McNair Paper 59, Right Makes Might:  Freedom and Power in the Information Age, Chapter 2, May 1998

To give information to the people is the most certain and legitimate engine of government.

The two key stages in the life of most information technologies are invention and application. These stages especially depend on healthy market forces and rational financial returns. Government infringement, opposition, or control at either end retards the technology. In short, success in making and using information technology requires economic freedom.

Creativity and freedom in invention and application have not been this crucial in every industry. In steel making, for example, the economical gathering of ore and coal and efficient manufacturing are key. In nuclear power, fault-free engineering and safe operation are what matter most. In consumer goods, success depends heavily on distribution. But as we can already see from the explosion of practical new ideas, products and services in the decade and a half since the deregulation of the U.S. telecommunications industry, the combination of invention and application, of science and market, provides the combustion for the information revolution.

The prospect of handsome personal profit in return for high-value innovation is critical to attracting the talent and justifying the risk-taking required at the upstream end (i.e., discovery and design) of information technology. While most technical wizards are no doubt motivated by the thrill of discovery, it takes the possibility of becoming the next Steve Jobs to ensure a steady flow of top-drawer scientific talent through graduate school and into the lab. The financial bonanza for breakthroughs by entrepreneur-inventors often comes with being acquired by an established information technology firm with the capacity to productize, market, and support novel ideas.

The development of new information systems and services requires large and efficient venture capital markets. Silicon Valley is as famous for its money engineers as for its software engineers. For such markets to function, returns commensurate with value and risk are needed to rationalize and stimulate daring investments. In addition to strong venture capital facilities, the market must provide the possibility of rapid application, revenues, and profits in order to yield an early payback for investors.

Such conditions cannot be generally replicated in a state-controlled economy. Even if vast public resources are garnered and invested in these technologies, a closed system has no way of emulating the fast market action and growth in valuation, capitali-zation, and earnings (thus reinvestment) that have accompanied the expansion of the information technology market in the capitalist democracies.

State ownership, planning, and resource allocation, even if meant to spark innovation, will more likely extinguish it. The last decade or so has buried the belief, held even in some American quarters, that state-centric, communitarian cultures could out-compete individualist systems in these technologies.¹ It takes the instantaneous signals of a free market to keep up with the blistering pace at which information technology is capable of emitting new applications and achieving lower costs. The information market has a voracious appetite, calling for the next course before it has digested the last. No sooner does a market segment seem saturated (mainframe computers, for instance), than it morphs and demands a better technology on an even greater scale (distributed processing). Because of flexible design, versatile componentry, malleable software, and open connectivity standards, new products and services can be developed, rushed to market, and incorporated with astonishing speed.

Neither producers nor users in this market have the time or patience for regulation. No major industry has developed a stronger aversion to government interference.² Since the divestiture of AT&T in 1984, the Federal Communications Commission and U.S. court system have faced relentless pressure to promote competition. From IBM's successful defense against anti-trust action in the 1970s to Microsoft's current battle against regulation, the world's most successful computer industry has also been the most free of the shackles of the state.³ The spread of e-mail, the Internet, and the World Wide Web have occurred well beyond the reach, and competence of government, which is now struggling to catch up because of public concerns about pornography, security, and organized crime.

Perhaps the greatest benefit from deregulation in the United States has been the marriage of computing and communications technologies, caused by the introduction of competition in the telecommunications industry. The power of networking, long confined to voice telephony, has multiplied the capabilities and impact of computers and has transformed the way people and organizations work. Data networks bring to every desk the capabilities that exist anywhere in the network, as well as a connection to every other desk. This has dispersed not only technology and processing power but also institutional and economic power. The cascade from mainframe to mini-computer to personal computer has spread the information revolution to workers and citizens, both fostering and thriving on economic freedom.

Governments, good and bad, can slow but not derail the information revolution train. Indeed, they have become its caboose. Even the U.S. government is an awkward participant in the information technology market. Some of the largest firms-IBM, AT&T, General Electric, and Unisys, for example-once had billions of dollars in business with the federal government and received sizeable R&D support out of public funds. In the past decade, as the information revolution has gathered speed, most of them have fled that market, typically spinning off or selling off their government system divisions to large prime defense contractors. Those that still provide products and services to the military establishment do so via the "primes."

The reason is simple: the commercial market, where customers are unencumbered with bureaucracy, political oversight, and arms-length purchasing rules, has proven so lucrative that doing business directly with the government now dilutes profitability, slows development, and offends the footloose culture of information-age companies. Fortunately for the U.S. military establishment, defense systems integrators, such as Lockheed Martin and Boeing, are savvy buyers of information technology. Through them, the fruits of the U.S. information technology industry are available for military application.

