Should market liberalisation precede democracy? The citizens’ point of view

Pauline Grosjean, Claudia Senik 23 August 2007

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One of the unexpected side-effects of China’s spectacular emergence is the spread of a new conventional wisdom about the sequencing of political and economic reforms in developing countries: economic reform should come first, and democracy second. The idea is that democratisation in the early stages of a country’s economic development can slow down further development. The continued hold of the Chinese Communist Party over political power is argued to be a positive ingredient in the construction of a viable market economy, as opposed to the erratic reform path experienced by former communist countries in Central and Eastern Europe, which predominantly chose rapid economic and political liberalisation in the 1990s. Another example is Latin America, where pervasive economic crises seem to support the view that democracy can be an obstacle to the development of the market, as leaders fail to impose unpopular reforms because they will be held responsible by the electorate. It follows that the optimal route is to develop market institutions first and consider democratisation at a later stage.

The relativist argument against early democratisation

Pushing the argument one step further, some have argued that the popular desire for political freedom and democratic institutions only arises when countries reach a certain degree of material comfort and market liberalisation. Hence the argument goes: not only is it more efficient to postpone democracy until the advanced stages of a country’s economic development, but this sequence also meets citizens’ preferences. If this is the case, it reduces the incentives of economic reformers to introduce democracy and it raises doubts about the legitimacy of external advisers pushing for the democratisation of the country, e.g. in the case of conditional aid. Of course, according to the tenets of the 'End of History' argument (Fukuyama, 19921), the triumph of 'democratic capitalism' is historically inevitable, so that one just needs to wait until 'modern democracy […] naturally emerges as a by-product of the capitalist process' (Schumpeter 19422). However, what if popular support does not naturally emerge?

In other words, although these arguments in favour of market development first and democratisation later seem rather intuitive and are widely diffused, do they rest on solid empirical grounds?

Conjectures without proofs?

The empirical literature devoted to the relationship between political systems and market development remains rather inconclusive. Basically, 'the findings are […] all over the place'3. Most studies are unable to draw a clear direction of causality because of the interdependent dynamics followed by democracy and market development through time in any given country.

Concerning citizens’ preferences, the idea that democracy is some kind of a luxury good that people start desiring only once they have passed a certain degree of market development is hard to reconcile with the recent vivid demonstrations in favour of democratisation in several countries of the Commonwealth of Independent States (e.g. Belarus, Georgia, the Kyrgyz Republic and Ukraine) and in China.

Empirically, there is evidence of a strong correlation between support for democracy and support for the market. However, this correlation cannot be interpreted in terms of causality as it is subject to the influence of omitted variables affecting both market and democratic institutions, such as cultural and legal origins, and because people’s preferences are likely to be influenced by the actual levels of market and democracy developments that they face. Hence, identifying causal relations between market development and support for democracy is usually considered a lost cause.

Identifying causality relations between market development and democratisation using frontier-zones

We address this problem using a new set of micro evidence from a survey carried out in 28 transition economies4, and relying on the special situation of the frontier-zones covered by the survey. The idea is that people who live in an integrated border-zone share the same experience of the market and, often, the same historically inherited 'cultural attitudes' towards the market and democracy, even though they live on different sides of the frontier. This is particularly plausible for the (often artificial) frontiers of the former USSR and in some formerly integrated regions such as the Ottoman Empire or the Austro-Hungarian Empire. However, because people face different political systems and levels of democracy on either side of the frontier, we can identify the effect of democracy on their preferences for the market.

Reciprocally, we assess the causal relationship running from the actual degree of market development to the popular demand for democracy. Here, we rely on three well-grounded observations: (i) market development differs widely across regions of the same country; (ii) in contrast, people who live in the same country share a common experience of democracy; and (iii) local market development at borders is partly exogenous, as it is influenced by the neighbouring region. Focusing again on frontier-zones, we thus compare support for democracy at the various borders of a given country.

Let’s not wait for the 'End of History'

Our main result is that democracy appears to generate some popular support for the market, while economic liberalisation does not clearly enhance the support for democracy. To be sure, the first finding suggests only that democracy increases the subjective support for the market; it does not mean that democracy does not complicate the task of reformers, with the risk of impeding market liberalisation.

The second finding casts doubt on the idea that the demand for democracy naturally 'emerges as a by-product of capitalism'. Our empirical analysis shows that market liberalisation as such is not sufficient to trigger the support for democracy.

The main message, therefore, is that one cannot use the preferences of citizens as an argument for postponing the construction of democratic institutions. Indeed, our empirical investigation based on transition countries does not validate the conjecture that, everything else being equal, support for democracy is stronger when the degree of market development is higher. The claim that democracy should 'come second' may thus be supported on the grounds of economic efficiency, but not of citizens’ preferences and welfare.

Of course, this work in based on the experience of transition countries, and the question arises whether its results can be generalised. The answer is that transition countries constitute a nice substratum to test the issues at hand as they have experienced different of paths of transition while coming from a very similar starting point (the experience of communism). Hence, they are both close enough to make comparisons relevant, but different enough to offer useful variations to interpret.

 


 

Footnotes

1 F. Fukuyama, The End of History and the Last Man. New York: Free Press, 1992.
2 J.A. Schumpeter, Capitalism, Socialism and Democracy . New York, Harper and Bros., 1942.
3 Persson and Tabellini (2007), “Democratic Capital: The Nexus of Political and Economic Change”, IGIER working paper.
4 See Empirical linkages between Democracy and Economic Growth. The Life in Transition Survey was implemented jointly by the European Bank for Reconstruction and Development and the World Bank in the autumn of 2006. The survey covers 28 transition countries in Central and Eastern Europe and the former USSR and Mongolia. Turkey, a non-transition country, was also included in the survey but not in our paper.

 

 

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Topics:  Politics and economics

Tags:  economic reform, democratisation, transition countries

Economist at the European Bank for Reconstruction and Development (EBRD)

Professor at the University Paris-IV Sorbonne