06 October 2004 Blog Home : October 2004 : Permalink
The NY Times a week or so ago reprinted an article from "Foreign Affairs" about the role of democracy in economic development. Essentially the article makes a decent case for reversing the standard claim that economic development is a prerequisite for democracy by claiming that, on the contrary, democracy inspires growth.
On the whole I have some sympathy for this counter argument but I think it may well be overstating the case. In my opinion it is not democracy per se leading to wealth so much as that the pre-requisites for successful democracy are identical to those required for sustained economic growth. In other words in my opinion democracy is like a canary in the coalmine indicating when the conditions are ripe for economic growth and development.
The first principle is literacy. A non-literate electorate is not going to make an informed choice about who to vote for. Funnily enough almost any job benefits from a literate workforce, hence a literate worker almost always more productive that an illiterate one. Increasing productivity is a major step towards development. In addition many many jobs and, indeed, many daily actions in a wealthy economy require basic literacy and numeracy.
The second principle is the rule of law. The point about democracy is that each political party has the same opportunity to run the government as long as it has the votes. This essentially amounts to a contract between the parties themseleves and between the parties collectively and the voters. The same applies even more strongly to commercial development. An impartial enforcement of contracts is one of the key reasons why entrepreneurs take risks. If an entrepreneur feels that the chance of someone else benefiting from his risktaking is greater than him benefiting from it he most likely won't take the risk and, as a result, development and growth fails to occur.
The third principle is lack of news censorship. Again in terms of democracy this is an obvious need but it also applies to economic growth and development. If there is censorship of commercial information then businesses will make bad decisions and lose money. This will therefore impact growth. In my opinion there is a very good reason why financial newspapers have less bias and more general news coverage than "general" newspapers - its good for business.
There are undoubtedly other related requirements for both thriving democracy and economic growth (e.g. property rights and lack of red tape) and some will be more important to one than the other but it seems to me that any country that has a literate population with a consistent and fair set of laws and no news censorship will eventually see economic growth and probably democracy as well. However there is one absolute killer that stops both and that is corruption.
The problem with corruption is that it tends to eat things away from inside. A little nepotism or an occasional thank-you gift is unlikely to affect anything, but once the pattern becomes established it eats away at the second principle -the rule of law - and that kills both nascent growth and real democracy. The shell that is left behind looks superficially democratic and may even appear to support growth but doesn't.
Hat tip: I found the original article in a post by Brian Micklethwait at Samizdata.