COVER STORY • 1T

he Authoritarian Challenge
to Democracy – a View froman Economist

By Naoyuki Haraoka

China & Russia’s Vaccine Diplomacy
in the Pandemic
China claimed it was successful in containing the spread of Covid19 infections in 2020. It used its authoritarian power to impose acomplete lockdown of major cities and rigorously restrict individual
freedom of behavior, such as in going out for shopping or traveling.
Even by the middle of the year, China had triumphantly said it had
contained the virus and had started focusing on an economicrecovery. It seemed to want to declare that its authoritarian regime
was working better than democratic governance. China has also
been using it foreign policy to boost its political influence on
developing nations, in particular those seriously hit by the pandemic.
Since the beginning of the pandemic in early 2020, China andRussia have been providing masks and other Personal Protective
Equipment (PPE) for hard-hit countries. And now they are providingthem with their own vaccines. While rich nations are trying to getvaccines from Western companies, low- and middle-income nationsin Latin America or Africa or the Middle East are depending upon
China and Russia for vaccine supply. China, with vaccine delivery
contracts with those countries, started delivery through cooperation
channels from its Belt and Road Initiative (BRI). Health was only oneof the many sub-topics of the BRI, but in the pandemic it is now themain focus.
Meanwhile, Russia is now trying to improve its status from anation condemned for the unlawful act of annexing Crimea in 2014 toa vaccine provider and liberator from the pandemic. Both nations’actions on vaccines have been quick, in contrast with the slower
WHO program of vaccine procurement for poorer nations. Such rises
in authoritarianism pose particular challenges to democracies andthe international liberal order. The possibility of democratic
governance being undermined by these challenges has led toincreased concerns among business and policy practitioners indemocratic nations.

Increasing Inequality & Social Divide
in Developed Democracies
In recent years, more nationalistic and anti-globalist sentiments
have been increasing in many democratic nations. In the UnitedStates, in particular, former President Donald Trump adopted a more
adversarial foreign policy, even sometimes against US allies,
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Author Naoyuki Haraoka

believing that US national interests had continued to be hampered byhis predecessor Barack Obama’s concessions to the rest of the world
in disseminating globalization among nations. A typical example istrade. Trump said that these concessions had expanded the US trade
deficit, and so he adopted a more protectionist policy, including
raising tariffs against some nations. In the domain of national
security, he also requested that US allies shoulder a greater burden
and responsibility in defending themselves. His foreign policy wasthus an “America First” policy. In Trump’s view, the argument thatpolicies to maximize the benefits of globalization would always
achieve the best outcome for any country, which had prevailed sinceWorld War II, was not valid anymore. Trump supporters pointed torising income inequality in the nation in recent years and believed
this inequality at least partly stemmed from globalization, which theyclaimed benefitted only the rich elites working in global business andnot the middle class or working class. The increase in immigration
as a result of globalization and the risk to their own jobs was anadditional source of frustration. These factors formed the basis of
their support for Trump. The Chart shows that in most of the major
developed democracies income inequality is rising, as seen in theincreasing Gini Coefficients among most of the OECD economies.
The end of the Cold War in the late 1980s was considered a victoryof capitalism and even before that, at the beginning of that decade,the idea of “leaving everything to price mechanisms” to resolve alleconomic issues was dominant in advanced democracies. This trend
was well represented by Ronald Reagan and Margaret Thatcher. The
1980s became the era in which the jargon “globalization” implied
capitalist nations’ eternal prosperity on the basis of free trade andinvestment, an international economic policy version of laissez faire.
However, since then until the 2010s, very few politicians in advanced
democracies had noted that income inequality was increasing andthere were more voters than ever who felt isolated and frustrated by
the lack of their politicians’ understanding of their real concerns andviews about economic trends, as represented by globalization andthe digital economy. They lost confidence in the political elites thatwere merely promoting the merits of globalization and a knowledgebased society where IT, non-skilled labor saving technology, had
started to play a key role. These poor and isolated people eventuallybegan severely criticizing these intellectual leaders for having
advocated for globalization or innovation only for their own interests.
It is hard to judge objectively how far this anti-intellectualism has
been expanding all over the world. It is not limited to the US. But
https://www.jef.or.jp/journal/

CHARTGini Coefficients of income inequality
0.500.45
2008
1985

0.40
0.35
0.30
0.25
0.20
0.15
0.10

TurkeyGreeceBelgium

FranceHungary

NorwayDenmark

Czech Republic

FinlandSwedenNetherlands

Luxembourg

GermanyJapan

CanadaNew Zealand

Italy

Australia

IsraelUnited Kingdom

Mexico0.00

United States

0.05

Note: The updated Gini Coefficients (data showing income inequality) are added to the G7 nations as follows:
US (2017) 0.39 higher than in 2008
UK (2018) 0.366 higher than in 2008
Italy (2017) 0.334 almost same as in 2008
Japan (2015) 0.339 higher than in 2008
Germany (2017) 0.289 almost same as in 2008
France (2018) 0.301 higher than in 2008
Canada (2018) 0.303 lower than in 2008
Except for Canada, G7 nations’ Gini Coefficients have continued to increase until recently since 2008.
Thus income inequality continued to rise among those nations.

