The Political Role of Business Magnates in Competitive Authoritarian Regimes

4.1.1 Example 1: Latin America (1860s to 1920s)

In the early 19th century, the newly independent states of Latin America adopted distinctly republican forms of government, with the exception of the constitutional monarchy of Brazil. The resulting models of government, though regularly challenged and adjusted, dominated until the 1870s, mostly resembling illiberal or chaotic democracies. As Sabato argues, “Despite the controversies often raised around Spanish American elections, for most of the period, these were the main legitimate road to government posts, and they offer a key to understand the politics of the republic.” ^[38] Additionally, active civil societies were developing, creating the societal foundations for democracies. ^[39] However, political challenges and armed revolts against the constitutional order were a common feature of Latin American politics during that period. ^[40]

Starting in the 1870s, Latin America experienced a phase of rapid economic growth based on commodities exports. ^[41] In this period, several Latin American countries developed political systems that have been described as oligarchic rule or oligarchic republicanism in the literature. In this context, the term oligarchy refers to rule by a small elite circle, which is not necessarily characterized by material wealth or a prominent role of business magnates. In these countries, elections were still the major means of assigning political power, and there were real challengers. However, political competition was heavily skewed in favour of incumbents.

The basis for this was the creation of a strong presidency with far ranging powers of interference in democratic processes and constitutional rights. The major weapon against the political opposition was manipulation of the electoral process. In the 19^th century, this regularly included restrictions on voting rights based on gender, ethnicity, property and literacy. As a result, on average, less than 10 percent of the population actually took part in elections. Moreover, vote buying and pressure on voters from state representatives, including via the police and employers, were common. While political liberties were heavily restricted, civil liberties were much better developed and protected. ^[42] Chile had already adopted such a regime in the 1833 constitution. In later periods of the 19^th century, Argentina, Brazil, Columbia and Uruguay also developed forms of oligarchical democracy. ^[43]

The oligarchic republics of Latin America can be interpreted as the competitive authoritarian regimes of their time. As this assessment is based on earlier democratic standards and refers to largely rural societies, the oligarchic republics of 19^th century Latin America could also be called early modern competitive authoritarian states.

In these countries, the traditional economic elites who meet the criteria for business magnates, i.e. business interests as the core activity, vast personal wealth and political activity at the national level, were large landowners. Their political power rested on a traditional system of clientelism, also called caciquismo, which gave them control over the people living and working on their land. Clientelistic political power was thus regionally fragmented. ^[44] Additionally, in the wake of the 19^th century, merchants gradually accumulated wealth and political power – usually within the span of three to four generations. Both landowners and merchants were acting in the context of extended families and formed integral parts of the ruling elites. ^[45] It is important to note that business magnates were not acting individually or with a distinct identity but as part of broader elite groups in the context of family networks.

At the same time, “the image of an overall concentration of wealth and economic power in the hands of a small and closed class of powerful families may apply to some specific cases and periods, but in many others – and especially in the larger countries – it fails to account for the dynamism of these societies where the powerful of one day could be successfully challenged the next. Within the context of a nonlinear transition from a basically traditional mercantile structure of production to one increasingly marked by capitalism, the upper classes were subject to the risks and hazards posed by the new demands of the system.” ^[46] Around the turn of the century, major challenges arose from public pressure created by a growing urban educated middle class and strong workers’ movements.

In Uruguay (1903), Argentina (1912), Chile (1920) and Colombia (1936), increasing political competition challenging the hold of conservative parties on power led to a change of political regime towards unstable democracy. However, the regime trajectory did not move to consolidated full democracy because of strong resistance from the elites, including traditional economic elites and new ones based in industry. Additionally, political violence remained strong. Especially during periods of economic recession, political regimes came under pressure. Populism and violent left-wing forces were further major challenges to democracy. In response, conservative forces regularly aimed to maintain dominance by means of military coups. This was the case in Argentina (first of several in 1930), Uruguay (1933 and 1973), Colombia (1953) and Chile (1973). In Brazil, increasing political pressure on the competitive authoritarian regime directly led to a coup in 1930, which brought to power a military junta that established a dictatorship, i.e. a fully authoritarian regime. After the dictatorship, an illiberal democracy was established in Brazil in 1945, which was again terminated by a military coup in 1964. ^[47]

As a result, the regime trajectory leading away from competitive authoritarianism did not move beyond an unstable democracy, populism and military rule for at least several decades in all five countries. It is, therefore, not possible to argue that there was a direct path from competitive authoritarianism to full democracy. Instead, the regime trajectory runs from competitive authoritarianism to unstable democracy through the rise of an urban middle class and workers’ movement, where conservative political forces, which are backed by the old business elites, loose political power but remain influential enough to prevent the consolidation of full democracy.

