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May 23, 2008

The Political Economy of Exporting Democracy

What's Economics Got to do with Foreign Intervention?

by Christopher J. Coyne

Discussions of foreign intervention often devolve into ideological debates. Republicans contend that the Democrats are "soft" on the war on terror and can't stomach the sacrifices that are required to spread democracy and freedom around the world. Democrats often respond that the Republicans botched the current efforts in Iraq and Afghanistan with poor planning and a general lack of "effort." If only better planning had taken place prior to occupations, the argument goes, the U.S. would not be mired in these situations.

But both sides miss the important issue. It is rarely considered whether the U.S. government has the means available to accomplish what it sets out to do when it intervenes abroad. Economics can shed important insights into government's capabilities, or lack thereof, in this regard. In After War: The Political Economy of Exporting Democracy, I use the economic way of thinking to analyze the ability of the U.S. to "export" liberal democratic institutions abroad. Employing the tools of economics affords the opportunity to put aside ideological issues and focus instead on the ability of the U.S. government to achieve its stated ends of spreading Western-style institutions.

Economists emphasize that people face constraints (e.g., knowledge, information, income, etc.) and respond to incentives. Incentives refer to factors influencing human behavior by changing the relative costs and benefits. When the benefits associated with a certain behavior increase, people engage in more of it. Likewise, when the costs associated with a certain behavior increase, people engage in less of it.

From an economic standpoint, military occupation is all about constraints and incentives. All of the various individuals (i.e., members of the military, bureaucrats, policymakers, politicians, citizens and policymakers in the occupied country, politicians in neighboring countries, etc.) involved in foreign interventions face certain constraints and incentives which contribute to ultimate success or failure. The application of the economic way of thinking to foreign intervention goes a long way in explaining why a majority of U.S. efforts to export democracy abroad through military occupation have failed dismally.

The Knowledge Problem: Creating Incentives for a Free Society

The most significant constraint facing policymakers and occupiers is the fundamental knowledge problem of establishing the foundations of a free society where they do not already exist. Many agree on the general characteristics of a free society – protection of individual and property rights, freedom of speech, rule of law, etc. – but the knowledge of how to effectively design and impose these characteristics is lacking.

The lack of knowledge regarding the factors leading to liberal democracy is captured in the following list of propositions put forth by political scientist Doh C. Shin (1994: 151):

1) There are few preconditions for the emergence of democracy,

2) No single factor is sufficient or necessary to the emergence of democracy,

3) The emergence of democracy in a country is the result of a combination of causes,

4) The causes responsible for the emergence of democracy are not the same as those promoting its consolidation,

5) The combination of causes promoting democratic transition and consolidation varies from country to country and

6) The combination of causes generally responsible for one wave of democratization differs from those responsible for other waves.

Success in military occupation is not simply a matter of taking the rules that work in one society and imposing them on another society. This point is illustrated not only by the many failed U.S. foreign interventions, but also by the failure of several Latin American countries to effectively mimic the U.S. Constitution.

The ability to transport rules between societies is constrained by the fact that underlying belief systems, values and ideals often differ across societies. What works in the United States will not work in the Middle East, just like what worked in Japan and West Germany following World War II is a very poor guide for current and future foreign interventions.

Given the lack of knowledge regarding the foundations of liberal democracy, why should we expect foreign occupiers to be successful in attempts to establish these institutions at gunpoint? The knowledge problem facing policymakers and occupiers prevents them from creating the incentives necessary for a free society. This realization alone should lead us to be extremely skeptical of the ability of the U.S. government to "export" liberal democratic institutions abroad through military intervention.

Unfortunately, the knowledge problem has not stopped U.S. policymakers from using foreign military interventions to foster political, social and economic change. Instead of recognizing the fundamental limitations of these efforts, focus is typically placed on the amount of "effort" in the form of time spent planning, monetary and humanitarian aid, troop levels, the timing of elections and exit strategy. Unfortunately, this overlooks the deeper issue – policymakers do not have the relevant knowledge to achieve their desired end.

The Economics of Politics

Politics is central to any foreign occupation. Therefore, it is important to consider the incentives facing those involved in the political system and the subsequent impact on military interventions and occupations. To illustrate this, consider a few of the key players in reconstruction efforts:

1. Elected officials

Economics suggests that the decisions of elected politicians are often shortsighted in nature. For elected officials that are constrained by a term limit, the main focus is on obtaining benefits during their time in office, even if these shorter-term benefits entail great costs that will be incurred in future periods. This is because current politicians will not incur "bills" that come due in the future since they will be out of office. This logic applies to military intervention just like any other policy. For example, in 2002 Larry Lindsey, a Bush economic advisor, announced that the Iraq war could cost in the range of $100-$200 billion. In order to maintain public support for the war efforts, the Bush administration rejected these numbers as a significant overestimation. To date, the war has cost over $500 billion with no end in sight. Further, Joseph Stiglitz and Linda Bilmes estimate that the war and reconstruction in Iraq could cost closer to $3 trillion when all is said and done and all direct and indirect costs are taken into account.

