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Will the Post-War Rebirth of the West Revive Democracy?

Putin’s war has rekindled the civilizational clash between democracy and authoritarianism. However, a fundamental contradiction lies at the heart of Western foreign policy: economic liberalism undermines democracy promotion.

 

Putin’s war against Ukraine is a violent aggression of an authoritarian imperialist oligarchy against a country that tries to go its own way. Ukrainians are suffering because their Eastern neighbour does not tolerate sovereignty within the area it regards as its zone of influence. Thanks to the bravery of the Ukrainian people and the coordinated response from the E.U. and the U.S., the West will emerge stronger after this war. As President Biden’s epochal Warsaw speech also showed, there will be a lot of talk about the civilizational clash between democracy and authoritarianism, the battle between light and darkness, the exhaustion of populism, and the revival of centrist liberalism. However, the post-war rebirth of the West does not automatically guarantee the revival of democracy. A fundamental contradiction lies at the heart of Western foreign policy: economic liberalism undermines democracy promotion. This article explores the war’s political-economic implications for international relations.


Sanctions that backfire


Putin’s violent imperialism justifies sanctions. Sanctions signal unity and strength, which is essential to push back against Russian aggression. However, in their current form, they might backfire. Sanctions are designed to inflict pain on the general population. During World War I, around 400,000 people died of blockade-induced starvation and illness in Central Europe, with another half a million deaths in the Ottoman empire.[1] While the effect of sanctions on Russia will not be so harsh, they severely burden the general population.


Lacking democratic channels, it is uncertain if these dispersed social costs will affect Putin. Several weeks after their introduction, Putin keeps shelling cities, and the attacks on civilian targets have intensified.[2] Smaller, economically dependent countries are easier to pressure through sanctions. During the 20th century, only three out of 19 attempts to use sanctions as a policy to impede war have been successful. Each time, the target was a small country. Bigger countries with more potential for self-sustenance are more likely to withstand sanctions.


Sanctions can easily escalate the push towards self-strengthening autarky, competitive nationalism, and the global scramble for resources. This is what happened in the 1930s, when sanctions intended to stem violent nationalism backfired. “Rather than stopping this nationalist tide and the risk of war that it entailed, sanctions reinforced it.”[3] Such dynamics are hardly compatible with democracy. Instead, they favour autocratisation. Without surgically targeting Russia’s ruling elite, sanctions are likely to be ineffective and could backfire.


Trapped in its own greed


Sanctioning the financial and political elite instead of the masses is technically doable. However, there is a great deal of hypocrisy around sanctions that makes such surgical sanctioning impossible. Western business elites rely on the same offshore network to hide their money as their Eastern counterparts. It is no surprise that there has been no significant advance on the regulation of offshore havens and the creation of a global financial registry that would allow democratic governments to crack down on illicit money.


The United Kingdom has acted as the key enabler of Russian kleptocracy. London and British offshore tax havens have long been the preferred destination for Russian capital. The ties go deep into the Conservative elite, with numerous Tory politicians accepting money from Russian backers. It is likewise reported that the Conservative Party’s chairman has run a luxury concierge service for Russian elites for 15 years.


It is not just the U.K. German elites like to pose as defenders of liberalism and ethical investments—but they have also been shielding Eastern Europe’s illiberals to protect corporate profits. Shortly before his term ended, German Chancellor Gerhard Schröder permitted the construction of the Nord Stream pipeline supplying gas from Russia to Germany. In return, Putin made him chairman of the shareholders’ committee of Nord Stream AG, a company owned by Russia’s Gazprom. Germany’s business elites have also made hefty profits in Hungary by cosying up with Viktor Orbán. “Schröderisation” has become the synonym for cynical business deals with illiberals and oligarchs.


Putin has been using the West’s own greed against the West, hoping that these financial interdependencies would ensure the West turns a blind eye to his violence and corruption. The West allowed illiberal elites and oligarchs to get fat over the past decade. And it is the Western-curated network of offshore havens that makes targeted sanctions very difficult to implement.


The development of underdevelopment


There is also a deeper mechanism through which economic liberalism undermines democracy promotion. Rapid liberalisation freezes countries’ competitiveness. If a country is competitive in low-wage agricultural export, then under liberal trade regimes, it will specialise in low-wage agriculture. In the long run, the country specialises in poverty and underdevelopment. As countries on Europe’s periphery specialise in low-wage production, they are increasingly plagued by brain drain, which further pushes these countries towards specialising in low-knowledge-intensity production. This has already happened in Ukraine. And it will continue to happen if the policies don’t change.


