Balancing Democratic Politics and Free Market Economy
Rahul Vyas*
Nidhi Nalwaya**
Classical Athenian democracy was based on the ideals of full political participation of
all citizens, a strong sense of community and equality of all citizens under law.
Modern democracy, on the other hand, relies on elected representatives and tends
to draw a distinction between the public and private spheres, thereby somehow
unraveling the bonds of community and fostering individualism. Democracy is not so
much about electing people as having a process and a system of checks and
balances that ensures that basic rights are protected.
Samuel Huntington defines the twentieth-century political system as democratic to
the extent that its most powerful collective decision makers are selected through fair,
honest, and periodic elections in which candidates freely compete for votes and in
which virtually all the adult population is eligible to vote.
The Authors have endeavored to study the various studies undertaken in the realm
of the complex relationship between Democracy and Free market Economy and
have presented a qualitative research paper on the same.
The basic tenets of democracy can be summarized in the points below:
 Equality (rights, treatment, respect).
 Freedom (from oppression, suppression, the arbitrary will of others).
 Power (having some, delegating it, making it accountable).
 Universality of citizenship for adults.
 Participation in public life (community responsibilities).
 A commitment to open discussion on matters of common concern.
 Taking decisions by means of votes and abiding by a majority result.
 Respecting the capacities and rights of the ordinary individual.
Another classification is that democracies are countries in which there are
institutional mechanisms, usually elections that allow the people to choose their
leaders. Secondly prospective leaders must compete for public support and thirdly
the power of the government is restrained by its accountability to the people.
It is a historical fact that democracies tend to enjoy greater prosperity over long
periods of time. As democracy spreads, more individuals are likely to enjoy greater
economic benefits. North (1990) has pointed out, a society's institutional framework
seems to play an instrumental role in the long-term performance of its economy
Democracy does not necessarily usher in prosperity, although some observers claim
that "a close correlation with prosperity" is one of the "overwhelming advantages" of
democracy. Some functional democracies, including India, have been laggards
economically at least until the last few years. Others are among the most affluent
societies on earth. However it is a fact that in the long run democratic governance by
and large brings prosperity to the population. As Mancur Olson points out: "It is no
accident that the countries that have reached the highest level of economic
performance across generations are all stable democracies, experience shows that
relatively poor countries can grow extraordinarily rapidly when they have a strong
dictator who happens to have unusually good economic policies, such growth lasts
only for the ruling span of one or two dictators “
Authoritarian regimes often compile impressive short-run economic records. For
several decades, the Soviet Union's annual growth in gross national product (GNP)
exceeded that of the United States but as has been evident the autocratic countries
rarely can sustain these rates of growth for long. The Soviet Union was unable to
sustain its rapid growth; its economic failings ultimately caused the country to
disintegrate in the throes of political and economic turmoil. Economist Jagdish
Bhagwati argues that "no one can maintain these growth rates in the long term.
Sooner or later China will have to rejoin the human race."
There are two strong reasons for democracies to have an edge over autocratic or
any other form of government, Democracies- are more likely to have market
economies, and market economies tend to produce economic growth over the long
run. Most of the world's leading economies thus tend to be market economies,
including Japan, the United States, and the economies of Southeast Asia etc.
Freedom House conducted a World Survey of Economic Freedom, which evaluated
80 countries that account for 90% of the world’s population and 99% of the world’s
wealth on the basis of criteria such as the right to own property, operate a business,
or belong to a trade union. It found that the countries rated free generated 81% of
the world's output even though they had only 17% of the world's population. A
second recent study confirms the connection between economic freedom and
economic growth. The Heritage Foundation has constructed an Index of Economic
Freedom that looks at 10 key areas: trade policy, taxation, government intervention,
monetary policy, capital flows and foreign investment, banking policy, wage and
price controls, property rights, regulation, and black market activity. It has found that
countries classified as "free" had real per capita Gross Domestic Product (GDP)
(expressed in terms of purchasing power parities) growth rates of 2.88%. In "mostly
free" countries the rate was 0.97%, in "mostly not free" ones -0.32%, and in
"repressed" countries -1.44%. Of course, some democracies do not adopt market
economies and some autocracies do, but liberal democracies generally are more
likely to pursue liberal economic policies.
