Question

In what ways are markets and democracy comaptible and incompatible? What countries' experiences best support your conclusion?

Answer 1

The debate between modernization theory and its opponents is over. Neither evidence nor argument can support the claim that authoritarianism is necessary for economic development. However, is democracy necessary for development, as opposed to obviously being desirable on other grounds? The evidence on how democracy actually operates in developing countries raises important questions about the relationship between markets, states, and democracies. In particular, the role of patron–client networks in these countries questions the relevance of the standard arguments made for the positive economic effects of democracy in developing countries. There is, however, an argument from the neo-Weberian school that claims that democratization can begin to undermine the patron–client relationships (neo-patrimonialism) that impede development. But in fact, there are powerful structural reasons why this is not likely to happen. Economic characteristics of developing countries make patron–client politics both rational for redistributive coalitions and effective as strategies for achieving the goals of powerful constituencies within these coalitions. These are unlikely to be affected by democratization. The evidence strongly supports our analysis. If this is right, and if many types of patron–client politics are damaging for development, democratization is unlikely to accelerate economic development. The case for democratization has to be made on other grounds.

1) Democracy: minimalist definitions

At its most basic level, a democratic system can be defined in procedural terms as ‘that

institutional arrangement for arriving at political decisions in which individuals acquire the

power to decide by means of a competitive struggle for the people’s vote’ (Schumpeter

1942). Expanding on this definition, Dahl (1971) identifies seven key criteria that are

essential for democracy, or what he prefers to refer to as ‘polyarchy’. These include:

• Control over governmental decisions about policy constitutionally vested in elected

officials

• Relatively frequent, fair and free elections

• Universal adult suffrage

• The right to run for public office

• Freedom of expression

• Access to alternative sources of information that are not monopolised by either the

government or any other single group

• Freedom of association (i.e. the right to form and join autonomous associations such as

political parties, interest groups, etc).

While still minimalist, Dahl’s definition of formal democracy includes the basic civil

liberties that should, in principle, guarantee that the democratic process is inclusive, free of

repression and enables citizens to participate in an informed and autonomous manner.

However, the focus of this definition, is still on contestation, or the electoral process itself.

For a long time, the international community has also tended to place tremendous faith in the

determinative importance of elections and what they can achieve for the democratisation

process – there is an implicit assumption that ‘elections will be not just a foundation stone

but a key generator over time of further democratic reforms’ (Carothers 2002).

2) Democracy: more substantive definitions

On the other hand, as has become increasingly clear with the emergence of new democracies

in many regions of the developing world since the 1980s, the process of democratisation

entails not only a transition to formal democracy, but also the consolidation of such a

democratic system. As analysts have found, relying on a minimalist definition of democracy

cannot quite capture the challenges besetting regimes that have undergone a transition but

have yet to consolidate their incipient democratic structures.1 As a result, a growing number

of democratisation experts is turning towards a more substantive definition of democracy,

one that gives greater prominence to the role and importance of accountability.

Three dimensions of accountability are usually distinguished:2

(i) vertical accountability,

which enables citizens to hold their political leaders to account through the electoral channel

at specified points in time; (ii) horizontal accountability, which refers to accountability

mechanisms that exist within the distinct bodies of government itself, whereby state

institutions are authorised and willing to oversee, control, redress and, if need be, sanction

unlawful actions by other state institutions (O’Donnell 1996); and (iii) societal

accountability, which refers to the (ongoing) watchdog functions of civic associations, other

NGOs and an independent mass media over the actions of the state (Schedler et al. 1999).

III. Democracy and development: Assessing key (causal) linkages

1) Modernisation theory and the emergence of democracy

During the 1960s and the 1970s, an argument that gained considerable prominence in

mainstream academic and policy circles was that democracy was more likely to emerge in

countries with high(er) levels of socio-economic development (Lipset 1959; Almond and

Verba 1963; Moore 1966). Building on Lipset’s seminal analysis (1959), which stresses at

one point that economic wealth is ‘an initial condition for democracy’ (p. 62), many analysts

and scholars interpreted this correlation as implying that development was a precondition for

democracy. This modernisation approach to democratisation understood the emergence of

democracy as a consequence of the transformation of class structure, the emergence of a bourgeoisie, economic development, increasing urbanisation, the prior development of

democratic values, and other cultural and religious factors.

