Op-ed: Growth Does Not Have To Be At The Expense Of Democracy

12 Sep 2014, by Ann Bernstein
By Ann Bernstein. Published in Business Day, 12 September 2014. Read the article at BDLive.

 

This article is based on CDE’s “Democracy Works” project. Read more about the project here and read the reports here.

 

A battle of ideas — a global contest between democratic and authoritarian approaches to growth and development — is playing itself out in countries around the world.

Are autocracies the best way to produce inclusive economic growth for the vast majority of the population? The evidence from three important democratic developing countries, India, Brazil and SA (Ibsa), is compelling and supports a resounding “no”. It is not necessary, as many are arguing in Africa, to give up individual freedoms, rule of law, independent institutions, a free press and regular elections, if you are struggling with the challenges of poverty. On the contrary, democratic rights and freedoms can in numerous ways help promote sustained development, faster economic growth and effective routes out of poverty.

Over the past 25 years, SA and its Ibsa partners, India and Brazil, have demonstrated that the challenges of development and poverty can be tackled using the combination of democracy and market reforms. Between 1986 and 1996, each country had its own economic crisis and, in response, all three governments introduced fiscal discipline and market reforms. In the years since, these reforms have yielded impressive results. In SA, the combination of democracy and market reform has improved the quality of life of millions of people in ways that were unimaginable under apartheid. Brazil’s poverty rate is now in single digits. In India, the size of the economy doubled between 2005 and 2012, with nearly 190-million people lifted out of absolute poverty.

Despite these achievements, India, Brazil and SA still have a long way to go in moving large parts of their population out of poverty and reducing inequalities. All three countries now face serious and remarkably similar challenges if they are to return to the rates of growth and inclusion they desperately need. A two-year research project run by the Centre for Development and Enterprise (CDE) and partner think-tanks in India and Brazil has concluded that each of these developing countries requires the urgent introduction of a multifaceted reform package.

In SA, the economy is being held back by inefficiencies and unnecessarily high costs, with competitiveness sliding in a tough global environment. While maintaining macroeconomic discipline, microeconomic reforms are needed to reduce the costs of doing business, and open up competition and markets for new firms and the unemployed. Considerable deregulation would serve the interests of the economy as well as of politics: too many regulations and subsidies create opportunities for corruption, as well as slowing growth.

SA has the world’s highest recorded rate of unemployment, at 35%, and 60% for people aged 18-24. In part, this is because SA’s labour laws favour workers in formal employment and discriminate against the jobless. India and Brazil’s labour laws are complex and costly. In both countries, pressure is growing for labour market reform, with some Indian states leading the way. This is a priority area for fundamental reform for SA.

Well-functioning state institutions are needed to ensure that the gains of economic growth are translated into genuine assets and opportunities for all. And a competent, honest state committed to public service, with a positive attitude to private enterprise, is vital to support and regulate market players.

In India and SA, the state’s sponsorship of social mobility has emphasised particular groups and the politically connected. This undermines its role as the provider of public goods, guardian of the national interest, and sponsor of inclusion and upward mobility for all citizens. In part, this has to do with policies of redress (reservations in India and black empowerment in SA), which give preference to caste, race and political insiders rather than merit. Such policies create public servants who take office with the assumption that “it’s our turn now” instead of a commitment to serving the public good. In all three countries, broad-based social mobility is held back because weak schooling systems leave so many people badly educated.

State bureaucracies in the three societies are too inefficient to manage infrastructure delivery effectively on their own. Governments either cold-shoulder private infrastructure investment or mismanage it. In Brazil, experts note that President Dilma Rousseff’s backward-looking socialist and nationalist prejudices block the most efficient ways to bridge Brazil’s huge infrastructure backlog. These comments could apply equally to SA.

Faster economic growth requires popular recognition that markets, entrepreneurs and companies are vital for future prosperity. The “trust deficit” between the state and private sector must be eliminated. Political attacks on business also have another source. In India, SA and, to a lesser extent, Brazil, previous market reforms are believed to have disproportionately benefited large companies, politically connected people and “crony capitalists” of all kinds. A second wave of reforms should ensure that new firms and entrepreneurs can take advantage of an improved and more competitive environment.

The central question facing policy makers is not whether reforms can be identified, but whether they can be carried out. Democracy can prove an advantage in this respect.

Real change will require new political coalitions. Reformers will need to identify, reach and mobilise new constituencies that will benefit from higher growth, better education and more efficient poverty programmes. Alternate sources of information and media freedom and diversity make this possible in democracies. Second, reformers must actively “sell” the benefits of high economic growth to voters. Capitalism rarely sells itself. Politicians can and should openly argue that higher economic growth, sustained over time, will not just create a few rich people, but can move the majority of people from the margins of existence to a job, a house, literacy, and basic services. And that the only way to achieve that growth in SA is through open and competitive markets that encourage business expansion and the flourishing of new enterprises.

Too often, reformers fail because they avoid the contested and difficult issues. Stuck in the politics of the moment, they cannot envision the politics of the future: how coalitions are shifting, how future support for change might be built from the bottom up. This is the great strength of democracy. SA has a flexible political system that provides politicians and those that influence them with the ability to renew themselves, deal with challenges and learn from their mistakes, opening the way to a better future.

In the end, democratic capitalism and market competition will succeed only if they are widely perceived to be fair, and if they are regulated by effective and independent institutions that support competitive markets and do not undermine enterprise.

Corruption undermines faith in public institutions; it also undermines faith in the market economy and its key players in the private sector. Rule of law and the effective and fair administration of justice have an economic value — they secure property and contracts — as well as political significance. When citizens see that equality before the law, fairness and justice are applied to rich and poor, powerful and unknown, then they are more likely to accept the system as legitimate. This is the true democratic dividend.

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