5. The relationship between democracy and economic growth
Introduction
It is difficult to establish the relationship between economic growth and democracy. There is widespread skepticism among scholars regarding the suitability of democracy in poor countries with weak state capacity. In juxtaposition to this sentiment, there are also strong views academics who argue that it indeed fosters economic growth.
This essay will argue that there is a positive relationship between democracy and economic growth. To satisfy this topic, this document will commence by defining the terms ‘democracy’ and ‘economic growth’. Next, it will discuss the negative and positive effects of democracy toward economic growth; thereafter reviewing how the framework affects the relationship of democracy and economic growth before ending with a conclusion.
According to political scientist Larry Diamond, democracy comprises of four key elements:
• A political system for selecting and exchanging the government through free and unbiased elections;
• The active contribution of the people, as citizens, in politics and civic life;
• Safeguarding the human rights of all citizens
• A rule of law, in which the laws and practices apply uniformly to all citizens.
Economic growth is described by Knutsen as ‘the increase in economic production, or aggregate income, over a time period and operationalizes as an annual percentage change in Gross Domestic Products (GDP) per capita.’ The components of GDP are as follows: sum of consumption, government expenditure, investment and net exports. Thus, any event that affects GDP’s constituents will affect economic growth. In the long run, prospective GDP can rise if the number or productivity of labour increase, capital increase, and economic production technology advances. In the short run, decrease in the price level, positive economic expectation, positive growth in the world economy, and expansionary fiscal policies will increase demanded real GDP.
Literature review
To buttress my arguments within this essay, I will draw on the works of Carl Henrik Knutsen, R.J. Barro, M. Fatke, M.Freitag,
NEGATIVE EFFECTS OF DEMOCRACY TOWARD ECONOMIC GROWTH
There is evidence to prove that democracy can either foster or deter economic development. Public protest (e.g. 'demonstration, strikes, boycotts, petitions, occupation of building, and political violence’) in democratic states has a negative impact to economic growth. Democracy encourages people to attend political activities such as protest, where can involve a high number of people. This is because people is more exposed to political news due to free media in a democratic system than the non-democratic system. Great ranges of issues may cause public protests for instant nuclear waste management in Germany, budget cut for higher education in Britain, and pension reform in France (p. 238). Public protest has a trade off with working hours that result the higher demonstration the lower economic production. For this reason, in Indonesia during Suharto regime, the government suppressed political movement on the virtue of political stability and economic growth (Hill & Shiraishi 2007). Therefore, the political movement in democratic countries can hinder economic growth.
Glaeser, La Porta, Lopez-de-Silanes and Shleifer have criticized the relationship between democracy and economic growth. They argue that economic and political institutions are endogenous, and that the key exogenous determinants of economic growth are a country’s stocks of human and social capital.
Contrariwise, Barro argues that ‘once a moderate amount of rights has been attained’, democracy hinders economic growth. This is because higher human capital will promote political parties to scrutinize the existing government, thereby slowing economic decisions since the democratic system demands political dialog, check and balances, and representation of affected interests (Knutsen 2010, p. 459). This relation’s pattern explains that the relationship between democracy and economic growth fluctuates.
It is also worth noting the economic performance in Singapore, South Korea and Taiwan during the non-democratic regime confirm that growth can be achieved under more authoritarian governments. It is possible to compare Sri Lanka to the previously mentioned countries, which opted for more democratic institutions but therefore sacrificed economic growth. However, this is not adequate empirical evidence, as not all authoritarian regimes have had similar growth, such as North Korea (Sen 1999).
POSITIVE EFFECTS OF DEMOCRACY TOWARD ECONOMIC GROWTH
In contrast, some evidence does prove that democracy has a positive impact on economic growth. One such piece is Knutsen’s example of Benin and Togo, two countries with low state capacity but different regime types after Benin’s democratization in 1990. The diagram illustrates how Benin has surpassed Togo after 1990.
Average income in Benin and Togo. This figure shows real GDP per capita (exchange rate-adjusted USD in 2000 prices) in Benin and Togo from 1960 to 2008. Source: World Development Indicators, World Bank, 2003.
The above displays that the political discrepancy has been accompanied by economic divergence. The diagram shows Benin’s and Togo’s GDP per capita in constant US$ (measured in 2000 prices) from 1960 to 2008.
Both are West African neighbors, with similar ethnic fractionalization structure, French colonial history, a post-colonial history of military rule, and even a shared currency (the CFA). The two countries thus constitute a suitable controlled comparison for examining democracy’s economic outcomes in low-capacity states. Benin’s democracy after 1990 has had several deficiencies. However, Benin has held relatively free and fair elections since 1990, and experienced changes of executive power. Civil liberties are also relatively well protected. In Togo, former ruler Gnassingbe Eyadema and his supporters managed to block democratization in the early 1990s, after initially yielding for pressure to institute a multi-party system. In contrast, Togolese elections have not been democratic, and reports suggest that courts were heavily influenced by the regime, freedom of assembly is not granted, and there is a high degree of government control over the media.
Democracy in Benin lead to policy modifications in social sectors, such as the reform in education policies (World Bank 2003, cited in Knutsen 2013, p. 2), which thereafter fosters human capital and improves labour productivity, thereby improving the economy. Hence, economic development in Benin confirms that democracy had a positive impact on its economic relationship.
The example above explains that democracy can have multiple effects on economic growth. Gupta shows that increase of economic growth per capita rises the ruling government's political legitimacy improves people living standard that afterward promotes democracy (Barro 1999, p. S182). In this sense, democracy is inevitable when the citizens’ welfare grows.
In addition to the above, Peev and Mueller argue that the link between democracy and economic freedoms leads to a link between democracy and economic growth, due to economic liberalization yielding faster economic growth.
It must be also be taken into consideration that dictators ruling over weak-capacity states could have incentives to pursue growth-retarding fiscal policies (Knutsen 2013, p. 3). Available resources for public-goods spending are reduced when dictators tap into wealth from the budget for personal consumption or for paying their winning coalitions. This is far easier to do for dictators in weakly institutionalized states, therefore portraying a negative relationship between authoritarianism and economic growth.
To round off the argument, we can use the example of the 10 largest economies of 2016, namely: the United States of America, China, Japan, Germany, the United Kingdom, France, India, Brazil, Italy and Canada. China aside, all the countries listed possess democratic institutions, proving that democracies are closely linked to economic growth.
Conclusion
In conclusion, it is still difficult to determine the exact relationship between democracy and economic growth due to the multitude of circumstances present in various countries. However, the information above suggests that democracy is a promising regime model that fosters the state capacity positively, enhances policies’ accountability and transparency, integrates public interest into policymaking, and reduces potential political violence, where all of these factors contribute to strengthen the national economy.
Therefore, it is possible to conclude that more often than not, when democratic institutions are present in countries, economic growth ensues.