4.1.2 Example 2: Post-Soviet Region (1990s to 2010s)

While in 19^th century Latin America, business magnates were socialized into the ruling elites over generations, they were newcomers in the post-Soviet region where socialist planned economies had banned private ownership of capital goods until the late 1980s. The end of socialism offered entrepreneurs the chance to make vast sums of money quickly with the help of political connections. The first future business magnates of the region started in the early 1990s with trade and financial operations. In both cases, large gains were only possible with political support. Regulatory and inspection authorities turned a blind eye to new entrepreneurs’ activities. National banks provided preferential credit. State enterprises became clients. ^[48]

The most successful new businesspeople used their profits from financial and trading activities to build industrial holdings. They took over state enterprises over the course of the privatization process, and their trading companies exploited customers’ debts during bankruptcy proceedings in order to bring them under their control. Here, too, state support was indispensable. The privatization process was, in many cases, manipulated by the state officials in charge. Bankruptcy proceedings were also frequently steered in favour of the trading companies. ^[49]

This extensive rent seeking was only possible in political regimes that gave business people enough leeway for independent action, i.e. which were not fully authoritarian, while lacking the rule of law to curtail many of the dubious deals that allowed business people to become billionaires in less than a decade. ^[50] The Forbes list did not include a single billionaire from the post-Soviet region up to 2000. However, over the following 18 years, the highest number of billionaires reported was 111 for Russia (2014), ten for Ukraine (2013), six for Kazakhstan (2008) and one for Georgia (since 2012). Politically influential business magnates in the competitive authoritarian regimes of the post-Soviet region exploited first their money and then their networks to support specific political actors. Many also took over mass media outlets in order to influence public opinion, on several occasions with the obvious aim of silencing critical reporting on their political allies. In some countries, business magnates have also run for or been appointed to formal political offices.

In Armenia, all business magnates were fully integrated into the ruling elites of a competitive authoritarian regime, being a part of the electoral machine not only through the provision of financial support but also by pressuring their employees into voting for the ruling party. ^[51] Levitsky and Way quote an Armenian legislator who claimed, “you cannot be a leader of an opposition party and have a businessman as a partner – he would be eliminated as a businessman.” ^[52] The most prominent business magnate actively involved in Armenian politics has been Gagik Tsarukyan, leader of the Prosperous Armenia party. After coming second in the 2007 parliamentary elections, his party informally supported the ruling party. When Tsarukyan declared his intention to run in the 2013 presidential elections, state pressure soon led him to rethink the move. ^[53]

For the cases of Azerbaijan and Kazakhstan, Radnitz has argued explicitly that the strategy of the ruling political elites to keep business under control, namely, refraining from large-scale privatization, ^[54] is the key factor behind the political stability in these countries as compared to the “colour revolutions” experienced by neighbouring countries (Georgia, Kyrgyzstan, Ukraine). ^[55] This stronger control over potentially independent business actors allowed political elites in Azerbaijan and Kazakhstan to move towards stronger authoritarian control in the 2000s. A similar argument for political regimes in sub-Saharan Africa is made by Ariola. ^[56]

4.1.3 Summary

A lack of independence on the part of business elites can be due to very close relationships between political elites and business magnates based on socialization and networking – which makes defection difficult because of actual commitment to the ruling regime and a lack of credibility for defection as in the cases of Latin America (1860s-1920s) or Malaysia (1970s-2010s). ^[57] Business magnates’ lack of independence can also be due to relatively strong authoritarian control, as in the cases of Armenia (1990s-2010s), Azerbaijan (1990s) or Kazakhstan (1990s).

