Democracy and Economic Development

David Gillies 11 avril 2005

Parmi les motifs invoqués pour faire la promotion de la démocratie à l’étranger, on affirme parfois qu’un système politique qui repose sur la transparence et la responsabilité, ainsi que sur le respect des droits de la personne et de la primauté du droit, et qui privilégie en même temps la formulation des politiques en fonc- tion de choix éclairés, est mieux à même que les autres systèmes de gouverne- ment de favoriser le développement d’une économie de marché dynamique.

Comme le montre l’auteur au moyen d’une dystopie imaginaire du développe- ment, s’il est vrai que les institutions politiques peuvent avoir sur la performance d’une économie une influence favorable ou défavorable, les rapports entre le régime politique, les choix stratégiques et le rendement économique sont souvent plus com- plexes que ne le croient certains champions des idéaux démocratiques.

L’auteur passe en revue les arguments auxquels font appel les donateurs d’aide pour expliquer pourquoi ils ont choisi de promouvoir les droits, la démo- cratie et la bonne gouvernance. Il examine également les rapports de recherche qui remettent en question les liens de cause à effet entre démocratie et croissance, et souligne l’importance que revêt la qualité de la gouvernance comme facteur contribuant au rendement de l’économie.

David Gillies se penche en outre sur la place qu’occupent les considéra- tions politiques dans la formulation de l’aide au développement. Il montre que les donateurs bilatéraux ont décidé d’intégrer les droits de la personne, la démo- cratisation et la bonne gouvernance parmi les objectifs du développement après que la Banque mondiale eut déclaré qu’une crise de gouvernance était à l’origine du sous-développement en Afrique. Aux yeux de certains organismes d’aide publique, la gouvernance est d’ailleurs devenue la variable politique centrale.

Gillies examine ensuite les résultats de travaux empiriques consacrés aux liens entre la démocratie et la croissance. Existe-t-il un cercle vertueux qui fait que les deux vont main dans la main ? Faut-il plutôt faire un choix cruel entre elles ? Ou bien doit-on plutôt conclure qu’il n’y a entre démocratie et croissance économique aucun lien probant ? Les résultats des études indiquent qu’il n’y a aucune loi d’airain ni aucun lien de causalité indiscutable entre la démocratie et la prospérité. En particulier, l’expérience de l’Asie de l’Est et du Sud-Est montre que la nature du régime politique d’un pays ne peut servir à prédire la perfor- mance de son économie et qu’il est possible de gouverner efficacement un État non démocratique. La démocratie semble néanmoins avoir un effet indirect sur la croissance en raison de son impact positif sur certains éléments essentiels au développement économique, l’instruction, la formation de capital humain, l’in- flation, les investissements et les inégalités de revenu en particulier.

Si les liens entre la démocratie et la performance économique sont tout au plus indirects, les donateurs devraient peut-être abandonner l’approche ultra- idéaliste (« tous les bons objectifs s’appuient réciproquement ») en faveur d’am- bitions moins transcendantes portant sur les conditions propres à favoriser la croissance, par exemple en encourageant la responsabilité économique et la transparence, ainsi que la mise en place d’un ensemble de règles prévisibles régis- sant les interactions économiques et la politique publique. En l’absence d’un lien empirique étroit entre démocratie et croissance économique, les donateurs inter- nationaux devront peut-être se tourner vers d’autres éléments, telles les valeurs rattachées à la politique étrangère, pour faire valoir les mérites intrinsèques des principes de la démocratie libérale.

Editor’s Note

Over the past 20 years the promotion of democracy has become an increasingly important element in Canadian foreign policy. This is reflected in particular in the growing expenditure on technical assistance to encourage democratic development. The papers in this volume are part of the IRPP’s International Democratic Development research program, which assesses Canada’s policies and programs in delivering this kind of assistance (for an excellent review of the evolution of Canadian democracy promotion policies, see Gerald Schmitz’s earlier paper in this series). The objectives of the project are to establish how Canada can contribute most effectively to the collective international effort to assist democratic development and to determine best practices for delivery of Canadian assistance.

An active democracy-promotion program raises critical questions about the right of one state to intervene in the internal governance of another. For that reason there has been considerable debate about the grounds on which it can be justified. The two papers presented here deal with the justifications that arguably have the greatest claim to legitimacy.

The first paper, by David Gillies, addresses what might be called the “nor- mal case”– interventions that have been used by donors of economic assistance to underdeveloped countries to try to improve the effectiveness of their assis- tance. These have become routine elements of most donors’ foreign aid policies. While good governance has been what Dr. Gillies calls “the master value” organi- zing this form of intervention, it has become increasingly coupled with the broader concept of “democratic development.” This has occurred gradually and continues to be contentious. Dr. Gillies explains the evolution of donors’ think- ing about the relationship between economic assistance and “political develop- ment,” identifies the issues in the debate about this relationship and discusses the relationship’s implications for donor policy and programs.

