"Malaysia Prime Minister Mahathir Mohamad and the Sultan of Johor are seen in a blue Proton Saga... "When asked whether there is any tension with the sultan, Dr Mahathir said: “No, I don’t see anything because I went to see him and he drove me to the airport. I don’t want to comment on the sultans because if I say anything that is not good then it’s not nice because he is the sultan”"

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Saturday, January 24, 2009

"It is hard enough to remember my opinions, without also remembering my reasons for them!" - Friedrich Nietzsche


"Democracy Versus Dictatorship

No other topic of the politics of economic growth has been more intensively studied or yielded such heterogeneous results as the democracy-growth link. Theories suggest thaI democracy affects both policy inefficiency and political uncertainty. Moreover, different theoretical approaches diverge on whether democracy increases or decreases inefficiency and uncertainty.

Democracy and Policy Choices
In the early post-war years, mainstream development theory argued that a cruel choice existed between rapid economic growth and the evolution of democratic processes. Different reasons were put forth about why only dictatorships could prevent inefficient policy choices. As the public choice school gained ground, this argument has become unfashionable. The prevailing view today is that dictatorships are more prone to inefficient policies.

Democracy and Inefficiencies
Two views on the inefficiency of democratic political systems claim that democracy leads to less than optimal savings levels or that democracy increases the power of special interest groups. An influential postwar strand of development economics tried to explain the backwardness of LDCs by market failures in need of correction by strong, paternalistic States. Briefly stated, growth depends on investment and investment depends on saving, but market failures or considerations external to investment produce insufficient private returns to savings, providing incentives for over-consumption. The State must therefore force private citizens to save in order to finance socially beneficial investments. Kaldor (1956) and Pasinetti (1961) elaborated on this theory in their well-known theoretical analysis of savings behaviour. They argued that savings rates differ between the poor, who tend to consume because they cannot do more than finance subsistence consumption, and the rich, who can. In a poorly developed country, the poor outnumber the rich. In a democratic country, the poor cannot be forced to save and can vote for redistributing income in their favour, leading to over-consumption and forcing the country into a low level of capital accumulation and slow economic growth. This view leads to the conclusion that the State must be strong and have a sufficiently long-term vision to carry out a policy of forced capital accumulation that would, at least in the short run, be unattractive to the average individual. This development theory clearly favours independent autocratic systems over tightly checked democratic systems with limited governments and reelection constraints. This cruel choice theory was so persuasive that it influenced the basic principles of development economics at least until the early 1970s.

A second argument advanced by Olson (1965) is the uneven influence of interest groups in democratic systems. He argued that the cost-structure of interest group organisation leads to a disproportionately strong influence of highly concentrated interests compared with encompassing interest groups that are very hard to organise. Olson (1982) relates this theory explicitly to inefficient policy choices and slow economic growth, arguing that the longer-lived a peaceful democratic system, the greater the influence of narrow interests representing industries with structural problems that use democratic avenues to establish selfishly favourable policies which damage overall efficiency and economic growth. This theory can, at least in principle, be used to call for strong autocratic governments uninfluenced by narrow interest groups and able to act for the common good. The line of reasoning can be developed by considering rent-seeking arguments in democracies.

Dictatorship and Inefficiency
This argument leads to the conclusion that dictatorships are advantageous because a dictator can implement policies unfettered by the pressures of interest groups. The objections are rather obvious: why assume that a dictator is sufficiently benevolent to implement efficient (in Pareto’s sense) development strategies? Indeed, most realistic political models dealing with autocracy assume that a dictator maximises whatever serves his purpose above all, rather than efficiency. Brennan and Buchanan (1980) forcefully analyse the problems created by dictators whom they realistically assume to maximise tax revenue this is certainly far from the efficient policies needed for private sector investment-driven development. In their view, dictators choose inefficient policies precisely because they are unconstrained by democratic control; introducing a democracy would tend to move policies towards the preferences of average voters and greater efficiency. The rent-seeking argument can be used to develop the point. In most cases, a dictator is not completely independent, but must satisfy an elite of rent seekers who support him. It is not at all clear why rent seeking should be more damaging in a democracy than in a dictatorship.

The idea that self-serving leviathans choose policies that private citizens would find inefficient is uncontroversial enough. However, a recent argument explains that even a benevolent dictator might chose policies that induce inefficient private sector behaviour because he cannot commit himself to a defined course of action unless it covers all situations. The most influential application of this argument has been for a Phillips curve type of interplay between government and the private sector analysed by Barro and Gordon (1983). Announcing future monetary stability is not credible if the private sector knows that this strategy does not serve the government in the future. Therefore, even if a benevolent government implements an ex ante optimal policy, rational private citizens will neither believe in nor react to policy stability. A dictator’s inability to bind himself to a future course of action thus leads de facto to inefficient policies and reduces economic growth.

This view therefore suggests that only democratic institutions can constrain the State to act in the common interest. The State must maintain a reliable political framework for private economic activity and a democracy is the best political system for this."

--- Politics and Economic Growth: A Cross-country Data Perspective / Aymo Brunetti, Organisation for Economic Co-operation and Development Development Centre
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