Link between democracy and economic growth?<\/p>\n
Akhmad Rizal Shidiq, Institute for Economic and Social
\nResearch, Faculty of Economics, University of Indonesia, Jakarta<\/p>\n
Democracy is desirable because it widens individual freedom
\nand capabilities, argues Satish Mishra (The Jakarta Post, Nov.
\n5). It makes sense as a means of development and economic growth;
\nand to enhance economic stability.<\/p>\n
No doubt democracy is a good thing, but to relate democracy to
\neconomic development -- which has at its core the process of
\ncapital accumulation -- is a rather complicated effort both
\nconceptually and empirically.<\/p>\n
Why does China grow much faster than India; why do the
\nMalaysian and South Korean economies perform better than the
\nPhilippines; or why did the economic miracle take place in East
\nAsia, not in more democratic Latin America?<\/p>\n
How could the path to democracy, instead of autocracy, arise
\nafter a crisis in countries like Indonesia?<\/p>\n
The researchers Przeworski and Limongi in 1993 offered an
\ninteresting survey on the relationship between political regime
\n-- or authoritarianism -- and economic growth. They reject the
\nidea that democracy eventually boosts stability and economic
\ngrowth and further assert that democracy may undermine
\ninvestment.<\/p>\n
The logic is that because the people in favor of immediate
\nconsumption can organize themselves to reduce profit and vote for
\nredistribution policies and non-investment activities, investment
\nwill decline. However, the problem is to explain why
\nauthoritarian regimes are more likely to postpone current
\nconsumption in exchange for larger investment.<\/p>\n
The next claim against democracy is that development needs a
\nstate isolated from the pressure of interest groups. In democracy
\nthis pressure arises from individuals: those who act collectively
\nas economic agents undertake investment, and can organize
\nthemselves to ensure income transfers in their own interests. But
\nthis does not explain why the state can always act in the
\ninterests of anyone else.<\/p>\n
The above researchers also assert that democracy maximizes
\ngovernment spending and output as compared to an authoritarian
\nregime. But they say this assumes perfect information among
\nvoters, perfect competition among parties, and perfect agency.<\/p>\n
Olson (1993) also stated that democracy does not give any
\nincentives to leaders to extract maximum attainable social
\nsurplus, unlike in the case of autocrats who have to fulfill
\ntheir personal objectives.<\/p>\n
Since economic growth arises from good policies, people tend
\nto think that politics -- democracy here -- affects the policies.
\nBut, in fact, good policies have always been rooted in more
\ncomplicated sources and institutional settings rather than just
\npolitical processes.<\/p>\n
This is why economic growth happens in both democratic and
\nauthoritarian states as long as they can produce good policies
\nand institutions for capital accumulation given their own
\nhistorical propensity to social fragmentation, stage of
\ndevelopment and technological trajectories of particular sectors'
\nindustrialization.<\/p>\n
On democracy and economic stability, there are two problems in
\nMishra's argument. First, after a crisis, do we really need
\neconomic stability -- and to what end? By nature, economic
\nrecovery is designed to get us away from the pit of economic
\ndisaster as soon as possible -- a big push, in other words.<\/p>\n
To ensure stability and a gradual process may be too costly
\ndue to the depth of our people's misery.<\/p>\n
Second, instead of supporting stability, democracy may produce
\nsomething else instead. Obviously, no matter how sophisticated
\nand well-designed, any development policy will create losers.
\nUnder democracy, these losers will gain substantial political
\npower to inflict high political costs on the winners. This makes
\npolicies more vulnerable.<\/p>\n
Furthermore, rather than arguing that democracy leads to the
\nflexibility to correct wrong policies, in fact democracy will
\nhinder the flexibility of state policy to make adjustments. Why?
\nBecause any change in policy will alter the loser-winner setting.
\nAgain under democracy, the potential losers under a new policy
\nhave greater power to deter any policy change.<\/p>\n
In addition, while many argue that democracy is the best
\nremedy for paralysis after a crisis, it seems that there is no
\nsufficient explanation as to how democracy may arise after
\neconomic and political turmoil.<\/p>\n
According to Mancur Olson (1993), democracy could emerge out
\nof a crisis if the crisis created a new balance of power and if
\npower-sharing, instead of fighting each other, appeared to be the
\nbest attainable solution among the leaders of the interest groups
\nwithin that new balance of power.<\/p>\n
This is, by the way, a very strict prerequisite. It cannot
\nexplain why such a new balance of power does not evolve into the
\n"roving banditry" category: a situation where a society comes
\nunder the sway of leaders who have short-time horizons, less than
\na monopoly of power -- or violence, suffer insecurity, and,
\ntherefore, tend to maximize the plunder of social surplus as they
\nhave no incentive to raise the subject's productivity in the long
\nrun.<\/p>\n
Four years down the road from the crisis, roving banditry is
\nmore evident in Indonesia than power-sharing for democracy. The
\ngame has now shifted to the 2004 general election, with none of
\nthe leaders of the fragmented interest groups at the moment
\ncapable of securing their positions after the election. The
\nleaders -- at national and local level, and in legislatures and
\nexecutives -- have greater incentives to steal from society than
\nfacilitate a long-term capital accumulation process in which they
\nare not guaranteed any returns -- that is, a bigger amount of
\npersonal collection from a larger societal surplus.<\/p>\n
Thus, for democracy to boost economic growth, it should be
\nable to facilitate capital accumulation and therefore always be
\nable to enhance stability, public order and predictability. Yet,
\nthis capability, at least in the short term, can also be provided
\nby authoritarianism -- a messiah, according to Mishra. Indeed, to
\nwait for democracy to create more effective long-term capital
\naccumulation bears it's own cost. The layman's wish to have a
\nmessiah to some extent does not come out of the blue. Indonesian
\npost-crisis experience shows that in transition, a country can
\nfall into roving banditry, especially if the momentum has been
\nlost.<\/p>\n
Interestingly, history shows that the now-so-called democratic
\nadvanced countries did not start out on their capitalist
\ndevelopment process by prioritizing democratization. The one-
\nmillion-dollar question is now whether with democracy a
\ndeveloping country, such as Indonesia, can always achieve
\neconomic success in emulation of these countries.<\/p>\n
One thing is clear, while both democracy and economic growth
\nare good things, the relationship between the two is not easily
\nunderstood.<\/p>",
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