Democracies and Economic Growth

Advocates of democracy would like to be able to establish a positive connection between democratic forms of government around the world and faster economic growth. Authoritarian governments would like, on the contrary, to show that their way achieves better results.

The empirical evidence is mixed.

​This blog looks briefly at the theoretical advantages of democratic organization. It suggests that:
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• Democratically organized societies have potential advantages in addressing the challenges they face. 
• However, these advantages do not necessarily translate into faster economic growth. 
• Moreover, democracies do not always articulate their potential strengths in actual practice. 

Measuring ‘performance’

There are three measures to think about when we try to assess the ‘performance’ qualities of democracies.

• the first concerns their inclusiveness; 
• the second is how they provide feedback to those in government; 
• the third is about the way in which democratic governments select policy priorities. 

Inclusiveness

Democracies aim to be inclusive of all opinion. Everybody can vote. There is freedom of expression and association. Some powers are delegated or assigned to local and state levels in order to reflect opinion there and frequently there are two representative chambers at the center.

The important result of including a large variety of opinion is that it allows for the policy challenges facing a society to be seen and framed in different ways. I may be keen on the introduction of GM crops because I see the challenge in terms of meeting food shortages. You may not want GM crops introduced because you see the challenge in terms of preserving a natural environment. 

Looking at alternative ways of framing policy is likely to improve the quality of policy making. It becomes easier to assess the importance of a policy and whether or not it has negative aspects.

However the result of looking at different ways of framing policies may not favor economic growth. Thus, the unwanted aspects of environmental contamination may tilt the decision against the higher growth option of planting GM crops.

It is also the case that many democracies struggle to achieve inclusion. 

Second chambers no longer provide the kinds of additional representation originally intended. They often reproduce the same kinds of party representation as first chambers.

Women and younger generations are typically under-represented. 

The powers of different levels of government at state and local levels may also be difficult to enumerate clearly. 

Thus the advantages of inclusion for democracies may not come through fully in practice.

Feedback

Democracies provide their governments with feedback on their policy choices. People vote against governments that have not delivered, or that have not performed according to expectations or promises. Thus, those who want to be re-elected to positions of power have a very powerful incentive to get on their bikes and deliver. If what they have promised to the electorate is better economic prospects, or jobs, then they will wish to avoid the electoral punishment that comes with failure. 

By contrast, autocratic governments pay limited attention to feedback and may not allow negative expression anyway. They seek submission or acquiescence. 

However, democratic feedback may again not necessarily favor the policy option with the greatest economic benefit. For example, many democratic societies are objecting to high levels of immigration even where economic analysis might point to the benefits of additions to the labor force. 

It is also the case that feedback in democracies often gets blunted. Major parties may decide to keep awkward issues off the agenda. Political parties may stick together in coalitions, divide the spoils of power and submerge feedback. Institutionalized arrangements for power sharing may also lead to policy stasis rather than responsiveness to feedback.

Thus, once again, the theoretical advantages of democracies in receiving feedback may not be realized in practice. 

Selecting Priorities

At any one moment, governments are likely to have to choose between competing policy priorities. Democratic governments may have been exposed to many different ways of looking at policy choices and to feedback on their past performance. But they still have to select where their current priorities lie. An authoritarian government also has to choose.

What is similar in the two settings is that both a democratic and an autocratic government can be assumed to want to select priorities that will help them stay in power. The difference between the two settings is that they are likely to make different selections.

A democratic government will have to select its priorities in ways that appeal to a majority. If it selects priorities that appeal to only a minority, the best it can hope for is a part share in a future government. In order to have been able to form a government it is likely to have tested out different policy offerings through its party platform, or may have responded to what the electorate says about its preferences.

An authoritarian government may have to think about the loyalty or acquiescence of a majority in the country. However, primarily it has to think about rewarding its own supporters and followers – businesses the ruling party or group is close to, supporters the leadership wishes to favor and possibly the armed forces on whom the leadership may depend. The selection will thus likely be biased towards a narrower group of beneficiaries than in a democracy.

It is not immediately clear whether economic growth will be benefited by selections that favor majority opinion or selections that are biased towards a narrower group. The key issue is around short termism.

In theory, because authoritarian governments can downplay public opinion they can select priorities with a long term pay-off rather than have to respond to the short term focus of democratic politics.
China’s belt and road initiative (BRI) can be seen as a classic case of long term thinking by an authoritarian regime.

However, democracies can resist some of the temptations of short termism, with, for example, independent central banks. At the same time, the pay-offs being sought by authoritarian regimes could also be about short term distributive gains for their supporters. They may also be less tolerant of independent centers of power such as a central bank. Their long term choices may also be wasteful. Many elements of China’s BRI would probably not pass time discounted calculations for resource allocation. 

The balance sheet

In theory, compared with authoritarian governments, democratic governments will make their policy selection taking account of a wider set of views, will be responding to sharper incentives from feedback on their past performance and with more information about how to think about their policy choices. This should give them an advantage over authoritarian regimes in meeting whatever challenges they face.

These characteristics reject a commonly made distinction between ‘regime type’ and ‘state capacity’ that separates bureaucratic quality and implementation from whether or not a regime is democratic. The three measures discussed above bring together the regime type with the idea of capacity. The two cannot be separated.

One implication of this is that in constructing future global economic scenarios we should not automatically assume the continued ‘success’ of China. So far, China has been able to lift many millions out of absolute poverty. At the same time the rewards for the governing circle, in the party, in business and in the security apparatus, have been enormous. So-called ‘anti-corruption’ campaigns seem no more than a smoke screen for struggles at the top over the division of spoils and a way to divert attention from the inequalities. 

The capacity of China’s regime to meet future challenges depends on the continued selection of policy combinations that achieve the acquiescence of the majority alongside exceptional rewards for the governing circle and associates. 

At the same time, even if democracies are theoretically better equipped to meet challenges, this does not necessarily translate into policies that favor or produce faster economic growth. The challenges may arise over the terms of social or political engagement rather than over purely economic challenges. They may be about ethical choices such as intergenerational fairness, or about how to handle the diversity of social values and multiple social identities. 

In addition, democracies rarely achieve their full potential for inclusiveness in defining the challenges they face, for clear feedback and for breadth of vision in policy selection.

Thus, on purely theoretical grounds we should not expect any clear correlation between democracies and economic growth. We need to examine empirical evidence with a good deal of caution about how the models have been set up and what they are measuring.

​The virtues of democracies are virtues of character rather than attainment.