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Democracy or Non-democracy
-- from the perspective of economic development

Guo, Gang
Department of Political Science
University of Rochester
May 1998

"It fully shows that the Chinese ... not only make reputable economic achievements, but also have the ability and confidence to succeed continuously on the path to democracy."

(-- People's Daily, May 26, 1998, page 3)

It feels a little strange to read this in the official editorial of the national newspaper of the Chinese Communist Party, but this assertion provides us with a good starting point in our inquiry into the relationship between economic development and democracy. Nowadays few, if any, politicians and political scientists alike, would deny that democracy and economic development are correlated. As Lipset said, "[p]erhaps the most widespread generalization linking political system to other aspects of society has been that democracy is related to the state of economic development"(Lipset 1959:75). However, as to the causal relations between the two, there have been quite divided opinions. We can discern at least three kinds of hypotheses from previous literature:

  1. Some authors hold that democracy and economic development have a reciprocal effect on each other. A classical example is Friedman, Justin's favorite. Friedman believes that more democratic political rights will reinforce economic rights and therefore will be beneficial to economic development; on the other hand, the assurance of the individual's economic freedom results in, and is predicted upon, the maintenance of a free-enterprise exchange economy that constitutes an ideal economic arrangement for a free society (Friedman 1962). Although he also stressed that some activities of the democratic government, such as income redistribution, would tend to retard economic development, these activities are not peculiar to democracies. In Friedman's opinion, what retards economic development is not democracy, but governmental interference. (I owe this point to Justin Fox).
  2. Some scholars view the favorable effects between democracy and economic development as single-directional; that is, economic development leads to democracy, but democracy retards economic development. Therefore democracy would be directly related with economic level, but inversely related with economic growth, since wealthy countries might have reached high economic level for other reasons, but would slow down after democracy is established, while for poor countries economic development has not create a favorable environment for democracy but thus they would also enjoy economic growth not retarded by democracy. Almost all the advanced economies of the world, including the United States, Japan, Germany, Great Britain, Russia, etc., and also almost all the emerging economies in contemporary world, made their initial take-off and fastest growth under non-democracy, or at least not under the kind of democracy we have in mind today. This view can be stretched as far as stating that "dictatorships are needed to generate development" (Przeworski and Limongi 1997:177).
  3. The third hypothesis is quite close to the second one, but in this hypothesis economic level is controlled for and the relationship between democracy and economic growth is non-linear, or curvilinear. That is, at lower stages of economic level, democracy would be unfavorable to economic development, while at the higher level, democracy would do a better job than non-democracy in encouraging economic development. Another way to put this curvilinear relationship is to control for level of democracy. As Barro concluded, "the middle level of democracy is most favorable to growth, the lowest level comes second, and the highest level comes third"(Barro 1996:14).

Intuitively and empirically, all these three hypotheses seem plausible. Numerous examples or counter-examples can be raised to support or disprove them. Yet which one are we to choose? In my opinion, if we are to look at these inquiries from the perspective of economic development, we should not over-emphasize the distinction between democracy and non-democracy. In the investigation into the causal relationship between democracy and economic development, it seems inevitable to compare democracy with non-democracy in their different effects on economic development and also the different effects of economic development on them. However, democracy and non-democracy are not so clearly distinct in their effects on some intervening variables that play important roles in bringing about economic growth or disaster. Nor are they very different in the influences that economic conditions exert on them. I will explore both points respectively as follows.

On one hand, both democracy and non-democracy can have beneficial or harmful effects on economic development. Previous studies in both economics and political science have offered numerous hypotheses on what factors encourages or dampen economic development (Clark 1982). Here I will focus on three kinds of stability, that is, ownership stability, legal stability and social stability. These three kinds of stability are among the most necessary conditions for economic development, though not sufficient conditions. If democracy or non-democracy have an effect on these three kinds of stability, they are bound to also have an impact on economic development. However, this impact unfortunately does not discriminate very much between democracy and non-democracy.