2. Bureaucrats

The occupation and reconstruction of Iraq has been characterized by infighting between various government agencies and bureaus. Many blame this on poor planning and management on the part of the Bush administration. However, the economics of bureaucracy predicts that this is the outcome we should expect no matter which party is in charge. Consider the incentives that bureaucrats face. Absent profit and loss to judge their effectiveness, the success of a bureau is judged by the size of its budget and the number of bureaucrats employed. Foreign occupations provide an excellent opportunity to increase both. The result is that while bureaus are supposed to be working together for a common goal, they end up fighting with each other in the hopes of establishing a dominant position and securing a bigger share of the resources associated with the intervention.

3. Special-interest groups

In addition to bureaucrats, private firms also seek to influence foreign interventions and secure a share of the associated monetary budget. Central to the process of securing contracts and significant roles in the intervention are the relationships between these firms and elected officials and bureaucrats. One example of this is the role played by Halliburton in the ongoing reconstruction of Iraq. The popular media has highlighted that Dick Cheney was the CEO of Halliburton from 1995 to 2000 as evidence of the connection between Halliburton and the Bush administration. While important, this neglects the more important fact that Halliburton has had a close relationship with the U.S. government for decades. This includes close connections with both Republican and Democratic administrations. While Republicans are often stereotyped as being in bed with "big business," in reality both Democrats and Republicans foster crony capitalism through the exchange of political favors for financial support.

The resulting military-industrial complex is a dynamic set of political, bureaucratic, and economic interests seeking to influence foreign policy regardless of the need or viability of this policy. It includes bureaucracies and special-interest groups which view foreign interventions as a lucrative profit opportunity. It also includes politicians from both sides who rely on the fear of foreign threats to maximize their votes. The main takeaway is that the perverse incentives created by political institutions affect foreign interventions by influencing policies and outcomes. The result will often be dysfunction or failure.

The Failure of Central Planning (Again) and the Free Trade Alternative

The main insights from the economic way of thinking regarding foreign intervention and military occupation can be summarized as follows:

1) Policymakers and occupiers face an array of constraints, both internal and external to the country being occupied, which make reconstruction efforts more likely to fail than to succeed.

2) The failure of foreign interventions and reconstruction efforts is not a matter of political ideology or the political party in charge. Nor is it an issue of "trying harder" with more troops, money, the timing of elections, or better planning.

3) The failure of foreign intervention and reconstruction efforts is due to the fundamental inability of government to centrally plan the complex array of formal and informal institutions of a free and prosperous society.

Military occupation and reconstruction is an exercise in large-scale central planning. For the same reasons efforts to centrally plan the economy under socialism failed, so too do efforts to centrally plan the complex array of institutions underpinning a free society. Given the abysmal failures of government attempts to centrally plan economies, why should we expect foreign interventions which utilize the same means to be any different?

In After War, I propose a shift in U.S. foreign policy toward a default strategy of non-intervention coupled with unilateral free trade with all countries. This strategy calls for a withdrawal from current engagements and an immediate reduction of trade barriers to U.S. markets, granting full access to all countries around the world. The logic behind withdrawal is grounded in the constraints discussed above. The logic underpinning unilateral free trade is that in addition to the economic benefits from trade, free trade also generates cultural benefits through the exchange of ideas, beliefs, and alternative ways of life. What better way to expose people throughout the world to the values of freedom, liberty and tolerance than to practice them ourselves?

Of course my proposed strategy does not guarantee that societies around the world will adopt western-style institutions. But neither does military intervention, as indicated by the historical record showing more failures than successes.

With the collapse of socialism, there is widespread consensus regarding the futility of economic central planning. This same logic has not been extended to foreign interventions that attempt to centrally plan economic, legal, social and political institutions. Like socialism, these more recent efforts at central planning are doomed to fail.


Shin, Doh Chull. 1994. On the Third Wave of Democratization: A Synthesis and Evaluation of Recent Theory and Research. World Politics 47: 135-170.

Stiglitz, Joseph and Linda Bilmes 2008. The Three Trillion Dollar War: The True Cost of the Iraq Conflict, New York: W.W. Norton.

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Christopher J. Coyne is an assistant professor of economics at West Virginia University, and is the author of After War: The Political Economy of Exporting Democracy.

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