Is a country’s economic growth inherently tied to democracy?
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Is a country’s economic growth inherently tied to democracy? Economist Dambisa Moyo argues the two are very much connected.
The following is an excerpt from Moyo’s book, “Edge of Chaos: Why Democracy is Failing to Deliver Economic Growth and How to Fix It.” Read as she draws comparisons and conclusions based on civil and social unrest among multiple countries, and what citizen dissatisfaction has to do with poor economic growth.
Almost three decades ago, the Berlin Wall fell. A period of barely restrained chaos, turmoil, and stagnation across the Soviet bloc had come to an end, and new market capitalist democracies began to emerge not only in the former Soviet sphere but also throughout the developing world, promising economic prosperity and peace for their citizens. Analysts and economists believed the end of communism portended a new era of stability and growth. Yet less than thirty years later, all signs point toward a world once again on the edge of chaos.
Expressions of discontent with the post– Cold War order have been on the rise, particularly since the 2008 financial crisis. The crisis catalyzed a climate of dissent in the West— the source of the financial crisis— and beyond, in which populist movements challenged leaders and elites, from the Occupy Wall Street protests against inequality and corruption in the United States to anti-austerity marches in Europe and uprisings in the Middle East.
In December 2010, a poor Tunisian fruit vendor named Mohamed Bouazizi lit himself on fire to protest the arbitrary Spring revolutions, as under the slogan of “Ash-shab yurid isqat an‑nizam” (“People demand removal of the regime”) protests spread throughout the Middle East and North Africa, from Tunisia to Bahrain, Egypt, Jordan, Libya, Sudan, and Yemen. Today, that region is in the midst of what some are likening to a modern Thirty Years War.
Protests have also shaken South America, Asia, Eastern Europe, and Southern Africa, to the extent that by the beginning of 2014 nearly half of the world’s economies (65 out of 150) were expected to be at a “high” or “very high” risk of social unrest— the highest rate of risk registered over the past decade. Meanwhile, angry citizens— from Buenos Aires to Kiev and Sofia, from Bangkok to Cape Town and Ouagadougou— were rapidly confirming those predictions.
Three million people protested in Istanbul’s Taksim Square and elsewhere throughout Turkey, demanding a voice in their political and economic futures; in Bangkok, two years of protests ended in a military coup; and massive demonstrations broke out in Brazilian cities, denouncing the billions spent staging the World Cup soccer matches in a country where one out of fifteen people is poor.
This wave of rising political anxiety has not been confined to developing nations, as campaigns against austerity, migration, income inequality, and globalization have also gripped developed countries. In November 2014, 100,000 people rioted in the streets, setting fire to vehicles in a march against EU‑sanctioned austerity— in Brussels! Around the same time, 50,000 demonstrators organized by the Campaign Against a Europe of Capitalism and War swarmed Barcelona in a demonstration against globalization. In July 2016, Berlin crowds protested Germany’s open-door policy to refugees, which had reached 1.1 million in twelve months. In September 2016, around 200,000 rallied in Germany, Austria, and Sweden against the Transatlantic Trade and Investment Partnership (TTIP) between the European Union and the United States. In the United States, where workers at McDonald’s and Walmart have demonstrated against low wages, polls reveal widespread concern about “income inequality,” formerly a topic of interest mainly to economists and other academics. The United States now has the highest level of income inequality in the industrialized world, a fact that some regard as “a threat to American democracy.” Meanwhile, the public’s revolt against globalization, which many blame for the loss of jobs and the hollowing out of the middle class, culminated in the British vote to exit the European Union and the election of political neophyte and outsider Donald Trump as US president in 2016. Trump’s ascendancy, in particular, represented a rebuke of the deeply entrenched political establishment that had dominated US politics for decades.
At a glance all of this global unrest appears disparate; however, these movements are united by a common thread: average citizens expressing anger at the impotence and corruption of the ruling political elites. It is a rebuke of political decisions to embrace trade and internationalism, policies that did not in fact “lift all boats” as the proponents of globalization promised, but actually harmed the livelihoods of so many. And it is a rebuke of government’s failure to create economic growth.
