Democracy and Economic Growth: Antagonists?

 

A proposition sometimes leveled at advocates of democracy is that there is a tradeoff between a country’s economic growth and the amount of freedom or democracy that its citizens enjoy. Indeed, no less an authority than Singapore’s Straits Times has observed that one cannot “eat democracy”. An example raised to support this point is that of India and China. It is argued that the former’s democracy has crippled it, while the authoritarian Communist Party in the latter lets it push through potentially controversial but necessary reforms that are good for the people in the long run.

 

Of course, many more differences than freedom, or the lack thereof, account for the two countries’ relative economic fortunes. More importantly, counter examples can be found; in Africa, the more democratic countries – South Africa, Nigeria and Botswana, for example - are also the richest and better governed. Nobel laureate Amartya Sen has also observed that no famine has ever occurred in a democracy.

 

One might question whether the chain of causation might not be mixed up; perhaps it is that prosperous countries can afford to be democratic and give their citizens freedom, while less well-off ones are not yet “ready” to be democratic, and that they must bide their time until they have developed sufficiently and are “mature” enough. Yet, a study[1] shows that if anything, democratization improves countries’ economic growth, even in “poor, ethnically diverse, African countries” – exactly the sort which one would assume to be least suitable for democracy. Another[2] found that though democratization lowered economic growth in the short run due to transition costs, it resulted in faster economic growth in the long run. Freedom House’s 1999/2000 report also found that poor countries classified as “Free” grew at more than double the rate of similarly poor countries classified as “Partly Free”.

 

How, then, does democracy impact on economic growth?

 

Democracy gives people a chance to peacefully oust incompetent leaders via the ballot box, thus imposing accountability upon politicians. With a peaceful and constitutional means of removing unpopular rulers, social unrest is reduced. Discontented citizens in democracies also generally do not, except in extremis, take up arms or execute coups. That handmaid of democracy, a free press, also helps in bringing pressure for accountability to bear, and also helps to expose scandals and incompetencies that would otherwise be covered up – Alberto Fujimori of Peru’s corruption was exposed by a video broadcast on television, for example.

 

Democracies also prize the rule of law, as opposed to the whims of the powerful, and have more credible judiciaries. Politicians and politically-connected individuals who have broken the law can thus be tried and punished, deterring them from enriching themselves at their countries’ expense. Democracies also prize and enforce property rights. All this improves the business climate and investor confidence.

 

A perennial problem bedeviling poor countries is that of corruption. While the majority of the populace remain mired in poverty, various bureaucrats enrich themselves by asking for bribes, raising the costs of doing business and discouraging foreign investment. Democracy brings accountability, as a sure way to win votes in a corrupt country is to promise a crackdown on corruption, and reporters’ quests for big stories make them excellent corruption sleuths.

 

Of course, autocratic or less democratic regimes could fulfill all of the above conditions. Laws could be adhered to, property rights strictly enforced and anti-corruption bureaus could be set up. After all, in many cases it is good governance which is required, as opposed to democracy per se. However, as the Roman poet Juvenal observed, “Quis costodiet ipsos custodies?” (Who watches the watchers?) Just as the invisible hand of the free market works to allocate resources efficiently, the adversarial nature of democratic societies and systems is a good way to ensure good governance, for where one fails, another will be quick to point this out and offer himself as an alternative.

 

A factor less democratic governments cannot provide, though, is a liberal climate. As a country moves up the value chain, transitioning from Primary industries (agriculture, forestry, fishing and mining) to Secondary industries (manufacturing) and finally to Tertiary industries (services), giving a country’s people freedom becomes ever more important. Tertiary industries require dynamic, creative people, and they tend to be stifled by autocratic climates, even to the point where they would rather migrate to a less oppressive country. Advanced economies thus cannot afford to oppress their people.

 

Democracy is not, of course, a panacea, and is fraught with problems of its own. For example, populism can result in short-sighted policies like over-generous welfare schemes and insurmountable trade barriers being enacted, and government can be captured by special interest groups. However, as Winston Churchill observed, “Democracy is the worst form of Government except all those others that have been tried from time to time”. To blandly assert that democracy is a luxury that poor countries cannot afford is plainly disingenuous, given that many benefit from it and that the alternative is often worse.

 

In the final analysis, even if democracy did retard economic growth somewhat, it must be remembered that man does not live by bread alone. Many, even citizens of comparatively underdeveloped countries like Indonesia and Iraq, exult in their newfound political rights. Who are we to deny them this, even if the tradeoff is half a point off annual GDP growth?



[1] Dani Rodrik, Romain Wacziarg. “Do Democratic Transitions Produce Bad Economic Outcomes?” Center on Democracy, Development, and the Rule of Law, Working Paper, 2005

[2] Elias Papaioannou, Gregorios Siourounis. "Democratization And Growth" London Business School November 2004