Thus, according to this reading, the emergence of democracy is endogenous to the process of

economic and social development—there is a simple, linear progression toward

modernization that ultimately culminates in democratisation. In other words, once a non-

democratic regime acquires a certain level, or ‘threshold,’ of economic development and

social maturation, it will inevitably become a democracy. According to the modernization

approach, then, the appearance of democracy should be seen as the crowning achievement of

a long process of modernization, or as a luxury that affluent countries can (finally) afford.

However, the advent of the so-called Third Wave of democratisation that swept across much

of the developing world beginning in the 1980s challenged this concept of ‘prerequisites’ for

democracy. Many of the movements towards formal democracy since then have taken place

in countries where such transformation would not have been expected based on low levels of

economic development and other socio-economic indicators. As has been amply

documented, a large number of countries experiencing a transition to democracy during the

Third Wave fell in the bottom third of the Human Development Index (Diamond, Przeworski

and Limongi 1997). Third Wave transitions also defied cultural arguments positing that

democracy is incompatible with certain faiths and religious values.6

In addition, many

authoritarian regimes were able to survive even after reaching a considerably high level of

development, so that there does not seem to be a natural progression from authoritarianism

to democracy after reaching some kind of developmental ‘threshold’.

In response to the perceived limitations of modernisation theory, a budding literature has

emerged since the 1980s that seeks to understand democratic transitions from a process-

oriented approach.7

This literature emphasises the importance of decisions, ideas and the

interaction among strategic domestic political actors in bringing about transitions in

‘unlikely places’, while acknowledging the importance of structural factors in shaping actor

choices to varying degrees.8

The focus of this literature is on elite interactions. In some

cases, however, widespread social mobilisation and (the threat of violent) protest from below

were instrumental in bringing about democratic change. This was very visibly the case in

both South Africa and the Philippines, as well as more recently in Ukraine.

Thus, a broad international consensus has emerged that holds that economic development

per se is neither a necessary nor a sufficient condition for the emergence of democracy. On

the other hand, beyond this general agreement about the fact that there are practically no

(structural) preconditions to the emergence of democracy, the nature of the relationship

between democracy and development remains a very hotly contested issue. Some have argued, for instance, that democracy is in fact an important (pre)requisite for the promotion

of development, while others have maintained, quite on the contrary, that authoritarian

regimes are better suited to that task. I explore each of these arguments in turn below, before

discussing some of the challenges posed by emerging democracies and the insights a new

look at modernization theory may offer.

2) ‘Democracy first’ argument: do all good things go together?

The core of the argument that democracy helps promote development (more than the other

way around) rests on some of the key institutional features of democratic systems – namely

its accountability mechanisms and checks and balances provisions. These features play an

essential role in limiting the abuse of executive and state power more broadly, and through

elections and other processes, they also provide a predictable (in terms of rules, not

outcome), transparent, periodic, and reliable system of rewards and punishments. According

to Sen (1999a), for example, it is these institutional characteristics of a (functioning)

democracy that explain why famines have never occurred in democratic systems. In a comparative analysis of policy reform in Central Europe after the transition to democracy in  

1989, David Stark and László Bruszt also find that ‘[e]xecutives that are held accountable by

other state institutions and held in check by organized societal actors … [produce] … more

effective … [developmental] policies’.

On the other hand, the wave of ‘democratic optimism’ that accompanied this momentous

transformation toward democracy in a vast number of developing countries – what Francis

Fukuyama (1992) enthusiastically described as ‘the end of history’9

– may itself have placed

unusually high expectations about what these newly emerging democratic systems could and

should accomplish. Turning many of the more traditional assumptions embedded in

modernisation theory on its head, a new orthodoxy emerged within the international

community (especially among donors) beginning in the 1990s that held that democracy is

not an outcome or consequence of development, but rather a necessary ingredient to bring

about development (see, for example UN-OHRLLS and UNDP 2006; Leftwich 2000).

