Economic freedom can overcome democratic frictions


No sooner had the government enacted long-awaited reforms in the agricultural sector than India’s democracy came alive with street politics and heady activism. On Thursday, farmers’ unions and the government were still deadlocked over the cancellation of the new farm laws. Without going into the substance of the views put forward on either side, what emerges is that in a democracy, reform measures can be debated by a show of force involving roadblocks and “bandhs” as much as through arguments in the courts and in Parliament. This implies that a democratic society imposes friction on policy-making and the implementation of economic reforms, unlike an autocratic society where technocrats can operate with a greater degree of freedom. On the other hand, some commentators have recently lamented and alleged that the decline of India’s democratic values ​​is a cause of loss of hope in India’s economic prospects. This raises a crucial 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 in 1950. Similarly, Brazil enjoyed a golden period of economic growth, averaging 10% per year, under a regime military in the 1960s and 1970s. In Asia, South Korea experienced rapid economic development under the dictatorship of Park Chung Hee in the 1960s and 1970s; After President Chun Doo-hwan’s infamous massacre of thousands of civilians in Gwangju in 1980, South Korea’s economy nearly doubled over the next five years. Besides China, Singapore is another example. Lee Kuan Yew is said to have remarked in The Economist that democracy is a luxury that only rich countries can enjoy. Other Asian countries that moved from poor to middle-income countries, such as Indonesia and Thailand, did so under undemocratic regimes. Malaysia also experienced remarkable growth under Mahathir Mohammed, who vigorously used the state apparatus to target political opponents and amass political power. Vietnam, the newest “Asian tiger” on the map, also has an authoritarian government.

In Asia, Japan is the only economy to have flourished as a democracy, although it enjoyed political stability by being governed by the same party until 1993. Even the United Kingdom and the United States , long considered beacons of democratic development, have achieved high industrialization and living standards. before arriving at a truly representative politics (universal suffrage was adopted by the United Kingdom and the United States in 1928 and 1965 respectively).

This view is also supported in academia. In a founding article entitled Democracy and Growth, Robert J. Barro shows that after controlling for the other drivers of growth, the overall effect of democracy on growth is weakly negative on average. It also suggests that democracy has a non-linear relationship with growth, in which economies with very low levels of political freedom benefit from an increase in democracy, while economies that have already achieved a moderate level of political freedom suffer more. In another observation relevant to the case of India, he states that the slowing characteristics of a democracy’s growth are redistribution patterns and the increased voice of special interest groups in legislative politics. In his analysis, political freedom is a type of “luxury good” that is consumed in greater quantities with economic prosperity.

Does this mean that India, with its raucous democratic tradition, sweeping redistributive programs and vocal special interest groups, is doomed to below-average economic growth? Fortunately, the negative causality between democracy and economic growth is not immutable. In a 2019 article, Daren Acemoglu, Suresh Naidu, Pascual Restrepo, and James Robinson find that democracy contributes to economic growth. But the channels through which democracy stimulates growth are investment, economic reform, education and health. Similarly, even Barro recognizes in his article that to the extent that political freedom leads to economic freedom and the rule of law, democracy has a positive effect on growth.

The lessons for India are clear. The Indian economy needs more reforms that give people more economic freedom. These reforms must be deep and structural. Executive and legislative strategies should be explored to implement them. Political capital should be spared for “big bang” reforms which are likely to generate stronger opposition as they impact larger special interest groups. 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. politically easier and should be exploited to the maximum. Only by abusing economic freedom can the Indian republic overcome the frictions of democracy and political freedom.

Diva Jain is a director at Arrjavv and a “probabilist” who researches and writes about behavioral finance and economics. Her Twitter handle is @DivaJain2

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