By Doug Gentry, on March 14th, 2011
This column in the March 7, 2011 edition of The New Yorker has an interesting perspective on economic development – particularly in the Middle East. In the language of my University Seminar class, here’s the claim presented by James Surowiecki
The autocracies of the Arab world have been as economically destructive as they’ve been politically repressive. That’s no coincidence. Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies.
In my Principles of Macroeconomics class we work on prioritizing investment options to improve long run economic development in the African country of Sudan. And in the first week of class we talk about scarce resources in countries – sometimes including a culture of entrepreneurship as one of the key ingredients of economic health. Surowiecki’s analysis makes but it also relies heavily on western, classical assumptions about individual incentives for innovation and risk taking. Are we missing a perspective here?
By Ajay Shah, on February 23rd, 2011
The puzzle
All of us are now curiously thinking about the abrupt phase transition that seems to sometimes occur in the endgame of an authoritarian regime. The traditional script was: The people rise up to rebel and the strongman murders them.
When the USSR collapsed, we thought it was special: it was a defunct regime that had just lost the will to live. But for the rest, the basic rulebook stood: the people get mowed down. And sure enough, that happened in Tiananmen Square.
But now, there are an increasing number of success stories with `velvet revolutions’, and one has to think more carefully about what goes in an authoritarian regime.
Conflicts beneath the surface
What appears like a monolithic regime from the outside can actually often reflect a diverse array of interests tugging in different directions. In this beautiful article by Laurence Wright on Saudi Arabia, he says:
I had begun to look at Saudi society as a collection of opposing forces: the liberals against the religious conservatives, the royal family versus democratic reformers, the unemployed against the expats, the old against the young, men against women.
On that same thread, Why do protests bring down regimes? A follow up by Graeme Robertson says:
While the news media focus on “the dictator”, almost all authoritarian regimes are really coalitions involving a range of players with different resources, including incumbent politicians but also other elites like businessmen, bureaucrats, leaders of mass organizations like labor unions and political parties, and, of course, specialists in coercion like the military or the security forces. These elites are pivotal in deciding the fate of the regime and as long as they continue to ally themselves with the incumbent leadership, the regime is likely to remain stable. By contrast, when these elites split and some defect and decide to throw in their lot with the opposition, then the incumbents are in danger.
So where do protests come in? The problem is that in authoritarian regimes there are few sources of reliable information that can help these pivotal elites decide whom to back. Restrictions on media freedom and civil and political rights limit the amount and quality of information that is available on both the incumbents and the opposition. Moreover, the powerful incentives to pay lip service to incumbent rulers make it hard to know what to make of what information there is.
I have also read others write similarly about China (but sadly, I do not have the reference): That in the absence of freedom of speech, the regime actually has no idea about where the problems lie, and is hence hypersensitive about criticism, and about solving the problems that it thinks do matter.
The behaviour of a jittery regime
Democracy matters in two ways. First, the regime has legitimacy. It is not worrying about a sudden upheaval that will destroy the regime. And, freedom of speech carries a steady flow of information to the regime. The UPA leadership does live in a bubble, but even they know that 8% inflation is a serious problem.
When a regime lacks legitimacy, and does not know what is going on, it is constantly fearful. It does not know what is going wrong and it can go off into extremes in trying to stave off some problems that it believes are first order. One area where this shows up is inflexible prices. To an external observer, it may be obvious that allowing price flexibility is better, but the regime is terrified about what will happen, so the price stays fixed.
Three examples
- Egypt
- In a blog post titled Garam Masala: Bread And The Life Of Egypt, Vikram Doctor writes:
I first realised how different Egypt was when I saw the bread in the street in Cairo. It was piled on low charpoy-like tables, thick rounds of freshlybaked bread, slightly scorched from the oven, a bit like tandoori rotis, but heavier…. Someone would replenish them from the bakery close by, and collect the money that people left, but nothing seemed to stop them just taking it away… the other reason why no one took the bread free was that it was so ridiculously cheap that they might as well just leave the few coins needed (in fact, buying bread seemed to be pretty much all that the piastre coins were used for). I calculated that, at that time (over 12 years back), the cost of a round of bread converted to something like three paise : something I could not imagine anything costing in any large Indian city. But this was the point: the price was unreal because a massive bread subsidy was one of the basic ways the Mubarak regime stayed in place.