This is the thinking underpinning much of the ‘good governance’ agenda promoted by the

international community (especially multilateral and bilateral donors). This donor agenda is

fundamentally concerned about the rules and practices according to which governments are

chosen and state power and authority are exercised (Kjaer, 2004). Although democracy as

such is not always explicitly spelled out as an element of internationally-supported good

governance efforts,10 there is a clear normative commitment to democratic politics embodied

in the good governance agenda. Among other things, good governance emphasizes the

importance of transparency and (both horizontal and vertical) accountability, and it also calls

for broadly inclusive and participatory decision-making processes as an essential condition

to the effective promotion of development. Cleary, as noted towards the end of Section II.2,

the discussion about participatory and inclusive forms of governance is not only part of a

donor-led agenda and on the contrary enjoys a long intellectual history – the point here is to

highlight how donors have embraced the concept of participation in their work, at least in

principle. PRSPs provide such an example, though they have been heavily criticised for

being donor-imposed and for promoting pro forma rather than substantive citizen/social

participation There are several advantages to an open, democratic, and participatory process to policy-

making from a good governance perspective – even if this implies that decision-making

processes are more protracted and less ‘efficient’ in the short term. Following Sáez (2005),

they can be summarised as follows:

In the first place, [participation] allows for the creation of alliances of various

interests in favour of set objectives. Second, it creates a sense of ownership of

adopted decisions, even if they oppose certain interests defended by them. Third,

it contributes to sustainability of policies over time: it reduces the chances of backlash if participation is solid and decisions taken are considered legitimate in their origin and outcome. Fourth, participation … fosters … more informed  

decisions. Lastly, participation permits society to demand more accountability of those in charge of public policies.  

However, the good governance agenda tends to espouse a view of politics which may be overly naïve and idealistic, and it can impose demands with regard to the quality of  

governance which are far beyond what is needed (or even possible) at (very) low levels of development (Khan 2005). It also tends to assume too easily that ‘all good things go  

together’ (Fritz and Rocha Menocal 2007) and that democracies will lead to policies favouring redistribution. However, in many developing countries, democratisation has not been associated with (much) redistribution (Gradstein and Milanovic 2004; Chong 2004).  

As Bardhan (nd) has warned, democratic decision-making processes are not always ‘pretty’

from a developmental perspective, and they do not necessarily lead to the enactment of policies that are (more) conducive to development. The fact that decision-making processes  

are intended to be more participatory and inclusive does not automatically make them developmentally more effective. Indeed, greater access to the state also means that the  

bureaucracy can more easily politicised. As Bardhan has put it, among other things not allcases of public pressure that democracy facilitates help development… Democracies may be particularly susceptible to populist pressures … and other particularistic demands that may  

hamper long-run investment[,] growth [and development more broadly’. Kurt Weyland’s

(1996) analysis of the striking failure of the first three democratically elected governments in

Brazil to enact badly needed redistribution reforms provides a particularly stark example of just how poor the developmental outcomes of a democracy characterised by too much  

fragmentation and too many competing interests can be.

3) ‘Development first’ argument: do the ends justify the means?

It is in fact this natural tendency of a democratic system to fragment, diffuse, and divide

power among many different stakeholders at many different levels, both within the state and

among societal actors (Dahl 1971), thereby making decision-making processes more time-

consuming, that has led many other analysts in academic and policy circles alike to argue

that, in the developing world, authoritarian regimes may be better suited than democratic

ones to promote economic development. As Halperin et al. have noted, ‘the appeal of the authoritarian-led approach has … at least something to do with its expediency, in comparison to the messy and time-consuming procedures typical of democracy’. The core of this argument is that development requires a strong, centralised, highly autonomous

government, especially when poor countries need to play ‘catch-up’, and that democratic politics are simply too messy and unpredictable to provide such a structure.

4) Challenges posed by emerging democracies: towards a new consensus on a fresher look

at modernisation theory...

As has been highlighted above, the advent of the Third Wave of democratisation throughout the developing world (reaching many low income countries as well), confirms the thinking  

that there are no structural preconditions for the emergence of democracy. On the other hand, only a limited number of countries that have undergone transitions to democracy have  

succeeded in establishing consolidated and functioning democratic regimes. Against this backdrop, many analysts seem to be reaching a consensus that structural factors – such as underlying economic, social, and institutional conditions and legacies – may in fact have a  

considerable impact on the prospects of democratic consolidation. It is telling that, with only

very few exceptions (most notably India and Costa Rica), all democracies that can be considered fully consolidated are wealthy. Lipset’s (1959) dictum four decades ago that ‘the

more well-to-do a nation, the greater the chances that it will sustain a democracy’, has withstood the test of time.  

In fact, revisiting his ‘prerequisites’ argument in 1994, Lipset has proposed that, while higher levels of income may not be a precondition for democratisation processes to start,  

they may be nonetheless advantageous for democracy to endure and become consolidated.

