Democracy and development a complex relationship in economics

Democracy and Economic Development

democracy and development a complex relationship in economics

This paper from the Overseas Development Institute analyses the complex A democracy should not be expected to produce better socio-economic outcomes. Democracy and Development: A Complex Relationship by () is agnostic (“ we do not know whether democracy fosters or hinders economic growth”) successful process of economic development than an electoral democracy such as India . A democratic state is a complex system involving multiple features .. a strong positive causal relation between democracy and development, and (2).

Given their organizational and financial resources these bosses have an edge over other politicians in winning elections, and the poor often are dedicated voters for them as they nurse their local constituency assiduously even as they loot from the system in general.

Another example of the exposure of the administrative system to the marauding forces of populist politics is provided by the widespread presumption among the borrowers both rich and poor from government-owned or controlled credit institutions in many countries that they can default on loans with impunity, as the politicians who have to depend on their votes cannot afford to let bank officials be too harsh with them. This has been one of the major reasons for the massive failures of state intervention in credit in developing countries.

democracy and development a complex relationship in economics

In the recent literature on the role of the state in economic development3 the issue of insulation or autonomy of the state has been formulated in terms of the notion of the ability to credibly precommit familiar from industrial economics. Thus it is easy to see that compared to the strong state, the weak state will have too much of undesirable interventions 3 See, for example, Bardhanand Rodrik This is an important issue that needs to be examined with detailed historical data. The determined way the South Korean state has handled various macroeconomic crises, say, in the seventies the two oil shocks, massive foreign debt, inflation, etc.

Elster has argued that to be credible and effective, precommitment requires democracy. The promises of a ruler are much more credible if there is a well-established procedure for throwing the ruler out of office for failure to keep those promises. Similarly, North and Weingast have cited the historical case of the Glorious Revolution in England inwhich by strengthening political institutions that constrained the king enhanced his commitment to securing private property rights and thus fostered economic growth.

I am not fully convinced by this argument. Democracy is neither necessary nor sufficient for effective precommitments. Let me illustrate this in the context of development by taking the case of infant industry protection, which has been popular in developing countries, as it was in the early stages of industrialization in the U. At the time when such protection against foreign competition is usually initiated, by the very nature of the argument for temporary protection, it is granted for a short period until the industrial infant can stand on its own feet.

But in most countries infant industry protection inevitably runs up against the time-inconsistency problem. When the initial period of protection is about to expire, political pressures for its renewal become inexorable, and in this way the infant industry soon degenerates into a geriatric, protection lobby. No conniving leader faces dismissal on this ground, making constitutional provisions for throwing out the ruler largely irrelevant here.

Thus well-established procedures of democracy are not sufficient for credible commitments. The most successful cases of infant industry protection in recent history have taken place under some of the authoritarian regimes of East Asia, particularly Taiwan and South Korea.

There have been some remarkable instances in these regimes of the government holding steadfastly to its promise of withdrawing protection from an industry after the lapse of a preannounced duration, letting the industry sink or swim in international competition.

In fact there is evidence now that with the recent advent of democracy in these countries, some of the earlier commitments of their governments have become weaker as, for example, in the case of the promised withdrawal of protection of small manufacturing enterprises against competition from the chaebols in South Korea. If market competition in general, and international competition in particular, is important in the development process, as a disciplining factor on productive efficiency and as an inducement to cost and quality consciousness, it is necessary to examine the role democratic institutions play in the management of conflicts that inevitably arise from the disruptions and dislocations in social and economic life that market competion brings in its wake.

Such corporatist regimes usually tend toward authoritarian practices, but the latter are not strictly necessary as the history until recently of centralized wage bargaining in the open economies of democratic Scandinavia, or of industrial policy in the small European states Katzenstein has written about, amply demonstrates. But the initial conditions in the latter countries were arguably rather special, and quite different particularly from more heterogeneous and unequal societies.

To the extent an authoritarian regime provides a more unified line of command, the common agency problem may be somewhat less severe. Rasmusen and Ramseyer have modelled a coordination problem8 in bribe collection in democratic polities: In some actual democratic polities such coordination problems are reduced by committee systems, disciplined factions and party political machines.