Another reason is that democracies that embrace liberal principles of government
are likely to create a stable foundation for long-term economic growth. Individuals will
only make long-term investments when they are confident that their investments will
not be expropriated. These and other economic decisions require assurances that
private property will be respected and that contracts will be enforced. A champion of
Free Market system, Ex - Federal Reserve Chairman Alan Greenspan has argued
that: "The guiding mechanism of a free market economy ... is a bill of rights, enforced
by an impartial judiciary
Last but not the least democratic governments are more likely to have the political
legitimacy necessary to embark on difficult and painful economic reforms. This factor
is particularly likely to be important in developing countries like India but it also
appears to have played a role in the decisions some formerly communist countries
like Russia have taken in recent years to pursue difficult economic reforms.
Free market implies that all are free to buy and sell as they will. Even if the starting
point were one of equal ownership of resources and income the outcome after a
period would be one of inequality of ownership and income and an increasing
tendency in this. Democracy on the other hand usually demands a sharing of
resources on grounds other than income and the market. A true democracy
constantly strives to subvert market choices or limit market operations so that
circumstances of need arise less rarely.
Friedman’s 1962 theory implies that Economic freedom is a necessary precondition
for political freedom. But later statements by Friedman make the relationship more
complex. Dawson (1998) notes that “In general, the relationship between economic
freedom and political freedom is that initial growth in one tends to promote the other”.
Friedman’s statement suggests that the direction of causation between economic
freedom and political freedom is either unclear or he variables are interdependent
Democratic institutions can foster growth in a variety of ways. Przeworski and
Limongi (1993) hypothesise that democracy should positively influence economic
growth through better protection of property rights, which promotes savings and
investment. Rodrik's (1999) results indicate that participatory and democratic
institutions cushion the impact of negative external shocks on economic growth.
Svensson (1999) finds that the long-term impact of international aid on growth
depends on the political and civil liberties in the host country. More specifically, aid
tends to have a positive impact on growth only in countries with democratic
governments. But Svensson (2000) and Knack (2001) also provide some evidence
that higher aid levels erode institutional quality, as measured by indices of
bureaucratic quality, corruption and the rule of law .
Supporters of the free market argue that any such sharing is wrong because any
interference would only make matters worse, and the less tactful that all have market
choices and if people are in a position of need it is their own fault. An obvious
democratic counter argument to this first argument is that for those in need it couldn't
be worse. A view not usually shared by those not in any great need. Further, it can
be argued that not all made any market choices at all, but are rather victims of the
market - those without access to income or resources, those deprived of education,
etc. Finally, and most shocking to those who worship the market, not all wish to play
by the market's rules, that is, there are those who would prefer not to buy or sell
themselves. In a democratic society it is possible to choose not to play by the rules
of a free market?
Robert Barro (1996) expands upon Lipset’s ideas on the relationship between
economic growth and democracy. He concludes that economic growth is a critical
intermediate step between economic freedom and political freedom. By controlling
for all factors except for GDP, Barro demonstrates the weak direct effect of the
attributes of free markets on democracy. In contrast,he determines the strong effect
of improvements in the standard of living on democracy, particularly per capita GDP,
infant mortality rate, and male and female primary school attainment. John Dawson
(1996) claims to have conducted the very first empirical test of Friedman’s 1962
hypothesis of the relationship between economic freedom and political freedom.
Dawson relies upon Friedman’s later remarks concerning the actual interrelationship
of the two variables for his hypothesis, rather than Friedman’s original unidirectional
relationship. The results of Dawson’s analysis support Friedman’s theory of the
interrelationship between the two types of freedoms and do determine the absence
of a single direction of causation. Despite the interrelationship, Dawson does
conclude that increases in economic freedom show a greater effect on both
economic growth and political freedom than do changes in political freedom on
growth and economic freedom. Dawson’s results discount the intermediate role of
economic growth for the two freedoms, thereby contradicting the aforementioned
work of Barro.Farr, Lord, and Wolfenberger (1998), research similar ground as
Dawson, with a stated purpose of distinguishing a direction of causation between
economic freedom, economic growth and political freedom.
Authors Gordillo and Alvarez Arce explored the causal links between economic
growth and political and economic freedoms in a series of countries and concluded
that with a model built from a panel with a small time dimension and using a
corrected LSDV estimator, that countries primarily concerned with economic growth
would apparently benefit from institutional reform in the form of market liberalization .
The Europeans seem to have achieved a level of compromise. China has rolled back
its previous controls over the market until it too is managing a compromise, though it
may need more democracy to enable the market to be contained. Australia has
recently survived a concerted effort to greatly extend the market. The U.S. is the
most obvious example of where the market has contained democracy with seemingly
disastrous consequences.
As an argument it has been repeated that just as a pure democracy seems an
impossible level of anarchy, so too a truly free market is impossible. This implies that
despite the tensions inherent in the relationship, we must continue to try and balance
democracy and market freedoms without mistaking the one for the other.