- Iran
- From The regime tightens its belt and its first, in the Economist:
From top ayatollahs to the IMF, everyone agrees that spending $100 billion each year to pin down petrol, gas and electricity prices, besides the cost of staples such as flour and cooking oil, is a bad way to dispose of Iran’s hydrocarbon revenues, accounting for more than 10% of GDP and encouraging waste on an epic scale. The symptoms of the malaise are legion: tea kettles simmer all day; the streets clog with recreational drivers out for a spin; lights glare because no one can be bothered to turn them off. `We can do it because we have oil,’ Iranians used to tell incredulous visitors.
- China
- The outstanding price inflexibility of China is that of the exchange rate. Consider the Chinese and the Indian exchange rates of recent years:
There is a dramatic difference in the exchange rate flexibility. The Chinese authorities are extremely loath to allow the exchange rate to fluctuate, even though it induces massive distortions in the economy. Why? I would venture to guess that once a large export reprocessing sector has built up, the regime is just scared to rock the boat, to displease many workers.
The exchange rate is the most important price in any economy. A country that can handle a floating exchange rate is a flexible economy, one in which firms are born and die, workers move across locations and industries, and prices fluctuate. Deep and liquid markets are shock absorbers. Firms have ample equity capital, i.e. low leverage, so that they are able to absorb shocks. There is a whole configuration of institutional arrangements which are conducive to price flexibility. By and large, India fares well on these counts, particularly in the vast informal sector where there is extreme flexibility. And most of all, when things do hurt, individuals are able to express their discontent through democratic politics.
If India did not have these long-standing strengths, Governors Reddy and Subbarao would not have been able to move to a flexible exchange rate. And this exchange rate flexibility, in turn, enables an array of other economic reforms in favour of a market-based system.
Also see: The message for China from Tahrir Square by Minxin Pei in the Financial Times and The Secret Politburo Meeting Behind China’s New Democracy Crackdown by Perry Link, on the New York Review of Books Blog.
Stability that is illusory
The regime change of recent years should make us think afresh about the notion of `political stability’. Democracy is always messy: demonstrations, machinations of party politics out in the open, colourful and often intemperate figures on television, elections, change in the ruling arrangement. But at a deeper level, this can be a more stable arrangement; there is no revolution at the end of the tunnel.
Similar reasoning applies in economics. Economists have always known that when prices appear to be stable, they often mask real trouble underneath. It is far better to have a small fluctuation every day, i.e. a steady flow of vol. The alternative — of clamping down on price movements on most ordinary days — merely yields big price movements on some days, which are far more difficult to handle.
Economic agents are not fooled by this stability on the surface. As Mark Roe says on Project Syndicate:
Even if all of the rules for finance are right, few will part with their money if they fear that an unfavorable regime change might occur during the lifetime of their investment.
More importantly, the grim stability of the type displayed by Hosni Mubarak’s Egypt is oftentimes insufficient for genuine financial development. Authoritarian regimes, especially those with severe income and wealth inequality, inherently create a risk of arbitrariness, unpredictability, and instability. They are themselves arbitrary. And everyone knows that beneath the stability of the moment lurk explosive forces that can change the regime and devalue huge investments. Because financiers and savers have limited confidence in the future, such regimes can’t readily build and maintain strong foundations for financial development.
Implications
This is a `capitalism and freedom’ style argument: that democracy and markets interact in the double helix of modern civilisation.
