Over the past decade, there has been a proliferation of capital moving from a number of authoritarian countries into emerging democracies. While in some cases this might represent wholly legitimate investment, often authoritarian governments are specifically seeking to direct the flow of these funds to achieve purposes other than purely economic. At CIPE, we define this issue as "corrosive capital" - equity, debt, and aid that both takes advantage of, and exacerbates weak governance in emerging democracies, to the further detriment of democratic and market development. Corrosive capital can distort policymakers' incentives and decision-making, privileging the political influence of authoritarian governments over local citizens' voices.
Corrosive capital has become a major challenge in the Balkans, where despite the passage of nearly two decades since the end of armed conflicts, democratic transitions remain incomplete. External actors, particularly authoritarian states, have reasserted their role in the region, diverting the Balkans from a trajectory of Euro-Atlantic integration. In response, in 2017, CIPE embarked on a unique project, pioneering a new, comprehensive methodology analyzing, first, how governance gaps in the Balkans create opportunities for the inflow of corrosive capital, and second, how that capital widens those governance gaps and undermines democracy. A network CIPE partners - the Sofia-based think tank Center for the Study of Democracy and teams of local experts in Montenegro, Serbia, Macedonia, and Bosnia and Herzegovina - have both identified specific governance gaps, such as loopholes in anti-corruption policies, non-transparent procurement practices, and a lack of strong competition policies, examining in particular the impact of Russia's economic footprint in the region.
CIPE's partners are raising public awareness about this issue, building greater transparency about foreign investment in the Balkans, and engaging local business communities to advocate that policymakers take steps to close identified governance gaps. By so doing, CIPE and its partners can make markets and democracies in the Balkans more resilient, ensure that local firms can compete on an equal footing, and build a level playing field for all investors. This will help democratize economic opportunity in the Balkans, countering the worrying spread of a perception that democracy and markets have failed the region's citizens. By tackling the challenge of corrosive capital in the Balkans, CIPE is also developing tools and approaches that can benefit other emerging democracies worldwide.
Read the first of the reports here. Andrew Wilson is the Managing Director at the Center for International Private Enterprise (CIPE).