Scale is as important as speed in achieving competi-tiveness in information techno-logy. Large commercial markets are needed to justify and afford the high R&D costs inherent in this industry. Absent such markets, military and other state needs are way too small to cover these costs. For instance, the investment required to compete in dynamic random access memory (DRAM) and micro-processor chips would be out of reach without revenue from the consumer electronics and personal computer markets. Japan's lack of military demand did not prevent it from seizing the world lead in DRAM chips. And the U.S. military was missing in action when the complementary metal-oxide semiconductor (CMOS) microprocessor industry took off.

The most stunning example of abysmal technological performance due to the absence of freedom is of course the death of the Soviet Union, which occurred within a decade of the merging of computers and communications. For want of a market of sufficient size, the Soviet Union had no hope of competing in information technology despite its seemingly immense defense sector. Gorbachev tried to fix this by cleaning up the Soviet Union's international conduct and image so that it could begin importing advanced technology from the West. However, the lack of civilian markets guaranteed that the Soviet Union would have trouble both attracting and absorbing information technology. Although the Soviet military was among the first to recognize the strategic potential of these technologies, it could neither incorporate nor adapt to them remotely as well as could the U.S. military, despite being roughly the same size. Ironically, the most successful use of information technology in the last years of the Soviet Union was by political activists using fax machines to spread subversive-i.e., democratic-ideas.

The dominance of civilian markets is nowhere more evident than in the United States, the country with the strongest military. The military market now makes up just 2 percent of U.S. demand for information technology, down from 25 percent in 1975.⁴ While U.S. armed forces still require some customized technology, they have come to rely heavily on the broader information market: the public telephone network, common integrated circuits, everyday computers and data networks, and standardized software operating programs. For example, Micro-soft's Windows is becoming the system of choice of the U.S. Air Force, not only for administration but for operations. As the microelectronic and data networking content of military systems increases, the military as a whole is becoming a tentacle of the civilian technology market, in the United States and elsewhere.

Although economic freedom obviously does not guarantee a booming market for information technology, it helps. It provides conditions for rapid market growth, which is especially important in stimulating investment and firing up competition. Moreover, nations in which the state retreats from the economy make inviting markets for information technology. For instance, those countries in which the national telephone monopoly is privatized are especially attractive markets for global computer and telecommunications companies, which anticipate pent-up demand for new services and products.

Of course, the more communitarian capitalism of Japan has proved advantageous at times, e.g., when the combined efforts of Toshiba, NEC and others, orchestrated by the Japanese government, seized the lead from the United States in manufacturing semiconductors in the 1980s. But the American microelectronics industry rebounded with higher-value, higher-margin customized chips and microprocessors. In an industry characterized by rapid-fire introduction of new products and services, the research and development phases are key, and they feast on freedom and openness.

Small countries with small domestic markets, while at some disadvantage, can still benefit from scale in information technology by hosting operations of such companies. These firms are unlikely to transfer advanced technology to subsidiaries in countries that are not embarked on economic reform and not joining the world economy. With scores of emerging countries now competing for direct investment, investors can be highly selective. Consequently, virtually all foreign investments in information technology production are either in mature or emerging free-market states, including China and India.

Although small, open states, like Taiwan, Malaysia, and Hungary, can find niches in the world information technology market, the investing firms and their headquarters' countries-usually the United States, Japan, and Western Europe-also stand to benefit from the dissemination of their technology. In addition to providing new markets and added revenues, globalization expands the capabilities, especially the human talent, to which the great economic powers have access and over which they have some continuing control, because they generate most new technology. As the know-how to produce mature information technology products spreads, income from joint venture and license fees flows back "home" for investment in higher value, higher return new technologies. So the diffusion of technology does not leave the source depleted. It has instead strengthened the information industries of Japan and the United States, and thus the countries themselves.

As noted, economic freedom both furthers and is furthered by participation in the global economy. Participation requires data communications for dispersed yet integrated operations. It provides pipelines for the latest innovations and applications. Despite the efforts of governments to control technology transfers, there is a growing reservoir of information technology in, although not tightly restricted to, the integrated core economy, where nearly all advanced value-added production occurs. Countries lacking economic freedom will have difficulty integrating, owing to their exclusion from the world trading system and to cold feet among foreign investors. Consequently, their access to the reservoir of technology will be limited.

In light of their indigenous deficiencies and investor disinterest, states without free markets will be forced to import advanced technology, legally or otherwise. While this is feasible for some technologies-the ones required to make and launch weapons of mass destruction, for instance-it is especially difficult for information technology. The main problem is not to find information products and services on the shelves of the world market, but to absorb, apply, and support them. Information technology piece parts work well only when imbedded in a society whose skills and infrastructure are undergoing a larger information revolution. These technologies are increasingly interdependent, especially as computer networking expands. Components alone are of limited value. How useful are desktop computers without host computers, networks, a steady diet of software upgrades, and competent users?

