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Wednesday, March 28

Democracy between the devil and the deep blue sea.

I'll preface this essay with the observation that if the problem I discuss were easy to solve, humanity could expect to be living in a golden age by the middle of this century.

Since the inception of this blog Pundita has periodically bashed US foreign policy initiatives that indiscriminately push onto developing countries neoliberal economic reforms such as privatization and ending subsidies to large industries. I haven't got much of a hearing in Washington. But now, writing in the current issue of Foreign Affairs, Ashutosh Varshney has laid out a discussion of my pet gripe that even a high school senior should be able to grasp.

Varshney illustrates exactly why it's working at cross-purposes for developed nations to promote democracy in a poor country while insisting that the country also be a model for privatization of industry and other neoliberal (market-oriented) reforms.

It is inarguable that all the world's poorest countries are in desperate need of neoliberal reforms. But the problem, as Varshney explains in India's Democratic Challenge, is that the more the poor get involved in voting, the more likely they are to block their government from making needed economic reforms that cause short-term pain to the poor or don't show results fast enough.(1)

It comes down to this: If you were poor and had the right to vote, would you vote yourself a huge pay cut or out of a job, if your vote brought in economic reforms that would benefit your entire society in the long run?

If you reply that America managed to accept the pain that went along with neoliberal reforms, you're overlooking many factors. As Varshney points out:
[...] market-based policies meant to increase the efficiency of the aggregate economy frequently generate short-term dislocations and resentment. In a democratic polity, this resentment often translates at the ballot box into a halt or a reversal of pro-market reforms.

In the West, such tensions have remained moderate for at least three reasons: universal suffrage came to most Western democracies only after the Industrial Revolution, which meant that the poor got the right to vote only after those societies had become relatively rich; a welfare state has attended to the needs of low-income segments of the population; and the educated and the wealthy have tended to vote more than the poor.

The Indian experience is different on all three counts. India adopted universal suffrage at the time of independence, long before the transition to a modern industrialized economy began. The country does not have an extensive welfare system, although it has made a greater effort to create one of late.

And, defying democratic theory, a great participatory upsurge has marked Indian politics, a phenomenon that is only beginning to be understood by scholars and observers: since the early 1990s, India's plebeian orders have participated noticeably more in elections than its upper and middle classes.

In fact, the recent wisdom about Indian elections turns standard democratic theory on its head: the lower the caste, income, and education of an Indian, the greater the odds that he will vote.
What about the Asian economic miracles? Varshney notes:
South Korea and Taiwan embraced universal-franchise democracy only in the late 1980s and the mid-1990s, two decades after their economic upturn began. Other economically successful countries in the region, such as China and Singapore, have yet to become liberal democracies.

[...] Democratic politics partly explains why, for example, privatization has gone so slowly in India compared to in China. In India, workers have unions and political parties to protect their interests. In China, labor leaders who resist job losses due to privatization are tried and jailed for treason and subversion [...]
If you ask, "What about Europe?" Well, the Europeans think just like all people everywhere. As The Economist notes in their report about the European Union at 50, which I quoted from on March 25:
The poor performers in Europe have been the core countries of the euro, in particular France, Germany and the Italy [...]

Nor is there much disagreement among economists about what [the] cures should be. In all three countries, labour and product markets are too highly regulated, holding back employment growth and making their economies less flexible. Both the IMF and OECD have been urging further liberalisation as the only sure route to better economic performance. Even Europe's political leaders understand this, though they are also swift to spot political obstacles to reform.

As Luxembourg's Mr Juncker once said, "we all know what to do, we just don't know how to get re-elected after we've done it."
In short, low income European voters have the same distaste for further belt tightening that Indians experience, even when reforms promise to remove an obstacle that limits their country's economic growth.

And population number is a huge factor: a little foreign aid goes a long way in a small European country -- and massive amounts of aid, both outright and in the form of development loans, has been poured into Eastern Europe. In countries with large populations, such as Indonesia and India, giving aid can seem like trying to fill a bottomless pit.

The good news is that since India's statist government embarked on economic reforms 15 years ago, when roughly one-third of the country lived below the poverty line, poverty has greatly decreased. Yet today, a quarter of India's 1+ billion citizens still live on less than $1 a day. So, economic progress has been damnably slow, while at the same time voting among India's poor has boomed.

I hasten to stress that resistance to economic reforms among poor voters is not the only reason that India and other poor democratic nations are facing obstacles to economic growth. Mexico, for example, has hit a ceiling because their ruling political party is loath to press for economic reforms that put a squeeze on the elite. Ashutosh Varshney is simply pointing out an issue about democracy that has been ignored by economists and foreign policy wonks who push neoliberal reforms on poor democratic nations: when the poor greatly outnumber the rich and middle class at the voting booth, economic reforms that cause short-term dislocations tend to be rejected by the majority.