The second paper, by Jane Boulden, deals with interventions that have been more exceptional in both their frequency and consequences. These have involved some form of military engagement and the more or less complete recon- struction of systems of government. In the first instance in the 1980s they evolved from the limited concept of the international community’s responsibility to end or prevent conflict through peacekeeping into the broader concept of peace-building – the promotion of conditions that would reduce the likelihood of the occurrence or recurrence of conflict. More recently, this justification has evolved into what might be called a doctrine of the right or responsibility of the international community to intervene in failed or failing states, either in the interests of preventing a humanitarian crisis or reducing potential threats to the security of other states. Beyond the fundamental principle involved (that is, the question of when the international community would be justified in undertaking such radical interventions), Dr. Boulden points out that there are important ques- tions to be asked about the democratic reforms that should be incorporated into peace-building policies, and how democratic-development strategies should be included in these policies.

An understanding of the issues raised in these two papers is central to the discussion of the role that democracy promotion should play in Canada’s foreign policy. They therefore provide a context for other papers in the series, which explore both the nature and methods of delivery of Canadian assistance to demo- cratic development.

George Perlin 
April 2005

An Imagined Dystopia: Economic Decay in a Difficult Development Partnership

The local representatives of the global financial institutions and assorted liberal democracies sped out to a secluded lodge on the outskirts of the city to ponder the radical policy shifts of Izania’s president. Just a few years earlier, development aid and experts of every stripe poured into this sleepy former colonial outpost. With an enlightened and popular leader, economic policies in tune with the Washington consensus and a well-educated and disciplined labour force, the Izania of the 1990s saw steady economic growth, significant foreign direct invest- ment and a flourishing export of gold, silver and platinum with growing regional markets for its wheat, maize, coffee and tea. The country’s courts and police were relatively independent, there was a vigorous press and a dizzying variety of com- munity groups found shelter beneath the mighty ruling party. There were even regular elections, although the outcome was never in doubt, and world opinion glossed over the intimidation meted out by party loyalists to the forces of dissent and reaction. In this idyll of political stability, donors worked hand-in-glove with the competent administration to modernize railways, road systems, and energy grids and fund a cornucopia of aid projects to build sustainable livelihoods in the rural heartlands loyal to the ruling elite.

But today the policy certainties that once made Izania a good place to do business no longer exist, replaced by ideological fervour, political instability and profound policy change. Dissent has swept away the complacent assumptions of a benevolent autocracy. Threatened by calls for constitutional reform and an alliance among civil society, organized labour and the urban opposition, the rul- ing party purged its reformist wing, circled its wagons and returned to the ideo- logical roots of its pre-independence liberation struggle. The opposition was quickly linked to colonial forces. The uneasy contract with settler capital was broken, and the private farms that had underpinned Izania’s wealth were forcibly expropriated. With property rights under attack, the rule of law quickly crum- bled. The police turned a blind eye to the farm seizures, and the courts legiti- mized the erosion of property rights. Armed militias roamed the countryside and the city slums, and expatriate farmers, the leaders of NGOs, journalists, trade unionists and the urban poor were targets of merciless attacks.

The impact on the economy was immediate and unrelenting. Investment trickled to a halt, and, desperate to shore up its support, the government print- ed money to finance subsidies on food and gas. The exchange rate was kept arti- ficially high, while a parallel market became the hub of the economy and weekly signalled the catastrophic depreciation of the Izanian dollar. Inflation soared to 500 percent, and the economy shrank by 20 percent. Interest rates were nega- tive, and saving funds were rendered worthless by a government that needed low interest rates to repay debts arising from its out-of-control borrowing. In the countryside, production ground to a halt, and donors handed out food to stave off hunger. Parliament, the press and the few remaining pressure groups were singularly ineffective in engaging the ruling party on the causes of the downturn or the need for policy reform.

All this had happened in just 18 months. Sitting poolside, the donor rep- resentatives worried that the window for dialogue and policy change was fast closing. In its place was a new brinkmanship in which the donor democracies had cut government-to-government aid to protest the growing illiberalism of Izania’s faltering democracy and had fallen back on the drip feed of humanitarian assistance to salve their collective conscience. In turn, Izania’s rulers used donor conditionalities as proof of foreign meddling and appealed to the country’s regional neighbours to help them stand firm against these foes of liberation and national sovereignty.