Information technology is constantly being modified, enhanced and overtaken by better ideas, leaving importing states to engage in an expensive, never-ending game of catch-up. Moreover, the societies most likely to excel in the application of information technologies are the ones that participate in the production of them. Empirically, the biggest and hottest markets are the advanced free-enterprise countries and the emerging countries of Europe and Asia that are now producing chips and software.⁵ It is doubtful that states that resist economic reform and integration can become competitive either as creators or as users.

Information technology is virtually impossible to partition. How can an ambitious state, unless it is very compact, e.g., Singapore- hardly a strategic worry!-expand its data-communicating, PC-using, software-programming capacities for narrow state purposes, e.g., military functions, yet avoid spillage into society? The more information technology that closed states acquire, the greater the likelihood that they will end up weakened or opened. Obviously, the less they acquire, the lower the political risks-but then, the more implausible is the prospect of becoming a world power.

Recent history confirms that economic reform, integration, and information technology are converging streams that produce a flood of progress when they meet. The world's free-market core has been expanding at an accelerating clip, with Latin America, Southeast Asia, and Central Europe embracing its tenets and joining its markets in the past decade, as did Western Europe and Northeast Asia over the several decades before them. Soviet communism was far from the only casualty of capitalism's triumph over state-based economic systems. The information revolution has figured centrally in these developments, spreading ideas, permitting global operations, facilitating the investment that has extended capitalism's reach, and improving the output of human capital in much of the developing world. Throughout this process, the enhancement of economic freedom has enabled emerging nations to attract investors and to acquire, use and eventually produce information technology.

But is history since 1980 a guide to the long-term future? Will economic freedom remain a prerequisite of national success from here on, especially as the information revolution matures into a more stable information age? Or could it be that the need for market freedom in the invention and application of information technology, so evident today, is not a function of the nature of the technology but of its youthfulness? Might those states now trailing because of their lack of openness come to enjoy the benefits of being "technology followers"-harvesting the crop without having worked the field?

After all, invention was where the action was early in the industrial age, too. The mid-19^th century leaders-England and Saxony-were not exactly world powers by the late 20^th century. Perhaps, in a less frantically creative future phase of the information age, production techniques, industrial management, and distribution will come to dominate, as occurred when the industrial revolution matured into the industrial age toward the end of the 19^th century. (Some argue that marketing has already seized control of the information age!) If so, it could be that the lead now held by open-market states in spawning and applying new ideas could fade as this revolution settles down. Conceivably, capitalism's phenomenal success in recent decades-perhaps democracy's too-might be a temporary pheno-menon reflecting its peculiar efficacy in launching the information revolution.

In considering this possibility, let us first admit that unbridled American-style capitalism, with minimal government involvement, is by no means indispensable for success in information technology. We have already seen that other market-based economic systems with larger state roles can be competitive. When information technologies become relatively stable, those with superior production processes can excel, as Japan did by the early 1980s. Also, when a particularly daunting technological challenge presents itself, government sponsorship and pooling can make a difference in creating a critical mass, as it did when Japan's state-run telephone company (Nippon Telephone and Telegraph) coordinated Japan Inc.'s assault on digital switching and supercomputers.

Thus, while maximum market freedom appears advantageous during periods of rapid market and product change, the link could be less strong in more stable times. Could we infer, then, that the advantage held by free-market states during the early, inventive phase of the information age will decay over time? Just as Japan took advantage of its trailing position at a time of relative calm early in the information age, might authoritarian states be able to make up for lost ground, or even turn their lateness and lack of openness to advantage, as information technologies mature in general?

Were it not for the special purpose of this technology-sharing and enhancing knowledge-the answer might well be yes. But again, economic freedom has been critical in both the creation and use of information technology. At the downstream (application) end, there should be no lessening over time in the importance of free markets in sustaining an edge in information technology. An open economy unceasingly demands information technology for its private enterprises to operate, especially as they become more decentralized and more interactive with their suppliers and customers. Extensive and modern digital telecommunications, with gateways to the global network, are essential to a vibrant private sector. In addition, large private enterprises are the most sophisticated users of information technology, demanding the best for their own strategic competitiveness. They are the "leading edge" that challenges industry to furnish better hardware, software, networks and services. Note how the demands of foreign business customers have forced emerging countries, once notorious for medieval telephone service, to upgrade their networks.

In contrast, closed economies lack private enterprises with a need for information technology to help them compete, cut costs, and increase profits. Governments do not present such demands. A state clinging to control of its economic system, for political or ideological reasons, will be at best ambivalent about promoting the very technologies whose purpose is to distribute and enhance knowledge and whose effect is to loosen control.