The Ukrainian economy experienced massive deindustrialisation in the 1990s. Domestic innovation dwindled, knowledge-capacities were destroyed, and the economy de-skilled like in most post-socialist countries. The number of trained scientists went down from 313,000 to 77,000 between 1990 and 2013.[4] The country’s free trade agreement with the E.U. signed in June 2014 also led to a decline in high-complexity industrial exports to the East and an increase in the share of low-complexity exports, agricultural products, and raw materials to the West. This leads to chronic current account deficits and mounting international debt.[5]


Instead of investing in innovation-driven growth, Ukraine—like several other countries in Eastern Europe, such as Hungary or the Baltic states—embarked on financialised development, fuelling consumption financed by foreign currency loans.[6] Banks concentrated on credits for non-productive consumption, such as mortgage lending to households. They funded this credit boom by importing short-term capital from Western Europe in Swiss Franc, U.S. dollar, and Euro loans, which they loaned out in the local currency. This risky foreign currency borrowing scheme, the Eastern European equivalent of subprime lending,[7] collapsed as the 2008 financial crisis destabilised the exchange rate, leading to skyrocketing debt and impoverishment.


Investing in human capital, upgrading the domestic industrial base and domestic innovation would help offset the adverse effects of global economic integration. However, like most other countries on Europe’s Eastern periphery, Ukraine lacks the funds to do that. Furthermore, the economic agreements with the E.U. and the I.M.F. reduce the state’s developmental wiggle room. Constant austerity drains public services. State-led developmental projects that were the engines of the rapid development of the most successful economies in East Asia become difficult to carry out. It is crucial to fight corruption, but this should not undermine efforts to promote domestic industrial upgrading and investment in human capital.


Foreign investment could partially offset de-skilling and deindustrialisation; however, Hungary’s economy, one of the most FDI-dependent economies in the world, shows that FDI is no panacea.[8] There is no guarantee that foreign know-how would spill over to the domestic economy. Thus, investment-dependent economies remain trapped in an assembly-platform function importing innovation and building their competitiveness on cheap domestic labour.


Even the most successful foreign-investment-dependent economies run into developmental bottlenecks, stagnant employment, low wages, growing inequalities, which undermine the legitimacy of liberal democracy.[9] If Western elites continue to push Ukraine towards a similar dependent development trajectory, they will sow the seeds of illiberal discontent.


From shock therapy to nationalism


Shock therapy was born by distilling radical economic liberal ideas. Implemented by bracketing “democratic niceties” that would “delay or even undermine economic policy-making,” shock therapy led to suffering and resentment of elites throughout Eastern Europe, ultimately fuelling the rise of authoritarian nationalism.


Shock therapists advocated for rapid mass privatisation of state assets. Without first strengthening the state’s bureaucratic and legal capacity, mass privatisation allowed the rapid accumulation of kleptocratic capital throughout post-socialist Europe. Members of the former Soviet Union such as Russia and Ukraine experienced particularly botched privatisations leading to rapid oligarchisation of the economy.


Parallel to the massive concentration of wealth in a few hands, mass privatisation also led to an unprecedented mortality crisis. Around seven million people died prematurely in the 1990s in Eastern Europe. The working class in deindustrialised towns dominated by one or a few large socialist companies suffered the most. Their physical and mental pain fuelled their resentment against the liberal elites and the cosmopolitan middle classes of the large cities that emerged as the winners of economic liberalisation.[10]


Once the pro-Western liberal elite came to power in Ukraine after the Orange revolution and then in the post-Maidan era, it implemented policies inspired by the same economic liberal recipes, such as austerity and trade liberalisation. The fear of economic loss generated by these policies played into the hands of Yanukovych’s pro-Russian anti-Western populist Party of Regions.


Yanukovych capitalised on criticising austerity measures and trade liberalisation, promising to protect workers and domestic industrial capacities. When he was elected president in 2010, he raised the minimum wage contrary to I.M.F. recommendations. In response, the Fund froze the payment of the previously agreed loan. The I.M.F. continues to push controversial policies in Ukraine, such as the privatisation of land and the remaining state-owned industrial companies.


This division pitting pro-Western neoliberals against anti-Western populists is typical in Eastern Europe’s dependent economies. If voters associate political liberalisation with economic pain, austerity, and material decline, their trust in democracy erodes, and authoritarian leaders gain a foothold.


