E. Democracy and economic development
It was mentioned earlier that, despite its many shortcomings in practice, the principles and processes of representative democracy are now generally accepted by most members of the United Nations as providing the basis for legitimate government. Democracy, however, is considerably more than a set of formal institutions that can be put quickly into place as a result of elections and a new constitution. It is rather a broad political culture that requires time to evolve in such a way that it responds to the particular needs and preferences of the population that chooses it, and it cannot be imposed by force, diplomatic pressure or according to an outsider's timetable22. [56] It is
253
also a large political mansion with many rooms in it, as the diverse arrangements of Western Europe and North America demonstrate. Nascent democracies must therefore be free to choose the institutional forms and processes that suit them best: sometimes they may succeed in copying western models but success is by no means guaranteed (North, 1994). In any case, democratic tradition and process is not unique to the west and new institutions may be less fragile if they are encouraged to take root in established national traditions.
This is not the place to enter a discussion about the ethical criteria for judging different forms of government23. [57] Here our interest is in whether democratic processes are more or less supportive of economic development than alternative political arrangements. A prominent feature of the current globalisation era has been the close identification of free markets and democratic principles. Market fundamentalists tend to focus on a positive link between participatory democracy and economic freedom through the acquisition, protection and use of property rights. This seems to be premised on the view that once a minimum set of institutional prerequisites are in place, the market economy will acquire a life of its own which should not be subject to political pressures. In fact, the association owes more to the dramatic collapse of the Soviet Union than to any «natural» symbiosis between the two. Indeed, the rise of democratic principles,
254
historically, has more often than not been driven by a desire to tame the unpredictability and brutality of unregulated market forces. By insisting that economic policy choices be narrowly restricted and, as far as possible, be treated as purely technical issues, there is a real danger that today's market fundamentalists will succeed, at least in the short run, in their attempts to remove more and more aspects of market behaviour and economic performance from democratic scrutiny and accountability. But diminishing the domain over which democratic choices can be exercised increases the risk of a backlash that will damage both political and economic development in the longer run. The incantation of political elites that «there is no alternative» to liberal economic reforms has already begun to fuel resentment and discontent in Europe (West and East) and in Latin America24. [58] What is patronisingly dismissed as economic nationalism by market fundamentalists usually reflects their disdain for any national preferences that are not revealed by the market and their unwillingness to support effective policies to ease the adjustment costs of economic change, especially those that fall on the least-advantaged.
An alternative argument sometimes heard is that human rights, social policies and democracy are political luxuries that can only be afforded at later stages of economic development. There is no doubt that economic advance, at least in the shorter run, has been achieved under some authoritarian regimes, or that democracies have sometimes failed spectacularly in the face of economic crisis. However, when presented as some kind of ineluctable principle of development, we believe this view also to be deeply mistaken.
Effective mechanisms of participation and voice, as well as respect for and defence of human rights, can actually have a very positive impact on the daily economic lives of individuals, especially those of the poor in developing countries, who are often remote, in more than just the geographical sense, from representative institutions in the capital cities: the peasant with undefined or unprotected property rights, subject to grasping landlords; the slum dweller subject to
255
arbitrary arrest from an undisciplined police force and brutality from criminal gangs; the precarious position of women and children in many societies. The elementary, positive freedom to survive is greatly increased in the presence of democratic institutions. Amartya Sen has shown that famines have often occurred in the presence of plentiful supplies of food because vulnerable groups (landless agricultural workers, for example) lack appropriate entitlements or ownership rights. In contrast, and despite many natural catastrophes, there has not been a single case of famine in India since independence (Sen, 1981; Dreze and Sen, 1981). The key factor is the ability of the affected population to give «voice» to its predicament and to maintain pressure on governments to respond rapidly and effectively to social distress. Such a situation contrasts sharply with that in many states of Sub-Saharan Africa and some of those in Latin America. In countries with democratic government and an array of democratic freedoms, disasters, man-made or natural, are difficult to keep secret (as happened with the great Chinese famine of 1958-61).
