FEW CHALLENGES ARE MORE CRUCIAL TO POLICY-MAKERS during this first part of the twenty-first century than ensuring the consolidation and survival of the world's youngest democratic states. The advance of liberal democracy to places yet untouched would mean increasing civil liberties and opportunities for literally millions of people, coupled with much brighter prospects for advancing global commerce and international peace. Conversely, the costs of democratic failure could prove difficult to contain, as authoritarian solutions to political and economic problems gather currency. It is because the stakes are so high that today's foreign assistance programs have made democratization a “core priority” (Carothers 1999), and in fact the public rhetoric in this case has been matched to some extent with increased funding – and even, for better or worse, military action.

To be sure, in only a very few places will foreign assistance and intervention make the decisive contribution that determines the fate of a young democracy (and we recall that many scholars consider foreign aid, as a general rule, to be detrimental to political and economic development). If a democracy is to establish and consolidate itself, it will mainly be due to local conditions on the ground coupled with good institutional arrangements and the policy choices made by elected leaders.

ONE OF THE MOST SIGNIFICANT FINDINGS TO EMERGE FROM our descriptive statistics concerns the considerable cross-country and cross-regional variation we observe with respect to the economic performance and political durability of young democracies. Thus, democracy in Eastern Europe and Latin America has generally moved (with some important exceptions we discuss later) toward consolidation, whereas in East Asia and Africa it has faced greater difficulty taking root. Why is that the case? What explains this diversity in the prospects for democratic survival?

In this chapter we explore these questions from a regional perspective. Naturally, we do not pretend to offer a detailed history of the political economy of each part of the developing world; instead, following a pioneering article by Krieckhaus (2006), we highlight the effects of the “initial conditions” commonly associated with particular places – for example, income and asset inequality in Latin America and ethnolinguistic fragmentation in Africa – on subsequent political and economic developments following the shift to a democratic polity. Although some of the variables we focus on in what follows do not necessarily loom large in our regression analysis, they do emerge as significant in the context of particular countries and this reminds us of the importance of conducting in-depth case study research alongside large-N data analysis.

WE BELIEVE THAT THE FINDINGS PRESENTED IN THIS book have potentially important consequences for industrial world's foreign assistance policies and programs that have democracy promotion as one of their key objectives. Specifically, we have argued that the leaders of young democracies may face great challenges in establishing their legitimacy and credibility, especially in divided societies where trust among social groups is lacking. In such cases, leaders may try to concentrate power by pursuing policies that enrich particular, targeted groups of “insiders” over the short run, but at the cost of undermining the broader public's faith in the value of democratic institutions. When weak political institutions combine with poor economic performance, democracy is unlikely to take root; in fact, when the institutions of newly democratic states are of poor quality, even relatively strong growth may not save them from backsliding or reversal, as so many recent cases (e.g., Thailand, Venezuela, and Russia) unfortunately illustrate.

Further, we have seen that the kind of economic performance may also matter to democratic consolidation. If countries enjoy growth but the wealth is not spread equitably, or in a way that promotes opportunities for socioeconomic mobility, consolidation may prove more difficult to achieve; as we have already seen in Chapter 2, highly unequal countries are less likely to remain democratic.

Definition of Democracy

Classifying governments as democratic or nondemocratic, as well as identifying episodes of political change as democratizations, is fraught with theoretical and practical pitfalls. For example, Milanovic (2005) finds that when using the Polity IV index of democracy, which has a 20-point scale (−10 to +10) that ranks regimes from most authoritarian to most democratic, where the analyst draws the line (e.g., at 0 or at +1) between democracy and authoritarianism has a significant impact on the findings. Our analysis attempts to avoid engaging with this particular issue by first identifying democratizations and then classifying the regime prior to the democratization as undemocratic and the resulting regime as a new democracy. Consequently, a more accurate term for the countries that we analyze might be “newly democratized” countries rather than democracies.

In building our democratization data set, we have relied on the Polity IV data set on political regime characteristics and transitions (Marshall and Jaggers 2005). Although the aggregation of the various components of the Polity score has been characterized as problematic (Munck and Verkuilen 2002), the extensive disaggregated data on regime characteristics that the Polity project makes available led us to use this measure. In particular, we employ the Polity IV score for the level of constraints on the executive, a factor not assessed by, for example, the classification developed by Przeworski et al. (2000). Consequently, we found the Polity data the most appropriate for our purposes.

RECENT YEARS HAVE SEEN A GROWING NUMBER OF ACAdemics and policy-makers express considerable optimism that democracy and economic growth are not only compatible but also mutually reinforcing. Democracy, for example, is alleged to provide investors with secure property rights, fostering growth that in turn strengthens domestic support for fledgling democratic institutions. As an example of this view, leading democracy scholar Larry Diamond (who, among other responsibilities, has served as a governance adviser in Iraq) recently told a group of African leaders that “Africa cannot develop without democracy,” while further asserting that the academic literature points “clearly” to “a causal effect of democracy on economic growth…” (Diamond 2005, italics added).