First, by ownership stability I mean the stable property rights system of a society. The productive potential of any property rights system depends not only on the way in which rights are assigned, but also (and perhaps more importantly) on the degree to which those rights are enforced (Coase 1960). Which one, democracy or non-democracy, would be better at protecting property rights? There doesn't seem to be much difference. Both democracy and non-democracy can infringe or protect property rights. In democracy, the pressures from the worse off for income redistribution are much greater than in non-democracy. Whereas in non-democracy the coercive authority can effectively quell the opposition who advocate an alternative, more distributionally favorable property rights system (Firmin-Sellers 1995:868). However, the coercive authority of the non-democracies might get out of hand and the ruler(s) might "use his power to steal the nation's wealth and to carry out nonproductive investment"(Barro 1996:2). An outstanding example would be the dictator Marcos of the Philippines, whose rule turned the richest country in Southeast Asia into the poorest. In this respect democracy might fare better, but in all we can hardly make much distinction between democracy and non-democracy in their impact on property rights system.

Second, by legal stability I mean the stable rule of law in a country. In a sense market economy is a legal economy. It is distinguished from the pre-market "moral economy", which is governed by the same "general social relationships" that mold the whole society (Booth 1994:656). A stable legal system is a necessary condition to attract domestic and foreign investment. Unfortunately again, democracy is not necessarily better than non-democracy in its guarantees of stable rule of law. On the contrary, even outright dictators, if they are far-sighted, will have an incentive to ensure a stable legal system, and they have more resources to do that. So non-democracy might have a more stable rule of law than a democracy where the state is weak in its enforcement of law. However, as Olson pointed out, since most autocrats are by their nature especially susceptible to succession crises and uncertainty about the future, it might not be in their interest to respect the law, which creates a very short time frame for economic agents and renders them unwilling to make investments that take time to mature. Taking this into consideration, we would agree with Olson that democracy is better than non-democracy in the guarantees of legal stability, as "the same court system, independent judiciary, and respect for law and individual rights that are needed to have a lasting democracy" are "exactly the same conditions that are needed for maximum economic development" (Olson 1993:572). Here, again, democracy and non-democracy are not so different in their guarantee of legal stability.

Third, by social stability I mean the lack of such social unrest as (roughly by degrees) crimes, strikes, demonstrations, riots, revolts, and civil wars, etc.. Needless to say, social unrest would to some extent damage the productivity of the society. It is hard to imagine a nation with rampant social unrest would achieve economic growth, but whether democracy or non-democracy is more capable of maintaining social stability is hard to decide. The same mechanism that ensures rule of law for non-democracy might work to quell social unrest, as the rulers have an interest to see to it that they have the monopoly in the distribution of the surplus in social output. However, non-democracy might have more social unrest, either because the widespread discontent against the government have no alternative peaceful outlet, or because the stake of state power is so high that ambitious contenders would use force to achieve it. In contrast to this, democracy might achieve more social stability, as both the discontent of the masses and the ambition of political élites would be temperated through the peaceful channel of competitive elections. When the Hong Kong Democratic Party leaders proclaimed "We抣l be back!" to their supporters on the night of Hong Kong's handover to China, they didn't mean violent revolt, not even protests, but that they would come back through legislative elections, and they did. So in this aspect, we, again, do not see much difference between democracy and non-democracy.

On the other hand, economic conditions can have beneficial or harmful effects on both democracy and non-democracy.

First, economic hardships can topple both democratic and non-democratic regimes. It seems that democratic regimes are more vulnerable to bad economic conditions, as the famous example of Weimar Republic testifies. Przeworski et al counted instances of survival and death of political regimes in 135 countries observed annually between 1950 and 1990 for a total of 4,318 country-years, and found that poverty is a fatal enemy of democracy: "[p]oor democracies, particularly those with annual per-capita income of less than $1,000, are extremely fragile: based on our study, the probability that one will die during a particular year is 0.12", or that it "can be expected to last an average of 8.5 years". In a year after their income falls, the probability would rise to 0.22(Przeworski et al. 1996:41). However, non-democracy is no less susceptible to bad economic conditions than democracy is. As Lipset pointed out, "[f]rom Aristotle down to the present, men have argued that only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self-restraint necessary to avoid succumbing to the appeals of irresponsible demagogues"(Lipset 1959:75). Poverty and/or worsening of people's living standard can be made use of by political forces to incite sufficient support in pulling down the present government -- not necessarily a transition to democracy, though. The most recent example would be the resignation on last Thursday of 32-year autocrat Suharto in the aftermath of the financial and economic turmoil in Southeast Asia. So non-democratic regimes are no less likely to die under severe economic conditions than democratic ones are.