Thus, the nature of this technology, not just its stage of development, favors open economic systems. The nature of heavy mechanical industry makes it compatible with state involvement. The nature of atomic power requires state management. Some government regulation is welcome in the food and drug industries. But information technology contradicts the purposes and can knock out the props of state economic power.

Conversely, the purposes to which information technology is put-decentralizing operations and decision-making, creating horizontal links, improving producer-consumer contact, sharpening external awareness and adaptability-correspond with strong market forces and distributed economies. Thus, even if the supply of information technology eventually becomes less dependent on economic freedom, the demand will not. Free enterprise states should retain their advantage over the long haul.

Success in creating and exploiting information technology also depends on and fosters political freedom. As one learned in introductory civics, access to information-via as many media as possible-is a precondition for effective democracy. And, the free flow of information amplifies the demand for democracy. Recent empirical research confirms a strong causal link between the availability of communications and the expansion of political freedom in the wake of communism.⁶

The dictators who try to control information, lest its free exchange undo their grip on power, clearly understand the correlation (without having to read the research). The world's most oppressive states-North Korea, Iraq, Cuba, Libya, Syria, Serbia-are also those most determined to monopolize information. The availability of information technology, whether or not allowed by the state, spreads news and opinions about what is happening inside (usually bad) as well as outside (usually better) the country. For most dictators, the truth can only hasten involuntary retirement.

It was once thought that information technology, manipulated by the likes of Goebbels, Stalin, and Milosevic, could subvert or preempt democracy. It can, but only in very limited forms (e.g., short-range broadcast). Satellite broadcast is hard to monopolize; thus the outlawing of dish antennae, which in turn gets more futile as the dishes get smaller. Network technologies-universal telephone service, fax, e-mail and the like-directly threaten any despot because of the horizontal communications they permit.

Looked at from the opposite direction, a climate of intellectual and personal freedom is important in encouraging breakthrough ideas, which are critical in information technology. True, authoritarian states can cultivate, pamper, and even motivate scientists and engineers whose inventions serve the nation (i.e., the ruler). But the speed with which the vaunted science and technology establishment of the former Soviet Union is crumbling demonstrates the fragility of state-controlled science in the information age.

Intellectuals, whether of science or of letters, want-no, need-intellectual freedom. In-tellectual freedom, especially when combined with the chance to exchange information, gives rise to demands for the right to question the ruler, the ruler's policies, and ultimately the ruler's legitimacy. Of course, a growing, prospering middle class, with access to information technology and to the outside world, will not be far behind the intellectuals in insisting on the freedom to read whatever books, see whatever plays, and hear whatever news it wishes. For a regime to deny freedom of the press in the face of such demands and opportunities is a losing battle. And with freedom of the press comes the questioning of authority. It is difficult, arguably impossible, for a state to fence off individual freedom from political freedom for long. It is the mix of freedoms that ferments, especially in a rising, informed, networked citizenry.

A state can always refuse to embark on genuine political reform. Indeed, the least legitimate, most odious, have the strongest reason-survival-to clamp down, and if need be crack down as an alternative to liberalization. In Cuba, for example, whenever the regime has slowed the process of economic reform, it has had to increase reliance on its thuggish security apparatus to deal with the popular discontent over economic hardship. Oppression is a huge boulder on the path of modernization, participation in the global economy, and successful use of information technology. In the end, brutal states, while dangerous, will have limited economic, technological and military potential.

The prompt and unrestricted use of new information products and services, characteristic of open political systems, increases the financial return on both innovation and capital. The digital network, the personal computer, cellular telephony, and the Internet-all of which required hefty investment in the face of market and technical risk-have relied on confidence that the government would not restrict use. The growth of browsers would hardly be as rapid if industry feared that government might interfere with the Web. The free sharing of ideas is especially important in disseminating and thus making full use of the latest information technology innovations. The fact that the first Chinese magazine about the Internet had to start underground underscores the contradiction between the urge to spread the technology and the urge to police it.

The link between democracy and information technology is not transitory. Over the half-century or so since the computer made its appearance, knowledge of the underlying science and new applica-tions has been readily accessible. Proprietary ideas have proved ephemeral in the marketplace. Deregulation and open standards have produced frenzied competition. Over the past several decades, the industry has deliberately and enthusiastically spread its know-how far and wide in its quest for global markets. Attempts by government to restrict the export of most information technologies have largely failed and been abandoned.

It follows that mastery-invention, design, engineering-of these technologies ought by now to be fairly evenly spread. Yet nearly all of the new information technology generated today still comes from the advanced democracies of North America, Western Europe, and Japan. And those other societies that are beginning to use and produce information technology are, for the most part, also democratic. The pattern is too strong to be accidental.