These economic debates contributed to the escalation of armed conflict in Ukraine. Research into the likelihood of rebel activity in the Donbas shows that local economic factors were stronger predictors of rebel violence than Russian ethnicity or language. Municipalities where the local population was highly vulnerable to trade disruptions with Russia induced by austerity and the E.U. free trade agreement were more likely to revolt and fell under rebel control earlier.[11] Putin seized on this opportunity and escalated this revolt first into a low-burning civil-military conflict then into an outright imperialist war.


Nationalism is not only escalating on Europe’s Eastern periphery. The global disillusionment with liberalism fuels the rise of competitive nationalism and protectionism around the globe. This competing nationalism will fuel inter-hegemon rivalry, a toxic cycle of growing resentment, and increase the possibility of violent conflicts on a global scale.


Toward a progressive internationalism


Democracy promotion through economic liberalism has been a blatant failure. The West based its foreign policy on the idea that cynically trading with autocrats would tame them. That capitalism would turn authoritarian regimes into democracies. However, it was capitalism that turned increasingly authoritarian instead.


Let’s be clear: global economic integration and partnership with the West is the only way ahead for Europe’s Eastern periphery. The region’s nations have every reason and right to seek NATO’s protection. The alternatives are Russia’s violent imperialism or China’s techno-authoritarianism. However, this makes it even more critical to get Western foreign policy right. Global economic integration and partnership with the West can take different forms.

Historically, democratisation never happened due to economic liberalisation and capital accumulation. It has happened through the empowerment of the working class, through improvements in social cohesion. If the West wants to show it means business, it needs to shift its foreign policy away from economic liberalism.


Western democracy promotion should deepen multilateral political cooperation, end the cynical profiteering with illiberals and their oligarchs, crack down on offshore tax havens, strengthen the state in peripheral economies, build up strong, independent rule-following bureaucracies, strengthen civil society and trade unions, and improve social cohesion. This will allow for sustainable and inclusive development and the consolidation of liberal democracy.


We need a new progressive internationalism centred on the notion of global justice, something that the alternative globalisation movement already advocated for twenty years ago. We need a new global green social democracy. Re-regulating the flow of capital and taxing the financial elites of the West and East would free up resources to invest in human capital and social cohesion. It would also allow for international industrial policy cooperation to mitigate climate change. A politically coordinated global Green New Deal would not only serve social and environmental goals but also help strengthen democracy. Will the reviving West learn from its own mistakes? Are Western elites ready to double down on democracy even if it means retiring economic liberalism? Only a progressive internationalism is genuinely compatible with democracy promotion.

Footnotes

[1] Nicholas Mulder, The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (New Haven 2022: Yale University Press), 5.

[2] As of March 19, 2022.

[3] Mulder, The Economic Weapon, 9.

[4] Yuliya Yurchenko, Ukraine and the Empire of Capital: From Marketisation to Armed Conflict (London 2018: Pluto Press), 191.

[5] Alexander Kravchuk, Zakhar Popovych, Roeline Knottnerus and Daniel van Heijningen, The Expected Impact of the EU-Ukraine Association Agreement (Amsterdam 2016: Transnational Institute), accessible at https://www.tni.org/files/publication-downloads/online_tni_issue_brief_oekraine.pdf.

[6] Johannes Pann, Reinhardt Seliger and Julia Übeleis, “Foreign Currency Lending in Central, Eastern and Southeastern Europe: The Case of Austrian Banks,” in: P. Mooslechner, P. Reading, M. Schürz and M. Würz (eds.), Financial Stability Report 20 (Vienna 2010: Oesterreichische Nationalbank): 56–76.

[7] Or Raviv, “Chasing the Dragon East: Exploring the Frontiers of Western European Finance,” Contemporary Politics 14, no. 3 (2008): 297–314.

[8] Gábor Scheiring, The Retreat of Liberal Democracy: Authoritarian Capitalism and the Accumulative State in Hungary (New York 2020: Palgrave Macmillan).

[9] Gábor Scheiring, “Varieties of Dependency, Varieties of Populism: Neoliberalism and the Populist Countermovements in the Visegrád Four,” Europe-Asia Studies 73, no. 9 (2021): 1569–1595.

[10] Gábor Scheiring, “Left Behind in the Hungarian Rustbelt: The Cultural Political Economy of Working-Class Neo-Nationalism,” Sociology 54, no. 6 (2020): 1159–1177.

[11] Yuri M. Zhukov, “Trading Hard Hats for Combat Helmets: The Economics of Rebellion in Eastern Ukraine,” Journal of Comparative Economics 44, no. 1 (2016): 1–15.


 

Original: ISRF Bulletin, March 29, 2022.