In the cases of Azerbaijan and Kazakhstan, this led to the introduction of a fully authoritarian regime. However, as business magnates simply move in line with the ruling elites, this scenario also allows for democratization from above, as in the cases of Mexico (1970s to 1990s) ^[58] or Taiwan (1990s) where business magnates whose business holdings were deliberately restricted by the government ^[59] did not inhibit the transition from a full authoritarian regime to competitive authoritarianism in the 1990s or later to full democracy. ^[60]

4.2.1 Example 1: Thailand

Thailand is an interesting case of more proactive business magnates in politics opting for what Markus/Charnysh call the logic of commitment compensation. The political regime of Thailand started to move from fully authoritarian military rule to competitive authoritarianism during the mid-1970s. Businesspeople were an important factor in the creation of an uneven playing field which marks the politics of competitive authoritarianism. As Phongpaichit and Baker summarize, “local businessmen invested heavily in getting elected, ensuring money was a key qualification. In the 1990s, approximately 70 percent of MPs were drawn from the ranks of male business owners who make up less than 3 percent of the population. In effect, parliament was a mechanism for drafting business leaders into the ruling oligarchy. The generals withdrew from the political front line but retained considerable influence, status, and independence. Top bureaucrats negotiated a new distribution of power with elected politicians for mutual benefit.” ^[62] In this system, entrepreneurs with political connections could engage in large-scale rent seeking. Thaksin Shinawatra, for example, served different posts in the state administration and government while his companies simultaneously benefited from state procurement and highly profitable state licences in the telecommunication and TV business. By 1996, Forbes listed ten billionaires in Thailand, with Shinawatra in fourth place.

According to Sen and Tyce, “these years saw the emergence of unrestrained ‘money politics’, with money becoming vital for bringing parties to power and keeping them there. Elections were won by those who could buy the most votes – a trend established in 1992, when the military ploughed vast sums into buying the previously untapped, but now increasingly engaged, rural vote. Elections became little more than bouts of ‘horse-trading’, as parties sought not only to purchase the support of voting blocs, but MPs from other parties, signalling the increasing strength of lower-level actors. Prior to the 1995 election, for example, MPs could command ‘transfer fees’ of 20 million baht [at that time, 0.8 million US dollars]. Once in office, the logic of competitive clientelism guided politicians; they had to recoup expenses and start building a coalition for the next election by diverting resources to key allies and constituencies.” ^[63]

When public discontent rose in the wake of the Southeast Asian financial crisis of 1997, Thaksin Shinawatra tried to create a rival political camp around his TRT party. The party managed to win the 2001 elections, and Shinawatra became prime minister. He was cleared of corruption charges by the constitutional court by a narrow vote and for technical reasons. As prime minister, he continued to promote his business interests, e.g. changing legislation to make the sale of his company tax free. ^[64] The old establishment, which opposed him, was supported by another business magnate, Sondhi Limthongkul, who had amassed huge media holdings. He used the media to attack the Thaksin Shinawatra government after the latter won a second term in office in 2005.

In the resulting power struggle, the business magnates sought not only to control media reporting but also to provide financial resources for protests actions. Both camps arranged long-term disruptive mass protests in their struggle for political power. In 2006, this led to the resignation of Thaksin Shinawatra in the wake of a short-lived military coup that left Shinawatra’s proxies in power, and in 2008, the old establishment managed to gain control of government after bloody protests. This in turn provoked mass protests from the Thaksin Shinawatra camp in 2009/10. After an election victory in 2011, Yingluck Shinawatra, his sister, became prime minister. Mass protests were again used to gain or defend political power in 2013: “Many of the street protests were financed by oligarchs, although this time the money has been more difficult to trace to specific individuals. […] A Bangkok-based political think tank estimated that the 2013-2014 round of street protests averaged ‘around five million baht [approximately 153,000 USD] a day on sustaining the protesters.’” ^[65]

However, in the longer run, the mass protests helped neither of the two camps of politicians and business magnates to power. Instead, the military took over in a putsch in 2014. ^[66] Thus, Rhoden identified the following political regime trajectory: “oligarchic funding – paid-in-part protests – security concern – military takeover.” ^[67] That is, the attempts of rival business magnates to gain political power provoked a return to full authoritarianism in the form of military rule.