Countries undergoing democratization are attractive candidates for investment. True, foreign investors want political stability. But they are coming to see that representative and responsible government produces long-term stability. (After all, the targets of recent revolutions have been antidemocratic regimes, not democratic ones.) Smart investors also see the promise that political freedom holds for the mobilization of human talent.

Just as openness within a society is an advantage in the creation and use of information technology, the difficulty and cost of trying to keep a society closed in the information age is growing. Support for dissidents or embryonic democratic institutions is increasingly available both from democratic foreign governments and nongovern-mental organizations, thanks to information technology. The permeability of even self-isolated societies is growing, especially when networked transnational "civil society" groups make it their business to network with the oppressed. Determined despots can combat this penetration only by retreating to more severe political and economic isolation, which will eventually make them its victims. The price and risk of combating democratic pressures are rising.

The link between societal openness and technological, economic and military success predates the information revolution-by a thousand years or so. The Nazi and Soviet experiences of the 20^th century might seem to contradict this; then again, they failed spectacularly. In his prodigious, pre-information revolution history of the world, William McNeill explains the stagnation of Chinese and Arab civilizations and the emergence of Europe, from 1200 A.D. on, in terms that ring true today: The first two civilizations used their advanced scientific and educational capabilities to serve and perpetuate closed, self-satisfied hierarchical systems. (Chinese science served the state; Arab science, the religion.) They lacked a rambunctious middle class determined and able to effect change in pursuit of freedom and power. Consequently, these civilizations lived off their human capital, discouraged practical applications of technology, put learning in a holding pattern, and smothered innovation.

In contrast, unruly European burgers were hostile to the status quo and the ruling few. As a consequence, an "incessant and accelerating self-transformation, compounded from a welter of conflicting ideas, institutions, aspirations, and inventions, has characterized modern European history; and with the . . . institutionalization of deliberate innovation in the form of industrial research laboratories, universities, military general staffs, and planning commissions of every sort, an accelerating pace of technical and social change bids fair to remain a persistent feature of Western civilization."⁷ This accounts for how the West grew in power, colonized much of the world, and-not always responsibly-dominated technology, industry, and warfare. (Had they not happened decades after he wrote, McNeill might have added: won the Cold War, became the model for the emerging countries, and caused an information revolution.)

A further accomplishment of the open West was "to mobilize greater human resources within . . . society than was possible within the more rigidly hierarchical societies." In the West, "we can detect the stimulating effect of circumstances that called for the conflicting energies of a larger proportion of the total population than could ever find expression in a society dominated by just a few individuals of comparatively homogeneous . . . outlook." Unruliness, animosity toward privilege and autocrats, openness, and the resulting mobilization of human capital erupted in the American and European democratic revolutions from 1776 to 1989.

These characteristics are if anything more important in the information age than in the West's long rise up to this point, because of the increased economic and strategic importance of knowledge shared and applied. Give those "unruly burgers" networks, and their ability to lead the charge of technology and to apply political pressure is vastly greater than McNeill observed in the pre-information age.

Of course, we can now see that these characteristics are not peculiar to the West, in a geographic or racial sense. The appearance of an increasingly powerful and demanding middle class in the emerging countries-from Southeast Asia to Latin America to Eastern Europe-roughly replicates the yeasty process that has produced both democracy and technology in the West. This suggests that "Western" societies (in a geographic or racial sense) have no special, enduring advantage, but also that their indomitable ways have broader appeal and value.

Democracy and power are also linked insofar as political freedom is inseparable from economic freedom and the latter is indispensable for success in the creation and use of information technology. This is an indirect but important line of reasoning; for, if valid, it weakens the prospect that an undemocratic capitalist country-some immense Singapore-can become and remain a great power in the information age.

Free enterprise does indeed breed political reform and, in time, accountable government. In Asia, Latin America, and Eastern Europe, nearly all emerging free-market nations are democratizing. True, the East Asian brand of democracy (e.g., de facto one-party rule) leaves much to be desired. But the current economic crisis in East Asia is intensifying pressure not only for greater economic transparency but also for greater political accountability. The recent opposition party victory in South Korea reflects the pressure to end state-industry cronyism and opaque (and shaky) financial dealings.

Empirical research (based on several East Asian nations) confirms that "marketization, the process of moving from a centrally controlled economy to a free market, provides the conditions necessary for fostering democracy and the means by which the citizenry can establish this system of government."⁸ The growing, prospering middle classes of the emerging nations, like those of the early Western democracies, demand legal protections and political rights to go with their economic freedom.

