HOW STRONG IS THE CONNECTION BETWEEN DEMOCRACY AND ECONOMIC WEALTH?

INTRODUCTION:
Before delving into the discussion on the topic altogether, it is important to understand that there are two ways in which this connection between the democracy and economic wealth can be established or refuted. The first way is to establish or refute that democracy leads to economic wealth and the second perspective would be establishing or refuting that economic wealth can lead to democracy. We shall study. The causal links are to be tested in both the ways so as to establish the kind of relationship and by studying the case studies of different countries and relating to different studies, we would be able to understand the connection in its essence. Democracy is seen as the institutional arrangement in which the individuals arrive at political decisions through acquiring the power by engaging in a competitive struggle to get the vote of the masses (Olson, 1993).In the current world scenario we see that the major powers of the world and the wealthiest nations of the world are infact democracies such as the Unites States, Canada, Japan and the European countries. However, the poorest nations of the world are found to be authoritative regimes such as Sudan, North Korea and Burma.

THEORIES AND EMPIRICAL RESEARCHES:

Many empirical studies have been conducted to understand the impact on economic wealth due to the transition to democracy. Cross sectional and time series data has been conducted over time with a large sample of years and countries being taken into consideration to arrive at a concrete conclusion. Lipset took the bold step of understanding and researching on this relationship whereby he arrived at the perspective that the more well to do a nation is, the more likely it is to sustain democracy which elicited that the wealth of country would lead to the consolidation of the democratic process rather than democracy nurturing economic wealth. He went on to explain that in a wealthy society where only a few percent of the citizens live in the conditions of poverty, the intelligent masses would collude to restrain the forces of succumbing to the appeal of irresponsible demagogues (Lipset, 1959). Hence Lipset formed more of a positive correlation between high levels of economic wealth and democracy. However as strong as this correlation was thought to be, it was not a case of causation because of which academics, policy makers and developmental analysts were involved in a huge debate as they tried to extricate the complexities of the relationship between democracy and development and understanding if there exists a causal link between the two. (Diamond, 1992) After Lipset, came in Dankwart Rustow who furthered the claim made by Lipset and substantiated that by saying that the socio economic welfare of the people is a condition that will lead to the democratic

process. This theory in itself saw the democratization process as a function of the development of the middle class, urbanization of cities and the development of other democratic values. This modernization approach entails that the authoritative regimes which reach a certain threshold of economic wealth acquisition will inevitably pave their way to acquiring democracy. (Rustow, 1970) However in the 1980s there was a wave of democratization which engulfed the developing world challenging the notion of the pre-requisites of democracy. As per the events documents, it has been divulged that a large number of countries which were in the transition period to democracy during this wave of democratization were found in the bottom half of the Human Development Index which is one of the indicators to measure the economic and social development of humans (Diamond, 2006). It was also noted that many of the authoritative regimes had not transitioned to a democracy and that the freedom eluded the people in such countries even after the threshold level of income was reached. This went on to show that there was no real progression of institutions in the country. One interesting observation which would be appropriately pointed out here is that the oil rich countries (countries which derive more than 30% of their GPD from exports) have continued to maintain repressive regimes event at high income levels which can be considered an anomaly as they dont follow the connection of democracy and economic wealth of its own. These countries would include Saudia Arabia and the Middle Eastern countries. So one analytical observation can be derived from the example is that reliance of the world on oil can create the governments which would be resistant to change because these countries have little incentive to develop their economy hence hindering the creation of the middle class and inhibiting the democratic process to flow in. (Ross, 2001) Extending the argument from this, we see that in the current world scenario, there exists many wealthy autocracies such as Singapore, Saudia Arabia, Kuwait where the masses enjoy high standards of living due to the immense creation of economic wealth. On the other hand we see that there are many struggling democracies which has a low GDP per capita and lower standards of living due to lower economic opportunities for creation of economic wealth. The classic case of India can be cited here where around 33% of the population fell below the poverty line whereas the economy itself might be booming due to the software technology and outsourcing of multinational operations to India (World Bank, 2010). Other than India, countries which are poor democracies include Ghana, Costa Rica, Nepal and Hungary. Thus this leads to the broad consensus which is gaining popularity among the scholars that the economic development is not a necessary and also not a sufficient condition for democracy. This goes on to show that there are no preconditions to the prevalence of democracy in some countries. The new theory that has been posited by Leftwich (2005) has included the element of state capacity as an important driver in the relationship which they believe can leave to the trifecta relationship where the state capacity should be considered one of the ways to get to the end. Now by that they all imply that by the end of the 1990s there was a growing notion that the institutions of the state matter along with the effectiveness and orientation of the state which are considered to be indispensable factors when deciding on the economic wealth being created and development ushering in. A strong state is