Democracy and the Market: A Brief Survey of Donor Policy and Empirical Research

Izania’s imagined dystopia captures some of the complex relationships among political systems, policy choice and economic performance. The causal arrow linking political system to economic performance is not a direct one. Izania has a democratic facade: opposition parties are legal; elections are held; Parliament, the courts and the independent press still function. However, these institutions are gravely weakened and economic policy is now being determined by fiat rather than political debate and informed choice.

The relationship between democracy and economic growth has preoccu- pied thinkers since the seventeenth century. Three main views have emerged: there are those who see a virtuous circle in which democracy and growth go together; those who see a cruel trade-off; and those who find no convincing rela- tionship between democracy and growth (Kurzman, Werum and Burkhart 2002; Przeworski et al. 2000). These views are no longer simply a source of scholarly debate. The spread of democratic values and market economics, and the violent backlash against these forces of globalization, put the relationship between polit- ical systems and economic performance near the forefront of international rela- tions. Moreover, international development agencies now make bold claims link- ing democracy with growth to justify programs of political aid and good gover- nance that intrude on the domestic jurisdiction and national sovereignty of recip- ient countries. A variety of instrumental and normative motives underpin this shift in donor thinking and practice.

By the 1990s, the World Bank and other international development insti- tutions began to acknowledge the role of political variables in determining the outcomes of economic reforms and economic development assistance. The OECD’s Development Assistance Committee saw a “vital connection between open, democratic and accountable political systems, individual rights, and the effective and equitable operation of economic systems” (OECD 1989). Aid was once thought to be the catalyst of growth, and prosperity the genesis of democ- racy. By the 1990s, development theorists and donor agencies were beginning to argue that political openness and respect for human rights must accompany, not lag behind, economic growth.

Theorists such as Amartya Sen and annual surveys such as the UNDP Human Development Report have helped build an international consensus that the purpose of development is the expansion of human capacity and choice. As the individual was gradually returned to the centre of the development stage, it became less tenable to speak of “generations of rights” in which civil liberties and political rights could be postponed until basic human needs had been met.

Civil and political rights such as access to information and a free press have real instrumental value for aid donors because they can help uncover the ineffi- ciencies of corruption or inept governance. A free press acts as an essential early- warning device against impending famine, for instance, by ensuring that there is public debate and prompt state action. Several famines – notably in China in 1958-61 and in the Sudan and Ethiopia in 1984 – have occurred under authori- tarian regimes that allow little free expression or public debate of state policies.

Donors now recognize that the fostering of democratic processes in government and society contributes to economic development by releasing cre- ative energies, enhancing accountability and deepening participation. The con- sensus among aid donors on the importance of human rights and democratic pluralism in economic development has led to the growth of a new kind of devel- opment assistance. The human rights agenda is served by projects to strengthen the voice and institutional capacity of nongovernmental organizations – any- thing from paralegal-service providers to lobby groups, labour movements, media organizations or human rights monitors. The governance agenda is even broader and can cover the spectrum of administrative, legal and, increasingly, security sector reform. A sample of any leading donor’s project portfolio could reveal projects to strengthen the rule of law, reform the civil service, curb cor- ruption, strengthen an election commission, modernize a police force, improve a line ministry’s financial management and so on.

International development agencies added a democracy and governance dimension to their programs based in part on values such as pluralism and respect for human rights. For some donors, promoting governance and democ- racy is closely linked to their national role conceptions. For Canada, the link is to the long-standing domestic values of respect for diversity and pluralism, and to “peace, order and good government.” For the United States, “the idea of democracy is closely linked to the national identity” and its history as “a shining beacon to individuals and families seeking personal freedoms” (USAID 2003).

Alongside normative interests, most donors also acknowledge more instru- mental motives underpinning their democracy and governance promotion activ- ities. These can range from foreign policy interests to efficiency and effectiveness arguments to ensure a return on aid investments. USAID, for example, is clear that “the strategic and long-term domestic and foreign policy objectives of the United States are best served by enlarging the community of democratic nations worldwide” (2003).