Still, the question is whether or not this same logic extends to everyday matters of development policy; to put it in its simplest terms, can a poor democratic state be expected to raise its growth rates from 3 or 4 per cent per annum to 7 or 8 per cent on a sustainable basis? There are certainly plenty of naysayers and the broad body of crosscountry evidence remains confusing, partly for familar methodological reasons discussed in earlier chapters, on the strength of the link between democracy and economic growth (Przeworski and Limongi, 1993; Brunetti, 1997). There is also evidence pointing to different types of growth paths, with more authoritarian regimes relying on resource mobilisation and exhibiting a greater degree of volatility, while growth in more democratic regimes relies on raising productivity and innovation, and tends to exhibit greater stability (Przeworski et al, 2000). Others have suggested that the more decisive test lies in the comparative strength of political regimes in managing economic transitions, suggesting positive results for democracies (Rodrik and Wacziarg, 2004). There is also plenty of evidence to suggest that, from a purely economic standpoint, democracies perform better than authoritarian regimes in producing more stable rates of economic growth, in handling negative shocks from whatever source, and in Producing better distributional outcomes (Rodrik, 2000). Restricting
256
the policy options available to developing countries thus increases the risks of undermining the prospects of both economic and democratic development.
This is not, of course, a matter that is likely to be resolved by econometric studies. The sensible position is probably to accept that political and economic progress are never tied together in any straightforward or functional way (Hirschman, 1994:229). That position still leaves plenty of room (and enough empirical evidence) to support the argument that democracy, involving not just periodic elections but the broader qualities of the participatory open society, can have and has had a significant, positive effect on economic growth25. [59] The fact that the link is not automatic implies a need for more careful attention to the possible channels through which positive synergies can be realised and the possible gaps that might have to be filled. Some have linked democratisation to less corruption and more efficient bureaucracies which in turn are associated with higher investment ratios, suggesting improvements in the bureaucracy might be as important as political stability (Mauro, 1995; Wei, 2001). Dani Rodrik (1998) has found a close correlation between the openness of an economy and the size of its government, a relationship that he suggests reflects an explicit quid pro quo for labour agreeing to trade liberalisation, which in turn suggests a greater sensitivity of democratic governments towards those who bear the costs of generally advantageous policies and whose cooperation is needed for their success. Others have found a strong link between democracy, investment in human capital and growth (Tavares and Wacziarg, 2001). Similarly, the introduction of democracy has been associated with reductions in inequality of incomes and, despite some fears to the contrary, this does not appear to have negative effects on economic performance, either because higher wages for workers
257
may reflect more efficient labour markets or because it encourages the emergence of a middle class and a thickening of market relations or because it produces a more stable investment climate (Rodrik, 1999). A related approach associates social divergence with a weakening of the interaction between individuals that is needed to boost innovation and accelerate the diffusion of ideas which in turn raise productivity (Grafton, Knowles and Owen, 2001).
The more general point, it seems to us, is that because dynamic market societies progress through both creative and destructive forces, they are bound to trigger tensions and conflicts. Such conflicts can emerge from technical progress, investment cycles, opening up to foreign competition and TNCs, shifts in the structure and location of economic activity, etc. These can be dealt with either by suppressing the underlying forces that give rise to them, and at the same time foregoing the benefits of such dynamism, or by learning to manage the conflicts through bargaining, arguing and negotiating. Albert Hirschman (1994:242-48) has suggested, and we agree with him, that there is a greater likelihood of learning to better manage the «steady diet of conflicts» generated by market forces under a democratic than an authoritarian regime.