It is reported that in postwar potentially imposes on every other legislator, when they cannot coordinate their votes to demand a bribe which compensates them for that externality. Japan the Liberal Democratic Party particularly its so-called Policy Affairs Research Council, where important policies were made and pay-offs were coordinated behind closed doors has been quite successful in centralizing bribery. Coordinated corruption may, of course, have less adverse consequences for resource allocation efficiency than uncoordinated corruption, as Shleifer and Vishny have suggested comparing corruption in Communist Russia with that in the post-Communist yearssince in the former case the bribee will internalize some of the distortionary effects of corruption.

The important question here, however, is how the ruler can credibly promise to keep the contributions lump-sum, and not come back again for quid pro quo deals at the margin. The autonomy of the state has other costs in terms of economic efficiency. Bureaucratic insulation makes it difficult to attain flexibility in dealing with changes in technical and market conditions and may thus discourage risk-taking and also in correcting wrong decisions.

This flexibility has been maintained in East Asia by fostering a dense network of ties between public officials and private entrepreneurs through deliberative councils as in Japan or South Korea or through the tightly-knit party organization as in Taiwanallowing operational space for negotiating and renegotiating goals and policies, sharing information and risks, and for coordinating decisions and mutual expectations with remarkable speed.

Such cozy governmentbusiness relations9 are more difficult to achieve or politically more suspect in societies like in South Asia that are more heterogeneous and unequal.

In many situations the state is neither a Stackelberg leader nor a Stackelberg follower. Neither the state actors nor the private interest groups usually have the power to unilaterally define the parameters of their action. Both may be strategic actors with some power to influence the terms, and the outcome of the bargaining game depends on their varying bargaining strengths in different situations.

Set in a bargaining framework, one may begin to resolve a problem of motivation that afflicts much of the discussion on the relationship between authoritarianism and development.

An authoritarian ruler may be better insulated and may have the capacity to resist particularistic pressures, but why would he be interested in playing a positive role in the development process? But in this model the power of the ruler to collect taxes or rents is invariant with respect to the policies to promote productivity. But what if some of the latter policies increase the disagreement payoffs and hence tilt the bargaining outcome in favor of the ruled?

As Robinson has emphasized, it may not be rational for an autocrat to carry out institutional changes that safeguard property rights, law enforcement, and other economically beneficial structures, if in the process his rent-extraction machinery has a chance of being damaged or weakened. He may not risk upsetting the current arrangement for the uncertain prospect of a share in a larger pie. In contrast, in South Korea and Taiwan initial conditions were much more favorable to the ruled with land reforms and expansion of mass educationand one of the few ways open to the dictators to secure their position was to derive their legitimacy from ambitious programs of shared economic growth thus shifting the whole bargaining frontier outwardthat would also serve nationalistic goals like catching up with Japan and warding off the Communist threat.

I Democracy helps development through the accountability mechanisms it installs for limiting the abuse of executive power, and provides a system of periodic punishments for undesirable government interventions in the economy and rewards for desirable interventions.

Accountability mechanisms are particularly important in averting disasters; in their absence major ecological damages in the ex-Soviet Union and Eastern Europe went on unchecked for too long.

Sen has commented that Indian democracy, with its free press and vigorous opposition parties, has been politically quicker in averting sporadic threats of famines and starvation deaths; but at the same time, the Indian political system, unlike the Chinese, seems to have been unable to deal effectively with endemic hunger and malnutrition. Sometimes in a democracy it seems easier to focus political attention to dramatic disturbances in a low-level equilibrium, than to the lowness of the level itself.

If there is a public complaints mechanism is in place, a democratic regime, other things remaining the same, may generate too many complaints since the penalty for complaints is usually relatively10 lowand thus leading to too much screening and the consequent delay of projects, compared to an authoritarian regime where complaints may be more risky.

Democracy and Economic Development

Of course, in many democracies public scrutiny particularly of high officials is constrained by laws regarding official secrecy like the Official Secrets Act of that the Indian government inherited from the British and the difficulty auditors always face in disentangling malfeasance from sheer incompetence the rules of punishment are quite different for the two, and in the case of the latter often non-existent in insulated bureaucracies.