Source: Compiled by the author based on OECD data

here in Japan as well, we are now seeing the increasing popularity ofmedia pundits more inclined to speak their minds in simple and franklanguage rather than giving the usual objective and neutral
observations.
The current coronavirus pandemic will further accelerate income
inequality and social isolation, and this could exacerbate social
divisions and political instability. The inauguration of Joe Biden as
US president in 2021 is not likely to resolve these divisions, despite
his calls for “unity” of American society. The political influence of all
those people who supported Trump cannot simply be ignored evennow. In this regard, the US government will have to continue toprioritize its domestic interests rather than international policies.

Relevant Political Regimes
Authoritarian regimes will not be the answer to a crisis like thepandemic, even if it seems initially that they are containing thepandemic. No administrative system based on rigorous hierarchicaldecision-making will work well in times of uncertainty, as it will bedifficult to find solutions for a crisis only with one or two ideas
stemming from the top of the hierarchy. Democracy would provide avariety of views on possible solutions and this diversity could modifyuncertainty. In the current pandemic, for example, the role of theheads of local governments has been more important than ever inmitigating the spread of virus infections. Central government
decisions for containing the pandemic have been well supplemented
by local governments. Among the policy advisors to the central
government in a democracy, there is a diverse group of experts such
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as epidemiologists, medical experts, economists, and psychologists.
If authoritarian regimes appear to have been successful incontaining the pandemic so far, in the long run they will not be
successful in achieving peace and prosperity in the post-pandemic
era. They severely restrict individual freedom and oppress basic
human rights, and thus seriously damage human welfare. Their lackof diversity of views will limit their abilities in moments of rising
uncertainty, when trust in leadership is vital. Leaders of authoritarianregimes often behave like dictators and their decision-making
process is not transparent. Thus they cannot be trusted.

Encouraging Evolution of Capitalism
How to address these issues of authoritarianism and democracy?
My answer is to encourage the evolution of capitalism. As
mentioned, while authoritarianism is rising and threatening
democracy, democracies themselves face internal challenges, suchas the populist backlash due to rising inequality and people’s senseof isolation. I believe that the promotion of evolving capitalism would
help restore social and political stability.
We can see the beginning of the evolution of capitalism in theexpansion of ESG investments in recent years. ESG refers toEnvironmental, Social and Governance investing. For a company toachieve long-term sustainable growth, it will need to be actively
engaged in these three activities. Today, mainstream investors invest
in companies considered to have high ESG values.
To be more specific, Environmental means active use of renewableenergy sources as well as active efforts for mitigation of global
warming gases; Social means respect for workers’ human rights anddiversity or work-life balance; and Governance means active
disclosure of a company’s information and diversity of its executive
board. In other words, companies pursuing ESG would pay more
attention to a variety of stakeholder interests rather than only toshareholders’ interests. They would correct excessive shareholderoriented management and instead take care of the employees’interests or social and environmental issues for the benefit of thenation or the whole world. In the market, individual investors
increasingly believe in more return and less risk from investment insuch ESG-oriented companies. The US business leaders association
Business Roundtable redefined in August 2019 “the mission ofbusiness corporations” as respecting all the stakeholders’ interests
instead of only shareholders’ interests, as previously adopted in
1997. The World Economic Forum in Davos in January 2020
reconfirmed a stakeholders’ interest-oriented capitalism which had
been advocated by Klaus Schwab, the host and the founder of theforum.
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This trend was born and developed with the enhanced perceptionof sustainability. If social and environmental instability erode thebase of the sound development of capitalism, capitalism itself will bedamaged. So the evolution process of capitalism started.
Looking at international trade, it would be better to reconsider theexisting dominant notion that full trade liberalization would always
achieve the best outcome for all the economies in the world. For
example, in discussing the quality of a Free Trade Agreement (FTA), it
has been considered that the higher the proportion is of items withzero tariffs to the total items covered by the FTA (what we call therate of trade liberalization), the better the FTA, and all trade policy
economists have agreed on the need to pursue such high-quality
FTAs as an ideal model of free trade to maximize the benefits ofglobalization.
This notion is based on the theory that trade liberalization will
always accelerate economic growth. But economic growth can beaffected by many factors, such as macropolicy, innovations,industrial policy, and so on, and it would be difficult to pinpoint the
impact of trade liberalization. One thing that is clear about tradeliberalization is that there will be winners and losers from it. While
competitive industries in the global market would benefit from tradeliberalization, there will also be industries that will lose due toincreases in imports and workers in those sectors will suffer
unemployment as a result. It is natural to assume that labor andcapital in such declining industrial sectors could not transform into
winning sectors immediately. It could take years for them to be able
to do so, even if trade liberalization is successful in achieving higheconomic growth nationwide that could also benefit the losers.
Research has shown that it would take around 10 years for a country
to achieve high economic growth after trade liberalization measures
have been taken.
Another economic consequence of trade liberalization policy basedon this theory is that while in rich countries there would be anincreasing income gap between high-salary workers and low-paid
workers, in low- and middle-income countries this gap woulddiminish. According to the theory, in wealthy developed nations there
would be a comparative advantage of trade in sectors with high-end
labor like high value-added high technology sectors, and free trade
would expand those sectors and benefit its workers, resulting in an
increasing salary gap. Meanwhile, in low- and middle-income
developing nations, their comparative advantage in trade is in the low
value-added sectors and low-end labor intensive ones. Free trade
would thus benefit low-end labor and the salary gap in thosedeveloping nations will diminish.
However, in reality, wages do not respond to labor demand andsupply in a flexible manner. This wage rigidity would prevent thistheory from being realized in practice. Even though the demand for
low-end labor in developing nations increases by international trade,wages would not respond to this increase in demand for low-end
labor. Labor in other sectors would not move to the sectors withcomparative advantage quickly as a result of international trade.
Production factors such as labor and capital exist in rigid rather thanflexible markets. Thus wage inequality in a developing nation would
not diminish so much. Meanwhile, in a developed nation, the highend labor force with academic underpinnings tends to concentrateon the high-tech sectors and with enriched education and humanresource development programs, labor mobility could be higher thanin a developing nation. So in a developed nation the salary gap could
increase, as the theory says.
On this issue, according to the book Good Economics for HardTimes (2019) by Abhijit Banerjee and Esther Duflo, MIT professors
and winners of the Nobel Prize for Economics in 2019, a young
economist at MIT in 2010, Petia Topalova, wrote an important paper
titled “Factor Immobility and Regional Impacts of Trade
Liberalization” (American Economic Journal, 2010), in which she
analyzed numerical evidence of the regional impacts of large-scaletrade liberalization implemented in 1991 in India, and concluded thatthe rate of the decline in poverty was slower in the regions mostseriously affected by trade liberalization than in any other regions.
This finding is contradictory to the theory.
Intuitively, whether in a developed or developing nation, it is moreconvincing to say that trade liberalization would create winners andlosers in the short term at least, as labor and capital would be lessmobile and it would take a long time for them to move to sectors
with a comparative advantage. With economic growth not beingenhanced very quickly as a result of free trade, it would be difficult toreduce this inequality between winners and losers in international
trade without relevant policies. For example, Trade Adjustment
Assistance is a federal program by the US government to try to
reduce the damaging impact of imports on certain sectors of the US
economy. This is one way to achieve redistribution of the benefits ofglobalization between the winners and the losers.
A trade war employing competitive tariff hikes among trading
partners would be detrimental to the global economy as it would
force consumers to pay for the cost of protection. However, in FTAs,
certain items in need of time to structurally adjust to tradeliberalization are often subject to gradual step-by-step tariff
reductions over five or 10 years or even longer. This is reasonable,
since with this policy sectors declining due to trade liberalization
could afford to adjust to the rise in imports. In this light, good FTAs
may not necessarily pursue higher rates of trade liberalization. For
example, less ambitious FTAs like the Regional Comprehensive