Economic development is a continuing process of transformation in which economic, political and social factors are closely interrelated. As such, it requires popular assent and that, in turn, needs institutions for consultation, discussion and participation; changes in the economic system require innovations in the framework of institutions that incorporate the incentives that can either stimulate development or retard it; and the ruling elites must be willing to respond to popular pressure and accommodate change. The capacity of the state to provide a coherent vision of the future and to manage the conflicts that change brings, including disciplining the behaviour of elites when they undermine the broader national interest, is perhaps the greatest challenge it faces in poorer countries. If a large part of the ruling class of politicians, officials and businessmen are unwilling to give up or modify some of the benefits and social position they enjoy from the status quo, then very little can be achieved until the structure of power has been changed either through evolution or revolution, preferably of the «velvet» rather than the violent sort.
258
Outside pressure, under some circumstances, can play a constructive role in deepening the participation process and building consent. In different ways that was probably the case in Japan, South Korea and Taiwan26. [60] But we have already argued that outside pressure and advice for economic and institutional reforms is frequently influenced by mythical narratives of the outsiders' own histories and by the misleading, universalist assumptions of mainstream economic policies. An additional problem is that international technocrats, business advisers and others tend to see the problems of development in relatively narrow, apolitical terms. Economists who overlook the wider political and social issues are unlikely, in our view, to provide useful advice and, by extension, economic development is unlikely to be achieved with economic instruments alone. If, as seems likely, productivity and growth are, in part, explained by politics, policy and institutions (Hibbs, 2001), then the elegant simplicities of the neoclassical and endogenous theories of economic growth are unlikely to be the source of many valid, general policy recommendations for countries seeking economic development.
The proposition that democratic processes and institutions are more generally vital for promoting development was central to the political thinking of Karl Popper, who argued in 1945 that democratic societies were much better at solving their problems and achieving their aims than authoritarian regimes (Popper, 1966, 5th edition). This is because problem-solving involves experimentation, processes of trial and error, tolerance and encouragement of open criticism, and a willingness, or at least incentives, for governments to change direction as a result of that criticism. Writing at the same time as Popper, Karl Polanyi (1944) recognised that extending «freedom in a complex society» also meant challenging the anti-democratic tendencies of the market to remove economic life from the influence of political voice and from collective and cooperative action. More recently, Joseph Stiglitz has taken up this theme, arguing for the importance of democratic process for economic development: inter alia, strengthening the mechanisms of «voice» helps to reduce the
259
risks of disruption by disappointed groups, and institutions for participation and consultation make it easier to create the necessary consensus for reform (in Chang, 2001, especially Chapters 7 and 8). This line of thought, as with Sen's argument for the importance of participation in public decision-making, government by discussion and public reasoning (Sen, 2005), is closely connected to the ideas of political theorists of deliberative democracy27. [61]
All these approaches challenge the view that the political process can be reduced to another form of market behaviour where self-interested competition is governed by bargaining and rational choice. In the Popper-Sen-Stiglitz framework, democratic political engagement can be an end in itself, encouraging citizens to think beyond their own immediate interests towards larger public interests, an educating process that strengthens civic virtues and supports the evolution of shared values and norms of behaviour that a long list of writers, including Adam Smith in his Theory of Moral Sentiments, have identified as essential for an effective economy and a stable polity. Nevertheless, while accepting that political institutions and processes cannot simply be reduced to their instrumental effectiveness in raising GDP, it is still important, especially for the poor, to be confident that democratic processes are effective in promoting economic development.