No matter what government does, it seems to fail. This failure is perhaps most worrying in the United States— the world’s leading economy for most of the past century. Not only does much of the world rely on the US economy (which accounts for a greater share of global gross domestic product (GDP) than any other country’s, totaling approximately one quarter), but the United States is also an economic and political model that many other countries have viewed as a path to prosperity, and have thus sought to mimic.
The failure is evident across many measures of living standards: in deteriorating real wages, rising poverty rates and worsening poverty statistics, as well as stagnating employment numbers. In terms of income, between 1979 and 2014 the top 10 percent in the United States saw their wages rise by a third, while the median wage rose by just 8 percent and the bottom 10 percent flatlined. Today, twenty million Americans live in extreme poverty, members of one in twelve American households go hungry, and, according to the US Census Bureau, the proportion of US citizens living below the poverty line increased from 11 percent in 2000 to almost 16 percent in 2012.
Joblessness, in terms of both unemployment and underemployment, has systematically worsened over the past decades. As an example, Charles Murray reported in 2016, “for white working class men in their 30s and 40s . . . participation in the labor force dropped from 96 percent in 1968 to 79 percent in 2015,” meaning that, in essence, since the 1960s, one in six men of prime working age in this group has dropped out of the workforce. Manufacturing employment accounted for about a third of the American labor force in 1970; as of 2010, that share had dropped to a tenth. The European Union has not been spared from similar employment trends, with youth unemployment topping 40 percent in Spain and Greece and 37 percent in Italy, and nearly one in four youths in France unemployed.
Worse still, not only are US living standards declining, but also the prospects of achieving social mobility and escaping economic destitution have fallen over time. In the last thirty years the probability has more than halved that an individual born into the bottom 25 percent of the income distribution in the United States will end his life in the top 25 percent. Meanwhile, according to the Pew Research Center, “the middle class made up 50 percent of the US adult population in 2015, down from 61 percent in 1971.”
Furthermore, American households continue to live a precarious financial existence, making it hard to plan or invest in a more prosperous future. According to US Federal Reserve data, Americans now owe $1 trillion in credit card debt, the highest level since the 2008 financial crisis, and US households owe a roughly equivalent amount in student debt and auto loans. A US Federal Reserve report notes that 47 percent of respondents said they either wouldn’t be able to cover an unexpected $400 expense through savings or their credit card, or would have to cover it by selling something or borrowing money. Furthermore, life expectancy— a barometer of economic and social success— has remained flat for all groups combined from 2013 to 2014, and has actually declined for white American men and women according to a 2016 report.
The confluence of these factors has contributed to the weakening of social cohesion (with rising rates of suicide, drug use, divorce rates, and violence in Middle America), culminating in the erosion of the middle class. It is the disaffected middle class that is at the heart of the rebellion against the political establishment in the United States and beyond.
Against this backdrop, angry voters’ rebellion against the establishment should have come as no surprise. In the UK referendum, seventeen million voters gave the government the mandate and instruction to leave the European Union after its membership of over four decades. Meanwhile, in the United States, Trump’s election was decidedly clear: not only did he win the presidency, but the Republicans held on to majorities in the Senate and the House of Representatives and won many gubernatorial races— an emphatic rebuke of the Democratic status quo. For its part, the US establishment has stressed that while Trump won the Electoral College, Hillary Clinton won the popular vote by nearly three million votes over Trump. However, these aggregated data mask the true disaffection of America’s Rust Belt and the South. After all, if wealthier New York and California are removed from the calculation, it is actually Trump who wins the popular vote by nearly three million votes.
In rich countries as well as poor, people want change. They demand policies that will improve their lives: better education, improved health care, more jobs— and quickly. Danger signs abound that policymakers are no longer able to deliver strong and sustainable growth—at least not under current political and economic thinking.