Second, both democracy and non-democracy can benefit from economic growth. It seems at first that economic growth would be only beneficial to democracy. This tradition can be traced back to Lipset, who regards economic development as one of the "social requisites" of democracy (Lipset 1959:69). Przeworski et al also found that for democracies, "economic performance does matter: indeed, democracy is more likely to survive in a growing economy with less than $1,000 per-capita income than in a country where per-capita income is between $1,000 and $4,000, but which is declining economically (Przeworski et al 1996:49). However, nothing in principle prevent non-democracy from gaining widespread acceptance and support if it succeeds in generating economic growth. Non-democratic regimes don't have to die when the economy is good and promising, and democratic transitions generally are not made at such times. Non-democracy (and also democracy) might perish for various reasons, economic disasters, succession crises, social movements, etc., but normally not because of economic growth. Here economic development doesn't seem to discriminate against non-democracy in favor of democracy. They are both bolstered by favorable economic conditions.

From the above examination of the causal relationships between democracy and economic development, we can arrive at an intermediate conclusion that the distinctions between democracy and non-democracy are not so great as we traditionally think, at least from the perspective of economic development. More theoretical exploration and empirical studies have still to be done to make the causal relationships clearer. One possible avenue of inquiry is to make distinctions more within than between democracy and non-democracy. That is, besides democracy versus non-democracy distinction, there must be some other differences between the political regimes that account for both their different influences on economic development and the different influences of economic development on them. For example, in Barro's cross-national data regression, he used a scatter diagram, plotting the part of the growth rate that is unexplained by the independent variables other than the democracy index and its square on the democracy index. The diagram pattern shows a resemblance of a "horn", suggesting the probability of heteroskedasticity. We have to consider why the variance of the residuals in growth rates decreases as the country becomes more democratic. More generally, the heteroskedasticity may be due to an omitted explanatory variable (Kennedy 1985:105). Another approach was offered by Firmin-Sellers, who arrived from a case study at the conclusion that a government must strike a delicate balance between coercive and cooperative institutions to ensure economic development, that is, it wields sufficient coercive authority and credible commitment.

The causal relationships remain largely inconclusive, but from my above analysis, I would rather believe that the relationship between democracy and economic development could be metaphored to that of "double ratchets". That is, they both might have some effects, directly or indirectly, on each other, and either democracy or economy might develop for whatever reason, but as one of them develops, the "teeth" of its ratchet would become more and more "protrusive", thus more and more effective in preventing the other from reversing. On one hand, economic development is not sufficient to bring about democracy, but as the economy develops to higher stages, it will become more and more effective in preventing democracy from perishing. On the other hand, democracy is not sufficient for the economy to grow, but as the polity develops toward a full-fledged democracy, it will be more and more difficult for the economy to shrink or reverse to an earlier stage. As both democracy and economic development have their own "semi-independent" dynamics, this view of mine is quite similar to that of Hirschman (Hirschman 1994:344), who called his processes and concepts as the "ratchet effect" and "taking on a life of its own". However, if, as he said, only when a behavior is said to become "second-nature" is it normally assumed that one is in the presence of genuine learning, whether, how and when democracy or non-democracy has become the "second-nature" can only be determined by the eventual economic consequences, as in his cases of Spain and Germany. After all, the introduction of this concept of "second nature" seems to be of little use.

