 60% said they trusted the government.^[47] Further, people were instantly more willing to give up certain rights and privileges in order to feel protected. A New York Times/CBS News poll in December 2001 found that 64% of Americans said they supported presidential authority to make changes to rights usually guaranteed by the Constitution.^[48] Inglehart calls this reaction the “Authoritarian Reflex.” In the most extreme cases, this sort of insecurity can pave the way to an authoritarian regime as people seek the perceived “strong man” to lead them to recovery.^[49]

Globalization and the Loss of Sovereignty

Is the international flow of goods and services—the globalization of the world economy—making governments slowly obsolete? While it is unlikely that we will see the end of the state as political unit anytime soon, there are transnational actors that increasingly encroach on governments’ abilities to act. This is particularly true as more and more of the world recognizes the merits of world trade and capital mobility: To be part of the system, they must abide by certain rules. Over the past 50 years, world trade has swelled from $310 billion to nearly $6 trillion, and accounts for more than 20% of world output.

The WTO demands that governments align tariffs and subsidies with those of their partners. To enter the WTO, China had to open many hitherto protected industries to foreign ownership and competition. By slashing tariffs, the government decreased its own hold and ability to shape the domestic economy. But without opening to global trade, these economies are doomed to stagnate.

Sovereignty’s assault is not limited to supra-national institutions like the IMF, World Bank, UN,^[50] and WTO. Multinational companies (MNCs) are also important conduits of change. MNCs often side-step their home governments and bargain directly with foreigners. Many countries make large concessions to attract MNCs and their factories. And privatization in many developing nations often provides access for MNCs to buy into new marketplaces. As seen in Figure 4-6, many MNCs are larger than the nations they work with.

Figure 4-6. 1999 comparison of countries and corporations(GDP and sales are in millions of U.S. dollars).^[51]

This corporate economic muscle can roll over government policy on occasion. Not only do companies side-step government regulators, but they also dictate the shape of policies and reform. There are also private financial institutions—banks, mutual funds, hedge funds, among others—that wield mighty checkbooks in the markets. They have their own interests regarding countries’ fiscal and monetary behavior. When such investors grow skittish, their mobile money can be yanked from countries very quickly, creating a stampede that, in itself, often forces countries to alter policies.

And let’s not forget about the increasing number of special interest groups that act across national boundaries. Environmental groups like the Worldwide Wildlife Foundation (WWF) and the Sierra Club rank high on the list of organizations working outside of traditional political channels to effect change, along with a variety of human rights organizations such as Amnesty International.

But countries still hold a few cards. In the fall of 2002, the Chinese government, for example, challenged global pharmaceutical companies to lower prices on AIDS drugs or they would allow generic versions to be produced and distributed in their country: They won the price concessions. We have also seen countries occasionally implement expropriation policies on MNCs or implement capital controls, while others sometimes default on debt obligations—interesting examples of flexing sovereign muscle (though not always to a country’s benefit). While sovereignty cannot be written off completely, foreign influences are attacking it from more angles every day as globalization grows.

It has been demonstrated throughout history, and all over the globe, that wealth creation breeds changes in expectations and capacities of governments. This is true for societies in the Biological, Material, and Experiential-trending phases. In lower income countries, governments struggle with meeting basic needs while setting the stage for future progress. While some have done it with little outside help, many have found that international assistance and pressure can help accelerate progress. With growing affluence, Material societies require their governments to provide institutions and rules to foster capitalism, encourage free markets and trade, assist in and maintain physical infrastructure, and develop human capital for further wealth creation. For the wealthiest strata, government provides support for the expression of the Experientials’ individualized ideological agendas.

As wealth creation continues in all phases of development, governments will have to grapple with ever-changing domestic values and lifestyles in the modern world. Dealing with these rapid evolutions while competing in the global economy and managing international relationships will be major challenges for governments in the coming years.