Growth is imperative for fulfilling human demands and improving lives. Economically, growth promises to reduce poverty and raise living standards; politically, growth is the sine qua non for free markets, free people, and the rule of law; individually, growth is essential to allowing people to maximize their potential.
But today, economic growth across the global economy is patchy and anemic. Most of the world’s largest and most strategically vital emerging nations— including Argentina, Brazil, Colombia, India, Indonesia, Mexico, South Africa, and Turkey— are only growing at 3 percent or less a year. This is far below the roughly 7 percent minimum needed to double per capita incomes from one generation to the next and consign poverty to history. Although there is some evidence that Europe emerged from recession in early 2017, the growth forecasts remain stalled at around 1 percent, hampered by the structural challenges of high unemployment and political uncertainty.
The Japanese economy continues a twenty-five-year period of malaise and tenuous prospects. And in the United States, despite recent GDP and job growth, and in spite of the initial positive reaction of financial markets to Trump’s election, the continued erosion of infrastructure and education dampens prospects for long-term growth. Most alarming, the International Monetary Fund has almost consistently cut its global growth forecasts over the past half decade after the 2008 financial crisis, warning in 2014 that the world economy may never regain its pre-2008 pace of expansion. This evidence of economic decline signals a more serious and deleterious corrosion of the global economy as it faces extreme long-term structural impediments or headwinds.
Three key drivers of growth— capital, labor, and productivity— have eroded under unprecedented headwinds. We face massive demographic shifts yielding too many young, unskilled, and disaffected workers in emerging economies, and aging populations already draining pension and health systems in developed economies. Widening income inequality, diminishing social mobility, commodity scarcity, and technological advances that enhance productivity at the cost of putting more people out of work all threaten to further dampen growth worldwide. The result of leaving these headwinds unanswered will be economic depression— a catastrophe for which existing policy tools are “impotent,” as the economists Lawrence Summers and Paul Krugman have both argued.
As much as the US economy will struggle to overcome these headwinds, other economies will likely struggle even more, particularly those that have depended on the United States for trade and foreign direct investment and as the largest bill payer of public goods and police of international sea-lanes.
Moreover, at roughly 22 percent of the budget, the United States is the largest contributor to the North Atlantic Treaty Organization (NATO), a group of twenty-nine countries committed to mutual defense in the event of an external attack.
In the face of these economic headwinds, liberal democratic capitalism is in retreat. After the fall of the Berlin Wall, this political and economic model— characterized by universal suffrage, civil rights and personal freedoms, and the individual control of capital and labor— had seemed ascendant. But now alternative models, such as authoritarianism, state capitalism, and illiberal democracies, have proliferated, offering formidable challenges to liberal democratic capitalism’s model of achieving growth. Meanwhile, liberal democratic capitalism itself has become weak, corrupt, and oblivious to its own ailments.
As they confront these challenges, leaders of liberal democratic capitalist nations are hobbled by the quirks of their own political systems. Needing to satisfy the electorate in order to remain in political office, policymakers tend to favor short-term policy responses. In focusing only on the gains that can be won today, they ignore the costs and consequences borne tomorrow. The short-termism that clouds policymaking leads politicians to embrace inferior policies.
Protectionism, for example, is now on the rise. According to Global Trade Alert, the G20 imposed 644 discriminatory trade measures on other countries in 2015. And as a result of increased capital controls on banks, cross-border capital flows have declined— with international loans having decreased 9 percent from 2014 to 2016, according to the Bank for International Settlements. State intervention in the economy is increasing even in traditionally capitalist societies. This is evident in the growth of welfare states, the expansion of the public sector, and the rise of governments as employers and allocators of capital. In the long term, such policies are likely to exacerbate military as well as economic conflict over scarce resources—pressuring politicians to make even worse decisions and fomenting a vicious downward cycle. Most importantly, such policies will only produce lower global growth.
