Sunday, February 19, 2017

Global Biz: Is Democracy Bad for Business?

"We can either have democracy, or we can have tremendous wealth concentrated in the hands of a few. We cannot have both"
-Louis Brandeis

"An educated populace should be easily governed"

I preface the provocative - but not revolutionary title of this  essay with the above two quotes to illustrate what I believe is the critical issue facing democracies today, and especially a small, open economy such as Jamaica.

I was moved to this missive by a presentation at the recent Destination Visionaries series in Kingston, which, primarily under the patronage of Jamaican-Canadian billionaire Michael Lee Chin, brought several international thought leaders in enterprise and economics to Kingston's Spanish Court hotel.

Among the more striking of these presentations was from Jamaican-born Peter Blair Henry (like myself, a product of the Harbour View community - though in his case, via S Elizabeth), who is presently Dean of the Stern School of Business at New York University, and the author of  "Turnaround: Third-World Lessons for First-World Growth"

Henry's excellent presentation, which focussed on the drivers of growth and the imperatives facing both developing and developed nations, inspired my question, which leads this article.

Why, in this age when freedom is being questioned more heavily than before, when the (barely) elected leader of the world's leading economy seems more despotic than democratic, has democracy seemingly failed to deliver widespread prosperity, especially in comparison to [some] dictatorships?

Noted economist Alvaro Vargas Llosa notes that in the 15 years up to 2007, the economies of nations ruled by despots grew at an annual rate of 6.8 percent on average—two and a half times faster than politically free countries. Those autocracies that have opened their markets in recent decades but continued to restrict or prevent democracy—China, Russia, Malaysia, and Singapore, for example—have done better than most of the developed or underdeveloped countries that enjoy a considerable measure of political and civil freedom.

An interesting stat in itself, but not necessarily a open-shut case for iron-fisted rulership. Vargas counters that Any political system, free or unfree, that removes some obstacles to entrepreneurship, investment and trade, and makes a credible commitment to safeguard property rights to a certain extent will trigger a virtuous economic cycle. Spain’s Francisco Franco and Singapore’s Lee Kuan Yew (who famously visited newly independent Jamaica to observe and adapt our economic policies back then) discovered that in the 1960s, as did China’s Deng Xiaoping at the end of the 1970s, Chile’s Augusto Pinochet in the 1980s, and many others at various times.  Not to mention the fact that dictatorships that enjoy economic success are heavily dependent on technology invented in countries where exercising a creative imagination does not land one in jail.

And, of course, the picture gets even more complex:  India, one of the world’s fastest growing economies, is a liberal democracy. So is Peru, whose economy is experiencing 7 percent annual growth. These are imperfect democracies, for sure, and in the case of Peru there has been little poverty reduction. But the recent success indicates that elections, freedom of the press and freedom of association can coexist with high economic growth.

Also, when one takes China out of the consideration in the "unfree" group, then the performance gap understandably narrows considerably.

Two things are certain, however. First, history indicates that the combination of political, civil and economic freedom is a better guarantee of ever-increasing prosperity than a capitalist dictatorship. Second, there are sufficient examples—Portugal or the Baltic countries—of underdeveloped countries that have generated stable and reliable environments through political freedom to invalidate the notion that a country should be kept in political and civil infancy until it reaches economic maturity.

Economist Paul Collier has controversially argued that authoritarianism can be good for growth. He would also say South Korean growth was successful due to its homogenous society. Its foreign immigrant population only reached 1m in 2007, and the majority are Chinese. In ethnically diverse societies only democracy can work for growth, says Mr Collier, because autocratic leaders with a narrow support base are otherwise tempted to siphon off national income. That explains why diverse India, with three major ethnic groups, four key religions, and 15 official languages, had no choice other than democracy-led growth. It would arguably take a dictator with the combined abilities of Machiavelli, Genghis Khan and Alexander the Great to wield absolute authority over such an unwieldy entity.

South Korea’s economic freedoms, a consequence of dictators’ decisions, led to demand for political freedoms. China’s Politburo will likely face similar challenge in future. Democratisation has not yet flourished since economic freedoms are themselves negligible: property rights are lacking.Asia’s most successful economies are a mix of flawed democracies and hybrid regimes. Most of these are moving towards, rather than away from, democratisation.

In a study of 100 economies from 1960 to 1990, Robert Barro found that prosperity tends to inspire democracy. Could China be next, following South Korea’s path? Its new premier recently  announced plans to crack down on corruption.

 Korea is one of those rare countries that has jumped from a developing to a developed nation. Many emerging markets get stuck in the “middle-income trap,” in which they achieve a comfortable level of development but can’t make that last, difficult push into the realm of the truly advanced economies. Korea has managed that feat because it has become a more innovative economy. You can see that in the popular products of companies like Samsung or LG, the nifty marketing of Hyundai Motor, and the regional popularity of K-pop.

Could that leap have been possible under the old dictators? It probably would have been much harder. Innovation isn’t something you can create in government ministries or corporate boardrooms. Sure, you can toss more resources at R&D and branding (Korea does that, too) but you can’t make people more innovative. That requires a change in mindset. Creativity goes on inside people’s heads.

Which brings us to the point of education. In his presentation, Peter Henry began with some personal history; his own Jamaican life begins as the child of educators, essentially rural folk who were steeped in traditional values, but open to knowledge and respect for education as the key to personal and collective advancement

On its website, the National Association of public Administrators (US) speaks to the need to reconstitute the school system. This means establishing a mandatory curriculum that includes philosophy and critical thinking at all levels. Getting people to participate in decision making always has been a serious problem, as people are so concerned with the every day minutiae of their lives.

In our local experience, with citizen participation in governance uneven, sporadic and peripheral, and with media more often concerned with meeting the public's seemingly unsatiable demand for sensationalism, one can legitimately question the efficacy of democracy. The areas where Jamaicans have innovated to world-class standards - music, athletics and oratory (Marcus Garvey, Michael Manley) - have largely developed in what may be called an extra-governmental manner, prime elements of a society increasingly ignorant of and even hostile to, the rule of law.

In order to be innovative, societies need full access to information - not to mention a respect for the value of same -, a confidence to speak one's mind and a willingness to take risks. While entrepreneurial activity has increased, this is largely being driven by shrinking opportunities in the formal business sector, with major investments being redirected to mass employers such as tourism and BPO that pay relatively low wages. An increase in the number of start-ups is yet to be matched by the kind of innovation that has rightly placed Silicon Valley and other tech hotbeds in India and the Far East in pre-eminent positions.

Fear caused by political control doesn’t foster an atmosphere conducive to free thinking. Censorship and limitations on information curtail the knowledge and debate necessary for the generation of new ideas.As South Koreans - and others - now passionately argue, democracy is critical for sustainable growth AND development, but ONLY where the populace is highly educated and charged with a sense of collective responsibility.

Otherwise, we get the worse of the scenarios described by Louis Brandeis in the first quote.

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