The invention or, more accurately, the discovery of today’s good gover- nance agenda stems from the failures of the World Bank’s economic reform and structural adjustment programs in Africa. With its landmark 1989 study entitled Sub-Saharan Africa: From Crisis to Sustainable Growth, the World Bank acknow- ledged a political dimension to economic development and recognized gover- nance as the independent variable explaining Africa’s underdevelopment:

Underlying the litany of Africa’s development problems is a crisis of governance. By governance is meant the exercise of political power to manage a nation’s affairs. Because countervailing power has been lacking, state officials in many countries have served their [own] interests, without fear of being called to account…and patronage becomes essential to maintain power. The leadership assumes broad discretionary power and loses its legitimacy. Information is con- trolled and voluntary associations are co-opted or disbanded. This environment cannot support a dynamic economy. At worst, the state becomes coercive or arbitrary. These trends, however, can be resisted [by building] a pluralistic insti- tutional structure, [respecting] the rule of law, and vigorous protection of the freedom of the press and human rights. (1989, 60-1)

The World Bank has applied governance criteria in China after Tiananmen Square, in the former Zaire and, more recently, in Zimbabwe to suspend or downgrade its operations. However, the bank’s charter of strict neutrality has required a careful distinction between the form of the political system and the quality of governance. In this narrower reading, effective public sector manage- ment and sound overall development management are criteria for good gover- nance rather than civil and political rights per se, or the openness of the political system (Gillies 1997; 1993). In this reading, the rule of law is not an end in itself but is important to the extent that it contributes to economic development. A pre- dictable set of rules is essential to reduce business risks, enforce contracts, lower transaction costs and prevent arbitrary decisions by the state. One important exception in the bank’s overall avoidance of the rights agenda is the issue of prop- erty rights, which are defended as an axiom of a functioning market economy.

The European Bank for Reconstruction and Development (EBRD) is the single exception to the general rule that multilateral financial institutions avoid political considerations in making lending decisions. Article 1 of the EBRD char- ter states that “in contributing to economic progress and reconstruction, the pur- pose of the Bank shall be to foster the transition towards open, market-oriented economies and to promote private entrepreneurial initiatives in the Central and Eastern European countries committed to applying the principles of multi-party democracy, pluralism and market economics.” Contributing international instru- ments that inform the bank’s political considerations include the Helsinki Accords, the Organization for Security and Cooperation in Europe and the European Convention on Human Rights. EBRD views the big-bang expansion of the European Union from 15 to 25 member states as a vindication of its contri- bution to democracy, economic development and regional integration. In con- structing annual country strategies, the EBRD looks at explicitly political indica- tors to determine the degree to which countries are meeting the charter require- ments for multiparty democracy, respect for human rights and the rule of law. Specific criteria used in the annual survey include: free elections; executive accountability to an elected legislature; judicial independence; freedom of speech, association and assembly; freedom of movement, conscience and reli- gion; and the right to private property.

Where EBRD recipient country policies are inconsistent with the charter principles, paragraph 3, article 8 of the charter allows the board of governors flexibility in formulating the bank’s response. In cases of fraudulent elections, corruption or unwillingness to implement reforms, EBRD is able to postpone or suspend operations, as it did in Turkmenistan, or caution heads of state about noncompliance with EBRD requirements, as it did in Belarus in 2001.

While the World Bank was the architect of the governance agenda, it was the bilateral donors and multilateral institutions such as the United Nations and the Commonwealth that more explicitly linked governance to the wider agendas of democratic pluralism and human rights. In 1990, the US Agency for International Development began its democracy initiative. In a much publicized speech he gave that year, the then British foreign minister Douglas Hurd argued bluntly that “poverty does not justify torture, tyranny or economic incompe- tence.” Hurd called for a concerted approach by the major donors, and he announced the establishment of the Westminster Foundation to assist fledgling political parties, an initiative similar to those of the German Stiftung and the American National Endowment for Democracy. Hurd set out the new British gov- ernment position by clearly linking funding decisions to trends in the quality of governance: “Countries which tend towards pluralism, public accountability, respect for the rule of law, human rights, and market principles should be encouraged. Governments which persist in repressive policies, corrupt manage- ment, wasteful and discredited economic systems should not expect us to sup- port their folly with scarce aid resources which could be used better elsewhere” (quoted in Gillies 1997, 26).

In 1990, President François Mitterand announced that in future France would be less generous in its aid to “regimes which conduct themselves in an authoritarian manner without accepting evolution towards democracy” (quoted in Gillies 1997, 17). In 1991, Germany introduced a new set of policy guidelines with five funding criteria: respect for human rights, popular participation in the development process, the guarantee of a predictable legal framework, a market- friendly approach to economic development and a commitment to poverty alle- viation. The European Commission added a human rights clause to its Lomé Convention, which underpins aid and trade relations with African, Caribbean and Pacific countries.

Nowhere was the emerging early-1990s donor consensus better reflected than in the Development Assistance Committee (DAC) of the OECD. Using some remarkably tough language, the DAC even accepted political conditionality as a legitimate instrument for defending human rights. It declared that while empha- sizing a preference for “positive support,” DAC member states “also wish to be clear about the potential for negative measures affecting the volume and form of aid, in areas of serious and systematic violations of human rights or brutal rever- sals from democratization, or when a complete lack of good governance renders efficient and effective aid impossible” (OECD 1993).

