Monday, April 03, 2006

Democracy and economic welfare

My first op-ed article in 2006 (the Indonesian version was also published by Kompas). Thanks to Jusuf Kalla for his remark. Because of the limited space, I had to drop some interesting issues:

1. Jagdish Bhagwati's rebuttal to Amartya Sen. According to Sen, famine never occured in democratic countries. But Bhagwati cited an example of an Indian state of Bihar, who had a famine problem in the 1980s although many other states had suprluses of rice production. The surplus state refused to transfer their surpluses, and the central government could not do anything. Finally, PM Indira Gandhi had to ask for help from Washington. This is on page 100-101 of "In Defense of Globalization" (2004).

2. The discussion about good institutions and economic welfare. Reverse causality issue: do good institutions create economic welfare, or are institutions good because prosperous countries can afford to have them? Acemoglu, Johnson and Robinson (2000) proved that institutions do matter. What's interesting from their paper is the use of settlers mortality rate during the colonial era as an instrumental variable, so they solved the problem of reverse causality. However, as we know, this guy doesn't really buy the idea, and argues that once you get rich, you can afford to have good institutions, good governance and less corruption.

Democracy

6 comments:

  1. Hi there,

    i read your op-ed piece and finding it most interesting (this is one of my fave subject though i barely know enough about it at all).

    I personally think that democracy is much overrated these days The great man said "it's as good as we could get", and he couldn't have put it better. Without going too far into the philosphical debate, let me just say the while democracy probably perform best to accomodate demand for growth, well being and wealth creation, democracy by itself require a preset goals (thus the significance of constitution as collective goals). without this crucial element, democracy will mostly be reduced as mechanism of consensus.
    Particular to the wealth creation issue, which your piece addressed quite nicely, I'm tempted to attribute most of it to correlation as opposed to casuality. Everywhere in history of democracy and wealth creation, economic productivity almost always reach record high during war time. Coincidentally this is almost always, too, relates with how much the democratic elements are being reduced. During WW II this phenomenon was obvious on both sides of the atlantic.

    During the last 50 years of recent history, almost all of the countries that switched to democracy perform less successfully (economically) compared the the time prior to the democracy. America Latin countries can provide best example for this. Wealth creation and democracy almost always succeed above average across a long period only in countries with homogenic culture. Of course, this opens the argument that this is probably due to the failure in forming the democracy, and not the concept of democracy itself. The problem is of course, formation of democracy almost always involve difficult consensus building that in itself creates a catch 22. Watch Iraq and our 40something parties for example.
    To argue that democracy stand the test of time better is probably relative to how long the time test is, really, no? The egyptian ancient civilization lasts for thousands of years, the Roman, Persian, etc. Surely these past civilization went different economic models so not directly relevant, but to use this argument for historical affirmation might be a bit irrelevant. Chinese as one of the worlds greatest civilization for example, run the longest with almost an absolute auhoritarian history. At the same time most brilliant model of functioning democracies as the motor of wealth creation are all based on imperialism/colonialism history which is the exact opposite of democracy.

    Which is i think where your thesis is most interesting, that is to put the stress on the institution building, improving the mechanism to reach the collective ideals (ie. wealth distribution as opposed to creation). Unfortunately you didn't put it in the article and now i have to read your references again. Thanks for a thought provoking piece though.

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  2. shit, that is far too long. Sorry guys!!!

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  3. ap, my two cents:
    1. For theoretical, yet interesting, discussion on democracy and econ growth, see Przeworski and Limongi. 1993. “Political Regimes and Economic Growth,” JEP 7: 51-69. Alas, we need JSTOR :-)

    2. On Sen's famine and democracy, it wasn't Bhagwati's. It was Vandana Shiva's take

    3. And are you saying that we need to proceed with democracy because it is too costly to reverse now? --not it strongly supports economic growth?

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  4. Treespotter:
    thanks, that was good remarks. and you're right, this is a very open ended discussion. and surely, a 1000 word op-ed won't adress everything.