None of this can be captured in the market-fundamentalist dogma of minimal government, which lacks any recognition of the state's economic role in preserving and fostering social cohesion, instead replacing this with a set of universalistic policy recommendations ostensibly derived from the «win-win» logic of economic theory (Gray, 1998:203). Instead of prescribing specific institutional arrangements and policy options for a developing, transition or post-conflict economy - those are for each individual country to discover - it is perhaps more useful to highlight the tasks that the government of a market-based democracy can be expected to perform and for which it must establish, through trial and error, and in tune with the political and social culture of the country, the most appropriate set of
260
institutions for carrying them out. We will return to this theme in the next chapter. Here we wish simply to reiterate that it is a strategic error to relegate political institutions to the category of «second-generation reforms»: instituting effective democratic processes is more urgent than creating stock markets or liberalising the capital account of the balance of payments. Apart from the obvious key requirements of democracy - that the legitimacy of government is derived from popular consent and is periodically tested in competitive political elections in which all adults are free to vote or stand as candidates, that voting is secret, and that the basic freedoms of speech, press, assembly and organisation are open to all - our argument for democratic gradualism, as well as the works cited above, stress the importance of participation, consultation and negotiation as a means of deploying local knowledge and local interests as a check on governments (and their foreign advisers) acting in an authoritarian manner between elections.
By encouraging and strengthening these local or micro-foundations of democracy, governments can be helped to design more effective strategies for reform and to build a broad coalition for societal change. This is no small matter given that one of the most important determinants of policy success is whether a government is able to create and maintain credibility in its programme. This is a difficult task and requires not just economic understanding but political skills of a high order, but the process is made easier if there is a genuine interaction between policy makers and effective local organisations. The credibility of a government's programme is also enhanced if it can set out a coherent and convincing multi-year programme of reforms and objectives. Coherence here means setting out the basic strategy, the interrelationships between social and economic factors, and a credible sequence of actions that will increase the probability of success. If economic agents expect a reversal of policy they will act accordingly and undermine it before it even gets under way.
Since we have stressed that promoting economic development is still an advance into terra incognita, governments will need to experiment and therefore there are bound to be setbacks and mistakes. In order to handle these without seriously damaging expectations and losing popular support for change, we suggest in the next chapter a framework along the lines of the post-war Marshall Plan, a
261
framework that will be stronger the more it takes into account local knowledge and interests. Since some of these interests will inevitably be hurt by changes in the structure of the economy, and because of ex ante uncertainty about the likely distribution of the benefits and costs of change - the costs often arriving ahead of the benefits - such «Marshall Plans» will need to make explicit provision for distributional policies. This will include safety nets for those directly affected by increased imports or market liberalisation: taking care of the wounded, in other words. But more general policies are also needed to focus specifically on poverty reduction and more equal income distribution in order to underpin the institutions of participatory democracy and, in turn, sustain popular support for programmes of change. The dangerous consequences of sections of the population being left behind in the development process include threats not only to the process itself but also to security within and beyond national borders. It is marginalised communities that constitute those «pools of disaffection» that provide at least a passive cover for terrorist groups, the leaders of which normally come from the ranks of the middle class rather than those of the poor. Although explicit distributive policies, including at the international level, may frighten the corporate sector in the rich countries, the G7 countries would be wise to support them.
Thus, we are arguing that creating and strengthening effective democratic institutions and introducing mechanisms for handling distribution issues should be among the top priorities for institutional reform, not relegated to some «second stage» when growth is under way and they can be more easily «afforded»28. [62] Underlying these remarks
262
on the importance of democratic processes is the recognition that although a competitive framework is essential in a world of scarcity, cooperation is also crucial for the success of market economies, and that cooperation is nurtured by political arrangements that allow and encourage participation by the citizens at large. It is within such arrangements that the population can help to change the formal and informal rules that govern their economic behaviour and gradually move them in a direction more favourable to sustained growth, although there is no guarantee that they will succeed. If, as suggested by North (1994), culture is a key ingredient of path dependence, then the probability of altering direction is much higher if changes in rules and conventions emerge from and have the support of grassroots democratic bodies than if they are imposed by elites or authoritarian governments; from this perspective, it is «adaptive» rather than «allocative» efficiency which is the key to long-run growth (North, 1994:367). Although we are not sure how to create adaptive efficiency or what institutional arrangements are most likely to nurture it, democratic practices do appear to be particularly suited to supporting the learning and experimental processes that characterise dynamic societies.