Authoritarian regimes have had little success satisfying, or buying off, the rising middle class with material prosperity. Give a person the chance to make money, and he will want more, not less, freedom-to use his money as he wishes, to go where he pleases, to say what he wants, and to criticize what and whom he dislikes. McNeill's theory of the politically demanding character of this stratum, once it gains economic clout, seems to apply no less to 20^th century emerging countries than it does to 16^th century European countries.

Economic transformation also shrinks the role of government and creates pressures on it to become legitimate. With marketization, the government becomes an economic backwater-owner, banker, and paymaster of swollen state enterprises that are unseaworthy in competitive waters. Internal economic reform, fiscal realities, and the need to participate in international financial institutions, especially the International Monetary Fund and the World Trade Organization, eventually force the state to scrap or privatize state industry. As it does, the economic power of the state shrivels, its assets disintegrate, and its revenues fall. Its ability to provide public and social service is then weakened. So, in turn, is its ability to resist pluralist demands and political reform. The state's loss of economic legitimacy lays bare its inherent political vulnerability, which invites still more determined opposition. It becomes not just a lame duck but a sitting duck.

Economic freedom, as noted, goes hand-in-hand with integration in the international economy, leading to business and social interaction with foreign investors, customers, suppliers, and managers, mostly with personal democratic beliefs. Attempts to contain this by creating a compartmentalized economy-part open, part not-might work for a while. Before long, the open part will become conspicuously more prosperous. Seditious ideas from abroad will land there and seep into the rest of the society. Fidel Castro's misgivings about freeing up part of Cuba's economy, as Cuban reformers advocate, suggest that he has a good nose for these risks.⁹ This is not to say that undemocratic states are incapable of instituting capitalism. But they are clearly less hospitable to it-maybe less good at it. Suharto's Indonesia, for example, appears to be less able than its more democratic neighbors to weather the economic crisis rippling through Asia and is under mounting pressure, including from financial markets, for political reform. Even if undemocratic states condone economic freedom, they hardly offer a climate conducive to individual initiative needed especially for success in creating and applying information technology.

In any case, the durability of undemocratic free-market states is doubtful. Pinochet's Chile was often mentioned-until Chile became democratic. Singapore is the most commonly cited example; but it is too small and idiosyncratic to support any generalization. One can understand why undemocratic rulers in Hanoi, Beijing, and elsewhere are more eager to effect economic reform than political reform- having seen what happened to the Soviet Union, on one hand, and is happening in North Korea, on the other. But, a strategy to delay or stretch out democratization is probably feasible only in the short term.

Indeed, Chinese elites admit that political reform-leading to some recognizable form of democracy-cannot be postponed indefinitely if China's modernization is to continue. Perhaps they are coming to appreciate that their goal of stability can better be achieved by accountable government than oppression. Their forecast, or hope, that this will occur over many decades-President Jiang Zemin recently prescribed democracy for China in 50 years-might underestimate the difficulty of inoculating free enterprise against free politics, especially as exposure to the rest of the world increases. Even now, though obscured by China's sorry human rights record, political openness and representative government are spreading at local levels. The appetite of Chinese citizens for freedom is unlikely to be satisfied by just a taste.

The presence of information technology can accelerate the demand for democracy once economic reform has been undertaken. A worker involved in computer-aided-design or -manufacturing is unlikely to be uninterested in sending and receiving e-mail or cruising the World Wide Web. Software programmers by day remain software program-mers at night. Imagine a typical business office in, say, China within a few years: ubiquitous desktop computers, printers, fax and photo-copy machines, local-area networks, each worker with a code-word, e-mail, wallet-sized diskettes. Is it hardly conceivable that the government is going to control when, where, how and why the employees-citizens use information.

The backbone telecommunications infrastructure needed for a modern economy-digital switches and transmitters that handle voice, data, and image-is also available to citizens with political grievances and goals. Conversely, a regime that refuses to build and allow modern communications for fear of the political consequences puts itself at a severe disadvantage in attracting foreign investment, developing its human resources, and participating in the world economy. So, no doubt with trepidation, the Chinese and others in a similar political predicament-the Saudi monarchy, for example-are digitizing and wiring their countries.

As authoritarian regimes yield to economic pressures to let in information technology, their continued attempt to restrict freedom of the press becomes a losing battle. Multiple media are demanded by foreign investors and homegrown private entrepreneurs. The content of state-controlled stations and papers appear evermore surreal and uninteresting as sources of raw truth increase. The government's attempts to shore up its authority backfires when its legitimacy-not to mention its journalism-becomes a target of ridicule.

