The Democracy Dividend: Faster Growth
(Bloomberg Opinion) -- (This is the first of a series of columns on economic growth and the challenges to democracy.)
Democracy’s faults have been easy to spot throughout the ages. Plato equated democracy with anarchy, instability or even mob rule, and argued that it is the second worst form of government after tyranny. Aristotle was a little more charitable, but still suspicious of democratic processes, writing “it is not safe to trust them [the people] with the first offices in the state.” Many modern Western philosophers, including Montesquieu, Rousseau and Nietzsche, were similarly critical of democracy.
This view hasn't been uncommon even before the current woes of democracy, especially when it comes to the suitability of democracy as a form of government for most countries in the world. The respected judge and economist Richard Posner, for example, wrote in 2010 that “Dictatorship will often be optimal for very poor countries. Such countries tend not only to have simple economies but also to lack the cultural and institutional preconditions to democracy.”
Nowadays democracy’s rap sheet is longer. It is blamed for gridlock, ineffectiveness, inability to reform and, of course, the election of flawed characters such as the current occupant of the White House. With all of these dysfunctionalities, it’s no surprise that democracies are having economic problems. And isn’t it the case anyway that democracy isn't so good for economic growth?
Actually the truth is quite a bit different. Democracy is good for economic growth. Countries that democratize -- switch from a nondemocratic regime such as a military dictatorship, monarchy or autocracy to a democratic regime -- grow more rapidly in the next 20 years or so, and end up with 20 percent higher income per capita.
The example of South Korea illustrates this. South Korea’s growth miracle is often credited to its authoritarian leaders in the 1960s, such as General Park Chung-hee, who directed the country’s state-based industrialization. But growth had slowed by 1980, when the country had reached per-capita income of only about one-third of Japan’s. Large student, trade-union and pro-democracy protests during the decade finally brought down the military government in June 1987, and the economy achieved almost 5 percent annual growth during the next two decades. Today its per-capita income is just 30 percent less than Japan’s.
But how could this be true? Isn’t nondemocratic China the greatest growth miracle of all time? Don’t most commentators believe that democracy isn’t good for growth or at best neutral? Aren’t democracies particularly bad at adopting reforms that are going to boost economic growth, such as tackling corruption or dismantling monopolies? Surely, democracy cannot function in a poor or low-education society; aren’t its economic implications leading to disaster? And aren’t all the troubles democracies all over the world are experiencing today proof of its flawed nature?
Let me take up each one of these five points in turn.
Yes, China’s growth is impressive. No democratic country comes close to it. But comparing China’s growth from the late 1970s, when its income per capita was less than $300 a year, to growth rates in Germany or the U.S. is a particularly egregious case of the proverbial comparison of apples to oranges. The right question is whether Germany would have grown faster in the last two decades had it been a nondemocratic country and whether China would have grown slower had it been democratic. These counterfactual questions are always difficult to answer and necessitate a statistical approach to form a reasonable estimate of how growth would have proceeded if the political regime of the country had been different. The simplest approach is to eschew simple cross-country comparisons such as stacking up China’s growth against that of Germany, but to look at how a country’s growth trajectory changes after it democratizes (or becomes nondemocratic). It is this type of analysis that most clearly reveals the growth deficits of nondemocracies.
Yes, the consensus in popular discussions and the view expressed in some academic papers is that democracy isn’t good for growth. This mistaken view has several sources. First and foremost, much of it is based on casual comparisons of the growth experience of some democratic nations to some nondemocratic ones -- such as comparing the growth of China to that of Western nations -- rather than careful statistical analysis. To understand the second potential reason, it’s useful to first note that nondemocratic regimes often fail when their economy tanks. So democracies often inherit an economy in turmoil. Comparing an economy a few years after democratization to several years before the advent of democracy is likely to give a misleading impression about what democracy implies for economic vibrancy. Finally, going back to Plato and Aristotle, many intellectuals have often been suspicious of democratic decision-making, highlighting the weaknesses of democracy and making them often ignore its successes.