The defining challenge of our time is to create solid and sustained economic growth that continues to meaningfully improve people’s lives. This is true in the United States, the Eurozone (countries using the euro), and other industrialized economies that are creaking under mounting debt, challenging demographics, and stagnating productivity. It is just as true in the developing world— home to 82.5 percent of the world’s people, 70 percent of them, on average, less than twenty-five years old. A period of unprecedented economic expansion has slowed in some places and has ended in others, and there can be no substitute for restoring growth everywhere.
Edge of Chaos argues that liberal democracies of the sort prevalent in the West simply cannot deliver this growth without substantial reform. Without fundamental changes, democratic politicians will struggle to address the numerous headwinds the global economy faces today. Indeed, the myopia within democracy leads to the misallocation of scarce resources, such as capital and labor, and short sighted investment decisions by politicians and business. Ultimately, the myriad economic challenges are a manifestation of a corrosive problem in the democratic political process.
This book proposes ten far-reaching reforms to democracy that are designed to combat this myopia, overcome the headwinds challenging the global economy, and galvanize economic growth. The proposals transform the way elections are held, alter how politicians are judged, and ensure that both voters and politicians take a long-term view. To this end the proposals include lengthening political terms to better match long-term economic challenges, imposing minimum standards on both politicians and voters, and many more.
Stagnant growth, entrenched poverty, high unemployment, unwinding globalization, and geopolitical unrest have become the new normal. The skepticism among policymakers, politicians, and ordinary people about the capacity of democratic capitalism to deliver growth and reduce poverty over the long term is in fact very rational. The state capitalism of China, Lee Kuan Yew’s Singapore, and Chile under General Augusto Pinochet have all moved hundreds of millions of people out of poverty and in some cases delivered impressive advances. The formidable economic performance over recent decades of such nations and others that are not liberal democracies—64 percent of the world’s elected governments in all— seems to suggest that democracy is not a prerequisite of economic growth.
Yet Edge of Chaos insists on the promise of liberal democracy. After all, per capita incomes in liberal democracies continue to rise, albeit sluggishly. Meanwhile, the problems of growth are not confined to market capitalism—and real problems such as corruption infect state capitalist and other competing systems. Rather than turning away from liberal democracy, nascent democracies need to prioritize creating growth over the immediate devotion of some paradigm of democratic perfection. And established democracies must put their own houses in order by passing aggressive constitutional reforms.
Above all, policymakers must face up to the facts of the twenty-first century. In an interconnected world of anemic growth, other countries’ crises will become our crises, whether they take the form of terrorism, income inequality, refugees, the resurgence of infectious diseases, or illegal immigration, and governments will grow ever more fragmented and weak, further undermining an already fragile international community. For Americans, and policymakers in the world at large, protectionism and isolationism are no remedy.
Historical evidence makes clear that protectionism will be accompanied by higher unemployment, lower economic performance, and stagnating living standards in the United States and elsewhere. An economically weakened and isolationist America will call into question the Pax Americana, whereby the United States oversees international peace and security, and thus expose the world to the unpredictable whims and values of nondemocratic powers. These are not the solutions the world needs.
Creating sustainable economic growth in the twenty-first century requires no less than aggressively retooling history’s greatest engine of growth, democratic capitalism itself. This requires a clear-eyed assessment of how ineffective the system is in its current state, politically as well as economically— and then implementing the repairs that will yield better outcomes.
Too much is at stake for us to remain wedded to the status quo. The ominous rise of protectionism and nationalism throughout the world portend that the global economy and community are eroding already. The only way forward is to preserve the best of liberal democratic capitalism and to repair the worst. We cannot cling to past practices and old ideologies simply for their own sake.
Doing nothing is no choice at all.
Excerpted from Edge of Chaos: Why Democracy is Failing to Deliver Economic Growth – and How to Fix It by Dambisa Moyo, with permission from Basic Books, an imprint of Perseus Books Group, a division of Hachette Book Group. Copyright © Dambisa Moyo, 2018.