History will settle whether marketization invariably leads to democratization. The question is germane but not decisive here, for two reasons: First, nations that offer both political and economic freedom will clearly be more competitive in making and taking advantage of information technology than those whose capitalism is entombed in a stuffy, undemocratic system of government. Democratic market economies will have an advantage-how much is impossible to say-in attracting investors, stimulating innovation, and applying information technology. If Vietnam becomes capitalist but not democratic, its prospects in information technology and in the global economy will be less good than otherwise. With some exceptions-there will always be Singapores-undemocratic free-market states, lacking in legitimacy and openness, will fall short in the creation and especially the use of information technology.

Second, a state that embraces market economics and integrates into the core economy yet remains undemocratic will come to share the bulk of the interests of the great democratic powers even if it does not also subscribe to core values. Those already integrated into the core are largely motivated by common economic interests, such as: the security of world energy supplies; the smooth functioning of global markets and systems; the institutionalization of free trade; common approaches to transnational challenges. Distill current U.S. global strategy and one finds a preponderant economic motivation, with its concentration on East Asia, Europe and the Middle East, its relentless drive to open markets, and its willingness to project power to ensure access to petroleum. Though America's closest and best partners have been other democracies, it usually can also count on less savory states that share its material interests. As the world economic core integrates and expands, it acquires collective interests that will animate the behavior of all who participate, be they politically open or not.

The idea that the societies most able to exploit the information revolution will be free enterprise democracies integrated into the global economy is not so astonishing in light of today's world and how it came to be. The Cold War was decided in large part by the sterling and appalling performances, respectively, of the United States and the Soviet Union in inventing, harnessing, and adapting to information technology. The Soviet Union had enough top-drawer scientists, upon whom it lavished fine labs and fine living. It also had military strategists who, early on, understood this technology's significance. But, as noted, it lacked a market of adequate size, signals, and capital-formation capacity. And, of course, it was the antithesis of openness. If the Soviet system was inferior in the creation of the dominant technology, it was by its nature a barrier to its use.

The kingpins of today's global information market are of course the free-market democracies of North America, Northeast Asia, and Western Europe. Within this group, U.S. leadership in most information technologies is a consequence of its greater economic freedom, including deregulation and a social-economic culture that reveres and rewards (to say the least) a Bill Gates. Because the U.S. market for information products and services is wide open to imports, domestic market size alone does not explain the American technological lead. Rather, the ideology of openness does.

A number of emerging countries, especially those of Southeast Asia and Eastern Europe, have shown promise in the production of information technology. India-democratic and, at long last, opening up its economy-is becoming a powerhouse in writing software for electronic export. Such successes have not been spontaneous. Rather, they result from investment decisions of corporations headquartered in the core, searching not only for new markets but also, more importantly, for cheap, quality labor to serve increasingly accessible global markets. Foreign direct investment brings technology, management know-how, higher-skill employment opportunities, access to distribution systems, exports and thus hard currency with which to invest in yet more technology, capital goods, national information infrastructure and human resources.

Because it fosters both reform and modernization, private direct investment is one of the main practical mechanisms connecting freedom and strength in the information age. It is not that Western multinational companies are sentimental about ideals such as liberty when they decide where to invest. But their calculations of risk and return must take account of stability, the rule of law, protection from arbitrary executive action and bureaucratic inaction, and the quality of human capital.

Favorable investment conditions are more likely to be found in countries committed to both economic and political reform. This explains why, for example, the sudden appearance of democracy in Spain after Franco's death produced a steep increase in foreign direct investment, even though capitalism had been around for decades. Where firms are only interested in market access or cheap unskilled labor, they may be indifferent to human rights and democracy. But to the extent they want to climb the value-added ladder and to be in a country for the long haul, they must, and seem to, favor accountable government.

For the link between openness and success in information technology to be bypassed, authoritarian regimes have to overcome their countries' indigenous shortcomings by importing information products, services, and production know-how. They would have to invest state resources on a scale sufficient to compensate for the inherent inefficiencies and the lack of vibrant consumer markets. However the state comes by such resources, we can assume that it is at the expense of the national economy. Since autarky is not an option, given the need to import technology, such states would have to try to participate in world trade and attract investment despite being state-dominated, which is unlikely to impress potential investors. At the same time, they would have to seal off the domestic authority of the state from that foreign trade and investment. While such a strategy is not infeasible, it is at best an expensive, slow and uncertain path that will lead to sub-par performance.

European (German, Italian, Spanish) fascism and Soviet communism were able to achieve temporary industrial viability. In the German and Soviet cases, this included scientific and technological excellence. But their output depended on unsustainable war economies or artificial state support-both of which led to the abyss. Moreover, such success as they achieved was more feasible in heavy industry than it is in information industry. Even then, in the Soviet case, the result was a vast, bogus industrial sector that has been dying ever since its plug was pulled. The Nazi case shows that a patently monstrous state was able to induce at least a spasm of economic and technological success, based on a variant (or perversion) of capitalism. Spanish fascism did not end in the same utter destruction as did the German and Italian franchises, but it did result in a moribund smokestack economy before being rescued by reform, democracy and integration.

