"It is ironic that although the triumph of democracy ten years ago helped trigger the global economic boom, the developing democracies have benefited least from trade and investment" said David Jessup, NEIS Executive Director. "If the trend continues, foreign purchasing and investment decisions by U.S. corporations may inadvertently undermine the chances for survival of fragile democracies."

Democracies, as defined by the Report, are those countries ranked as "Free" by Freedom House, a well-known human rights organization that conducts an annual survey categorizing countries as "Free," "Partly Free," and "Not Free."

Since the fall of the Berlin Wall, new trade agreements and commercial goals have become central to U.S. foreign policy. Beginning with President Bush and continuing through the Clinton administration, trade with China and Mexico has become a U.S. foreign policy priority, culminating in the signing of NAFTA in 1993 and the likely admission of China to the World Trade Organization (WTO).

The NEIS report asks whether developing democracies might be better served by global trade rules that take democracy into account. Up to now, linkage between trade and "freedom of association" has been resisted by most developing countries out of fear of protectionism. The report suggests that such linkage would do far more to help developing democracies gain market share for their exports than it would to protect industries in the developed North. This issue will be the subject of intense debate at the upcoming WTO meeting in Seattle later this month.

However, while government policies are important, most decisions about purchasing and investing abroad are made by individual businesses. And while recent attention to working conditions in poorer countries has prompted many U.S. firms to adopt corporate codes of conduct supporting "freedom of association," corporations increasingly import from undemocratic countries where such freedoms are not allowed.

According to the report, footwear is the industry most inclined to purchase from authoritarian countries. Yet Reebok and a number of other firms have adopted corporate codes which include "freedom of association" as a criteria for outsourcing, and Reebok's CEO Paul Fireman has urged other business leaders to do the same.

"If these codes of conduct are to have real meaning," Jessup said, "it should be reflected in foreign purchasing decisions. Consumers need more choices when it comes to country of origin, and product labeling should be extended to mail catalogues and Internet sales."

NEIS believes that American consumers are likely to be bothered on moral grounds by the shift of so much of the U.S. collective purchasing power away from developing democracies. The notion that countries which repress freedom, deny fundamental worker rights, and sometimes inhibit religious liberty are increasing their share of our developing country dollar outflow is hard to accept.

The report also raises concerns on economic grounds. "Investment is risky – and recovery is slow – where authoritarian corruption and cronyism prevail over the rule of law and democracy," it states, adding that "the information economy needs democracy."

"If we want to sustain a 'long boom,' we should use this period of prosperity to strengthen and expand democracy to all parts of the globe," Jessup said. "As a nation, we are understandably proud of our role in promoting democracy, as symbolized by the fall of the Berlin Wall. Now we need to put our money where our values are. Otherwise, some countries may conclude that in order to compete in the global trade and investment game, it pays to become more authoritarian."

Other findings from the report include:

The developing democracies share of manufacturing exports to the U.S. fell from 56.7% to 35.1%, a drop of 21.6 percentage points, since 1989. In contrast, countries ranked as Not Free gained 10.6% and those ranked Partly Free gained 10.9%.

Because the U.S. absorbs such a large proportion of developing countries' exported products, American purchases disproportionately affected the democracies' share of exports to the world as a whole. Between 1989 and 1997, the democracies' share of developing country exports to the rest of the world fell to 39.2%, a loss of 4 percentage points. The Party Free countries gained the most ground with a 3.9% increase.

Developing democracies' share of U.S. Foreign Direct Investment (FDI) in manufacturing has remained largely stagnant. Countries ranked as Free gained 1.8 percentage points from 1989 to 1998, while the Not Free countries (principally China) gained 5.7 points. The Partly Free countries lost 7.5%, due almost entirely to Brazil, which remains the largest single developing country recipient of U.S. FDI. By 1998, four countries, Brazil, Mexico, Malaysia (Partly Free) and China (Not Free), accounted for 67.6% or $44.5 billion of the total U.S. FDI in developing country manufacturing. This was more than twice as much as all the developing democracies put together.

Democracies lost 4.4 percentage points in Foreign Direct Investment from the rest of the world while Not Free Countries gained 9.5points and the Partly Free countries lost 5.1 points.

The New Economy Information Service (NEIS) is a nonprofit network for analysis of the effects of rapid economic change on work life, families, communities and the wider world. NEIS brings together leading figures from labor, politics, business, academi, and the civil society. The Washington, D.C. based organization founded in 1998 undertakes research and organizes discussions—face-to-face, through e-mail, and on its website www.newecon.org. For a complete copy of the report, please contact NEIS at 202-347-2348 or visit our website.