Democracy and Development

April 21, 2019

Modernization theory holds that democracy brings greater economic liberalization and better development, thus a better standard of life for everyone participating in an economy. Or, that economic liberalization brings greater democratization. The causal arrow has not established a directionality; people just see democratization and liberalization going together in many contexts around the world since 1980.

The causal factors as explained by political economists are several, but they all trade on similar intuitions relating to safeguards against expropriation. A democracy will not seize an investor’s money to solve a short-term problem nor to weaken competitors. A democracy has a longer time-horizon than an autocrat and thus will prioritize investment and increased tax revenue rather than short-term gains from nationalization.

And theoretically a democracy should allow greater distribution of wealth among a greater spread of citizenry, enabling moves past subsistence, furthering the goals of health and education, saving and investment, etc. In a democracy, voters coordinate on punishment strategies for politicians who don’t follow the will of the people.

But the punishment strategy is usually voting them out of office, which means there is some benefit to the politician from being in office or else the threat would not be effective. A little bit of corruption is necessary to keep a democracy running.

And the flow of resources to citizens is in reality just another form of investment, not a dividend of national productivity paid to millions of shareholders, but rather a furthering of human capital to enhance national productivity and thus eventual returns to investors and tax collectors. Fine if the tax collectors return the money to you in a transformed and more useful way, less so if it is again returned to a small cadre of investors in the form of regulatory concessions or covering their externalities for them.

This is “development”; a flow of goods to the benefit of all, but toward the end of increasing economic productivity rather than for the ethical purpose of fulfilling human potential. It is effective, it is cynical, and it has lifted billions out of poverty all over the world.

Why do countries decide to democratize in the first place? Why subvert their sovereignty and traditional policies in order to attract foreign investment and “develop”?

1. Nations or their leaders need cash due to external crisis: taxing moveable assets requires some bargaining

2. There’s a gamble that a small degree of democratization can create conditions for higher investment and thus higher tax revenues over a long time, and that a ruler/elite can remain close enough to power to have access to that revenue

3. Another elite group is already participating in finance networks and takes over in order to proceed

In effect, democratization is a means of almost-elite challengers trading money for power, bargaining for greater voice in government in exchange for taxes. In case #1, above, only those who have the capital eyed by the sovereign is at the table negotiating for their rights. In situation #2, it is those with capital to invest who steer policy, and in situation #3, no exchange of power takes place beyond the change in elites. In democratization, the extension of rights and power beyond economic elites is almost accidental. The only reason why rights become universalized in these situations is to prevent alternate or disparate bargains between sovereigns and different social groups; to minimize the chance of one being played off the other.

Since 1980 and the expansion of democracies, there has been some handwringing about the backsliding away from democracy being seen around the world in the 2000s. This is precisely the disempowering of those who accidentally or by default received the franchise in the wave of liberalization. As long as countries remain democratic for the investor class, and thus hospitable for money-making, international organizations do not really care about democracy for the rest, save some policy paper writing exercises.

Indeed, the correlation between economic growth in democracy might more accurately be characterized as a correlation between economic growth and stability. Democracy is more stable than autarchy, though an authoritarian regime can also be planned for—perhaps more short-term investments.

This is all to say that we should be suspicious when democracy is used as an excuse for overseas expeditions and that, while democracy is generally better than other alternatives, we should always remember who democracy was designed by and for.


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