Link between democracy and economic growth?

Link between democracy and economic growth?

Akhmad Rizal Shidiq, Institute for Economic and Social
Research, Faculty of Economics, University of Indonesia, Jakarta

Democracy is desirable because it widens individual freedom
and capabilities, argues Satish Mishra (The Jakarta Post, Nov.
5). It makes sense as a means of development and economic growth;
and to enhance economic stability.

No doubt democracy is a good thing, but to relate democracy to
economic development -- which has at its core the process of
capital accumulation -- is a rather complicated effort both
conceptually and empirically.

Why does China grow much faster than India; why do the
Malaysian and South Korean economies perform better than the
Philippines; or why did the economic miracle take place in East
Asia, not in more democratic Latin America?

How could the path to democracy, instead of autocracy, arise
after a crisis in countries like Indonesia?

The researchers Przeworski and Limongi in 1993 offered an
interesting survey on the relationship between political regime
-- or authoritarianism -- and economic growth. They reject the
idea that democracy eventually boosts stability and economic
growth and further assert that democracy may undermine
investment.

The logic is that because the people in favor of immediate
consumption can organize themselves to reduce profit and vote for
redistribution policies and non-investment activities, investment
will decline. However, the problem is to explain why
authoritarian regimes are more likely to postpone current
consumption in exchange for larger investment.

The next claim against democracy is that development needs a
state isolated from the pressure of interest groups. In democracy
this pressure arises from individuals: those who act collectively
as economic agents undertake investment, and can organize
themselves to ensure income transfers in their own interests. But
this does not explain why the state can always act in the
interests of anyone else.

The above researchers also assert that democracy maximizes
government spending and output as compared to an authoritarian
regime. But they say this assumes perfect information among
voters, perfect competition among parties, and perfect agency.

Olson (1993) also stated that democracy does not give any
incentives to leaders to extract maximum attainable social
surplus, unlike in the case of autocrats who have to fulfill
their personal objectives.

Since economic growth arises from good policies, people tend
to think that politics -- democracy here -- affects the policies.
But, in fact, good policies have always been rooted in more
complicated sources and institutional settings rather than just
political processes.

This is why economic growth happens in both democratic and
authoritarian states as long as they can produce good policies
and institutions for capital accumulation given their own
historical propensity to social fragmentation, stage of
development and technological trajectories of particular sectors'
industrialization.

On democracy and economic stability, there are two problems in
Mishra's argument. First, after a crisis, do we really need
economic stability -- and to what end? By nature, economic
recovery is designed to get us away from the pit of economic
disaster as soon as possible -- a big push, in other words.

To ensure stability and a gradual process may be too costly
due to the depth of our people's misery.

Second, instead of supporting stability, democracy may produce
something else instead. Obviously, no matter how sophisticated
and well-designed, any development policy will create losers.
Under democracy, these losers will gain substantial political
power to inflict high political costs on the winners. This makes
policies more vulnerable.

Furthermore, rather than arguing that democracy leads to the
flexibility to correct wrong policies, in fact democracy will
hinder the flexibility of state policy to make adjustments. Why?
Because any change in policy will alter the loser-winner setting.
Again under democracy, the potential losers under a new policy
have greater power to deter any policy change.

In addition, while many argue that democracy is the best
remedy for paralysis after a crisis, it seems that there is no
sufficient explanation as to how democracy may arise after
economic and political turmoil.

According to Mancur Olson (1993), democracy could emerge out
of a crisis if the crisis created a new balance of power and if
power-sharing, instead of fighting each other, appeared to be the
best attainable solution among the leaders of the interest groups
within that new balance of power.

This is, by the way, a very strict prerequisite. It cannot
explain why such a new balance of power does not evolve into the
"roving banditry" category: a situation where a society comes
under the sway of leaders who have short-time horizons, less than
a monopoly of power -- or violence, suffer insecurity, and,
therefore, tend to maximize the plunder of social surplus as they
have no incentive to raise the subject's productivity in the long
run.

Four years down the road from the crisis, roving banditry is
more evident in Indonesia than power-sharing for democracy. The
game has now shifted to the 2004 general election, with none of
the leaders of the fragmented interest groups at the moment
capable of securing their positions after the election. The
leaders -- at national and local level, and in legislatures and
executives -- have greater incentives to steal from society than
facilitate a long-term capital accumulation process in which they
are not guaranteed any returns -- that is, a bigger amount of
personal collection from a larger societal surplus.

Thus, for democracy to boost economic growth, it should be
able to facilitate capital accumulation and therefore always be
able to enhance stability, public order and predictability. Yet,
this capability, at least in the short term, can also be provided
by authoritarianism -- a messiah, according to Mishra. Indeed, to
wait for democracy to create more effective long-term capital
accumulation bears it's own cost. The layman's wish to have a
messiah to some extent does not come out of the blue. Indonesian
post-crisis experience shows that in transition, a country can
fall into roving banditry, especially if the momentum has been
lost.

Interestingly, history shows that the now-so-called democratic
advanced countries did not start out on their capitalist
development process by prioritizing democratization. The one-
million-dollar question is now whether with democracy a
developing country, such as Indonesia, can always achieve
economic success in emulation of these countries.

One thing is clear, while both democracy and economic growth
are good things, the relationship between the two is not easily
understood.