In the twenty-first century, the DAC has taken a more balanced approach to the challenges donors face with “difficult partnerships” (OECD 2001). The language on political conditionality has softened – the DAC notes that it works “only where there is internal ownership of the conditionality by reformers who are in a position to use it to advance their reform programs.” This is generally the opposite of the case with “difficult partnerships.” Instead, the DAC recognizes that “it is important to support the poor in countries with severe governance problems, including conflict-prone countries.” These “difficult partnerships” arise in settings where “development objectives play little role compared with the prolongation of power” and where “genuine participatory development is funda- mentally compromised [by]…corruption and political repression [which] are commonly associated with such regimes” (OECD 2001, 4). Recognizing the potential loss of policy influence in ending government-to-government aid, the DAC suggests improved donor coordination, an alignment of all policy instru- ments (trade, aid, security, investment) and indirect influence on policy reform through internal and external civil society change agents.

Martin Doornbos is one commentator who argues that governance no longer has the primacy it did in the early 1990s as either an operational tool or a policy-making concept for aid donors. And practical observers such as Merilee Grindle have called for more realism and priority-setting – what she terms “good enough governance” – rather than the impossibly sweeping set of gover- nance reforms that some donors look for in countries emerging from conflict or with records as poor performers (2002). In a similar vein, Doornbos concludes that “notions of good governance are likely to remain part of the donor parlance, but with less ambitious anticipation about the scope for intervention and politi- cal restructuring that was attached to them earlier” (2003,16).

However, if the assumptions underpinning the G8 Africa Action Plan are anything to go by, donors continue to focus on governance as a tool for policy choice, even if its utility as an operational and programming concept looks less compelling. In that sense, not much has changed since the emergence of the donor democracy and governance agenda in the early 1990s. If anything, the evi- dence that governance and institutions do matter is now conventional wisdom, not just in donor capitals, but also in increasing numbers of developing coun- tries. This may be linked to two features of international relations in the twenty- first century: “first, democracy’s status as the predominant form of political governance within the Westphalia nation-state system; and second, the emer- gence of an international norm that considers democracy promotion to be an accepted and necessary component of international behaviour” (Schraeder 2003, 22). Aid donors can see their governance and security agendas partly replayed, at least rhetorically, in the African development blueprint for the twenty-first cen- tury, the New Partnership for Africa’s Development (NEPAD).

At the Kananaskis G8 Summit in 2001, the leaders of eight major indus- trialized countries met with African leaders and welcomed the NEPAD initiative as the basis of a new development partnership with Africa. In designing its Africa Action Plan as a response to the NEPAD, the G8 leaders at Kananaskis recognized that the NEPAD “offers something different. It is first and foremost a pledge by African Leaders to the people of Africa to consolidate democracy and sound economic management, and to promote peace, security and people-centred development. They have undertaken to hold each other accountable for its achievement. They have emphasized good governance and human rights as nec- essary preconditions for Africa’s recovery” (G8 2002).

The NEPAD calls ambitiously for an average annual growth rate of 7 per- cent to be sustained over 15 years as the engine of Africa’s economic recovery and suggests that “half or more” of new OECD country aid “could be directed to African countries that govern justly, invest in their own people and promote eco- nomic freedom.” This starry-eyed optimism aside, a genuinely novel feature of the new social contract between the donor community and Africa is the inclu- sion under the NEPAD of an African Peer Review Mechanism (APRM) as the modality to influence the volume and direction of significant external aid, invest- ment capital and debt relief through “enhanced partnerships” with countries who are “governancing well.” As the G8 Africa Action Plan puts it, “the peer review mechanism will inform our consideration of eligibility for enhanced partner- ships. We will each make our own assessments in making these partnership deci- sions. We will not work with governments which disregard the interests and dig- nity of their people” (NEPAD 2001).

The essence of the APRM is that those countries that take the mechanism pledge hold each other accountable in achieving norms of good governance and compliance with stated economic policies. Under the mechanism, leaders found in violation of these norms will undergo a process of constructive dialogue with their Africa peers in an effort to put their governance performance back on track. The jury remains out on the prospect of the APRM as a way to embed democratic gov- ernance in Africa. While the new democratic administration of Mwai Kibaki in Kenya is the first African government to submit itself to the APRM, there remain considerable political obstacles to overcome in designing by consensus a set of gov- ernance criteria that are, in the words of the African architects of NEPAD, consis- tent with “global standards” of democracy. The special circumstance of Zimbabwe, where an embattled ruling party has weakened democratic institutions in its strug- gle to dismantle the last vestiges of settler colonialism, is seen by some commenta- tors as a litmus test of the NEPAD in general and of the APRM in particular.

