European Economic Perspectives 28

The Democratic Advantage

Participatory political regimes deliver higher quality growth, according to Dani Rodrik’s CEPR Discussion Paper, ‘Institutions for High-Quality Growth’ – No. 2370 (February 2000). They do so because they produce superior institutions better suited to local conditions.

Rodrik notes that the encounter between neo-classical economics and developing societies has revealed the institutional underpinnings of market economies: a clearly delineated system of property rights; a regulatory apparatus that curbs the worst forms of fraud and anti-competitive behaviour; a moderately cohesive society that exhibits trust and social cooperation; social and political institutions that mitigate risk and manage conflicts; and the rule of law and clean government. These are arrangements that economists usually take for granted, but which are typically absent in poor countries.

So the question for policy-makers is no longer ‘do institutions matter?’ but ‘which institutions matter and how can they be acquired?’ Rodrik examines the types of institutions that allow markets to perform adequately, focusing on five in particular: property rights; regulatory institutions; institutions for macroeconomic stabilization; institutions for social insurance; and institutions that manage conflict.

How does a developing society acquire institutions that support a healthy, sustainable market-based system? Rodrik emphasizes the importance of ‘local knowledge’, arguing that a strategy of institution-building must not over-emphasize best practice ‘blueprints’ at the expense of local experimentation. The blueprint approach is largely top-down, relying on the expertise of technocrats and foreign advisers. The local knowledge approach, in contrast, is bottom-up and relies on mechanisms for aggregating local information.

In principle, these mechanisms can be as diverse as the institutions that they help create. But Rodrik contends that the most reliable forms of such mechanisms are participatory and decentralized political institutions. While non-democratic forms of government have often succeeded admirably in the task of institution-building by using alternative devices, the broad, cross-national evidence indicates that they are exceptions rather than the rule. Nothing prevents authoritarian regimes from using local knowledge; the trouble is that nothing compels them to do so either.

In fact, the record is even more favourable to participatory regimes than is usually acknowledged. Rodrik’s research provides evidence for four conclusions. First, democracies yield long-run growth rates that are more predictable than those generated by autocracies. Second, democracies produce greater short-term stability whatever the long-run growth rate. Third, democracies handle adverse shocks much better. And fourth, democracies deliver better distributional outcomes.

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