In a much discussed quantitative analysis, Przeworski and Limongi (1997) also find that economic development has a very important impact on the sustainability of democratic systems. Looking at cross-regional data from 1950 to 1990 on a wide variety of well performing and poor-performing democracies, the authors find that the less successful  

democratic regimes are in generating economic growth, the more likely they are to break down.

The fact that, contrary to what Przeworski and Limongi (1997) would have predicted, there have been few full-fledged, formal reversals to authoritarianism even among the poorest countries may offer some solace. This may be due in part to the fact that, given the current international discourse in favour of democracy (at least formally), outright authoritarian ‘solutions’ to domestic problems are a lot less likely to be tolerated.15 Interestingly, some of the relatively most successful examples of recently democratising countries in Sub-Saharan Africa are also among the poorest (in particular Benin, Ghana, and Mali).16 However, it remains true that democracies that have failed to produce developmental outcomes remain  

much more fragile and unstable. Expectations for these incipient democracies to deliver tend

to be rather high and unrealistic, which adds to the considerable strain they are often under –

especially because commitment to them remains instrumental rather than principled.17 Many

of the elections that took place in Latin America in 2006 reflected this growing

disillusionment with (incomplete) democracy and pointed to the resurgence of populist

candidates in the region (Rocha Menocal, 2006).

But so what happens at higher levels of wealth that makes democracies so sturdy?

Unfortunately, Przeworski and Limongi (1997) do not provide much in the form of causal mechanisms: describing the stability of democracy at high levels of development as ‘a  

miracle’ hardly helps provide an understanding of the processes that may be at work

sustaining that relationship.

Above all, democratic consolidation requires the evolution of a democratic political culture where all the main political players (both in the elite and the mass public), parties, organised interests, forces and institutions view and accept democracy as ‘the only game in town’. In other words, the democratic process is the only legitimate means to gain power and to channel/process demands. Admittedly, the building and strengthening of such a democratic

political culture is bound to take a long time, and this is the main challenge hybrid regimes

are facing today.

In fact, it is in establishing the causal connections between development and the maintenance/consolidation of democracy that some of the insights of modernisation theory may prove to be most useful. In essence, modernisation theory posits that high levels of economic development contribute to the stability of a democracy once it has been established because it attenuates polarization by tempering class struggle and fostering the  

moderation of political conflict. As increased levels of development reduce the levels of objective inequalities, distributional conflicts become significantly less accentuated and more gradualist views of politics develop among the population at large. The promotion of a more tolerant and moderate political culture is also facilitated by increased educational opportunities, themselves the product of modernisation. In addition, economic development also fosters the growth of civil society—of ‘intermediary organizations which act as sources of countervailing power’ (Lipset 1959)—by fostering the (material) opportunities to create and participate in such voluntary organizations.  

This discussion on the links between development and the consolidation of democracy is in no way intended to suggest that all wealthy democracies have reached a stage of ‘perfection’ and that there is a linear trajectory toward that end point (again, as highlighted in Section III.2, there is no ‘end of history’ here). In fact, as several analysts have pointed out, wealthy (and mostly Western) democracies can also suffer from serious democratic deficits, manifested, among other things, in low levels of voter turn-out, the decline of associationalism, and sectors of the population that are less than tolerant (e.g. Putnam 2000).  

In the main, however, in all these established, consolidated, and, as it happens, mostly wealthy democracies, a majority of the actors/stakeholders subscribes to Przeworski’s (1991)  

• definition of democracy as ‘institutionalised uncertainty’: in a democracy, all outcomes are in principle unknown and are open to contest among key players (e.g. who will win an electoral contest, what policies will be enacted, etc.) – the only certainty is that such outcomes will be determined within the framework of pre-established democratic rules.  

Some analysts have also argued that it may not be high levels of development as such, but rather the way in which this wealth is distributed among the population, that is responsible for fostering the appropriate conditions for democratic stability and consolidation.  

