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.