Price flexibility works best when there is price flexibility in a lot of markets. If all prices were fixed, and you only freed up one, then it could easily make things worse. It is hard, crossing the hump, and reaching over to the other side where all prices are flexible. And, price flexibility goes well with democracy. Flexible prices are constantly disruptive. Every day, there are a few pockets of the economy that are really getting hurt in the creative destruction. It requires a confident regime to take these fluctuations in its stride. A jittery and illegitimate regime may be more likely to clamp down on price fluctuations since it fears these could destabilise it.
 
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By Rok Spruk, on October 4th, 2010
Professor William Easterly recently presented (link) an intriguing empirical evidence on the relationship between nation’s politics and economic growth. In particular, professor Easterly presented data on long-run economic growth and the scope of democracy for a majority of countries between 1960 and 2008. Professor Easterly identified that the highest-growing countries in the world were those with autocratic political regimes. Among ten highest-growing economies between 1960 and 2008, all of them, except for Cyprus, have been characterized by hybrid and autocratic political regimes. On the other hand, ten countries with the lowest growth rates of real GDP per capita between 1960 and 2008 were equally known for authocratic political systems or flawed democracies.
Presumably, the evidence bodes against the recent prediction by Dani Rodrik that authoritarian political regimes ultimately create economic systems vulnerable to external shocks and structural change, thus hampering the prospects of structural change as a neccessary condition for economic development.
To estimate the general pattern of the relationship between economic growth and the nature of political system, I reviewed real per capita GDP growth rates between 1970 and 2007 for a group of 134 countries across the broad spectrum of different levels of GDP per capita. Based on Summers-Heston dataset of real GDP per capita growth rates (link) between the stated time period, I estimated average rates of growth of GDP per capita and collected data from Economist Intelligence Unit on the level of democracy across the world in 2008 (link). The intuition behind this approach is the identification of endogenous and casual direction between the two variables. From the theoretical perspective, it is nonetheless difficult to establish a relationship between the form of government and long-run economic growth. There are at least two possible directions of casuality.
First, the underlying assumption of the relationship could be that systemic changes in political environment are essential to the structural change and, hence, are the main mechanism behind the enforcement of constitutional changes and public policies. The assertion of the underlying theory is that autocratic and authoritarian political system hinder structural changes and the establishment of institutions and democratic governance that is crucial for economic growth. This particular view has been asserted by Dani Rodrik (link), Andrei Shleifer, Florencio Lopez de Silanes and Rafael La Porta (link). While Dani Rodrik’s perspective heavily relied on the importance of institutions for long-run economic growth, Shleifer, Lopez de Silanes & La Porta captured the essence of economic development in the legal origins of nations.
Second, the causality in economic growth and political system could also stem in the opposite direction. The basic underlying assumption could be that higher rates of economic growth encourage systemic changes in the political system and enable the adoption of democratic institutions. The notion of economic growth as the engine of democratic changes has deserved a strong empirical support.
Robert Barro’s analysis of long-run economic growth across the world (link) has examined the relationship between the level of democracy and long-run economic growth rate. The empirical evidence suggests a non-linear, inverted-U relationship between democracy and 10-year growth residuals, both coefficients in partial quadratic equation and the partial correlation coefficient being statistically significantly different from zero.
The notion would suggest that as countries depart from a low level of real GDP per capita, the adoption of democratic institutions accelerates economic growth but only up to some point. After the tipping point, the economic outcome of further democratization results in lower growth of real GDP per capita, partly because a high level of democracy tends to promote public policies that diminish growth prospects such as higher tax rates on labor and capital and the redistribution of income, all of which exert a somewhat negative effect on productivity growth and incentives for labor supply and investment.
The first table portrays the distribution of real per capita GDP growth rates across 134 countries between 1970 and 2007. The distributive pattern resembles the properties of normal distribution curves. In fact, the estimated coefficients of skewness and kurtosis suggest a rather very mild departure from the assumption of normality which is of the high importance, especially in testing hypotheses about the effects of explanatory variables on long-run growth dynamics. The normality assumption of normally distributed errors was not tested via normality tests.
