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Economic Growthand

Democracy

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Agenda

• Economic and political freedoms • Effects of autocracy on growth • Impact of growth on democracy• Lipset Hypothesis – prosperity

tends to inspire democracy • Barro’s study – “Gastil” concept of

political rights

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Objectives

• What is the net effect of democracy on growth?

• Do you think the autocratic regime of China can survive in the face of continued economic growth?

• Why should the advanced western countries not try to impose their own political systems upon the poor countries?

Freedom House Freedom In The World 2015

(www.freedomhouse.org)• State of freedom (annual report on the condition of political

rights and civil liberties) in 195 nations • More aggressive tactics by authoritarian regimes and an

upsurge in terrorist attacks contributed to a disturbing decline in global freedom in 2014 

• “Of the 195 countries assessed, 89 (46 percent) were rated Free, 55 (28 percent) Partly Free, and 51 (26 percent) Not Free.

• A troubling number of large, economically powerful, or regionally influential countries moved backward: Azerbaijan, Egypt, Kenya, Nigeria, Russia, Thailand, Turkey, and Venezuela.

• Continuing a recent trend, the worst reversals affected freedom of expression, civil society, and the rule of law.

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Freedom House Freedom In The World 2015…

• In a new and disquieting development, a number of countries lost ground due to state surveillance, restrictions on internet communications, and curbs on personal autonomy.

• Ratings for the Middle East and North Africa region were the worst in the world, followed by Eurasia. Syria, a dictatorship mired in civil war and ethnic division and facing uncontrolled terrorism, received the lowest Freedom in the World score of any country in over a decade.”

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Democracy and growth – China

• China experienced one of the highest rates of economic growth over the past three decades – It is also not a democracy

• 1989 – authorities brutally crushed a political demonstration in Tiananmen Square, and years later dissidents and even religious protestors were still mercilessly punished for the mere act of expressing their opinions in public – there are no signs of impending collapse of the communist government until today, though most economists predict robust growth for China for years to come

• Do you think the autocratic regime of China can survive in the face of continued economic growth?

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“Arab Spring” protests in the Middle East (early 2011)

• Anti-government activists' use of

technology Tunisia: ousted President Zine el-Abidine Ben Ali

from power (fled to Saudi Arabia), ending his autocratic rule (23 years)

o demanding justice for relatives killed by his regimeo protests aided by Facebook, Tweeter Eygpt: ousted President Hosni Mubarak (30 years)

and transition to democracy o government moved to cut internet access, disable

text messaging services and disrupt cellphone networks

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… in the Middle East … Yemen: demanded President Ali Abdullah Saleh (30 years)

to step downo one of the poorest and most heavily armed countries in

the Middle East, is home to multiple separatist movements and has its own particularly virulent branch of al-Qaeda

o many of the diseases that exist in the Arab world exist in Yemen, from tribalism to poverty to corruption

• Countries have been under autocratic rule for decades, and are virtually devoid of the traditions, experience and political infrastructure on which to build stable new governments

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Tunisia under Ben Ali(Source: Washington Post Foreign Service, 24/01/2011)

• “Under Ben Ali, Tunisia was perceived by the West as a model nation in the Arab world - moderate, relatively prosperous and secular. The autocratic leader, who seized power in 1987, stamped down on Islamic radicalism; he was a U.S. ally in the war against terrorism in a region where al-Qaeda was making inroads.

• Ben Ali also lorded over a landscape of repression and corruption. Journalists were censored, harassed and monitored by his intelligence service. Critical voices were silenced.

• His family owned more than half the companies in Tunisia, including banks, hotels and real estate development firms. Bribes and good ties with the government were the route to jobs and promotions.

• In the streets, shops and offices, Ben Ali's photos were everywhere, as were the secret police.”

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Political and economic freedoms

• Economic freedom usually believed to promote growth

• The connection between political and economic freedom is controversial

• Milton Friedman argues that the two freedoms are mutually reinforcing

an expansion of political rights – fosters more democracy – fosters economic rights and tends thereby to stimulate growth

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“….. we do not know whether democracy fosters or hinders economic growth”

• Concluded by Przeworski, Adam and Limongi, Fernando (1993), on the basis of their theoretical arguments and statistical studies (“Political Regimes and Economic Growth”)

• They argue that it is not at all clear if democracy, with its slow empowerment of the less wealthy, secures growth-fostering capitalist property rights better than dictatorships

“….. we do not know whether democracy fosters or hinders economic growth” …

• Democracies may actually be more susceptible to pressures for immediate consumption (and may involve rich-to-poor redistribution of income including land reforms) and other particularistic demands (enhanced role of interest groups in systems with representative legislatures) that may hamper long-run investment

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Authoritarian regimes

• Nothing in principle prevents non-democratic governments from maintaining economic freedom and private property

• Examples of autocracies that have expanded economic freedom – the Pinochet government in Chile, the Fujimori administration in Peru, and several previous and current regimes in East Asian “miracle” economies

Authoritarian regimes …• China experienced one of the

fastest rates of economic growth in recent decades and it is not a democracy

• Most OECD countries began their modern economic development in systems with limited political rights and became full-fledged representative democracies only much later

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Effects of autocracy on growth

• Can however be adverse if a dictator uses his power to steal the nation’s wealth and to carry out nonproductive investments

