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April 13, 2000

Democracy Has the Edge When It Comes to Advancing Growth

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    IS democracy valuable on economic grounds alone? 

    As thousands rally in protest against the World Bank and the International Monetary Fund at their annual spring meetings in Washington this week, that question takes on particular importance. One provocative answer is proposed by Amartya Sen, the 1998 Nobel Prize winner in economics and currently the master of Trinity College in Cambridge, England. In his book, "Development As Freedom" (Knopf, 1999), Mr. Sen argues that the economic value of democracy should not be judged on its contribution to economic growth. Rather, democracy should be sought as an economic end in itself, just like higher incomes. Freedom is essential, he argues, to a full life. 

    As appealing as this thought is, however, Mr. Sen may sound to some a little defensive about the economic value of freedom. If he is, the reason may be that in the past couple of decades democracy has taken it on the chin in certain economic circles. Many largely authoritarian developing economies, like South Korea, Singapore, Chile and China, grew rapidly while democratic developing nations like India did not fare as well. 

    The general argument is that democracies usually stress investment too little and social spending too much. They have difficulty controlling inflation and defending currencies, thus chasing away foreign capital. Moreover, when economists subject the performance of democracies to rigorous statistical analysis, they find no significant relationship between democracy and growth. 

    But Mr. Sen and others may be trying too hard to accommodate these studies. And the protesters in Washington, who essentially want international financial institutions to be more accountable to a broader range of the world's citizens, may have a stronger point than is generally acknowledged. As economists look more closely at the evidence, the case for democracy's contribution to the economy looks stronger precisely because these governments must take into account the needs of most of their people. 

    As one reads deeper into his book, Mr. Sen clearly agrees. He wants it both ways -- that democracy is good for both psychic and material well-being -- and he increasingly looks correct. 

    First of all, we should be clear about what the statistical analyses of democracy actually say. Economists may not be able to show that democracy contributes to growth, but the same research cannot demonstrate, with any statistical significance, that authoritarian governments on average produce faster growth, either. 

    Further, as Dani Rodrik of the John F. Kennedy School of Government at Harvard points out, the economic performance of authoritarian nations is either very good or very bad. By contrast, the economic growth of most democratic nations occupies the middle ground -- reasonably strong and usually stable. If we had to choose blindly in which country we would prefer to live, any person interested in a decent income would choose a democracy over authoritarianism because a much higher proportion of them perform well. 

    A new study by two young economists, Jose Tavares of the University of California at Los Angeles and Romain Wacziarg of Stanford University adds further weight to the case for democracy. In particular, the research, as yet unpublished, finds that democratic nations invest significantly more on average in human capital -- essentially, education. Most economists argue that such development of human capital is critical to economic growth over time. 

    There is a wrinkle, however. The study also finds that many authoritarian governments invest more in plants and equipment than do democracies. As a result of such physical capital investment, some -- mostly a handful of rapidly growing nations in Southeast Asia -- have achieved greater economic gains. 

    Even if it is true that authoritarian governments invest more in physical capital -- and there are some technical reasons to doubt the evidence -- democracy has the edge in the long run. Authoritarian governments may be better at making the large initial investments in infrastructure and basic manufacturing that help start growth. The dictatorial Southeast Asian regimes might well have succeeded in important part by emulating existing Western and Japanese technology. Even the Soviet Union performed well for several decades through focused investment in such well-tried sources of growth as large steel and oil facilities. 

    But over time, democracies will produce more diversified ideas and the freer flow of information required to move to a more advanced stage of development. Consider how rapidly India is growing today, and how pre-eminent its computer software industry is. Democracies also generally have less tolerance for elite social groups or monopolistic organizations that maintain a stranglehold over innovation and markets. 

    In fact, we emphasize too little how democracy stimulated America's own economic growth through early demands for thousands of corporate charters, which made competition possible, guaranteed access to property for most citizens, and the revolutionary development of a free and mandatory education system. Today, the United States is even willing to take the measure of William H. Gates in an antitrust suit. 

    "Would any other nation in the world challenge its leading technological businessman?" asks Mr. Rodrik. Some authoritarian nations, from Korea to Chile, are also becoming more democratic as they grow, but it remains to be seen how completely they have shed the controlling habits of their dictatorial past. 

    As we enter an information age, human capital will become all the more important, and so will democracy. How to create and process new ideas will further displace physical capital as the determinant of economic growth. 

    So, contrary to the claims of some experts who look down their noses at the Washington protesters, these groups may not be facing backward at all. Some of them may be naïve, but their demand for recognition of a broader range of human needs may be more critical to good economic policy today than ever before. 

    Sometimes democracy is troublesome, of course, and democracy can be managed as poorly as other forms of government. But the founding fathers issued similar warnings about America's burgeoning democracy 200 years ago. Over time, it worked best. 

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