Even though democracy does not necessarily lead to economic development, nor the other way round, even though democracy is not necessarily the best form of government for poor countries from the perspective of economic development, I have to emphasize here that we should not stretch this "indistinction" between democracy and non-democracy too far. My point here is: economic development can not and should not justify democracy, nor can or should it legitimize non-democracy. Economic development can not justify democracy simply because it is not yet clear whether democracy is more effective than its alternatives in bringing about economic development. Next I will focus on why economic development should not justify either democracy or non-democracy. The economic considerations can be nothing more than just an instrumental point of view, and if we regard it as a sufficient justification for either kind of regimes, the consequences would be dangerous. Tocqueville stated:

Nor do I think that a genuine love of freedom is ever quickened by the prospect of material rewards: indeed, that prospect is often dubious, anyhow as regards the immediate future. True, in the long run freedom always brings to those who know how to retain it comfort and well being, and often great prosperity. Nevertheless, for the moment it sometimes tells against amenities of this nature, and there are times, indeed, when despotism can best ensure a brief enjoyment of them. In fact, those who prize freedom only for the material benefits it offers have never kept it long.

(Elster 1993:269)

Here Tocqueville put special emphasis on freedom, or personal autonomy. To justify democracy, we need to add another assumption, that of intrinsic equality. As Dahl justifies democracy:

If the good or interests of everyone should be weighed equally, and if each adult person is in general the best judge of his or her good or interests, then every adult member of an association is sufficiently well qualified, taken all around, to participate in making binding collective decisions that affect his or her good or interests, that is, to be full citizen of the demos.

(Dahl 1989:105)

This is a little different from John Stuart Mill's utilitarian justification for representative democracy. Mill also pointed out that "each is the only safe guardian of his own rights and interests"(Mill 1951:279), but the thrust of his arguments is closer to the justification of democracy on economic development. Mill holds that the criterion of a good form of government is "by ... the goodness or badness of the work it performs for [the people]"(Mill 1951:262), and he believes that happiness is the supreme good. So I don't think it would be a far stretch to assume that these imply the instrumental justification of democracy that democracy is desirable because it can bring about well-being of the people, which is instrumental to people's happiness. In this respect, he is quite similar to such classical utilitarians as his father and Bentham.

This utilitarian justification of democracy has some recent reminiscences. Anthony Downs developed an economic theory of democracy in which every person is assumed to be maximizing his or her welfare under democracy in a utilitarian sense (Downs 1957). In a book explicitly directed toward this economic model of democracy, Plamenatz argued that people do not and should not prefer democracy to its alternatives because they believe it is better at maximizing the satisfaction of their wants. "Neither its champions nor its critics are concerned with maximizing the satisfaction of wants or the achievement of goals. They favor it because it gives men certain rights and opportunities; or they reject it because it does not. But these rights and opportunities are not valued because they make it easier for people to maximize the satisfaction of their wants"(Plamenatz 1973:168).

From the above sketch of some relevant literature, I would conclude that democracy, as well as non-democracy, should not be justified on the ground of economic development. We prefer democracy to non-democracy in that democracy is the only feasible form of government that ensures us basic freedom and equality, rights and opportunities, and these freedom and equality have their own rights. They are ends in themselves, and we do not need to introduce utilitarian considerations to justify democracy. So democracy is desirable not because it can bring about economic development and let everyone better off, which, as we have seen, does not have much distinction between democracy and non-democracy. If we believe that economic development should justify democracy, then we have to also concede that it should also justify any kind of regime, provided that it also generates economic growth and makes everybody better off. Actually the instrumental justification had also been used by non-democratic regimes in legitimizing themselves. A prominent example is the former Communist countries. When the Stalinist rulers realized that they could no longer legitimize their regime by the claim to represent the true preferences of the people, they turned to economic and political performance as the new justification for their rule. However, when they failed to live up to people's expectations and encountered "systemic crisis", the regimes collapsed (Weigle and Butterfield 1992:23).

In conclusion, in this paper I purport to show that previous studies of the relationship between democracy and economic development may have over-emphasized the distinction between democracy and non-democracy, and that economic development can and should justify neither democracy nor non-democracy. I also suggest that future studies may focus on other characters of the regime than democracy versus non-democracy. If I may venture to make policy prescriptions, I would support the efforts to ensure economic freedom, to promote the development of competitive capitalism, and to enhance individual freedom and equality. However, I would rather not support such efforts to "export" democracy to developing countries or such passive attitudes as to "wait-and-see" economic development to automatically bring about democracy.