Democracy and the price of a vote

Democratic institutions are good for economic growth. That’s one of the few things economists agree on, after decades of research into the link between politics and prosperity. Dictators can potentially control the state, its resources, and much of society. But countries that have long-established elections and associated institutions also tend to have reliable governments, competent finance ministers, and reliable legal systems. In a paper published in 2019, Daron Acemoglu of the Massachusetts Institute of Technology and co-authors split countries into dictatorships and democracies. They found that 25 years after the permanent switch from the former camp to the latter, a country’s GDP was one-fifth higher than it would otherwise have been.

The problem is that making the switch takes longer and is more expensive than is often assumed. Look beyond Mr. Acemoglu’s black-and-white division. If you allow some countries to be more democratic than others – after all, there is little point in putting a centuries-old democracy in the same category as a democracy that is finding its feet – a different picture emerges. In a study published last year, Nauro Campos of University College London and co-authors found that regimes face challenges as they try to rid themselves of autocratic tendencies. On average, countries lose 20% of GDP per person in the 25 years after escaping dictatorship compared to their previous growth path, in part because many struggle with the transition to democracy. Today there are more such intermediate regimes than ever (87, according to the Economist Intelligence Unit, our sister organization).

Reliable institutions are a prerequisite for development, but building democratic institutions takes a lot of time. Countries do not end up under a military dictator one day and start with a fully formed Supreme Court the next. Civil servants who know when to leave the private sector, legal systems that protect property rights, and thriving charities and universities take decades to develop. It will take even longer for investors to be convinced. Democracies spend more on health care and education, which pays off, but only over decades.

. immediately, rethinking politics is upending the economy. Few autocrats are sensible technocrats, but they hang around while democratic progress comes in fits and starts, and occasionally goes in reverse. Countries often need several new leaders and constitutions before reforms stick. There is always a risk that a democratic experiment will result in a coup, war or uprising. For companies, it is often too much of a gamble to make big bets on stability. Local parties do not want to get close to politicians and anger those who will be next in charge. Foreign creditors want to make loans to a government that will still be there to pay them back.

Elections also entail costs. Autocrats fix them, which is complicated and expensive. But winning – the task that awaits a politician in a newly democratic country – is often even more expensive. After all, influencing through persuasion (for example with promises of shiny new sports stadiums) consumes more money than repression. A party-run media empire will be able to spend billions of dollars. Welfare promises that win votes will be even more expensive. New Democrats also tend to rely on networks of allies of the capitalist system to campaign, protect and finance them. These networks may be more extensive than the networks that kept their predecessors in power. Neither the powerful at the top, such as generals or businessmen, nor the voters they attract, will be particularly keen on a pay cut.

Few candidates are actually wealthy themselves, which means that payments often come from the state once the candidates are in power. Budget balances fall under corruption, as inner circles siphon off money. The possibility of losing the next election sometimes makes such activities more urgent, rather than discouraging them. Worse still, new presidents sometimes choose to rent out parts of the government. Instead of closing down state-owned enterprises, they happily use board positions as rewards and issue licenses to national monopolies. The civil service changes hands. Flagship investments – planned elsewhere – migrate to supporting regions. There is no more money, expertise or time to worry about growth.

Fill the ballot boxes

However costly change is, the circumstances that provoke it are hardly better. Mr Acemoglu notes that GDP per capita tends to stop growing in the five years before a country becomes a democracy. Suharto, a former dictator in Indonesia, resigned in 1998, a year after the Asian financial crisis began. In 2011, Egypt’s Tahrir Square was filled with protesters demanding “bread, dignity and freedom.” Today, Egypt is once again buzzing with political protest after years of crisis. This also applies to Sri Lanka and Pakistan.

There is nothing more likely to drive politicians to reform, or the population to protest, than inflation, unemployment and falling living standards. Too often, autocrats are primarily responsible for these problems. But exchanging leaders or holding elections will not immediately solve decades of economic mismanagement. The difficulties of democratization may also help explain why so many countries are stuck somewhere where they cannot achieve full democracy. While a plebiscite offers significant economic benefits, these take time to manifest, while the costs are more immediate. People who are no longer able to make ends meet after the overthrow of an autocrat, despite the grand promises sold to them by popular leaders, are more likely to turn their backs on reforms. The road to democracy is fraught. That’s why history is littered with failed experiments.

© 2023, The Economist Newspaper Limited. All rights reserved. From The Economist, published under license. Original content can be found at www.economist.com

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Updated: Oct 19, 2023 7:45 PM IST