Robert Bates has some persuasive insights on the determinants of Africa’s latest wave of democratization and the prospects for democratic consolidation in Africa. He argues that the economic determinants of democracy in Africa do not include the typical ingredients of growing prosperity, a rising middle class or gov- ernment concessions to the demands of private agents whose resources they wish to tax. “Africa’s path to democracy is not that of the West. Rather, it most closely approximates the path taken by the socialist regimes of Eastern Europe.” Bates sees the economic building blocks of democracy as emerging, paradoxically, from the “attempts of revenue-starved fiscs and government creditors to extract politi- cal regimes from loss-making policies.” In effect, “the economic impetus for political reform originates not from the private economy, but from the needs of the public sector” (1999, 93). This analysis holds out some hope for real or imag- ined dystopias. African political elites, determined to maintain power at any cost, have constricted the private economy and middle classes and created disequilib- ria in markets, clientelism, fiscal crises and foreign debt. But these old forms of governance have proved economically unsustainable. As Bates interprets events, in Africa, internal and international pressures for democratic reform have occurred at the nadir of national and pan-African economic history.

No Ironclad Laws: The Ambiguous Research Linking Democracy and Economic Growth

In an early classic of the modernization literature, Seymour Martin Lipset argued that economic development creates a number of the preconditions for demo- cracy. These include increased education, a strong middle class and private organ- izations (akin to de Tocqueville’s voluntary associations and Putnam’s social capi- tal). Economic development for Lipset was a necessary, if insufficient, precondi- tion for democracy – it had to be accompanied by the building of political legit- imacy (Lipset 1959). In a more recent classic of political sociology, Rueschemeyer, Stephens and Stephens show from detailed historical studies that economic development prompted a shift in the balance of class power from the landed elites to the working and middle classes, leading to democratic outcomes (1992, 74-5). As Barrington Moore’s study of political development concluded, “no bourgeois, no democracy” (1966). It is tempting to push the findings of these scholars fur- ther and suggest that democracy is a deeply held value that is increasingly sought- after as the education and income levels of populations rise (Feng 2003, 261).

Donor agencies have paid some attention to the empirical relationship between governance and aid effectiveness. The World Bank’s study Assessing Aid identified and tested the statistical significance of three coefficients for aid, policy and the relationship between aid and policy. It concluded that aid works, but only in an environment where there are good or enabling policies (Dollar and Collier 1998). The policy implication of this conclusion was that aid should be targeted to good-policy/high-poverty countries, a prescription taken seriously by some donors – such as, arguably, CIDA, in its recent efforts concerning country “concentration.” However, donors appear to have paid less attention to the empirical evidence linking democracy and growth in the claims they have made for political aid and good governance. A survey of the empirical evidence sug- gests that claims that democracy promotion is one of the keys to sustained eco- nomic development have somewhat insecure foundations.

The three broad positions describing the linkage between democracy and growth are: win-win, or “virtuous circle”; trade-off, or “cruel choice”; and “no effect.” The cruel-choice school says that in modernizing societies, the first order of business is capital accumulation for rapid industrialization. Developmental democracies concerned with the creation of a just social order and a fair distri- bution of assets are at odds with this priority. Redistributive policies addressing social and economic rights shift public resources and inhibit savings essential for rapid economic growth. The cruel-choice view recognizes that rapid growth will widen inequalities but maintains that these inequalities will diminish over time as the benefits of growth trickle down to the poorest. In this view, the political management of growth must be premised on order, not on democratic partici- pation or human rights.

The virtuous-circle perspective sees democracy and growth as good things that go together. In this view, constitutional limits on power enable citizens to plan their lives, and they also protect citizens against arbitrary or misguided eco- nomic policies. A more nuanced argument, based on some empirical evidence, suggests that pressures for democratic development are the outcome of moderni- zation and the market. In South Korea, Taiwan, Indonesia and Thailand, authori- tarian governments modernized by opening markets while suppressing labour and wages and muzzling dissent. As living standards improved, the South Koreans, Thais and Taiwanese pressed for rights and democracy and succeeded in opening up their political systems.

The transition to electoral democracy took longer in Indonesia, and it was closely connected with the collapse of Southeast Asian currencies in 1997 and with public fury over the cronyism and corruption of the Suharto regime. The case of Indonesia can in some respects be used to refute the virtuous-circle argu- ment; it underlines the special dangers of situations where the rapid liberaliza- tion of the economy occurs within a fossilized and repressive political system.