    Rizal:
    1. I did quite Przeworski at the end. not that one, but a similar piece on his co-authored book "Democracy and Development."

    2. Actually the one I quoted was Bhagwati's. I wasn't aware of Shiva's piece. And in his book, Bhawgwati didn't make any references to Shiva. So let two of them resolve the matter... :-)

    3. Cost minimizing is also a valid economic argument, isn't it? Besides, there's no theoretical nor empirical reason why reversing democratic progress now is good for economic growth.

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  5. 1. Another article by Acemoglu, JEL (2003).
    (he also mentioned the paper you quote , 2001 is just another example of theory on beliefs difference)

    In this paper, he said that, there are some conditions that democracy does not have to be the only possible policies and institution that is good for economy.

    The key features of institution choice is whether there is full commitment either from the government or the citizen.

    If there is full commitment by the ruler or by the citizen, thus Political coase theorem would be applied, In this case Political Coase theorem, means that the rules can choose the optimal policies based on the characteristics of society. Thus it is not necessarily means democracy.

    The key set-bact of the paper may be;
    1. There is no issue of credibility
    2. Since there is only two players, citizen and ruler, there is no explanation on how could the commitment be enforced. If there is a big entity that could enforce either citizen or ruler to commit to their commitment,then the solution would be much better.

    In this case, under certain conditions, may be not democaracy doesnot necessaily means no economic growth.

    2. According to cost analysis of reversing. It is kinda interesting. Comparing the cost of keep pursuing the hard way of democatization process or cost of reversion. have you tried to calculate this or this is just an ideological prediction?

    Have you calculated the cost of keep pursuing democarcy in static and dynamics terms?

    How long do you predict that this situation (this uncertaion so-called democratization process in Indonesia) will lead into into the next level of democracy?

    It doesn't make any sense for me if you do not take into account this dynamics possibility in calculating the cost of still in democracy?

    Let assume that you already do this, have you compared it to the static and dynamics of reversion?

    I think, without doing these two things, you can not have any clear conclusion on the which path is better than that of another path.

    In my humble opinion
    Best,

    The.Dreamer

    ReplyDelete
  6. 1. Another article by Acemoglu, JEL (2003).
    (he also mentioned the paper you quote , 2001 is just another example of theory on beliefs difference)

    In this paper, he said that, there are some conditions that democracy does not have to be the only possible policies and institution that is good for economy.

    The key features of institution choice is whether there is full commitment either from the government or the citizen.

    If there is full commitment by the ruler or by the citizen, thus Political coase theorem would be applied, In this case Political Coase theorem, means that the rules can choose the optimal policies based on the characteristics of society. Thus it is not necessarily means democracy.

    The key set-bact of the paper may be;
    1. There is no issue of credibility
    2. Since there is only two players, citizen and ruler, there is no explanation on how could the commitment be enforced. If there is a big entity that could enforce either citizen or ruler to commit to their commitment,then the solution would be much better.

    In this case, under certain conditions, may be not democaracy doesnot necessaily means no economic growth.

    2. According to cost analysis of reversing. It is kinda interesting. Comparing the cost of keep pursuing the hard way of democatization process or cost of reversion. have you tried to calculate this or this is just an ideological prediction?

    Have you calculated the cost of keep pursuing democarcy in static and dynamics terms?

    How long do you predict that this situation (this uncertaion so-called democratization process in Indonesia) will lead into into the next level of democracy?

    It doesn't make any sense for me if you do not take into account this dynamics possibility in calculating the cost of still in democracy?

    Let assume that you already do this, have you compared it to the static and dynamics of reversion?

    I think, without doing these two things, you can not have any clear conclusion on the which path is better than that of another path.

    In my humble opinion
    Best,

    The.Dreamer
    Ps. Sorry for repeated same comments. I am kinda gap-tek.

    ReplyDelete