Ten highest growing countries in terms of real GDP per capita between 1970 and 2007 are Equatorial Guinea (8.39 percent), Taiwan (5.98 percent), China (5.97 percent), St. Kitts & Nevis (5.49 percent), Botswana (5.45 percent), Bhutan (5.38 percent), Maldives (5.38 percent), Hong Kong (5.37 percent), Macao (5.30 percent) and Singapore (5.29 percent). In real terms, the estimated average real per capita GDP growth rates suggest that it took only 13 years for Singapore’s real GDP per capita to double and 21 years to triple. In China, where the estimated average growth rate exceeded Singapore’s growth rate only by 0.69 percentage point, it took roughly 11 years for real GDP per capita to double and only 19 years to triple. In the lower tail of growth distribution are mostly countries from Sub-Saharan Africa such as Democratic Republic of Congo, Liberia, Somalia, Central African Republic and Niger. Average real growth rates of GDP per capita of these countries were negative. The negative average real GDP per capita growth rate occured in 11 percent of country observations.
Distribution of economic growth across 134 countries between 1970 and 2007
 Source: own estimate based on Summers-Heston dataset
The following graph illustrates the relationship between long-run average growth rates and the level of democracy in 2008 for the entire sample of 134 countries. The attempt to analyze the effect of democracy level on long-run economic growth is based on the notion that democratic institutions elevate economic growth in the longer run. The estimated slope coefficient (0.2277) suggest that a one-point increase in democracy index increases the average long-run per capita GDP growth rate by 0.2277 percentage point controlling for other factors.
Although the cross-country variation in the level of democracy explains only about 9 percent of growth rate variance, and even though the direct effect of democracy on economic growth seems minor and almost non-existent, the estimated sample regression coefficient is statistically significant at 5 percent level. It suggests that the effect of democracy on growth is persistant and evident in the particular sample.
Democracy and average long-run growth rates in a sample of 134 countries
Source: own estimates
Hence, to account for different degree of variation in average real GDP per capita growth rates, I divided the sample into quartiles. The goal of the pursued empirical strategy is to see whether the difference in variance composition between countries with similar growth rates persists. I divided the total sample into four groups: high growth performers (average growth rate higher than 3 percent) moderate growth countries (average growth rate below 3 percent and above 2.05 percent) and low growth countries (average growth rate below 1.09 percent). The next graph shows the relationship between democracy and average real GDP per capita growth rate in high-growth countries between 1970 and 2007. The parameters suggests a different relationship. The estimated slope coefficient is negative (-0.1638), suggesting that a one point increase in democracy index decreases the average real GDP per capita growth rate by about 0.1638 percentage point.
The share of variance explained by the democracy variable increased by 22.5 percent. In the statistical sense, the effect of democracy on economic growth in high-growth countries has been more powerful compared to the total sample. The estimated slope coefficient is statistically significant at 5 percent level. I also estimated beta coefficient (-0.338) to account for the effects of standard deviation increase on the average growth rate in real GDP per capita. The estimated beta coefficient suggests that a one standard deviation increase in democracy level (2.4 points) would, on impact, decrease the average real GDP per capita growth rate by 0.338 standard deviation or 0.394 percentage point in real terms.
From a theoretical perspective, the enforcement of democratic policies in high-growth countries would have a minor negative effect on economic growth, holding all other factors constant. Surprisingly, authortarian regimes previal in 44 percent of countries in the high-growth sample. Thus, the hypothetically negative effect of democracy on economic growth is evident but it is far from significantly negative.