Markets can function only within an institutional and legal framework that includes
property rights, legal enforcement of contracts and other rules to govern business
transactions.
In the same vein , rigorously competitive elections are the bedrock of any functional
democratic system but a winner-take-all attitude with the victor concentrating power
is unsuited for democracy in the long term. Well-functioning democracies are rooted
in complex constitutional and laws that separate the executive, legislative and
judicial power at the same time protecting freedom of speech, assembly and
peaceful dissent by those who lose elections.
Regulatory institutions – like the Banking Ombudsman, SEBI, TRAI and bodies that
oversee various other industries – play a fundamental role by maintaining a fine
balance between the free markets and the actions of elected governments and
legislatures. A relevant example is the Reserve Bank of India, perhaps the most
important of these institutions, as it is responsibl e for designing and regulating the
monetary policy .
The policy and regulatory mistakes that contributed to the subprime mortgage crisis
– and thus to the Global financial system’s meltdown and the continuing travails of
the Eurozone have yet again made the issue of optimal economic regulation and its
relation to democracy relevant and sparked a worldwide vociferous debate on the
same . Taking a certain view some people believe that markets and private initiative
require no significant regulation. The role of politics is to elect majorities that can
abolish regulations and regulatory bodies.
A segment of the popular discourse similarly opposes regulatory institutions, but for
very different reasons. It is argued that politicians can regulate and supervise without
intermediate bodies that have some degree of autonomy. To their minds, these
bodies merely impede and constrain realization of the people’s will.
Globalization and the increasing complexity of financial and other markets make it
imperative that the domains of private activity, political decision-making and
regulation be clarified. The challenge is even greater because some regulatory
agencies must be multilateral, or at least intergovernmental, given the global nature
of much economic activity. The difference and the distance between markets and
politics must be clear – and, for the sake of both effectiveness and legitimacy, it must
be based on rules that are well understood and mooted by popular support .
The authors of the present paper have tried to the define the fine balance
between
continued economic growth being necessary for
enhancing the prospects of the working class and the poor. Just pursuing capitalist
growth substantially rejects the claim that caring about social justice requires aiming
for distributive equality.
The impact of political freedom on economic growth is much less
clear in the existing literature. Based on the evidence presented in we can safely
say that political freedom do not have to be postponed. Furthermore, the dynamic
relationships estimated with the Kiviet method indicate that intensified democracy
may result in faster growth and greater economic freedom. They also indicate that
economic prosperity makes democratisation easier. Chong and Calderón (2000)
show that improvements in the institutional framework have a positive influence on
economic growth, especially in poor countries. After establishing and solving a full
system of equations determining growth and the channel variables, Tavares and
Wacziarg (2001) sustain that the overall impact of democracy on growth is
moderately negative. In an article with a different
approach, Minier (1998) studies the experience of countries in which the level of
political freedom changes significantly. Countries that democratise seem to grow
faster,while countries becoming less democratic grow more slowly than comparable
nations Even if democracy and economic freedom were not mutually reinforcing,
there are no economic grounds for postponing democratisation to give priority to
market reforms.
Capitalism has been a good servant . Yet while this has helped to reduce global
poverty and expand education, it has come at a cost namely an alarming rise in the
levels of public and private debt, excessive consumerism, and a huge population that
has been reduced to Have Nots . Any system that prevents large numbers of people
from fully participating or excludes them altogether will ultimately be rejected.
Digitization and the Internet have given consumers enormous abilities to connect
and aggregate their voices. Power is dispersed, but wealth is concentrated. Further
development and population growth will put a lot more pressure on our planet.
Capitalism needs to evolve, and that requires different types of Democratic leaders
from what has been the case so far, Not necessarily better leaders, but leaders who
are able to cope with today’s challenges. Most of the leadership skills—integrity,
humility, intelligence, hard work are integral. .
Governments with an evolutionary mind-set those regimes that seek to encourage
and enhance rather than prescribe and provide handouts will and should use taxes(
GST) and standards( Emission Norms for Pollution ) etc to facilitate the population
and governance in broad directions without trying to force specific solutions. . The
accurate way to do this would be to make those standards self-modifying and
dynamic.
The link between the free market and democracy has been a savior of many a
nation . The delicate interplay between these two pillars of the modern society has
created a nations that sprung into relative prosperity, freedom and wealth of
opportunity as also put forth remarkably effective leaders who have traversed the
worlds of government and finance created a just and compassionate democracy.
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