As a consequence of that supposed causal relationship, he urged those who were gathered to shun any thoughts of adopting authoritarian solutions to their economic problems. Diamond said that the East Asian miracle, for example, “took place in a historic and regional context that is unlikely to be repeated” and that it therefore failed to provide a relevant developmental model for contemporary political leaders, despite continued growth in such countries as China and Singapore (Diamond 2005). Democracy was not simply one path to development; apparently it was now the only path.

Diamond's line of argument stands in sharp contrast to a long tradition of research in political economy making precisely the opposite claim: namely that democracy and democratic institutions, including elections and powerful legislatures, provide political incentives that undermine long-run growth (for influential arguments, see Huntington 1968 on developing countries and Olson 1982 on the advanced industrial states).

The international community has good reason to be concerned by the fate of the world's young democracies (Freedom House, “Freedom in the World 2008,” Press Release, January 16, 2008). From Latin America to East Asia, constitutional arrangements and democratic institutions are under fire. Is the “third wave” of democratization (Huntington 1991) now receding? If so, what is causing the retreat?

Reports from the field indicate that democracy's health is fragile. During the research and writing of this book, for example, the democratically elected regime of Thanksin Shinwatra in Thailand was overthrown by a military coup in September 2006 (representing the fourth time that democracy had collapsed there), only to see a new but uneasy round of parliamentary elections held 16 months later. Meanwhile, a new move toward democratization in Pakistan (that country's fifth attempt to establish this regime type) was marred by election-related violence culminating in the assassination of former Prime Minister Benazir Bhutto. In Africa, elections in Kenya in late December 2007 that were widely viewed as fraudulent led to widespread bloodletting along ethnic lines.

Elsewhere, democracy in Fiji (the second episode of democracy in that country) abruptly ended in a coup d'etat in December 2006, while in January 2007 the military in Bangladesh conducted what might be called a “soft” coup, maintaining the government in power while demanding that it declare martial law in the face of a deteriorating political situation.

Chapters 2 and 3 have presented three important findings thus far. First, in direct contrast with the nations of the OECD, governments of developing countries are sensitive to globalization and race to the bottom pressures in social security and welfare. Nevertheless, the findings in chapter 2 suggest that, paradoxically, those that comprise the bottom quintile of income distribution are not the ones directly harmed by a race to the bottom; this is mostly because social security, education, and health spending in LDCs tends to be regressive, helping mostly the middle class. The third major finding is that, while levels of health and education may not be increasing in response to globalization, public education spending is becoming more equitable. These findings overall are instrumental in illustrating the complex relationship between states and markets in the current era of globalization; domestic institutions (i.e. labor market institutions, the government–labor relationship) mediate and influence policy outcomes in a decisive and meaningful way.

Are the broader implications of these findings that the race to the bottom is leading towards convergence in lower-income economies? In other words, are all developing nations advancing towards the adoption of the “lowest common denominator” – the “neoliberal bottom” – in welfare provisions for their citizens, emphasizing minimal social welfare protections and deregulation, and investing only in those social policies that complement markets (e.g. education)?

Along with optimism for progress, the ascendance of global capitalism has given rise to fears of decreased welfare protections and benefits, as well as a loss of sovereign power for individual nations. Academics, journalists, policy-makers, and activists around the world caution that globalization will inevitably lead to a race to the bottom. According to the RTB hypothesis, in a world unhindered by restrictions on trade and capital flows, investors will pursue the highest rate of return, wherever that may be found. Nations that go counter to the market by protecting their citizens from the worst of its effects could lose out in the competition for global business and funds. Safety nets, environmental standards, and acceptable labor costs and protections could all raise production costs or risk lower profit margins.

As pointed out in the introduction, scores of sophisticated analyses reveal that the race to the bottom is not a concern in developed countries. Does this imply that fears of a race to the bottom in the developing world are also misplaced? A full answer to this question must begin with an account of why globalization might affect rich and poor countries differently. That is, are there compelling reasons to expect a different outcome in developing countries from what has occurred in their more developed counterparts?

I argue that it is domestic institutional differences between developed and developing countries, especially those involving labor, that give rise to different policy reactions to international market expansion. In the current economic environment, the ability of labor market institutions in the developing nations to negotiate compromises effectively (or not) between government, labor, and business is the chief factor creating these differences. Unlike the advanced industrialized nations, where labor tends to be more organized and institutions more broad-based, the fragmented character of LDC labor organizations makes it near-impossible for them to negotiate with one voice, and the differing agendas give governments under pressure from international markets the leeway to reduce benefits. Thus, without mobilized and coordinated labor market institutions, RTB pressures prevail, and retrenchment in social spending will take place.

This chapter attempts to unravel how and why the effects of globalization in the developing world are mediated by domestic institutions linked to labor.