4.2.2 Example 2: Georgia and Moldova

A similarly dominant position of business magnates in politics emerged in Georgia in the early 2000s when businessmen were among the first to challenge President Eduard Shevardnadze. ^[68] Prominently among them was Arkadi “Badri” Patarkazischwili, who had made his fortune in Russia. Another Georgian business magnate who had made his fortune in Russia, Kakha Bendukidze, became the most prominent oligarch in the Georgian governments of the 2000s, serving as a minister for five years. The most influential business magnate in Georgian politics, however, is Bidzina Ivanishvili, the only Georgian who has been included on the Forbes list of billionaires to date. In 2012, he founded the oppositional Georgian Dream party, which won the parliamentary elections that year and nominated him as prime minister. After his business came under scrutiny – including in the wake of offshore leak scandals – he resigned as prime minister and party leader. When the Georgian Dream candidate won the 2013 presidential election, Ivanishvili was generally seen as the grey eminence in Georgian politics. After he forced the resignation of the government, he announced his return to the party leadership in 2018. ^[69] In Georgia, business magnates are thus a major force stabilizing the political regime between competitive authoritarianism (the classification by Levitsky and Way) and illiberal democracy (the classification by Brownlee).

In Moldova, the dominance of Soviet nomenclatural networks in the 1990s and Communist Party rule in the 2000s, in combination with the small size of the national economy, delayed the rise of business magnates. ^[70] Only when the Communists lost power in 2009 did business magnates assume a prominent role in politics. Anatol Stati, founder of the Ascom Group, supported an opposition party founded in 2007 and was seen as a major force behind the removal of the Communists from power. In 2009, business magnate Veaceslav Platon entered parliament; in 2010, Vlad Plahotniuc, who had acquired four of five national TV stations, followed. While Platon was neutralized by a long-term prison sentence, by 2015, Plahotniuc had emerged as the grey eminence of Moldovan politics, similar to Ivanishvili in Georgia. He managed to form a broad coalition of political parties. Although his official positions – parliamentary deputy from 2010 to 2013 and again from 2014 to 2015 – look minor, he in fact indirectly controlled the government through his position as leader of the Democratic Party until 2019. ^[71] Again, a coherent attempt to change the political regime is not visible. Instead, the ruling elites seem to use informal means to create what Levitsky and Way call an uneven playing field for political competition. Moldova, too, is stuck on the border between competitive authoritarianism and illiberal democracy.

4.2.3 Summary

The creation of a new political camp (as opposed to a new political party which can support the existing political camp) clearly places a business magnate in opposition to the ruling political elites. As the rule of law is not observed in competitive authoritarian regimes, such a strategy is a very risky endeavour, which endangers not just political perspectives but also business interests and personal freedom. The combination of the considerable resources needed to implement this strategy and the high risk attached to it explain why this scenario is exceptional.

In the two cases where magnates were successful, Georgia (2010s) and Moldova (2010s), the political strategy of business magnates can continue for a longer time. However, if the army or security forces oppose the business magnates, they can intervene, as they did in Thailand (2006 and 2014) and Madagascar (2009). ^[72] If the army returns to the barracks (as in Thailand in 2006 and in Madagascar), the chaotic politics of competitive authoritarianism manipulated by business magnates continue. If the army stays in power, as in Thailand after 2014, the result is the establishment of full authoritarian rule.

4.3.1 Example 1: Indonesia

Under the authoritarian rule of Suharto, which was established in 1967 and relaxed to competitive authoritarianism in the mid-1970s, Indonesia’s business elites were firmly integrated into the ruling political elites. However, by the mid-1990s, some business and state administrative elites were alienated by Suharto’s increasingly personalist leadership – e.g. promoting his family members to influential positions. The 1997 Asian financial crisis, which caused the GDP to decrease by over 10 percent in the following year, was a trigger of widespread public protest. While the literature on the case does not agree on the importance of elites or civil society in bringing about the end of Suharto’s rule and the start of democratization in Indonesia, both clearly played a part and reinforced each other. Business magnates retained their political influence after the regime change and became more independent from political and state administrative elites. Informal manipulation of politics remained an important part of their strategy, thus preventing Indonesia from moving beyond an incomplete democracy. ^[73]

