Democracy and the Market Economy: Transparency, Accountability and Participation Are Key to Fairness

Article excerpt

Discussion on the interaction between market economy and democracy and the influence one has on the other has permeated different international meetings. It is indeed an extensive subject that includes relations between good governance, corporate governance and the process of a fairer globalization. And within such discussion, the role that Governments, corporations, international organizations and civil society have to play should be considered.

Although there is no proven correlation between democracy and market economy, many development economists believe that transparency, accountability and participation in political decision-making will have a direct effect on the level of market fairness. Transparent and participatory decision-making also makes a positive contribution to a country's investment climate.

According to the Executive Opinion Survey carried out with multinational companies in the 2004 World Economic Forum, the governance cluster, which includes corruption and bureaucracy, was considered one of the top three most binding constraints for investment. Nevertheless, it is important to keep in mind that economic growth is not necessarily linked to raising people's living standards. According to Daniel Kaufmann, Director of Global Governance at the World Bank, institutional and economic reforms have to come hand in hand with participatory approaches.

Good governance may play a role in the investment decisions of companies, but the availability of strategic natural resources like oil is more important to them. Still a transparent, participatory and accountable polity can be a further advantage. The private sector represents a powerful driving force behind good governance if it takes corporate governance seriously. This concept gained momentum as the global economy became increasingly market-based, rather than centralized as it was during the cold war, and interdependent with corporations as its organizers and investors saw a link between sound corporate governance and lowered investment risk. Moreover, the Asian crisis at the end of the 1990s, which spread to many countries worldwide, highlighted the need to strengthen governance reform in the global financial architecture. Even so, such discussion has been framed within legal boundaries, posing a challenge in defining what practices are bad.


The problem of corruption, for instance, lies in a grey area. According to Mr. Kaufmann, this is because discussion is focused on illegal forms of corruption in the public sector. In the World Bank's Global Competitiveness Report 2004/2005, he warns that "the reality of corruption is twofold: first, it most often involves collusion between at least two parties, typically from the public and private sectors, for a corrupt act to take place; and second, where the rules of the game, laws and institutions have been shaped, at least in part to benefit certain vested interests, some forms of corruption may be legal in some countries". The same study shows that corporations headquartered in developing countries, often characterized by a good governance environment, tend to engage in illegal forms of corruption such as bribery at some of their branches. It is then possible to observe that the domestic institutional context of the host country influences the level of corporate governance. Moreover, such practices may create a vicious circle, hampering the level of country governance.

As in the case of corporate governance, the mechanisms of globalization are also central to the discussion of good governance. Amartya Sen, Lamont University Professor at Harvard University and 1998 Nobel Laureate in Economics, has constantly reminded the world that although there is no need of dispensing the market economy, globalization on market alone is not enough. …