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Business News/ Opinion / Views/  Economic freedom can overcome democratic friction
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Economic freedom can overcome democratic friction

There are several examples of economic success under authoritarian regimes and some academic studies have shown how a few aspects of democracy could get in the way of growth

A general view of parked tractor trolleys and trucks of protesting farmers along a blocked highway during a demonstration against the central government's recent agricultural reforms at the Delhi-Haryana state border in Singhu (AFP)Premium
A general view of parked tractor trolleys and trucks of protesting farmers along a blocked highway during a demonstration against the central government's recent agricultural reforms at the Delhi-Haryana state border in Singhu (AFP)

No sooner had the government enacted long-pending reforms in the farm sector, Indian democracy came alive with street politics and heady activism. As of Thursday, farmer unions and the government were still deadlocked over the rollback of new farm laws. Without going into the merits of the views put forward by either side, what stands out is that in a democracy, reform measures can be debated through a show of strength involving road blockades and “bandhs" as much as through arguments in courts and Parliament. This implies that a democratic society imposes frictions on policymaking and the implementation of economic reforms, in contrast to an autocratic society where technocrats can operate with a greater degree of freedom. A recent comment by the chief of Niti Aayog, alluded to the reform-inhibiting features of democracy. On the other hand, some commentators have recently bemoaned and alleged a decline in India’s democratic values as a cause for losing hope in India’s economic prospects. This begs an all-important question about the relationship between democracy and economic development.

Anecdotally, the link between economic growth and democracy has always been tenuous. Examples abound. In South America, authoritarian Argentina had a per capita income as high as Western Europe by 1950. Similarly, Brazil enjoyed a golden period of economic growth, averaging 10% per annum, under a military regime in the 1960s and 70s. In Asia, South Korea witnessed blistering economic development under the dictatorship of Park Chung Hee in the 60s and 70s; after the infamous Gwangju massacre of thousands of civilians by President Chun Doo-hwan in 1980, South Korea’s economy almost doubled in the next five years. Besides China, Singapore is another case in point. Lee Kuan Yew is supposed to have famously remarked to The Economist that democracy is a luxury that can only be enjoyed by rich nations. Other countries in Asia that have moved from being poor to middle income, such as Indonesia and Thailand, have done so under non-democratic regimes. Malaysia also saw remarkable growth under Mahathir Mohammed, who vigorously used the state machinery to target political opponents and accumulate political power. Vietnam, the newest “Asian Tiger" on the map, also has an authoritarian government.

In Asia, Japan is the only economy to have prospered as a democracy, although it enjoyed political stability in being governed by the same party till 1993. Even the UK and US, long considered beacons of democratic development, achieved industrialization and high living standards much before achieving a truly representative polity (universal suffrage was adopted by the UK and US in 1928 and 1965 respectively).

This view has support in academia as well. In a seminal paper titled Democracy and Growth, Robert J. Barro shows that after controlling for other drivers of growth, the overall effect of democracy on growth is weakly negative on average. He also suggests that democracy has a non-linear relationship with growth, wherein economies with very low levels of political freedom benefit from an increase in democracy, while economies which have already achieved a moderate level of political freedom are hurt by more of it. In another observation relevant to India’s case, he states that the growth-retarding features of a democracy are redistributive schemes and the enhanced voice of special interest groups in legislative politics. In his analysis, political freedom is a type of “luxury good"that gets consumed in greater quantities with economic prosperity.

Does this mean that India, with its raucous democratic tradition, big redistribution schemes and vocal special interest groups, is doomed to sub-par economic growth? Luckily, negative causality between democracy and economic growth is not cast in stone. In a 2019 paper, Daren Acemoglu, Suresh Naidu, Pascual Restrepo and James Robinson find that democracy does contribute to economic growth. But the channels through which democracy drives growth are investment, economic reforms, education and healthcare. Similarly, even Barro recognizes in his paper that to the extent political freedom leads to economic freedom and rule of law, democracy has a positive effect on growth.

The lessons for India are clear. The Indian economy needs more reforms that grant people more economic freedom. These reforms need to be deep and structural. Both executive and legislative strategies should be explored to implement them. Political capital should be saved for “big bang" reforms that are likely to arouse stronger opposition since they impact larger special interest groups. Wherever possible, reforms should be done incrementally but steadily, so as to avoid alarming vested interests. Also, many growth drivers in a democracy, such as accountability, rule of law, enforceability of contracts and an enriched information environment, do not require drastic legislative action and can be improved through better administration. Likewise, firing up growth drivers such as education, healthcare and private investment is politically easier and should be exploited maximally. Only by overindulging in economic freedom will the Indian republic be able to overcome the frictions of democracy and political freedom.

Diva Jain is director at Arrjavv and a ‘probabilist’ who researches and writes on behavioural finance and economics. Her Twitter handle is @DivaJain2

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Published: 10 Dec 2020, 10:19 PM IST
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