Democracy, claims this new orthodoxy, is ‘good for growth’. Free public
debate ensures politicians become more aware of what public services
constituents are lacking and what infrastructure is needed to promote business
growth. The pressure for re-election will provide an incentive for politicians to
supply them. A democratic political system by its nature is more open and
transparent so voters will be more aware of inefficiencies and corruption in the
political system and so be able to vote out those responsible. The ongoing
debate, compromise and coalition-building associated with the practice of
democratic politics is a better environment for ensuring long-term political
stability. The rules of succession are clear in a democracy: when one leader
loses the confidence of a majority he/she is compelled to step down and a new
leader is elected. To replace a dictator is typically more complicated, espe-
cially dictators who have killed or exiled other prominent figures posing a
threat to their continued rule. Democracy, by contrast, provides ample oppor-
tunities for rising figures to build a base of support before challenging for the
leadership. The legitimacy of a democratic mandate may strengthen the hand
of democratic leaders taking tough decisions. Democracies across Europe
have been able to impose tough austerity measures (cutting spending and rais-
ing taxes) in response to the global financial crisis since 2008 by appealing to
electors about the ‘need for sacrifice’.
The critical response to these arguments focuses on how democracy can
undermine economic growth. Democracy equalizes the right to influence the
allocation of resources through the political system. As the average voter in a
developing country is likely to be poor this may bias the political system
towards redistribution. The resulting political threat to the property rights of
business and the wealthy may reduce the incentive to undertake long-term
investment. Democracy may also bias the political system towards short-term
populist consumption,especially if the tenure of elected politicians is short or
uncertain; for example, subsidizing rice rather than taking measures that will
improve the national power supply in 25 years’ time.
Olson (1993,2000) argues the democracy/dictatorship distinction is less
important than the timeframe and competition faced by the leadership. An
autocrat with a monopoly of power and a reasonable expectation of surviving
in office for an indefinite period (what Olson calls a ‘stationary bandit’) will
have an incentive to promote economic growth. A stationary bandit will bear a
substantial portion of losses from excessive taxation or violation of property
rights. A secure stationary bandit will conduct ‘theft’ through predictable
taxes, leaving producers with an incentive to generate incomes (Olson, 1993,
2000). Dynastic succession can reduce the likelihood of succession crises, so
give dictator-monarchs more concern for the long run and the productivity of
their societies (although as North Korea experiences the third generation of
dictatorship, this effect is not immediately apparent). Even if the dictator has a
long time horizon and hopes to bequeath power to a son or daughter there is
uncertainty about what would happen when the dictator is gone. In a secure
democracy with predictable succession of power under the rule of law, the
210 Patterns and Determinants of Economic Growth