Tuesday, 13 March 2007

Democracy and Economic Progress

The Wall Street Journal Online has a very interesting entry today in their Econoblog. WSJ.com invited economists Daron Acemoglu of the Massachusetts Institute of Technology and Ed Glaeser of Harvard University to discuss the delicate relationship between economic growth and broader political freedoms.

Highly recommended because, firstly, the discussion itself is very interesting and secondly, the discussion cites and provides links to many interesting papers and articles on the topic.

Basically, both have a broad consensus –
democracy doesn't strongly predict economic growth, at least not in the short run, and democracy is not perfect as a political system, but it is the best we have. However, Daron considers education as a chief ingredient supporting democracy, while Ed believes that social and economic divides are the main barriers for a sustainable democracy.

Here are bits of the discussion that I personally deem to be somewhat relevant to Malaysia (as usual, emphases added).

Is Democracy the Best Setting For Strong Economic Growth?

from WSJ.com Econoblog

Ed Glaeser:

While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable. There is no robust statistical relationship to back it up, and Robert Barro actually found democracy reduces growth, once he statistically controls for the rule of law (Elanor: that is, rule of law that comes with democracy is what counts, at least empirically).

…(M)any of the best growth experiences have been in less-than-democratic regimes that invest in physical and human capital such as Lee Kwan Yew's Singapore or post-Mao China… I think the relationship between democracy and wealth reflects the power of human capital -- education -- to make countries both rich and democratic. If you put enough smart people together, they'll figure out how to govern themselves and gravitate towards democracy.

Daron Acemoglu:

Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation… In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes… Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies, which are often adopted after transitions from repressive dictatorships and during periods when politics are turbulent and conflicts over wealth distribution are strong.

… (I)t's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing because they have more equal distributions of political power than autocracies or monarchies.

Can’t agree more.



carry trade said...

Acemolgu's one of my fave young economists (eerr, as in under 40 I think..)!

But back to democracy. Democracy provides freedom (within the confines of law) which is essential for any creative pursuit, I believe. Not just creative pursuits per se, but any pursuit that would thrive better with thinking and innovation.....

Hi&Lo said...

If there is equitable distribution of wealth, will wealth creation naturally follow?

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