Democracy is more easily maintained when wealth is distributed in a more or less equitable

manner across society, because it is precisely a more even distribution that prevents class

polarization and fosters moderation. Hence, appropriate social and institutional mechanisms

need to be established to ensure adequate distribution. In the words of Larry Diamond

(1992), ‘to the extent that [the] benefits…of economic development…are grossly maldistributed…it may do little to promote democracy’. The crisis that democracy in bVenezuela is currently undergoing and the appeal that the country’s president Hugo Chávez appears to have among many of the most marginalized sectors of the population certainly seems to confirm this reading. On the other hand, democracy has been able to survive (if not exactly thrive) in very unequal settings like Botswana, Brazil, India, and South Africa. This suggests that there is a need for further research and analysis on the links between democracy, development, and inequality

Direct democracy seems incompatible with capitalism, mostly due to direct democracy scarcely having ever been tried in complex societies (the Athenian polis, while a notable example, had a rather limited conception of suffrage in its version of “direct democracy”). Since there is no hard evidence for the two being compatible or incompatible, we cannot conclude either way.

Representative democracies, which are commonly coalesced under parliamentary or presidential systems, are more compatible with free market capitalism and civil liberties than any other system which has hitherto been tried. Though representative democracy may be flawed, it is the lesser of all evils — the “worst form of government, except all others that have been tried,” as Churchill quipped. Because representative democracy allows for greater efficiency and homogeneity of political action, the fortunes of capitalism may rise and fall organically with the attitudes of large demographics and corporations themselves. Particularly given the personal and lobby-based nature of politics in the United States, capitalism could not ask for a better system, perhaps even among hypothetically more refined forms of government.

I would speculate, were we allowed greater historical evidence of the relative efficacy of direct democracy as it pertains to capitalism, that we would be unpleasantly surprised as to the anti-free-trade and anti-free-market nature of direct democracy. Without the formation of representative bodies with clearly defined interests (which are agglomerations of the interests of many people and firms), I would imagine it would be difficult for capitalism in its present state to survive, given that cogent policies that claim (with varying degrees of accuracy) to approximate the “will of the people” would be replaced by a capricious and polarized system of bickering that pits fundamentally different sets of cultural and political assumptions (at least in large, heterogeneous countries such as the United States) in a battle to see who would be the first to attain the draconian scepter of mob rule.

Mob rule, from the time of Aristotle, has been rightfully perceived as being bad for business. For capitalism as a system of agglomerated businesses, as well as policies regulating and authorizing the free exchange of goods in domestic markets as well as across international borders, an electorate which could never make up its mind (and which was built upon mass action and the capricious will of the people) would fare exceedingly poorly in cultivating a system approaching the success of the West’s current system de rigueur of neoliberal capitalism.

,

Democracy as understood today (with people contributing different amounts of money to the common pot - or some contributing nothing, yet all having the same voting power) creates very strong incentives to undermine capitalism and free markets through government intervention.

The inherent instability of democracy (with new governments coming in every few years and favoring different companies and industries, as well as changing regulations, interest rates, etc) makes it more worthwhile for a serious business to invest in politicians rather than the product itself or the workers. This undermines capitalism and free markets, and leads to a vicious cycle of co-dependence between large businesses and politicians.

Another barrier to capitalism is the fact that democracies today generally have a legislature (a law-making factory). The more laws there are, the less likely it is for a capitalist society to exist or prosper. Capitalism needs few laws and even fewer lawyers.

The most capitalist (free market) societies today are those run by stable dictatorships (or semi-dictatorships) such as those in the Arabian Peninsula, Singapore, etc. These societies also tend to be some of the most prosperous societies in the world, with some of the highest levels of human development (low crime, low pollution, etc). In such dictatorships, there is no incentive for their politicians to plunder as much as they can every few years before they are replaced by other hungry politicians, nor do they have to put barriers to their people’s creativity in return for votes.

“Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide. It is in vain to say that democracy is less vain, less proud, less selfish, less ambitious, or less avaricious than aristocracy or monarchy. It is not true, in fact, and nowhere appears in history. Those passions are the same in all men, under all forms of simple government, and when unchecked, produce the same effects of fraud, violence, and cruelty. When clear prospects are opened before vanity, pride, avarice, or ambition, for their easy gratification, it is hard for the most considerate philosophers and the most conscientious moralists to resist the temptation. Individuals have conquered themselves. Nations and large bodies of men, never.” - John Adams (early president of the US)

“... Hence it is that such democracies have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security and the rights of property, and have in general been as short in their lives as they have been violent in their deaths. ...” - James Madison (early president of the US)

“The democracy will cease to exist when you take away from those who are willing to work and give to those who would not.” - Thomas Jefferson (early president of the US)

"Democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine percent." - Thomas Jefferson (early president of the US)