4.3.2 Example 2: South Korea

In South Korea, the military government had, since the 1960s, supported the development of huge industrial holdings called chaebols even more proactively than other Southeast Asian countries. By the 1990s, the turnover of the ten largest holdings equalled about half of the country’s GDP, while the same indicator stood at about one-fifth of GDP for Taiwan and one-fourth for Indonesia. ^[74] In South Korea, the result was a very close relationship between the political elites and the families and managers of the chaebols. ^[75] Many high-ranking managers had worked in the state bureaucracy or with the military before joining a chaebol. ^[76]

When the military regime moved towards competitive authoritarianism in the mid-1970s, this relationship was not challenged. Even after the end of military rule in 1987 and the establishment of democracy, changing political elites and chaebol leaders remained close. In the 1990s, the chaebols continued to

“channel their resources into media, academia, and bureaucracy, shaping public opinion to their advantage. […] Politicians take the chaebol’s threats of an investment strike seriously because of its consequences on economic performance.” ^[77] The chaebol, thus, promoted the stabilization of the political regime as an incomplete democracy. However, organized civil society, trade unions and increasingly strong anti-chaebol sentiment in the population acted as a counterweight. In the 1990s, “as a result, the government’s chaebol policy lacked coherence and principles. The government sometimes used its authority to retaliate against chaebol leaders who did not ‘behave’. A typical example is that of Chung Ju Young, whose group, Hyundai, had to endure several years of government sanctions after he ran for the presidency in 1992.” ^[78] Over the longer run, repeated scandals concerning chaebols, related civil society activism and court sentences handed down for prominent chaebol representatives reduced their political impact while the country seemed to move towards full democracy. ^[79]

4.3.3 Example 3: Ukraine

A classic example of business magnates switching political camps regularly is Ukraine. Business magnates managed to create a majority in parliament – although a fragile one – for President Leonid Kuchma after the 1998 and 2002 elections. ^[80] With their informal influence over a significant share of parliamentary deputies and their control of important mass media outlets, they clearly contributed to the creation of the uneven playing field in a competitive authoritarian regime. However, when the competitive authoritarian regime was threatened by public protests in 2004 and 2014, many business magnates started to hedge their bets and gradually switched sides.

A telling indicator of political flexibility is the political affiliation of the business magnates who gained seats in the national parliament. When power changed after the presidential elections of 2004 and the related “Orange Revolution”, the number of business magnates in factions of the old power holders decreased from 13 to 4, while the number increased from 2 to 8 for the new ruling parties. The presidential elections of 2010 reversed the balance of power, and within two years, 11 business magnates had joined the parliamentary faction of the new ruler, President Viktor Yanukovich. After he fled the country in the wake of the EuroMaidan protests in spring 2014, that number was reduced to two in less than a year. ^[81]

Thus, business magnates in Ukraine have never initiated a change in government or in the political regime, but they have acted as catalysts for an ongoing change by providing additional support to the winning side. However, as their manipulations of political decision-making processes continue, they impede a move to full democracy. ^[82]

4.3.4 Example 4: Russia

In Russia, too, business magnates were seen as informal power brokers in the 1990s, though they were much less likely to assume political office themselves. Their financial support and control over media reporting are generally treated as decisive contributions to Boris Yeltsin’s victory over the communist candidate in the 1996 presidential elections, despite approval ratings that were usually significantly below 25 percent in the two years prior to the election. In return, the business interests of the campaign sponsors received preferential treatment from the state, most prominently in the privatization auctions around the elections. ^[83]

Towards the end of Yeltsin’s second term, business magnates and members of the political elites, e.g. regional governors, began to position themselves for a potential change in power as Yeltsin’s chosen successor seemed unlikely to win. However, when that chosen successor, Prime Minister Vladimir Putin, won the presidential election in 2000 in a landslide victory in the first round, he immediately started to implement what he called the “vertical of power”, i.e. the subordination of all politically relevant actors to the national state executive with him as president. Business magnates with control over important mass media outlets, such as Boris Berezovsky and Vladimir Gusinsky, as well as business magnates who challenged Putin politically, most prominently Mikhail Khodorkovsky, were neutralized with the help of manipulated judicial proceedings. They lost their core business assets and were forced into exile. ^[84]

