Democracy and economic development

An interesting piece on FT.com about democracy and economic development. The author, Pranab Bardhan, Professor of Economics at Berkeley, wonders how democracy can help or hinder economic development.

Democracies are better able to avoid catastrophic mistakes, (such as China’s Great Leap Forward and the ensuing great famine that killed nearly thirty million people, or a massive mayhem in the form of Cultural Revolution), and have greater healing powers after difficult times. Democracies also experience more intense pressure to share the benefits of development among the people, thus making it sustainable, and provide more scope for popular movements against industrial fallout such as environmental degradation. In addition, they are better able to mitigate social inequalities (especially acute in India) that act as barriers to social and economic mobility and to the full development of individual potential. Finally, democratic open societies provide a better environment for nurturing the development of information and related technologies, a matter of some importance in the current knowledge-driven global economy. Intensive cyber-censorship in China may seriously limit future innovations in this area.

All that said, India’s experience suggests that democracy can also hinder development in a number of ways. Competitive populism -– short-run pandering and handouts to win elections -– may hurt long-run investment, particularly in physical infrastructure, which is the key bottleneck for Indian development. Such political arrangements make it difficult, for example, to charge user fees for roads, electricity, and irrigation, discouraging investment in these areas, unlike in China where infrastructure companies charge full commercial rates. Competitive populism also makes it difficult to carry out policy experimentation of the kind the Chinese excelled in: for example, it is harder to cut losses and retreat from a failed project in India, which, with its inevitable job losses and bail-out pressures, has electoral consequences that discourage leaders from carrying out policy experimentation in the first place. Finally, democracy’s slow decision-making processes can be costly in a world of fast-changing markets and technology.

It is very important to add something that very few people have noticed (one of them is Fareed Zakaria of Newsweek). There is a lot of evidence and a large body of literature that suggests that countries that become democratic will stay democratic once their economic development has reached about $6,000 GDP per capita (because they have a large enough middle class to sustain a democratic system). Below that level, they tend to fail. When and how they democratise obviously depends on a number of other factors, too. But the point is that the crucial political point in their economic development comes somewhere around 6,000 dollars per capita. Now, while China has come a very long way in terms of economic development, its GDP per capita is only about half of that. So when people say that China's astonishing rise and failure (so far) to become a democracy somehow proves that it is perfectly possible to have a modern economy without democracy and the rule of law, the answer is yes, maybe. But China is no proof because it is not, in fact, a developed country with a large middle class (yet).