Democracy Makes You Wealthier and Happier ; Politics Are a Much Stronger Indicator of the Likely Success of Economic Reform

Article excerpt

WE LIKE to believe the good guys (eventually) triumph, even if life persistently proves us wrong. We equally like to believe freedom, economic progress, happiness and the quality of life are somehow related, and the last 20 years seem to have given us some pretty powerful geopolitical evidence that democracy works "better than the alternative". But it is not so easy to put real numbers on its value, the related aims of two papers* published today in the Economic Journal.

The most important of these sums up research into 220 loan- backed development programmes by two World Bankers, David Dollar and Jakob Svensson. This makes it clear how very much more likely such programmes are to succeed if they are agreed with democratically- elected governments. The difference amounts to a full 20 percentage points. Indeed - uncomfortably for the bank - politics are a much stronger indicator of the likely success of reform programmes than the elements within the World Bank's control, such as the size of the loan that it makes and the number of conditions attached. These seem to have no relationship at all with its chances of success or failure.

This is important not merely because of the money at stake: in fiscal 2000, by no means a record year (as the chart shows), the World Bank and its soft-loan arm lent nearly $15.3bn (pounds 10.6bn) worldwide. It is also significant because our international institutions have traditionally tried to keep politics out of economics. Of course, this has varied. Take, at one extreme, the argument over China's admission to the World Trade Organisation. Trade is what crosses frontiers; the WTO is not really supposed to concern itself with internal affairs. And the argument has been won (even in the US) by those who believe access to western markets will encourage democracy in China, against those who argued it should delayed until political change, or at least better human rights, actually came about. At the other extreme, take membership of the European Union: the "transition" path to for Eastern and Central Europe has some political basics built into the course. And - rather more questionably - EU governments have recently put an existing member in the political doghouse.

In between lie the financial institutions, the World Bank and the International Monetary Fund. The governments who set these institutions up after the Second World War also sought to leave a legacy of democratic institutions (along with a profoundly damaging faith in the efficacy of big government) in their former colonies. But they have not stopped lending when democracy crumbled. Of course the institutions are in a cleft stick. Too much politics, and they are seen as the slaves of their biggest subscribers, notably the United States; too little, and they are condemned as the supporters of Third World dictators.

The choice has become more delicate in the 20 years or so since the World Bank realised that pouring money into dams and roads was likely to be wasted if the government framework was defective or corrupt. It became increasingly clear that developing countries were held back more by weaknesses in their policies than by the lack of finance for investment. We have rediscovered (as if we should ever have forgotten) the importance of the rule of law to the germination of enterprise, the attraction of investment, the creation of new businesses and jobs. So the bank stopped building white elephants and switched to promoting policy reform. All around the world, it is engaged in helping restructure public utilities to attract investment and encourage competition, so developing economies may at least have efficient energy, water and telecommunications systems. Meanwhile, loans to support public sector management and economic policy rose to nearly a quarter of the total last year. And, under the glare of donors' attention, the bank pays increasing attention to its success rate. …