Braguinsky finds that “more than half of the postcommunist oligarchs who rose to prominence during the Yeltsin era did not survive in the ranks of the oligarchy until 2006.” ^[85] Other potentially independent political actors, such as regional governors, political parties or mass media, were also integrated into the vertical of power. Loyal entrepreneurs were then heavily favoured by the state. The number of Russian billionaires increased from 25 in 2004, i.e. around the time when Russia moved from competitive to fuller authoritarianism, to 87 in 2008. This number fell drastically in the wake of the international financial crisis, which hit Russia hard; however, it soon stabilized at approximately 100. ^[86]

4.3.5 Example 5: Turkey

Another example of strong state actors starting to neutralize politically influential business magnates perceived as contributing to political instability is Turkey in the 2010s. In Turkey, business magnates started to emerge through the creation of large family-based holding companies in the 1960s, most prominently those of the Koç, Sabancı, later Şahenk (with Doğuş holdings) and Doğan families. Their rise was only possible with informal state support. Similar to the case of Russia in the 1990s, business magnates offered financial support for campaigns in return for preferential treatment of their business interests by politicians. As business magnates had not been part of the old elite and the Turkish political system was marked by political competition, alliances between business magnates and political actors changed regularly. As a result, business magnates became increasingly important power brokers in the 1970s. In the 1980s, they and some new holding companies, most prominently those of the Uzan family, benefited from state promotion as “champions of economic modernisation” in an attempt by the Turkish government to follow the East Asian model. ^[87]

As a result, the business magnates of large family-based holding companies were deeply entrenched in Turkish politics, offering – in competition with each other – financing for political campaigns and support from the mass media outlets under their control to political elites, democratic politicians and military rulers alike, in return for state support on a macro-economically relevant scale. Karadag concludes that “these political competition structures seriously overburdened the financial capacities of the state, and neither politicians nor businessmen had any incentive to fundamentally alter these rules.” ^[88]

A change came with the 2002 parliamentary elections when the AKP of Recep Erdoğan was able to form a government: “These elections present a clear break in the […] politico-economic development in Turkey as, for the first time, the socio-economic counterelite [to] the influential oligarchs has been elected to power without being prevented from consolidating its position in the political process.” ^[89] The AKP government used judicial proceedings to limit the political influence of actors without democratic legitimation, including the army and business magnates, most prominently, the Uzan family. As a result, important mass media outlets were assigned to new owners who were close to the government.

With the crackdown on the Gezi Park protests in 2013 and even more after the failed coup in 2016, it became increasingly clear that Erdoğan was systematically side-lining all oppositional forces, including those subject to democratic legitimation. The political regime, thus, became increasingly authoritarian. To create an ever more uneven playing field, the state put increasing pressure on business magnates, especially those with relevant media holdings, ^[90] while promoting its own loyal group of business magnates. ^[91] The resulting rise of new loyal business magnates is visible in the Forbes list, as the number of Turkish billionaire families rose from six in 2002 to 38 in 2018.

4.3.6 Summary

If business magnates are flexible in their political alliances, they can change sides when they expect that the ruling political elites will lose power. This does not necessarily lead to regime change, as they can misjudge the situation (losing out or returning to the old alliance). However, this is rarely the case, with the only examples being Kenya (1990s-2010s), Madagascar (1990s-2000s) and Malawi (1990s-2000s). ^[92] In unclear situations, business magnates likely prefer to stay with the ruling elites, as described in scenario 1.

If the regime becomes more authoritarian, business magnates who are not flexible enough in their political alignments (or fast enough, e.g. when giving up their media assets) will end up in the opposition. As the political regime becomes more authoritarian, political pressure on these business magnates will increase until they are neutralized, as seen in the cases of Russia (2000s), Turkey (2010s), Venezuela (2000s) and Nicaragua (2018). ^[93]

In the case of attempted democratization, business magnates are likely to change sides regularly as the best way to remain influential in politics. As a result, several political factions will receive support from business magnates, which means that they partly neutralize each other and thus offer a safeguard against a permanent takeover by one political force and a return to more authoritarian politics. At the same time, their reliance on political corruption and manipulation hampers a move towards full democracy, as demonstrated by the cases of Georgia (2000s), ^[94] Indonesia (1990s-2000s), South Korea (1980s-1990s) and Ukraine (2000s and 2010s).