Democracy, Economy, Theories

Is Democracy Good For Economic Growth? Part I

Democracy in action, but does it promote growth in the economy?

Democracy in action, but does it promote growth in the economy?

As the world becomes increasingly fearful of the economic crisis which has emerged within the Eurozone, it seems poignant to contrast the fate of Greece, the home of democracy, and the centre of Europe’s economic malaise, with that of China, the poster boy for authoritarian governance. Whilst there are, of course, vast differences between these two countries, the economic rise of China under an authoritarian regime suggests that it is worth posing the question; is democracy good for the economy?

To begin, it is worth stating that democracy is a complex concept, so for the purpose of this article, we shall consider democracy in its most basic terms: A political system based upon the right of citizens to participate in political decision making through representation; whereby only laws essential to maintaining democratic procedures are necessary criteria to terming a state democratic.

Out of the world’s twenty richest countries, measured by nominal GDP, only three are governed by non-democratic systems: Russia, China, and Saudi Arabia. Moreover, this striking correlation of strong markets and democratic political systems is, theoretically speaking, logical. This correlation is underpinned, not by democracy per se, but by liberalism, most commonly manifested politically as liberal democracy.

The relationship between liberal philosophy and democratic politics is derived from their compatibility, which was established throughout Europe during the Age of Enlightenment. John Locke, considered the father of liberal philosophy, famously advocated “life, liberty, and property” as the inalienable rights of private individuals. Thus, individual liberties, or freedoms, are the central tenet of liberal philosophy. If democracy is to be considered a system based upon the individual right to political participation, then it shares ideological roots with liberalism. Consequently, most democratic countries have a liberal-democratic political structure, with individual liberties subject to legal protection, as a safeguard against the tyranny of the majority. As a result of these overlapping values, liberal democracy has come to underpin Western political philosophy, and is the guiding principle of the vast majority of the world’s democratic political systems.

Developing in parallel to this political liberalisation, liberal thought within the economic sphere became popularised, particularly through works such as Adam Smith’s Wealth of Nations, in which Smith advocated free trade and the division of labour. Taken further, the ultimate manifestation of liberal thought is the ‘free market’. The free market represents an ideal model of capitalism, because it denotes the most efficient and profitable means of production. Within a free market, economic actors are able to conduct business without political interferences, such as the imposition of a minimum wage, or import tariffs. Without these restrictions, economic actors are reduced to a state of pure competition, driving costs down and resulting in higher quality and lower cost products. This model is impossible to implement fully, as it ignores political and social costs, which, in the real world, are inevitable. Nonetheless, though the theoretical free market is politically untenable, as well as undesirable, the term itself is colloquially used to describe economies characterised my minimum intervention.

Thus, democracy and liberalism are reinforcing, as are capitalism and liberalism. As a consequence, it is arguable that, using liberal ideology as a medium, democracy and capitalism are also mutually reinforcing. So these three systems can effectively coexist. However, the question remains; does democracy encourage economic success?

The answer: less than you would think.

Excluding states already in possession of developed economies, such as the colonial European powers, almost every economic success story since the Second World War was propagated under an undemocratic political regime. Furthermore, the vast majority developed as a result of centralised, state capitalism, as opposed to economic liberalisation. A notable example of a state that achieved rapid economic growth and success as a direct result of this policy is South Korea. By building protective tariffs around its nascent automotive and ship-building industries, South Korea was able to create good quality products for a low price, and successfully export these goods by undercutting foreign competition. As a result of this success, South Korea enjoyed a currency surplus, which subsequently increased both the value of domestic currency, and the income of South Korean workers. A significant result of this affluence was to strengthen the political regime, with the improvements in quality of life effectively legitimising the government. Contemporary examples of this include Saudi Arabia and Russia, with the governments of both of these states able to sustain legitimacy through expensive welfare systems funded by energy exports.

Even when economies succeed through the adoption of economic liberalisation, this process often occurred under authoritarian political systems. For example, what Milton Friedman called “the miracle of Chile” was perpetrated by the regime of General Pinochet, who forced the economic transition through against widespread opposition. In addition, this process was only possible because Pinochet had affected a military coup which had overthrown a democratically elected government.

Many developing democratic states are undermined by economic liberalisation, because this process often results in a trade deficit, caused by capital flight. This occurs because domestic industries often lack the efficiency to compete with foreign businesses, particularly multinational corporations that are able to produce products and services at a low price. The consequences of this are often; currency devaluation, a ‘brain drain’ emigration of skilled workers, and sometimes, a debt dependency. However, democracies also often struggle to follow the protectionist development model illustrated by the South Korean example. This is often due to labourers organising themselves politically, such as through trade unions, and using strikes to effect greater economic rights. This undermines competitiveness, and prevents the effective implementation of the export model. Nonetheless, such protests are difficult for elected governments to quash, with the knowledge that they must retain popular support to remain in power. Ultimately, the key to succeeding in either of these macroeconomic strategies is a unified political approach. Thus, whilst it is not impossible for democratic governments to succeed, it is often far easier for their authoritarian counterparts.

Continue with Part II

This series was also published in International Policy Digest

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