Economic Partnership (RCEP), in terms of the rate of tradeliberalization in their tariff reduction schedule, would be better thanthe more ambitious Comprehensive and Progressive Agreement forTrans-Pacific Partnership (CPTPP).
Looking at today’s trade policy agenda, there are many areas
where we need new multilateral rules, as domestic policies arehaving an increasing impact on trade, such as competition policies,
patent policies, and national security policies. In particular, theemergence of the digital economy is enhancing the need for newrules on data security and sensitive technologies in terms of nationalsecurity. The CPTPP, including new rules on domestic policies, could
provide a good prototype of new rules for those issues. Whilepursuing inclusive growth, trade policies should be built upon such arules-based regime.

Conclusion“Better globalization” to achieve inclusive growth would be myanswer to counteract the authoritarian regimes starting to increase
their influence in global governance. Mitigating inequality andloneliness must be at the center of such better globalization. We
could call this “humanistic globalization” as well. Capitalism must
evolve to be more humanistic by taking concerns about inequality
and isolation into consideration.
There are a couple of lessons for economists in trying to achievethis. One is that we should take a holistic approach rather than asiloed one. Today our economy and politics are increasinglyinterlinked. Economists looking at only the economy and ignoring
political movements stemming from increasing inequality andisolation among people would not be able to produce realisticprescriptions for the economy. They must learn from politicalrealities to propose well-balanced and realistic policies.
The other is that a more evidence-based approach would benecessary in policy-making. The analysis of Topalova mentioned in
the previous section tells us that theories can be wrong in the realworld. We have to believe in evidence and not theory. With excessive
preoccupation with authoritarian theories, economists will follow thewrong path, just as authoritarian politicians do who value only asingle idea. Good economics must always stem from a fact-based
objective approach rather than from a theory, no matter how
attractive and mathematically elegant it may appear.

Naoyuki Haraoka is editor-in-chief of Japan SPOTLIGHT & executive managing
director of the Japan Economic Foundation (JEF).

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