New India: No Democracy No Prosperity

Niti Aayog CEO Amitabh Kant’s comment on too much democracy ignites the debate on democracy and development. There is a section of “thinkers who” believes that democracy can work as a barrier to economic growth. A few years ago, at the Goa conference, I had an argument with a UK based researcher. He was arguing that India should have followed the China model meaning if India had less democracy at the initial phase then India would have been better in terms of economic growth. After achieving a certain level of economic development, the country can shift to democracy. But my point was that we do have seen the countries which have democracy at an early stage of industrialization and did well in economic terms. The association between democracy and economic growth is widely debated in the literature. It is also widely debated whether democracy affects economic growth or economic growth affects democracy. Lipset (1959) suggests that per capita income or more specifically economic wealth is important as far as the development of democracy is concerned. The size of bureaucracy will decline over the period of time after the initial phase of democracy. This argument is supported by the modernization theory of democracy proposed by Diamond and Lipset in the Book titled Democracy in developing countries: Latin America (Diamond and Lipset (1989)). It is suggested that economic progress plays important role in democratization. Economic growth and social classes formed due to economic progress play an important role in the development of democracy. Acemoglu et al (2008) do find a positive association between per capita income and democracy, but it is not clear whether per capita income really affects the development of democracy. There are arguments again modernization theory but it is also found that for the survival of democracy certain level of per capita income in required (Przeworski (2005)). Talking about the impact of democracy on income, Przeworski (2004) suggests there is no significant difference in the income of dictatorship and democracy but the population increases rapidly under dictatorship therefore per capita income can be high in democracy. Barro (1996) interestingly suggests the inverse U shape relationship between democratization and economic performance which is also known as the Barro effect. When there is a high level of democratization, the size of government, as well as government spending, can increase beyond a certain level and that can reduce the private income due to taxation and it can affect the economic growth negatively. Plümper and Martin (2003) also finds the existence of the Barro effect and also finds the U shape relationship between democratization and government spending. Plümper and Martin (2003) suggests that participation is important as far as the association between democracy and economic performance is concerned. A certain level of participation is good for economic performance. This means in a democracy where participation is minimum, there may be a poor economic performance. But if there is  excessive participation then there may be over investment (excess investment) in public goods which may harm economic performance. Therefore, an inverse U shape relationship is suggested. While for government spending there are two types of public consumption, transfer of rents to elites and provisions of public goods. Initially, democratic governments for survival has to focus on the rents therefore initially the total spending will not increase rather it may decline due to less public goods but once the democratic government starts developing, the government has to focus on the public goods which will benefit most of the population so that for next time the same government can sustain the power. This negative link between democracy and economic development is mainly because of more focus on human capital accumulation and less focus on physical capital (Tavares and Wacziarg (2001)). Comparing democracy with dictatorship, democracy focuses more on labor share and labor income. labor share in the manufacturing sector in dictatorship is low on the other hand, dictatorships use capital efficiently. The growth in the dictatorship is labor extensive and labor exploitive (use labor inefficiently pay less compared to the democracies). Therefore, the income distribution is different in both regimes (dictatorship and democracy). The level of inequality is low in a democracy compared to a dictatorship. Przeworski (2004) also highlights that democracies associated with a low level of inequality (income inequality measured in terms of Gini coefficient) compared to the dictatorship. Przeworski (2005) also suggests dictatorship does redistribute but also uses the forces where wealthy or developed democracy redistributes more even more than poor democracy. Acemoglu and Robinson (2001) suggested the inverted U relationship between democratization and inequality. Democracy takes the demands of the poor seriously so efforts are taken for increasing access to public goods like education. For the survival of democracy, a certain level of per capita income, below that democracy will face instability. Democracy can’t survive if inequality grows beyond a certain level. Therefore, democracies are very sensitive towards redistribution, but since a certain level of per capita income is required, democracies can’t afford to ignore the economic growth. These are widely discussed arguments. Few studies have done an empirical analysis. Barro effect, proposed by Barro (1996) is observed based on Gastil’s index of democracy. But democracy has an intrinsic value. For example, if there is a protest against any government policy then that protest itself has an intrinsic value as people are conscious of their rights which is an important shade of human development. Freedom which is the base of democracy is a part of the overall development. Therefore, even if we assume that democracy hurts economic growth (which is not established by literature), democracy is very essential for overall development.

Now coming to the “too much democracy” comment, the indices used to identify the state democracy don’t suggest that. International IDEA’s The Global State of Democracy Indices puts India in the mid-performance democracy category. Following countries are top ten countries in 2019 as far as democracy index by the Economist Intelligence Unit. Except for Bhutan, all countries are high-income countries.

The following figure suggests that for India, the democracy index is low (obviously not too much of democracy). Top ten countries are doing good as far as democracy and economic progress is concerned. 

The per capita GDP of Bhutan is 3128 (In constant 2010 Dollar) in 2018 where India’s per capita GDP is 2169.17 dollars in 2019. Bhagwati and Panagariya in a book titled: Why growth matters, proposes the Indian Model for developing countries where there is a coexistence of democracy and economic growth. That “Indian Model” is now vanished. Both democracy and the economy are facing severe threats in Naya Hindustan (New India)..

 

References

Acemoglu, D., & Robinson, J. A. (2001). A theory of political transitions. American Economic Review, 91(4), 938-963.

Acemoglu, D., Johnson, S., Robinson, J. A., & Yared, P. (2008). Income and democracy. American Economic Review, 98(3), 808-42.

Barro, R. J. (1996). Democracy and growth. Journal of economic growth, 1(1), 1-27.

Bhagwati, J. (1995). Democracy and Development: new thinking on an old question. Indian Economic Review, 1-18.

Bhagwati, J., & Panagariya, A. (2013). Why growth matters: How economic growth in India reduced poverty and the lessons for other developing countries. Hachette UK.

Diamond, L. J., Linz, J. J., & Lipset, S. M. (Eds.). (1989). Democracy in developing countries: Latin America (Vol. 4). London: Rienner.

Lipset, S. M. (1959). Some social requisites of democracy: Economic development and political legitimacy. The American political science review, 53(1), 69-105.

Plümper, T., & Martin, C. W. (2003). Democracy, government spending, and economic growth: A political-economic explanation of the Barro-effect. Public choice, 117(1-2), 27-50.

Przeworski, A. (2005). Democracy as an Equilibrium. Public Choice, 123(3-4), 253-273.

Przeworski, A. (2004). Democracy and economic development. Mansfield & R. Sisson (Eds.), The evolution of political knowledge. democracy, autonomy, and conflict in comparative and international politics, 300-324.

Przeworski, A., Alvarez, R. M., Alvarez, M. E., Cheibub, J. A., & Limongi, F. (2000). Democracy and development: Political institutions and well-being in the world, 1950-1990 (Vol. 3). Cambridge University Press.

Tavares, J., & Wacziarg, R. (2001). How democracy affects growth. European economic review, 45(8), 1341-1378.