Democracy or economic development? — Sum Dek Joe

JUNE 15 — There has always been a longstanding argument on the relationship between democracy and economic development. In classical analysis, the perception of democracy inhibits economic development has always prevailed in the literature. Marx and Engles (2007, p.62) once suggested that “democracy unchains the class struggles” and further implied that private property and universal suffrage are incompatible, as the rich would abdicate the political power to exploit the poor through democracy. The argument supports the state autonomy as the central strength of economic growth due to its effective command and coordination production that leads to industrialisation and development. Recent studies also dealing with the question whether democracy is an expensive price to pay for delayed and slow economic growth resulted from the implication of democratisation (Sirowy and Inkeles, 1990). Dick (1974) went further arguing that economic growth could only take place in the form of central planning or authoritarianism for an undeveloped country.

On the other hand, King (1981) and Kohli (1986) argue that democratic government is better suited for sustained economic development for developing countries. It refutes the assumption of the prevalence of benevolent dictators in authoritarianism and the imminence of corruption and misuse of power in the absence of democratic institution is inevitable which results economic backwardness. Therefore, democratic institutions are crucial to provide civil liberties and political right to incentivise social conditions for economic development. Besides that, Goodell and Powelson (1982) opine that the requisite of economic growth is the freedom of a group to engage in economic activity and the government is legitimately elected to allocate available resources according to voters’ will. Thus, the extension and establishment of basic human rights and freedom exerts the motivation for citisens to participate and contribute to the economy without the fear of oppression.

This article argues that economic development has a positive causal effect to democracy but not vice versa and the two subjects sequentially and mutually reinforce each other once maturity in economy is achieved. Firstly, it is argued that democracy hinders economic growth and authoritarianism is relatively more favourable for economic growth in less developed country. Secondly, once an economy reaches the desired stage of economy that resulted from first stage, the continuous economic development subsequently fosters democratisation to take place. Thirdly, full democracy and economic development in post-democratisation era tend to co-exist and reinforce each other.

The hindrance of economic development by democracy

Democracy tends to undermine the expansion of an economy particularly in underdeveloped countries due to the inherent characteristics of democracy for accommodating the views of everyone, which in turn translates into populism. In the early stage of development, Bhagawati (1966, pp.203-24) argues that underdeveloped countries face a “cruel choice between rapid expansion and democratic processes”. It is understood that everyone would vote in pursuit of self-interest to maximise utility without taking into account the maximum benefit of the overall population. According to Solow growth model (1994), high savings and investment are required to generate sufficient capital accumulation for long-run economic growth. However, the inherent behaviour of lower income groups would work against the objective as they have lower marginal propensity to save. Besides that, underdeveloped countries focuses more on labour-intensive production which results in higher opportunity for labour to form union. The formation of union in early stage of development is unhelpful to the economy as it fights for pay rise and labour’s rights that eventually cause reduction in overall profit and investment. Haggard (1990) formulation explicitly argues that authoritarianism could overcome these collective action dilemmas by restraining the self-interested behaviour of groups through sanction and command. The dysfunctional consequence of early democracy in less developed countries is political instability and political institutions in developing countries are generally weak and fragile to begin with (Huntington, 2006). The enormous pressure on government rooted from the democratic mechanism eventually magnifies the drawback of democracy on economic development. Therefore, a strong and authoritarian rule is more preferred to ensure necessary economic coordination by the entire population without bounding to majority populist measures as occurred under a relatively weak democratic-elected government. Also, authoritarianism exerts the power and autonomy to political elites to extract and distributes resource to the economic agents more effectively.

This argument is widespread with the evidence of the Asian miracle growth under their respective authoritarian regime. China, once labelled as the Asian sleeping giants with its majority rural populations and backward economy has experienced unprecedented economic growth with a one party rule under the Communist Party of China (CPC) since the economic reform launched by Deng XiaoPing in 1980s. Not only did China successfully reduce its poverty rate from 61.1 per cent in 1980 to 6 per cent in 2011, China has overtaken US as the largest economy in terms of purchasing power parity with its average income of $970 skyrocketed to USD$11850 in the same period. The massive growth in industrialisation and growth in China is attributed to its relatively small private ownership and well-managed state owned enterprise (SOE) that enables the state to improvise desired economic decision within an iron-grip rule (Rawski, 1999). On the contrary, Philippines, which once branded as the poster-boy for Asian democracy under the influence of America’s rule, experienced poor performance in its early stage of development and eventually led to reverse transition to authoritarianism. Today, the Chinese has higher primary school enrolment rate (128 per cent) and lower poverty rate (6 per cent) as compared to the Filipino (106 per cent) and (19 per cent) respectively according to World Bank statistics. These examples are best described by Lee Kuan Yew (2000, pp.121) that “what most countries needed for development was the discipline, not democracy”. It is also supported by Helliwell (1994)’s work that there is a significant negative partial effect of democracy on subsequent economic growth that would jeopardize economic development.