Yes, there is a common a view that democracies are bad at economic reform, often backed up by the argument that you need the firm grip of a dictator to push reforms through, in the manner that General Augusto Pinochet did in Chile after he overthrew the democratically elected government of Salvador Allende in 1973 (and proceeded to execute more than 3,000 people). Today too many support authoritarian governments with the argument that these are better suited to implement tough reforms that democracies won’t be able to stomach.
But the truth seems to be the exact opposite. Across a variety of areas, democracies are much more likely to adopt market-friendly reforms. When a country democratizes, it often undertakes a battery of reforms, undoing a range of inefficient regulations and monopolies instituted by its nondemocratic predecessor regime.
This proclivity to adopt market reforms is one of the reasons democratization increases economic growth rates, though it isn’t the only one. Partly as a result of these reforms and partly because of the other economic and social changes that a democracy brings, investment goes up following democratization, and this together with the reforms is responsible for the pickup of growth in the few years after the onset of democracy. But the most notable change following democratization is neither market reforms nor investment. It is that democracies increase taxes and spend more on education and health, preparing the economy to achieve greater productivity in the decades to come.
Yes, it seems plausible a priori that, as Richard Posner’s quote above suggests, when the electorate is poorly educated or the economy is far from modern, democracy should have greater problems and its negatives might well outweigh the positives. But the data show something different. Democratization even in low-income and low-education countries appears to lead to faster growth.
This isn't to deny that some countries may not be ready for democracy, and yet this doesn’t appear to have much to do with the level of education or the structure of the economy, but with the nature of politics in the country. Take Libya after the fall of its long-serving dictator, Colonel Moammar Qaddafi. Democracy was bound to hit a rocky patch there because Qaddafi had ruled the country by exploiting tribal differences to prop up his regime and refraining from building even the most basic capacity of the state beyond its military. The country was also infested with weapons and armed groups. In such an environment, democratic politics indeed becomes much harder to maintain. In this light, the 20 percent or so increase in income per capita following democratization is even more remarkable. If one were to focus only on functioning democracies, the number would be much larger. The 20 percent gain from democracy includes cases like Libya.
And yes, democracy is under siege. But the evidence that democracy is good for growth doesn’t directly speak to whether democracy is easy to make work. Nor does it imply or maintain that nondemocratic countries will seamlessly transition to democracy. Democracy requires work and will often face headwinds, and not only because the idea of democracy is often threatening to powerful international actors such as Russia and China today. Its most important problems are not external, but internal. First, democracy creates losers as well as winners. After all, somebody has to pay the higher taxes it imposes and those who see their monopolies disappear tend to be not too happy with it. These tensions, especially when the losers are powerful enough to undermine democracy, are one major reason why the fate of many democracies has been precarious.
Even more important is what recent events in the U.S., as well as those in several other countries ranging from Hungary to Turkey and Venezuela illustrate: democratic checks and norms often stand in the way of eager strongmen who will then try to undercut and decimate them. Democratic politics becomes more difficult during times of hardship because of natural forces leading to polarization or greater unwillingness to compromise, which is an essential pillar of democracy.
All of these are not reasons to disparage democracy, but on the contrary to vigorously support it. Democracy can be fragile. It is sometimes gridlocked, sometimes polarized, sometimes confrontational. It is seldom pretty. Yet it is not only the best regime we have to protect the rights of most people and to give them voice, but it is also much better than the alternatives for the health of our economy. In this light, Churchill’s famous quip about democracy becomes even more meaningful: “No one pretends that democracy is perfect or all-wise. Indeed it has been said democracy is the worst form of Government, except for all those other forms that have been tried from time to time”.
What Churchill didn’t say but is equally important is that democracy also takes work and needs defending if we are to enjoy the advantages it creates relative to all those other forms that have been tried from time to time. And that starts by first recognizing what democracy has to offer and then admitting that it is only us, the common people, that it empowers, and that we alone can shoulder its defense.
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