Economic freedom can overcome democratic friction

Context: Ongoing protest against long-pending farm sector reforms have given a new lease of life to the question of whether democracy is compatible with the economic development of a country.

Democracy - an inverse relationship with growth:

• Non-linear relationship with growth: wherein economies with low levels of political freedom benefit from an increase in democracy, while economies which have already achieved a moderate level of political freedom are hurt by more of it. - Robert J. Barro
  • Political freedom is a type of "luxury good" that gets consumed in greater quantities with economic prosperity.
• Growth-retarding features include - Redistributive schemes and the enhanced voice of special interest groups in legislative politics.
• Success of authoritarian regimes: as compared to democracies, further discourages democracy.
  • Authoritarian Argentina had a per capita income as high as Western Europe by 1950 while Brazil enjoyed economic growth, averaging 10% per annum, under a military regime in the 1960s and 70s
  • In Asia: China, South Korea (under Park Chung Hee in the 60s and 70s), Malaysia (under Mahathir Mohammed), Vietnam (the new Asian tiger).
• Counter argument against the growth of The UK and US: Being considered as the beacons of democratic development, achieved high living standards much before achieving a truly representative.
  • Universal suffrage was adopted by the UK and US in 1928 and 1965 respectively.

Democracy- a vehicle of economic development

• Political freedom leads to economic freedom and the rule of law, democracy has a positive effect on growth.
• Growth drivers in a democracy: Investment, economic reforms, education, healthcare, accountability, the rule of law, enforceability of contracts and an enriched information environment.

Lessons for India:

• More deep and structural reforms: that grant people more economic freedom; Reforms should be done incrementally but steadily, so as to avoid alarming vested interests.
• Continuous administrative improvements in growth drivers: like accountability, the rule of law, the enforceability of contracts and an enriched information environment.
• Political capital should be exploited for big-bang reforms: that is likely to arouse stronger opposition since they impact larger special interest groups.

Conclusion: Only by overindulging in economic freedom will the Indian republic be able to overcome the frictions of democracy and political freedom.