If the efficacy of state power was limited in the industrial age, it has vanished with the information revolution. Fascism is hardly conducive to the kind of creativity one associates with sandals, cutoffs, and the proverbial two guys inventing information technology in a garage. Even some of the giant information technology corporations are mediocre at creating conditions for breakthrough ideas and ingenious applications, which is why the smart ones incubate new ideas separate from their main business structures. State organs are, of course, far worse. This technology, as many have observed, is undoing vertical power by decentralizing initiative and work, permitting scale without mass, distributing economic power, and rewarding agility. It favors and flows from unbound individualism, and it loathes the regimentation that comes with state control.

It is not enough to invent and build information systems: they are made to be used. Operating complex systems requires talents and disciplines-management and engineering, mainly-that are found in abundance in the private sectors of the advanced democracies. Here again, governments, democratic or not, are inherently inept in these abilities, which have little in common with the competencies needed to govern. Just compare telephone service in a country with private service providers to that in a country with a government-run postal, telephone and telegraph (PTT) system. In the United States and other advanced free-market states, government now contracts with private firms to perform nearly all systems development, integration, and operation. The importance of these skills in the successful use of information technology makes it all the more difficult for a closed, state-controlled system simply to procure what it needs from the international bazaar, let alone to rely on indigenous capabilities.

If any authoritarian state could defy the equation of freedom and technological success in the information age, it would be China. The prospect of China becoming a modern economic, technological and military power while remaining a closed system has grave implications, namely, that it could become both militarily strong and hostile to the United States and to the interests and values of the democratic core. In light of its uniqueness and importance, the case of China requires special analysis.

Because of its potentially immense domestic market and role as the world's largest low-cost manufacturer of labor-intensive goods, China has considerably more leverage than the typical emerging country. Its bottomless sea of underutilized labor (now engaged in subsistence farming) gives China virtually unlimited capacity in its key factor of production. The Chinese are using their leverage strategically to obtain what they need: foreign capital, management know-how, access to export markets, and technology.

Still, there are several reasons to doubt that China can, for long, be both economically successful and politically closed. China must integrate into the world economy; indeed, this is exactly the purpose to which the Chinese are applying the leverage their huge market and labor supply gives them. While self-sufficiency remains a stated tenet of Chinese political thought, that ideal is already being negated by the prevailing Chinese strategy of importing technology and exporting manufactures. (Growing Chinese dependence on foreign oil and gas is a matter of necessity, not choice.) So the question is not whether China can remain authoritarian while sealed off from the world-like some enormous Myanmar-but whether it can be successful and integrated without evolving into a more or less full-blown capitalist system with a brand of democracy.

China has the market clout to resist frontal assaults against its lack of freedom, as we have seen vividly in the defeat of the U.S. attempt to withhold most-favored-nation status. American, Japanese, and European firms feel they cannot afford to be prissy about the lack of political freedom in China. Yet state control of Chinese economic and political life is under siege. Its growing middle class "will demand participation in political decision-making . . . to protect its gains. The new middle class is increasingly armed with information and the communications tools to . . . organize political action."¹⁰ Several lines of defense have already been abandoned: intellectual and cultural freedoms are growing; state enterprises are being deserted as fast as the government can afford the dislocation costs; foreign contact is virtually unrestricted; freedom of movement is accepted. The Chinese themselves admit-many of them surely hope-that the incorporation of Hong Kong will alter China, and that the peaceful, voluntary unification of Taiwan with the mainland will require sweeping political reform of the latter.

Finally, to succeed with information technology, China will not only need to acquire and create it but also to encourage its use. It is implausible, if not infeasible, that China will become a major producer of information technology solely for its own military and for export, while suppressing its domestic market. Indeed, there is no indication that the Chinese are considering such a futile strategy.

It is just as hard to imagine that China would use informa-tion technology in its productive enterprises and in support of foreign direct investment, yet at the same time effectively block its general use in the country's economy and society. Unless China gives up its current development strategy altogether, Chinese citizens will have expanding and increasingly affordable access to a modern and extensive telephone system, computers, software, broadcast media, wireless, and data communications. Sure enough, as of now, Beijing is abandoning restrictions on Internet use.¹¹

Beijing will not be able to forestall a national information revolution. Indeed, its current course will make it an accomplice to one. As previously noted, the correlation between widespread access to information technology and democracy is strong. Different as China might be, there is no reason to think the link would not apply there. So even in the limiting and most important case of China, an authoritarian regime will be unable to withstand pressures for both political and economic freedom if it is to achieve technological success and integration into the world economy.

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Last Update:  October 1, 2002