Another straw to the camel's back of democracy is that the demands of globalization exacerbate the need for economic reforms. Varshney explains:
A start toward privatization was made in 2001 [in India], but unions and some political parties have vigorously resisted it. To help millions of small producers, many manufactured products continue to be reserved for "small-scale investors" (a status that caps investment at $250,000 per industrial unit), although in 2001, garments, toys, shoes, and auto components were finally removed from the reserved list. No proposal for a complete dereservation of all industries has yet been seriously entertained, hampering the ability of many Indian companies to compete with their counterparts in other developing countries, notably China.
So does this mean that China's dictatorship model of government has the edge over democracy in the globalization era? In some ways in the short run, yes. But as Varshney points out, India's mature democracy "has a viable solution to the problem of political transition: the party, or coalition of parties, that wins elections will run the government. Transition rules are now deeply institutionalized in India, and [so] long-term political stability is a virtual certainty."

China, on the other hand, is a tinderbox waiting for another revolution from the disenfranchised masses. Keep in mind that:
In China, rural and urban inequality grows at alarming rates, stirring unrest amongst those hundreds of millions who remain impoverished. In fact, China, responsible for only 6 percent of world trade, has actually lost manufacturing jobs in the past ten years.(2)
In India, the impoverished can take to the voting booth to change the way their government does things. In China, there is no option but to revert to the Maoist revolutionary mode, which only sets the stage for another military dictatorship mouthing slightly different slogans.

If you find yourself thinking of the Middle East and Iraq in particular while reading this essay -- why yes. The prevailing wisdom in the US government is that since Iraqis are suffering so much anyhow, might as well build the country on the foundation of neoliberal economics. But Washington also wants Iraq to be a democracy -- and not just the stage show variety.

We want to see smiling Iraqis waving their purple-stained fingers after voting in fair elections. But most of those Iraqis are poor, so one shouldn't expect them to ponder in the voting booth, when asked whether they want their government to put them back to work or wait for private industry to give them a paycheck.

"Oh no," wail neoliberals. "If the Iraqis do that, they head right back to a centrally planned economy. The next thing is a return to Stalinism. Then come the death camps for Iraqis who don't want to starve while waiting for a ten-year plan to work!"

Is there a golden mean -- a way to balance economic reforms with immediate social needs? No. A golden mean exists only on paper when economic theories meet up with societies. But there are strategies to wiggle through reforms without toppling a democratic government.

There is the ice cream strategy. Brazil's president recently launched a painful economic reform while increasing a popular welfare-type program.

There is the nibble-around-the edges strategy, which concentrates on economic reforms affecting sectors that mostly concern the elite, such as stock market reforms. This, on the theory that a larger investor class eventually helps the entire economy.

There is the carpetbagger strategy, and the time-honored vote-buying strategy. But in the end of all strategies are the really painful realities. As Varshney puts it:
[...] if market-oriented economic reforms are to be embraced in areas directly relevant to the masses, politicians will have to answer the following questions: How will the privatization of public enterprises, the reform of labor laws, and the lifting of agricultural subsidies benefit the masses? And how long will the benefits take to trickle down?

All of these reforms are likely to enhance mass welfare in the long run. Therefore, for democratic politicians, this problem will effectively mean taking measures such as reserving a substantial proportion of the proceeds from privatization for public health and primary education, constructing safety nets for workers as labor laws are reformed, and coming up with a plan for a second green revolution in agriculture in return for drawing down the current agricultural subsidies.

The last one, in particular, will require both opening up agriculture to market forces and greater public investment in irrigation, agricultural research, and rural infrastructure and education.
Varshney's advice for India's government holds true as well for many other countries -- and for wealthy governments that invest significant development aid in the world's poorest democracies.

The basic formula is that the more a foreign donor government values democracy, the more carefully the government should promote economic policies that cause short-term pain to the donor country's poor.

President George Bush might have been acknowledging this formula during his recent tour of Latin America in his remarks about "social justice." But his notable silence on the high tariff that protects American corn farmers, and which makes ethanol more expensive to produce in the US than Brazil, illustrates that the basic principle underlying the formula applies to all democratic nations.

However, putting aid money behind social justice programs comes too late in the day to avoid the huge leftward turn in Latin America, which is largely a backlash against indiscriminately applied neoliberal theories.

The fault is not in the theories but in the Promised Land mentality that infests multilateral development institutions and Western foreign development planning. A half century ago, the promised land in development circles was the centrally planned economy "with a closed trade regime, heavy state intervention, and an industrial policy that emphasized import substitution," as Varshney puts it. Then development circles went gaga over capitalist reforms.

If the US wants the poorest democratic nations to modernize, we need to pay as much attention to the immediate demands of the poor in those nations as to the long-term benefits of economic reform.

This advice isn't rocket science. If lingerie makers can come up with different sizes for a bra, if dressmakers can make a pattern for several dress sizes, why can't the US government -- and, indeed, all wealthy governments -- construct foreign development policies on a case-by-case basis?

There is no promised land -- no one strategy or type of development policy that works to serve US interests while serving the needs of modernizing nations. There is only constant adjustment, which was not possible even 15 years ago. But in this era of the internet and global TV, it is relatively cheap to closely monitor how reforms and aid are working their way through a society, and adjust development aid accordingly. Change should no longer be the work equivalent of turning the Grand Canyon around.

1) India's Democratic Challenge

The entire essay is not available online, but the writing (which I've barely skimmed in this essay) is so important to so many issues that it is worth $5.95 to purchase the PDF version from Foreign Affairs magazine. See the purchase icon at the above link.

2) China, India Superpower? Not so Fast! Despite impressive growth, the rising Asian giants have feet of clay by Pranab Bardhan.
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