Democracy and average long-run growth rates in high-growth countries
Source: own estimates based on Summers-Heston and EIU datasets
The next graph portrays the relationship between democracy and average real GDP per capita growth rates in low-growth countries. Contrary to the sample estimate in high-growth country group, the effect of democracy on real GDP per capita growth rate is positive and persistent. The correlation coefficient is positive and moderate (0.458) and statistically significant at 1 percent level. The beta coefficient (0.458) from the regression specification suggests that a one standard deviation increase in democracy level (cca. 1.497 points) would raise the average real GDP per capita growth rate on impact by 0.458 standard deviation or 0.382 percentage point, ceteris paribus. In fact, the variability in level of democracy explains 21.1 percent of the variance of average per capita GDP real growth rates. The estimated slope coefficient is statistically significant at 2.1 percent level and 0.6 percent level, suggesting a very low probability of rejecting the null hypothesis and a strong influence of democratic institutions on economic growth in the long run.
Democracy and average long-run growth rates in low-growth countries
Source: own estimate based on Summers-Heston and EIU datasets
In the next subsample, I jointly added high-growth and low-growth countries in the single sample and changed the casual direction. The underlying assumption is that democracy level is endogenously determined by the long-run average real GDP per capita growth rate. In real terms, I assumed that the public choice of political institutions across the world depend on the real GDP growth rate. Hence, I estimated the relationship by including the squared term in the regression equation. The estimated slope coefficients suggest a typical inverted-U relationship between real GDP per capita growth rate and the level of democracy. The real GDP per capita growth rate alone explains 30.6 percent of the cross-country variaton in the level of democracy. Intuitively, the results suggest that there exists an optimum level of real GDP per capita growth that maximizes the level of institutional democracy.
Differentiating the conditional expectation function of the level of democracy with respect to the real GDP per capita growth rate yields the partial derivate dy/dx = -(ß2/2ß3). Plugging the two coefficients in the partial derivate yields 3.65. Thus, the growth rate of real GDP per capita that maximizes the level of institutional democracy is 3.65 percent. Hence, both coefficients are statistically significant. The p-values are 0.000 suggesting a zero probability of rejecting a null hypothesis when it is, in fact, true – and a strong predictive influence of both variables on the expected level of democracy.
The effect of long-run economic growth on democratic institutions in high-growth and low-growth countries
Source: own estimates based on Summers-Heston and EIU datasets
Countries with the comparable growth rate are Iceland, Ireland, Trinidad & Tobago and Spain. Except for Trinidad & Tobago, none of these countries is either flawed democracy or an authoritarin political regime. Therefore, the expected level of democracy is low in countries where the average growth rate of GDP per capita is either very low or negative or very high.
Hypothetically, the conditional pattern of real per capita GDP growth supports the notion that the highest-growing countries in the 20th century such as Singapore, Taiwan and Botswana had a relatively low level of democracy and a significant degree of political authoritarianism. In addition, countries with the lowest growth rate of real GDP per capita such as Liberia, Sierra Leone and Somalia were also authoritarian political regimes. The predictive power of the regression equation is reasonably high since more than 30 percent of the variance of the level of democracy is explained by a non-linear shifts in the long-run average real GDP per capita growth rate.
Democracy is a controversial question of the modern theory of economic growth. Indeed, the empirical evidence suggests that the highest growth rates were achieved in those countries with a considerable degree of political dictatorship. However, the lowest long-run growth rates of real GDP per capita were achieved by countries in which political dictatorship prevails. The pattern suggest that the quality of institutions such as the rule of law, judicial independence and a constitutional democracy complement the significance of human capital which is the essential engine of long-run economic growth.
The most important growth engine of the highest growing countries such as East Asian tigers and Ireland has been the emphasize on human capital that resulted in a high level of knowledge intensity and high productivity growth rate. These countries were known for heavy doses of state interventionism aimed towards the implementation of industrial policy conducive to economic growth. However, the conclusion should be taken with caution. Political dictatorship or authoritarianism were detrimental to least-developed countries since it encouraged predatory political behavior and resulted in the political environment with a complete absence of the rule of law, judicial independence, protection of private property rights, institutional integrity and constitutional democracy.
