Academic journal article The Cato Journal

Political Freedom and the Stability of Economic Policy

Academic journal article The Cato Journal

Political Freedom and the Stability of Economic Policy

Article excerpt

Most of the regime shifts in democracies occur through the electoral defeat of the incumbents, while most dictatorships relinquish power only through violence. Democracy requires consent of the citizenry, and consent requires political legitimacy. Therefore, violent popular opposition is neither a necessary nor a sufficient condition for a democratic breakdown. Thus, it seems that to the extent that democratic authority is rooted in the popular consent, political violence poses less of a threat to democracies than it does to dictatorships. However, recent experiences in Africa and Latin America indicate that democratic decay and political delegitimization coupled with disastrous economic performance shortened the life span of many democratic regimes. It is therefore not clear whether democracies are more or less resilient than dictatorships. Nevertheless, it is possible that democratic regimes are characterized by more stable economic policies than nondemocratic regimes and therefore the type of the political regime may be important, not for just being democratic or dictatorial but for the stability of its policies.

By focusing on poor indicators of instability such as coups, revolutions, and political assassinations, the current literature has failed to differentiate between the collapse of democratic and authoritarian rules or whether democratic regimes collapse for the same reasons as do authoritarian regimes. The current literature is silent on whether democracies are more fragile or less susceptible to economic and political breakdowns. Using a number of political and policy instability variables, this article examines whether political freedom (a proxy for democracy) has any effect on the stability of political regimes. Regimes can be characterized as unstable if they are susceptible to violent and unexpected turnover of the political leaders.

Furthermore, the article explores the possibility that political freedom might explain differences in the stability of economic policies. Economic policies are regarded as stable if the economic agents are able to predict them. It is important to understand that the decisions of private investors depend on factors that are partly under the control of the government. Economic agents react negatively on the uncertainties about future behavior of fiscal, trade, and monetary policy variables. For these entrepreneurs the stability and the predictability of these parameters weigh heavily on their decisions of whether to behave one way or another. Predictable policies and clear rules of the game are important for economic agents.

Alternative Views on Democracy and Stability

Some studies suggest that democracies are more stable than dictatorships, Resler and Kent (1993) suggest that democracies build their legitimacy on institutionalized procedures and constitutional guarantees of political rights and freedoms, while the primary means through which dictatorships establish their legitimacy is good economic performance. Hence, economic setbacks are more likely to create instability in dictatorships than in democracies.

Sorensen (1991) suggests that political democracy facilitates the translation of economic power into political power. Dictatorships, on the other hand, threaten powerful interest groups and thereby undermine their sustainability. The mutual accommodation of powerful economic and political interests makes democracies less destabilizing. Przeworski (1991) also claims that democracy allows political players to adopt, alter strategies, and build new alliances to advance their interests. It gives them opportunities to achieve their goals through institutionalized competition within the existing political framework without creating political upheavals. Dictatorships, on the other hand, dampen these opportunities and political actors resort to violence to change policies or to assume leadership.

Democratic governments have a better mechanism for handling the transitions from one leader to another than authoritarian regimes, and elections are a practical and often peaceful way for choosing between rival political leaders. …

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