June 2000 Fraser Forum: Democracy & the Rule of Law
Click here for the FULL version of this paper
In the long run, the difference between prosperity and poverty depends on how fast an economy grows. Much of the recent empirical research on the determinants of growth has concentrated on the role of government policy in fostering this long-term growth. Although the government's influence includes the fiscal and monetary instruments that have been the main focus of macroeonomists, an even more important dimension of policy concerns the character of a nation's political, legal, and economic institutions. Differences in institutions across countries have proven empirically to be among the most important determinants of differences in rates of economic growth and investment. Consequently, basic reforms that improve the quality of institutions provide one of the best routes for transforming a country from poverty to prosperity in the long run.
The question of which aspects of institutions matter for long-run economic performance has proven to be more controversial than the proposition that institutions are important overall. One strand of the recent research has focused on democracy, specifically on the strength of electoral rights and civil liberties. The second strand has emphasized property rights and legal structures that promote the rule of law. Some scholars, such as Milton Friedman in Capitalism and Freedom (1962), argue that these two aspects of liberal institutions are mutually reinforcing and that both are conducive to economic performance. Recent empirical research supports the idea that property rights and the rule of law are key determinants of economic growth and investment. However, the research delivers mixed results with respect to the effects of democracy: some research finds positive effects, some negative, and often the relations are not particularly statistically reliable.
Perhaps the findings about democracy and the rule of law can best be summarized by relating them to US foreign policy toward developing countries. The US focus for many years has been toward promoting democracy - notably free elections with multiple parties - in all times and places. For example, when Haiti was run by a military dictator, the United States intervened to restore the previously-elected president, despite his doubtful credentials. When President Fujimori of Peru disbanded the legislature and assumed dictatorial powers - ostensibly in a temporary way to counter a terrorist threat and to enact drastic economic and political reforms - the United States complained bitterly. When President Mobutu of Zaire was finally toppled by a revolution - after more than 30 years of mismanagement and corruption - the United States called immediately for the new leader, Kabila, to organize free elections. Moreover, China was continually attacked for its lack of democracy, although it had made major strides in enhancing the rule of law, whereas Russia was applauded for its free elections despite its difficulties in maintaining law and order.
The current US Secretary of State, Madeleine Albright, was asked recently whether it was sometimes necessary to sacrifice democracy in the short run in order to promote economic growth. She replied to the effect that there was no such tradeoff because democracy was a prerequisite for economic growth. This response sounds pleasant but is simply false. The idea that democracy is necessary for growth is just as false as the proposition that dictatorship is essential for poor countries to escape poverty. The more nearly correct statement is that, on average, the extent of democracy has only a weak relationship with subsequent economic performance.
When President Fujimori initiated his self-coup in 1992, then-US Secretary of State James Baker, said "you cannot destroy democracy in order to save it." This proposition turned out to be false for Peru. Fujimori's curtailment of democracy led, in fact, to important economic and legal reforms, to success against a severe terrorist threat, and in a few years to a restoration of democracy. Apparently it is sometimes possible for dictators to accomplish things, including sustainable democracy, although the serious challenge is to predict the behaviour of autocrats in advance.
The fact is that democracy is a tricky matter. It is desirable for its own sake, and it tends to arise more often and to a greater extent when countries become richer. History indicates that poor countries have difficulty sustaining democracy; when a democracy arises without prior economic development it tends not to last. Even if a poor country could beat the odds and sustain democratic institutions, there is no reason to believe that this accomplishment would help much in the quest to escape poverty. The movement from dictatorship to a moderate degree of democracy seems to contribute a little to economic performance, but this positive effect does not continue once a moderate degree of democracy has been attained. In this sense, a full representative democracy is something of a luxury good - it costs something, but rich countries can well afford it.
For a country that starts with weak institutions - little democracy and little rule of law - an increase in democracy is less important than an expansion of the rule of law as a stimulus for economic growth and investment. In addition, democracy does not seem to have a strong role in fostering the rule of law. Thus, one cannot argue that democracy is critical for growth because democracy is a prerequisite for the rule of law.
The problem in the United States recommending democracy to a country such as Zaire (now the Republic of Congo) is not that democracy would harm economic performance but, rather, that it would have little impact. If there is a limited amount of energy that can be used to accomplish institutional reforms, then it is much better spent in a poor country by attempting to implement the rule of law - or, more generally, property rights and free markets. These institutional features are the ones that matter most for economic growth, and these features are not the same thing as democracy. Moreover, in the long run, the rule of law tends to generate sustainable democracy by first promoting economic development. Thus, even if democracy is the principal objective in the long run, the best way to accomplish it may be to encourage the rule of law in the short run. Perhaps US advice to poor countries should focus more on the rule of law, property rights, and free markets, and less on the romance of democracy.
Robert J. Barro is a Senior Fellow at the Hoover Institution and the Robert C. Waggoner Professor of Economics at Harvard University. His expertise is in the areas of macroeconomics, economic growth, and monetary theory. He recently completed a volume titled Determinants of Economic Growth: A Cross- Country Empirical Study (MIT Press, 1997). The complete text of this paper can be found on our web site www.fraserinstitute.ca.
info@fraserinstitute.ca
4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7
Tel: (604) 688-0221 Fax: (604) 688-8539 Book Orders: 1-800-665-3558 ext. 580
You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.