The question which set of growth policies is essential to high long-run growth of real GDP per capita involves two answers. First, the primacy of institutional quality alongside the investment in human capital is by far the most important engine of long-run economic growth. Without first-class institutions and human capital, the vicious circle of poverty and social deprivation for less developed nations can be endless. And second, the components of constitutional democracy such as electoral rights and pluralism, good functioning of government, high level of political culture and civil liberties can deliberately increase the prospects of economic growth.
However, if the power of state is left unrestrained by the absence of the rule of law and a coherent set of checks and balances on the coercive strenght of redistributive interest groups, even a high level of democracy would not alleviate the persistence of poverty and weak structural indicators. On the contrary, it would only worsen the prospects of long-run economic growth.
By Winton Bates, on September 20th, 2010
 Peter Boettke recently wrote a paper entitled: ‘Is the only form of “reasonable regulation” self regulation?’ (GMU Economics Paper 10-05).
This paper draws attention to the potential for self-regulating communities (governance without government) to achieve benefits of social cooperation even in unpromising situations. The subtitle describes the contents of the paper: ‘Lessons from Lin Ostrom on regulating the commons and cultivating citizens’.
Boettke attributes the concept of reasonable regulation to Anne Krueger. He tells us that Krueger got him thinking about the concept when she said at some conference that rather than central planning or unfettered markets we need reasonable regulation – regulation that is not capturable by special interests. Having read some of what Krueger has written about rent-seeking societies I imagine she put forward the concept of reasonable regulation as an ideal worth striving for rather than as something that could easily be achieved.
Boettke argues that self-regulation systems apply reasonable regulation. He suggests that since self-regulating systems are operating outside the formal realm of politics they so not face the problem of protecting against the unwarranted influence of politically empowered special interest groups.
I think this is a good point, but it may be over-stated a little. Community organizations do have to cope with the problem of protecting against the unwarranted influence of special interest groups among their members. They also have to deal with free-rider problems. The main difference is that when decisions are made within such organizations opportunistic behaviour is more easily seen to be opportunistic. It is more difficult for any individual or group to argue for unwarranted preferential treatment when the people who have to pay for this are members of the same community. It is also easier for the opportunistic tendencies of individual members to be restrained by subtle (or not so subtle) threats of retaliation by other members. It would be more defensible to argue that self-regulating systems are able to deal more effectively with the unwarranted influence of special interest groups.
Self-regulation systems seem to have some attractions for everyone opposed to statism, including self-styled commie libertarians and anarcho-capitalists (as well as sensible people like myself  . Such systems would presumably also be attractive to Burkean conservatives who emphasize the importance of the ‘little platoons’ i.e. the spontaneous social groups that arise spontaneously in society.
Yet self-regulation may appear to be too utopian to play a major role in modern democracies. Everyone can understand that tribal groups were able to self-regulate to ensure that forests and fisheries were sustainable. They can understand that their ancestors were able to run schools and hospitals through local community organisations without help from governments. But I expect that many people would feel that there are powerful reasons why self regulation of many areas of life has been displaced by the regulatory apparatus of the democratic state. Is there something about democracy that leads inevitably to taking decisions out of the hands of local communities and placing them into the hands of governments, and then centralizing those decisions at the highest level of government?
This is a big question that I don’t think I can answer adequately at the moment. But I will make a few relevant points.
First, I think it is inevitable that a lot of people will look to politicians to offer solutions to local problems and that politicians will offer such solutions. Politicians do not win many votes by telling voters that they aren’t interested in local problems.
Second, I think that most people are aware that when a politician offers to solve problems by displacing self regulation, then someone has to pay for the costs involved. When people weigh up the benefits of regulation that will take the trouble out of things (to borrow a phrase from Charles Murray) against the additional taxes involved, there doesn’t seem to be any a priori reason why they should choose regulation. Perhaps the problem is that they think other people will pay – which could stem from confusion over tax incidence.