As Feng points out, one reason Indonesia was particularly hard hit by the 1997 financial crisis was that the opening of the country’s financial markets was not preceded by the development of sound financial institutions (2003, 269). Large capital inflows were inefficiently allocated in a regulatory environment marked by kickbacks, corruption and bribery. The political elites had enormous opportunities to enrich themselves, and officials had considerable discretion to interpret regulations. Feng finds it significant that Indonesia was the only autoc- racy among the Southeast Asian Tigers at the time of the 1997 financial crisis and its economy was hit hardest by the meltdown. Its economy shrank by 13 percent in 1998, more than any other in the region. In 1999 and 2000, Indonesia’s recov- ery was the slowest (2003, 270).

The modernization theorists informed a long-standing donor preoccupa- tion with economic development. However, the conventional wisdom that growth must precede political development can be challenged both on theoreti- cal grounds and with some empirical evidence. First, regimes that suppress the civil liberties and political rights associated with democracy can pay economic costs. Managing complex modernizing societies requires information, but this commodity is in short supply in authoritarian states. By contrast, freedom of speech, of assembly and of association help keep a government informed. Public participation and scrutiny of state policy may avert planning disasters. Second, regimes that suppress rights can be unstable because they foster apathy and dis- affection, which can lead to economic inefficiency. Regimes without legitimacy require repression to rule. And with coercion, additional resources are shifted to maintaining security and may be lost to development.

Property rights, which are fundamental to market-led development, are more secure under democratic than authoritarian regimes. Robert Putnam’s classic study of the civic roots of modern Italy underlines the positive impact of high lev- els of social capital on economic activity and political democracy, and it also shows that the leverage of governments to promote social priorities is much greater where the civic culture is able to play a dynamic role in social change (1993).

However, as a whole, the empirical evidence directly linking democracy and economic growth is ambiguous, at best. There is no ironclad law defining the relationship between democracy and economic growth. Time-series data usually show little or no direct relationship between democracy and growth. The effects, where they are demonstrated, appear to be more subtle and indirect. Kurzman, Werum and Burkhart reviewed 47 quantitative studies and recorded 19 finding a positive relationship between democracy and growth, 6 finding a negative rela- tionship and 10 with no statistically significant relationship. A further 9 studies found a mix of nonsignificant or positive or negative findings, depending on the model used and the cases included. One study reported an inverted-U effect (Kurzman, Werum and Burkhart 2002).

Some authoritarian regimes have been able modernizers, but most have not. The economic record of Third World democracies has been no worse than that of many nondemocratic regimes. Inequalities in democracies such as India have been less acute – or at least more stable – than those found in non- democratic Third World countries. Contrary to the predictions of the cruel- choice school, one empirical study found a positive correlation among three indices: freedom, per capita product and the physical quality-of-life index (Sieghart 1983). Another found that democratic stability and “civil and political rights cannot prevail if social and economic rights are ignored” (Arat 1988).

The empirical data examining democracy’s effect on growth has focused on three ways in which that effect might be transmitted: investment, state spending and social unrest (Przeworski et al. 2000). Investment has been described as the single strongest predictor of economic growth. The cruel-choice school argues that democracies will dare not impose unpopular measures to increase invest- ment. The virtuous-circle perspective holds that investment will grow in demo- cratic societies where there is abundant economic information and property rights secure from arbitrary or unpredictable changes to the rules of the game.

Excessive state spending can act as a brake on growth by reducing national savings and diverting resources into interest payments. Both democracy and authoritarian rule can prompt excessive state spending. In the case of the former, there can be excessive spending on social priorities driven by populism; in the case of the latter, there can be excessive military spending, resulting in large tax burdens.

Social unrest has a negative impact on growth because it disrupts produc- tion, which creates disincentives for long-term planning and reduces investment. The cruel-choice school argues that autocratic regimes, such as Brazil in the 1960s, achieve growth by suppressing social unrest, while the virtuous-circle perspective maintains that democracies manage dissent more effectively by chan- nelling grievances through formal political participation and by providing an arena in which mutually beneficial deals can be struck between capital and labour. A more nuanced position between these two poles is the inverted-U posi- tion, which argues an indirect effect of democracy on growth that is negative at low levels of democracy and positive at high levels of democracy.

Kurzman, Werum and Burkhart used pooled time-series data to demon- strate that democracy has a marginally significant positive effect on investment, which in turn has a positive effect on growth; that democracy has a negative effect on state spending, which in turn has a negative effect on growth; and that democracy has a robust inverted-U effect on social unrest, which in turn has a negative effect on economic growth (2002). This last finding suggests that the effect of democracy on growth is negative at low levels of democracy, positive at high levels of democracy and not significant at middle levels of democracy using the Freedom House scales of civil and political liberties.