Checks and balances in a bureaucracy often involve a multiple veto power system. While this system inevitably involves delay in decision-making, it is supposed to keep corrupt officials in check. One high official in New Delhi is reported to have told a friend: A multiple veto system also has an inherent bias toward rejecting too many good proposals or what is called Type I error and inhibiting against risk-taking in general.

Of course, the type of a decision-making structure in economic administration is not uniquely related to the nature of political regime; a democratic public administration may be organized as a centralized hierarchy, whereas an authoritarian ruler may choose to organize his economic administration up to a certain level as 10 Whistleblowers losing jobs are not infrequent in democratic regimes.

In a situation of highly imperfect information the desirability of even uninformed central control varies, as Bolton and Farrell show, according to the relative importance of private information and the need for coordination, which may vary from case to case. They also point, drawing from the literature on dynamic incentive contracts, to the importance of commitment constraints. Going back to our earlier discussion, we may note again that authoritarianism is neither necessary nor sufficient for commitment.

In developing countries where much of the economy is in the vast informal sector and dispersed in far-flung villages and small towns, the accountability mechanisms of democracy are particularly important at the local community level.

Large-scale development projects directed from above by an insulated modernizing elite are often inappropriate technologically or environmentally, and far removed from or insensitive to local community needs and concerns.

Rather than involving the local people and tapping into the large reservoir of local information, ingenuity, and initiative, these projects often treat them simply as objects of the development process; they end up primarily as conduits of largesse for middlemen and contractors and encourage widespread parasitism on the state.

There is, however, no one-to-one relationship between the strength of democracy at the national political level and that of institutions of accountability at the local level. In large parts of Northern India, for example, it is common to observe the serious problem of absenteeism of salaried teachers in village public schools and of doctors in rural public health clinics. The villagers are usually quite aware of the problem but do not have the institutional means of correcting it, as the state-funded teachers and doctors are not answerable to the villagers in the insufficiently decentralized system.

Similar accounts are available of more effective public pressure in rural basic education and health services in Cuba compared to some of the more democratic regimes in Latin America. There are, of course, many authoritarian countries where local accountability is completely absent and the situation is much worse than in North India. They are generally not a feature of dictatorships.

Democracy and Development A Complex Relationship

Generally in politics we distinguish between public and private activities. Producing, selling, and purchasing goods are "private" - they are the domain of the individual or firm rather than the state. If you are interested in states where the government handles all the affairs of daily life i.

Modernization theory was the dominant view in comparative political science for most of the last century. Although it has since been dethroned, it is still incredibly common in research. The basic notion is that economic development causes democratization although at some point the claim was softened to just that they are strongly correlated. A Note About Generalization What we are talking about here is a generalization of how the world works.

Like commenters and other answers have pointed out - you can always find examples where it doesn't seem to apply perfectly. This is entirely normal.

democracy and development a complex relationship in economics

It just means there are things yet to be explained in the world. The Theory Basically, the theory is just that as an economy develops it also tends to become more democratic.

He uses some indicators of economic development and shows that the countries with high levels of economic development are also the ones that are democracies.

The causal relationship between economic development and democracy - Politics Stack Exchange

Cutright goes a lot further as did a lot of other modernization theorists: Similarly, if a democratic country's economy slipped it would eventually become less democratic. What does a developed economy look like? Of course, this research will very highly depend on how you measure the state of an economy.

A developed economy should be higher in urbanization. This does tend to happen as an economy develops agricultural workers move to urban areas to take jobs in manufacturing, and eventually the manufacturing jobs are lost to service jobs. Back in the hey-day of modernization theory, this was measured as the number of telephones per 1, people.

Not only can a developed nation afford telephones, communication lines are valuable for economic growth. A developed nation has a well-educated work force. The reasoning is again two-fold: More income per person should generally indicate a more developed economy. The modernization "story" The common story of modernization theory begins with an undeveloped, authoritarian government.