Third, to borrow another thought from Charles Murray (which he may have borrowed from Friedrich Hayek) I think the tendency for government regulation to displace self regulation is related to a tendency for people to see problems from an engineering perspective rather than a healing perspective. There is a tendency to try to solve problems by designing new systems to replace self regulating systems, rather than to think in terms of solutions that will enable self regulating systems to work better. I don’t think there is any fundamental reason why politicians should see themselves as engineers rather than healers.
These considerations provide grounds for optimism that reasonable regulation might be sustainable in a democracy.
Postscript:
 
The references to Charles Murray are from his book, ‘In Pursuit of Happiness and Good Government’, which I wrote about here and here.
By Rok Spruk, on September 9th, 2010
Dani Rodrik argues (link) that political dictatorship is damaging to economic growth since democracies not only outperformed countries with flawed political regimes in the dynamics of economic growth but also in terms of greater civil, economic and political liberties and investment in education that help enforce better public policies and yield better prospects of economic development.
“Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies.”
By Winton Bates, on September 4th, 2009
There seems to be increasing skepticism these days about the worth of democracy. The following quote from a post by John Humphreys on the “Thoughts on Freedom” blog provides a good example of what I mean:
“Democracy has become a new faith. Simply saying the word supposedly makes an argument stronger, as though there is some inherent morality in two wolves and a sheep voting on what to have for dinner. Democracy has it’s uses — it allows you to change government without any killing and it puts downward pressure on corruption. But I doubt that it leads to better policy, and indeed I think it has a built-in bias towards ever more totalitarian policy controlled by special interest groups …”
In my view Humphreys is wrong. There is an inherent morality in democracy when it is perceived appropriately as a system in which all members of the polity have equal potential to influence the construction and operation of the political order. The problem is that it is often seen to be legitimate for some groups to use democratic politics as a means to obtain benefits at the expense of others. Such attitudes should be denounced as immoral for the same reason that the attitude that the market economy exists to enable some people to benefit through opportunistic exploitation of others is widely denounced as immoral. As James Buchanan has emphasised, the viability of a market economy and a democratic political system both depend on norms of mutual respect and reciprocity.
The political system in most democratic countries does not have huge problems in dealing with blatant attempts by some people to benefit at the expense of others. Democratic politics can be effective in dealing with corruption (as John Humphreys acknowledges). It is worth noting, however, that corruption often goes undetected for long periods where dedicated institutional arrangements do not exist to detect it.
I think that democratic politics are also reasonably effective in dealing with unsubtle attempts at vote buying, for example where a governing party promises additional benefits to residents of marginal seats in a desperate attempt to hold onto or win office. Parties initiating such tactics risk being perceived by voters as acting unfairly – and hence unworthy of being elected to government.
It is much more difficult for voters to deal appropriately with complex issues such as those involved in trade protectionism. A recent policy brief prepared for the Lowy Institute by Bill Carmichael, Saul Eslake and Mark Thirlwell describes the nature of the problem as follows:
“Most of us have a limited understanding of what is at issue in decisions about protection. Our response to the prospect of opening domestic markets is influenced by the information available to us about the domestic consequences. In the absence of public information about the economy-wide gains at issue for the community as a whole, and in view of the more visible costs to prospective losers, the latter have naturally found support at home. As a result, governments have had difficulty mobilising a domestic commitment to open domestic markets to international competition” (“Message to the G20: defeating protectionism begins at home” p 7-8).
The solution advocated by the authors is “a domestic discipline on national decision-making that promotes wide domestic awareness of its economy-wide costs.” Rather than attempt to summarise the proposals here I recommend that people should read them in the context in which they are presented in the paper.
The thought that I would like to leave you with here is that there is scope for policy outcomes in democracies to be improved if more intellectual effort is put into constructive efforts of the kind presented in the Lowry paper.
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