Markets, democracy, and ethnicity: toward a new paradigm for law and development.

Author:Chua, Amy L.

    It is by now a commonplace that we are living in a period of radical global transformation.(1) Particularly in the developing world, this transformation has had two watchwords: markets and democracy.(2) Indeed, the reascendant teleology of free-market democracy has redefined the very concept of underdevelopment--a term that has shed its exclusively Third World trappings and today joins in a single embrace countries from Algeria to Azerbaijan, from Pakistan to Poland.(3)

    Marketization and democratization each have been the site of massive Western legal intervention in the developing world. Legal work on marketization ranges from structuring international project finance(4) to drafting market-oriented laws(5) to developing legal regimes that facilitate the transition from command to market economies.(6) Work on democratization includes not only writing constitutions(7) but also grappling with formidable issues such as the transplantability of Western social and political institutions(8) and postcommunist state building.(9)

    But there is one constitutive element of developing societies that these interventions repeatedly overlook. Entrenched ethnic divisions permeate most developing countries,(10) and these divisions bear a distinctive and potentially subversive relationship to the project of marketization and democratization. In First World countries, markets have tended to reinforce the economic dominance of a perceived ethnic majority over those countries' most salient ethnic minorities--hence the controversial calls for (and backlash against) market-"correcting" affirmative action for blacks and Hispanics in the United States.(11) In the developing world, the ethnoeconomic dynamic tends to be just the reverse: Markets often reinforce the economic dominance of certain ethnic minorities. In the First World, democracy poses no radical challenge to economically dominant ethnic groups.(12) By contrast, in the developing world, democracy characteristically pits a politically powerful but impoverished "indigenous" majority(13) against an economically dominant ethnic minority.

    From these simple premises, a number of profound implications follow. First, far from having the civilizing effect that Montesquieu envisioned,(14) marketization in the developing world is often destabilizing, fomenting ethnic envy and hatred among often chronically poor majorities. Second, in most developing countries, democracy can proceed only in deep tension with markets. Rather than reinforcing the market's efficiency and wealth-producing effects, democratization ordinarily will lead to powerful ethnonationalist, antimarket pressures. Third, ethnic division in the developing word cannot be regarded as just another aspect of underdevelopment curable by the universal prescription of free-market democracy. On the contrary, the combined pursuit of marketization and democratization in the developing world is likely to catalyze ethnic tensions, with potentially catastrophic effects, including the subversion of both markets and democracy.

    Despite compelling historical and sociological evidence corroborating these propositions,(15) and despite the unprecedented influence currently wielded by American lawyers in the developing world,(16) the interrelationship among marketization, democratization, and ethnic conflict has been almost entirely ignored.(17) This Article will provide a framework for analyzing and addressing the consequences likely to ensue when markets and democracy collide with the particular ethnic structures that characterize most developing societies.(18) Although there are other potential axes of social division in developing societies, over the last several decades ethnicity "[a]s a political idea, as a mobilizing principle,"(19) has spread through the world with striking new intensity(20) and has been a far more fertile source of mass conflict than, for example, class or religion.(21)

    Part II describes the prevailing law and development paradigm and argues that the ideology of free-market democracy forms the theoretical core of today's international development literature, policy, and practice. Part III highlights a fundamental and pervasive feature of developing societies that lawyers and legal scholars involved in the developing world almost uniformly have disregarded. Most developing countries have one or more ethnic minorities who, for widely varying reasons, have economically dominated the "indigenous" majorities around them. Under certain conditions, the presence of an economically dominant minority will introduce a fundamental tension between markets and democracy. This will be the case whenever the economically dominant minority is also market-dominant, meaning that it tends to be economically dominant under market conditions.(22) In developing countries with a market-dominant minority, markets and democracy will tend to favor different ethnic groups. Markets will (by definition) benefit the market-dominant minority, while democracy will increase the power of the relatively impoverished majority. In these circumstances, markets and democracy will not be mutually reinforcing. Rather, the combined pursuit of markets and democracy will produce a very charged and unstable situation.

    Part IV proposes a model to explore the consequences of pursuing markets and democracy under these conditions. The sobering thrust of the model is that in many developing countries, the combined pursuit of marketization and democratization will likely lead to one of three nonexclusive outcomes: (1) an ethnically fueled antimarket backlash; (2) actions directed at eliminating the market-dominant minority (for example, atrocity or expulsion); or (3) a retreat from democracy.

    Part V applies the model developed in Part IV to three countries currently receiving extraordinary attention from the international business and legal communities: South Africa (the "next Hong Kong?"(23)), Kazakhstan (the next Kuwait?(24)), and Vietnam (the next "Asian Tiger?" (25)). Without purporting to offer a how-to guide, Part IV explores the question of which reforms, legal and nonlegal, would lead to the long-term success of markets and democracy in the developing world. If the model is correct, a critical policy question is whether the potentially explosive ethnic dynamics triggered by markets and democracy in developing countries can be kept in check with conventional human rights and social welfare measures (for example, judicial reform, international treaties, progressive taxation, social security, and public works projects) or whether they require more radical measures. Ultimately, the historical record of the developing world suggests that, short-term efficiency costs notwithstanding, narrowly tailored, ethnically conscious interventions into the market may prove the best way of forestalling more drastic outcomes (for example, ethnically targeted expropriations or ethnic eliminationism). Along with market adjustments, there might also be room for ethnically conscious adjustments to the democratic process.

    In their systematic ahistoricism, Western lawyers involved in the developing world have not focused enough on whether today's sophisticated market initiatives fundamentally differ from the market policies of the past when viewed from a distributional and ethnodistributional perspective. Are today's international asset securitizations and telecommunications privatizations structurally any more advantageous to majorities in developing countries than yesterday's mining concessions? Why have some groups repeatedly fared better than others under market conditions? Proponents of marketization and democratization must start confronting these questions, however awkward or unsettling. If they do not, markets and democracy in the developing world will remain mutually subversive.


    Notwithstanding the operatic "death" of the law and development movement twenty years ago, its central tenets remain the intellectual backbone of international development policy and practice. Section A will clarify my use of certain terminology in this Article. Section B will describe the rise and fall of the early law and development movement. Section C will describe the prevailing law and development orthodoxy, as manifested both in the current literature and in practical international application. Finally, Section D will highlight a fundamental problem in the current paradigm.

    1. Terminology

      In this Article, the term "marketization" refers to the whole spectrum of efforts toward privatization and contractualization of economic activity in developing and transitional economies, ranging from the replacement of a command economy with market mechanisms to typical "economic liberalization" measures (such as privatization, liberalization of investment and trade restrictions, and elimination of price controls).(26)

      "Democracy" is a contested term and can take numerous forms.(27) In this Article, I will adopt what Jon Elster describes as the basic definition of democracy: "simple majority rule, based on the principle `One person one vote.'"(28) The term "democratization" will refer broadly to any political reform introducing greater electoral competition(29) or increased majoritarianism in the political process.(30)

      Ethnicity is another controversial concept that has generated much debate among social scientists.(31) Following Horowitz and others, I adopt "an inclusive conception of ethnicity,"(32) which acknowledges the importance of subjective perceptions of identity(33) and encompasses differences along racial lines (for example, blacks and whites in the United States or South Africa), lines of geographic origin (for example, Malays, Chinese, and Indians in Malaysia), and linguistic, religious, tribal, or other cultural lines (for example, Protestants and Catholics in Ireland, and Hutus and Tutsis in Rwanda).(34)

      I use terms...

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