• Many governments in Africa, Latin America, former planned economies in Eastern Europe, the Marcos administration in the Philippines, and the Suharto administration (crony capitalism) in Indonesia seem to fit this pattern

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Democratic institutions

• Provide a check on governmental power and thereby limit the potential of public officials to amass personal wealth and to carry out unpopular policies

• Since at least some policies that stimulate growth will also be politically popular, more political rights tend to be growth-enhancing on this count

• Thus the net effect of democracy on growth is theoretically inconclusive (as mentioned earlier that democracy does have drawbacks)

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Lipset Hypothesis• A common view, often called Lipset Hypothesis,

is that prosperity (increases in living standards) tends to inspire democracy

• At the same time, democracies that arise without prior economic development may not last long

• A number of Asian tigers (eg. Taiwan, South Korea) have moved towards democracy

• Will China do the same as rapid growth progresses? What about Vietnam? Russia?

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Barro, Robert J. (1996)“Democracy: A Recipe for Growth?”

• Applied regression analysis to study the relationship between growth and its various determinants that include democracy and he used data for roughly 100 countries for the period 1960-1990

• The cross-country analysis suggests that there are positive effects on growth from the

maintenance of rule of law free markets small government consumption high human capital

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The Gastil concept of political rights

• Democracy in the Barro’s study is measured by the “Gastil concept of political rights” ie.

rights to participate meaningfully in the political process

o rights of adults to vote and compete for public offices ando for elected representatives to have decisive roles on public policies

• The countries that have dominant political parties are considered less democratic and the index is scaled from 0 (fewest political rights) to 1(most political rights)

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Inverse U-shapebetween growth and democracy

• Results tentatively indicate that more democracy raises growth when political freedoms are weak but

• depresses growth when a moderate amount of freedom is already established

• Inverse U-shape in the plot between growth rate and democracy

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Question • Democracy in the Barro’s study is

measured by the “Gastil concept of political rights”, that is, having the rights to participate meaningfully in the political process. His analysis highlights that countries which have dominant political parties are considered less democratic. How does the study apply to the situation in your country?

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Is democracy sustainable with low growth?

• Cross-country data suggests that countries at low levels of economic development typically do not sustain democracy

political freedoms in many newly independent African states in early 1960s did not last long

• Conversely, non-democratic countries that experienced substantial economic development have a tendency to become more democratic (eg. Chile, South Korea, Portugal, Spain, and Taiwan)

Democracy and Reforms• Amin, Mohammad; Djankov, Simeon. 2009. Democracy and

Reforms. World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/4031

• The authors use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reforms, because politicians have the incentive to embrace growth-enhancing reforms to win elections. By contrast, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. This paper tests these hypotheses, using data on micro-economic reforms from the World Bank's Doing Business database. The results provide robust support for the claim that democracy is good for growth-enhancing reforms.

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Democracy, Market Economics and Development:

An Asian Perspective• Igbal, Farrukh; You, Jong-Il. 2001. Democracy,

Market Economics and Development : An Asian Perspective. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/13904

• While it is widely accepted that economic freedom, as ensured broadly by the operation of the economy according to market, or laissez-faire principles, is a critical determinant of development, the role of political freedom, as ensured broadly by the practice of democracy, is less well understood.

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Democracy, Market Economics and Development:

An Asian Perspective …• The papers focus largely on the experience of East

Asia in recent years, featuring: democracy and the market economy, emphasizing both politics, and economics as essential to improve the lives of citizens; democracy and social justice, as intrinsic to development, arguing that rights and liberties are best conveyed by the democratic system of governance;

• participation, as fundamental to democracy and development, for it is the practice of democracy that is most critical to the long-term sustainability of development;

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Democracy, Market Economics and Development:

An Asian Perspective …

• liberal participatory democracy, as instrumental to produce sustainable economic reforms, by ensuring the legitimacy of reform efforts. Notably, the preconditions that participatory democracy requires in order to fully support reforms, are discussed, with supporting evidence from experiences in Latin America, and Asia; and,

• political and economic institutions of Asia, and the West, as set to converge, despite inconclusive debates on Asian values.

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Conclusion• The advanced western countries

should not try to impose their own political systems upon the poor countries

• They should rather try to export economic freedom (property rights and free markets) as democracy will expand automatically after a reasonable degree of living standards are being achieved

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References • Amin, Mohammad and Djankov, Simeon

(2009). Democracy and Reforms. World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/4031

• Barro, R.J. (1996).“Democracy: A Recipe for growth?” In M G Quibria & M Dowling (eds.), Current Issues in Economic Development: An Asian Perspective, Hong Kong; New York: Published for the Asian Development Bank by Oxford University Press

• Calvert, Peter and Calvert, Susan (2007). Politics and Society in the Developing World, Pearson Education Ltd.

References • Igbal, Farrukh and You, Jong-Il (2001).

Democracy, Market Economics and Development: An Asian Perspective. Washington, DC: World Bank. © World Bank. https://openknowledge.worldbank.org/handle/10986/13904

• Przeworski, Adam and Limongi, Fernando (1993). “Political Regimes and Economic Growth”, Journal of Economic Perspectives, Vol. 7, No.3, Summer, pp 51-69

• World Bank (2002). “Building Institutions for Markets”, World Development Report

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