Mature economy fosters democratisation

Conversely, the effect of economic development on democracy does not succeed the same negative causal impact as argued above. In fact, economic development is argued to create more motivations for democratisation to take place. As an economy develops from a labour-intensive agricultural economy to capital-intensive industrial economy, the driving factor of the transformation is human capital and technological innovation according to Solow growth model. Therefore, it is inevitable for the state to highly invest in human capital to ensure long term growth which essentially implies better access to education and higher standard of living. Dahl (1971) argues that the apparent causal effect of economic development and democracy may be explained by the rise of education level and average income as society in general has higher consciousness about individual rights and freedom. This is particularly true as affluence effectively increases the risk aversion of a society towards any instability that put their private property at risk. It also results in higher demand for transparent and accountable governance. Also, democracy tends to better survive in certain level of economic development because society, in general is likely to participate in any coup or revolutions that could cause an economic downturn to the country. Overall, this situation can be justified by the seminal work of Lipset (1959) suggesting that democracy is the product of economic development.

The trend of democratisation taking roots in developing economies after achieving maturity in their economy can be dated back as early as 1900s when Switzerland was then the only full democratic European country. Many Western European powers including Britain back then, limited its suffrage to certain threshold of income level and qualification until 1920 when most of them successfully transformed into full democratic states. Huber, Rueeschemeyer and Stephen (1993) argue that the wave of democratisation is resulted from the creation of trade unions formed by the increasing number of industrial labours with higher income and education levels. These labour movements successfully placed the ideology of universal suffrage and transparent parliamentary governance as their center of struggle and subsequently adopted by their respective government (Zolberg, 1986). In recent case, there were more than 30 countries including East Asian economies like South Korea, Taiwan and Malaysia experiencing democratisation between 1974 and 1990. This scenario can be attributed to their unprecedented economic growth and development before the oil crisis in early 1970s which successfully raised the society’s living standards and bred a huge population of urban middle class that demand for democratisation. Huntington (1991, pp.31) further explained that “there is a political transition zone” where the stratum is filled with countries of mid-level economic development. Although there is no specific point of economic maturity that guarantees the occurrence of political transition (Diamond, 1992), the arguments show that there is higher inclination for a country to democratise given its rising income level and standard of living. Therefore, judging from the past and present, economic development is a decisive and positive causal factor for the expansion of democracy.

The mutual reinforcement of economic development and democracy

Oddly enough, when an economy achieves the required maturity stage and successfully experiences the democratisation transition, the initial economic development and newly-born democratic rules tends to create a unique dynamic by mutually reinforcing each other. Lipset (1960, p.31) argues “that the more well to do a nation, the greater the chances that it will sustain democracy.” Firstly, economic development reinforces existing democracy by contributing to its legitimacy and stability. Furthermore, the risk for reverse transition back to authoritarianism is greatly minimised when the economic development precedes the democratic rules. This can be explained by Diamond (1989, p.150) that “if they (authoritarianism) do perform in delivering socioeconomic progress, they tend to focus popular aspiration around political goals for voice and participation that they cannot satisfy without terminating their existence.” Therefore, the fundamental of economic development that was built prior to democratisation strongly reinforces the continuity of democratic rules. When most of the population is literate and generally wealthy for subsistence, the risk of class tension and radical political orientation is greatly diminished. Secondly, democracy fortifies economic development in an established economy by enabling people to participate in policy-making through voting so that the will of the population can be effectively conveyed to the leadership. Under democracy, individuals’ rights and freedom were protected and rule of law is in place to ensure societal order. With the mature income level and economic stability that precedes full democracy, the economy is capable and strong enough to absorb the possible risk and uncertainty caused by election. Therefore, the combination of these two subjects fully enhances their usefulness by mutually reinforcing each other.

The notion is supported by Helliwell’s data (1992) that countries with higher income levels are more likely to have democratic form of governments. As discussed above that authoritarianism is preferred to take place in a lower income country and generates economic growth in an agrarian economy, then gradually the developing county tends to democratise after reaching certain threshold of maturity in economy. In result, it leads to the mutual reconciliation and reinforcement between economic development and democracy. The trajectory of Singapore to its today’s position as high income nation is the best example to illustrate the overall relationship of the subjects. This tiny island nation located in the aisle of the Malay Peninsula without any blessing of natural resources was ruled under the iron grip of Lee Kuan Yew from its independence in 1963 till 1990 and experienced unprecedented highest economic boom in the region. As the economy grows, it gradually embroiled into the third wave democratisation (Huntington, 1991). Although Singapore today’s democracy status remains controversial among scholars, it is undeniable that with its current developed economy, many Singaporeans are now demanding full democracy and the political transition is still taking place. Thus, it accords to the argument that economic development that take place in democratisation tends to reinforce each other after the maturity stage.

Summary and conclusion

In the final analysis, it can be said that there is no perfect correlation or linearity to describe the relationship between economic development and democracy. However, this article concludes that there is a causal and sequential relationship between economic development and democracy. The findings support that authoritarianism promotes development in undeveloped countries and pour cold water on the popular belief of vice versa with the assumption of the prevalence of benevolent dictators. Democracy is just not the only ladder that leads to growth and development. In light of this state of affairs, developing economies under authoritarian rule tends to undergo political transition or democratisation after attaining mature economic level. The drawback is that there is no specific level on the required maturity of the economy and there is no guarantee that the transition will take place inevitably. Nonetheless, it serves as a good guide and generalisation for future reference. Lastly, democracy in an economically developed country tends to flourish and reinforce one another and eventually spread across the globe.

* Sum Dek Joe is a member of Malaysian Progressives in Australia (MPOZ) and currently studies Economics at the Australian National University (ANU).

** This is the personal opinion of the writer and does not necessarily represent the views of Malay Mail Online.

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