It is difficult to draw firm conclusions from the empirical literature as to whether political freedom causes economic freedom, whether the causal rela- tionship is the other way around, or whether there is a feedback effect between political and economic freedom. Feng undertook a series of causality tests and achieved results showing that political institutions, by virtue of their relatively permanent nature, influence economic institutions. In effect, political freedom has a causal effect on economic freedom. Importantly, these findings appear to hold irrespective of developed and developing society distinctions, suggesting a similar pattern of causation irrespective of the level of development. Feng boldly concludes that a major policy implication of his findings is the “importance of establishing democracy as the prevailing political order to facilitate…economic development” (2003, 274).

Some Implications for Donor Development Assistance Policies and Programs

As the imagined dystopia of Izania illustrates, political institutions matter, and they can influence economic growth for better or worse. Repression, instability and policy uncertainty powerfully constrain the economic decisions of individu- als and firms with negative effects on growth. Political stability, policy certainty and political freedom are the political foundations of sound economic manage- ment and have an indirect bearing on the determinants of economic growth, such as inflation, investment, income inequality, human capital formation and property rights. Democracy has a positive indirect effect on growth through the predictability of the regular change of government and its positive impact on pri- vate investment, education and human capital formation (Feng 2003).

Lessons drawn from the empirical work of Feng and others suggest that developing societies will sustain growth where there is an emphasis on political stability, the enlargement of political and economic freedom, and the creation of a capable and efficient government. While there are potential trade-offs among these foundations for growth, donors are increasingly recognizing that the pro- motion of representative political institutions and sound administrations are part and parcel of the development puzzle. Governance and democracy promotion have an important role to play in helping developing societies build a political foundation for economic development.

However, while democracy promotion is the focus of this IRPP research project, and while human rights, democracy and governance have an equal claim to validity in the projection of Western values, it is governance that has become the master value for some, if not most, official aid agencies. There are some prac- tical reasons for privileging governance in donor assistance policies and programs. First, regime type is sometimes a poor predictor of economic per- formance. In Asia, the differences between democracy and dictatorship provide little explanation for successful economic policies. The decisive ingredient of the East Asian miracle seems to have been the quality of economic governance and institutional arrangements. These included a capable, merit-based civil service; effective public-private consultation and collaboration; and, crucially, the effec- tive implementation of policy (Root 1996). Prior to the 1997 financial meltdown, Asian nondemocracies such as Singapore and South Korea had promoted trans- parency and accountability in economic governance, which enabled information- sharing and consensus-building with private economic actors. By contrast, Asian democracies such as the Philippines and India have long struggled with policy implementation and poor service delivery. The function of governance to frame and implement policies appears to be related to growth and may also be linked to effective poverty reduction in those high-performing Asian economies that succeeded in balancing growth with a degree of equity to lift large numbers of people out of the poverty trap.

Good governance is appropriately emphasized in donor assistance policies because governance interventions can help countries put in place the building blocks for development, such as access to the policy-making process, transparent and predictable regulations, and access to timely economic information. Governance interventions also address the implementation gap and capacity chal- lenges that have bedevilled service delivery in developing countries and reduced the quality of the project-based lending of some international financial institutions.

If the relationship between democracy and economic development is empirically open-ended and indirect, at best, then donors may need to consider how their democracy, rights and governance programs are justified. Instead of an “all good things go together” approach, donors could consider less lofty approaches that focus on the enabling conditions for growth and development. These include promoting accountability, transparency, and a predictable set of rules to govern economic interactions and public policy.

In the absence of a strong empirical basis on which to link democracy to rapid growth, policy-makers may need to look to values claims, to the arguments about policy interdependence associated with globalization and possibly to the security/development nexus to justify their democracy promotion efforts. These are entirely legitimate foreign policy reasons for Canada to promote what George Perlin has called “the intrinsic worth of liberal democratic values” and to project the national values embedded in the classic formula of “peace, order and good government” (Perlin 2004, 3).

The emphasis in this paper on governance does not detract from our democracy promotion efforts; it simply places that agenda within the develop- ment rubric of poverty reduction. As we have noted in the context of Asian high- performance economies, donors could support national efforts to increase the formal and informal systems of accountability and information sharing and con- sensus building in economic policy-making. Such an initiative could extend beyond the elite business associations or tripartite business-labour-government forums to include support for economic organizations of the poor, such as pro- ducer groups, cooperatives, the informal sector and micro-entrepreneurs.

The author thanks Rohinton Medhora of the International Development Research Centre, Leslie Seidle at the Institute for Research on Public Policy and David Emelifeonwu for comments on an earlier version of the paper.

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