thus defined as the network of authoritative institutions that would formulate and implement top level decisions throughout an assigned and demarcated politically confined region and entity. (Geddes, 1994) Now I would want to delve into the two empirical studies that were done by different researchers into understanding the strength of this connection per say. The first study was conducted by Adam Przeworski, Jose Antonio, Michael Alvarez and Fernando Limongi who compared the trends of economic development of around 140 countries during the time period from 1950 to 1990 using the methodology of pooled sample. They estimated that countries with GDP per capita of $4000 and over would be able to sustain democracies, hence perpetuating the threshold process that was mentioned earlier by Rustow.(Przeworski, 1996) Despite mentioning the conclusion that wealth strengthens democracy, the authors downplayed that the gradual economic growth would not necessarily transpire a transition from autocracy to democracy. They contended that they dont know whether democracy would foster economic growth or hinder it altogether. (Limongi, 1996) An example of hindering it would be that Pakistan has always prospered under military dictatorships such as the Green Revolution brought in by the Martial Law administration President Ayub where as the 7.2% GDP growth rate experienced during Zias rule in the 1980s along with the failures of democracy recently seen in the rule of President Zardari where the country plummeted further into economic doldrums. The second study was conducted by Charles Kurzman, Ross E. Burkhart and Regina Werum who undertook the methodology of pooled annual time series for the time period 1951-1980 considering examples of 106 countries in the process with 88 non-core countries being considered. These authors came to the conclusion that democracy has a marginal positive effect on the economic growth of a country through the concept of investment as it increases the investment in the democratic countries creating stronger economies. However they also pointed out that democratic societies can have reduced government expenditure which has a negative effect on the economic growth. Amalgamating the effect of the two factors, they came to the conclusion that democracy tends to produce a small but robustly important indirect effects on the economic growth of a country leading to production of economic wealth. The direct effects revealed upon consideration and research included reduction of social unrest in democratic societies which lead to furthering of economic growth thus overall creating a favourable impact on the economic wealth of a nation. (Kurzman, 2002) Roll and Talbot in 2003 embarked on strictly restricting themselves to the countries that transited to democracy from authoritative regimes whereby they took 44 countries during the time period of 1959 to 1999. He undertook the methodology of the event study to understand the average growth rate before the years of the democracy compared to after the years of democracy. His data elicited that the average growth rate was equal to 1.9% for the countries which were taken in the research after democracy had ushered in, in response to the 0.8% economic growth rate the same countries had enjoyed when they were under non-democratic rule. (Roll and Talbot, 2003) Thus the argument put forward adhered to the observation that democracy is an important pre-requisite for the promotion of economic development. This although goes in connection with the correlation mentioned above that the wealthiest countries are infact democracies but the following research goes on to the refute the claim of Roll and Talbot.

However, Junling Hu in 2004 used the same event study method but came up with different results altogether. He discovered that half of the countries were above their growth rate after they entered into a democratic setup while half of the countries were below their growth rate after they allowed democratic setup to take over. This went on to show that democracy was not a cause of prosperity and economic wealth. Hence Junling took the income level as a variable and discovered that once a country was able to reach a certain level of GDP per capita which was $3000 then a democracy would never go back to being a non-democratic company and that democracy prospers in countries with high levels of income. It was also noted that as the authoritative regimes tend to reach the $3000 level, they become freer and beyond the $5000, a non-democracy will become freer over time. This finding was consistent with the models that were pursued and observed in the East Asian countries along with some of the South American nations. (Junling Hu, 2004)

COMPLEXITY OF THE CONNECTION:

The different researches and the different studies mentioned above are not meant to confuse the reader but to present the complexity of the relationship in itself. Democracy can be defined in various ways and can be conceptualized in various ways. Political freedom can be seen as a way to conceptualize democracy whereas the prevalence of the market system of demand and supply with little government intervention can be seen as the economic democracy which can then be corresponded to economic wealth (Bolen, 1985). Speaking of economic wealth, the term itself can be complexly described across different dimensions ranging from economic growth rate, GDP per capita, development as mentioned by Amartya Sen (lower unemployment, equal distribution of income and wealth) and other economic factors which can be taken into account when conceptualizing economic wealth fully. By considering both sides and both the directions of the relationship whereby democracy leads to economic wealth or the economic wealth leads to democracy, we have fully analyzed the statement in itself to understand that the matter would require further research to come to a solid concrete conclusion (Dietrich, 1993). In light of the researches and the examples mentioned above, it can be concluded that the statement itself is a hotly contested one with different approaches and research methodologies being employed to arrive at desirable results. However the variance of the data, the presence of outliers and the consideration of too many variables in the researches have elicited that the a more well rounded, involving greater number of countries and indepth reasoning-based research needs to be conducted to divulge important results that would answer the numerous queries arising from the previous researches conducted. What we are left with for now is that democracy either leads to economic development or that economic development is a precursor for the democracy to usher in and to prevail. (Bardhan)

POLICY IMPLICATIONS:
Once we have reached the analytical level mentioned above in the previous paragraphs, I believe it is important to discuss how each conclusion can be used fruitfully in the formulation of policy and how each side has different policy implications. What we first need to understand is that the two opposite conclusions drawn would have conflicting or opposite public policies. These alternative policies per say have led to policy debates and even that remain unclear which needs to be implemented.

The first approach can be termed as the development first democracy later which centers around the creation of economic wealth as a precondition to democracy. For this to happen and to be proved true, policies need to be formulated and should be aimed at cultivating intellectual and human capital so that the economic growth not only trickles down but is shared leading to a higher GDP per capita. This will lead to the development of the social values and the social capital necessary to bring about a change in the nature of institutions from authoritative to democratic. Countries in abject poverty such as the subSaharan countries need a total economic uplift for any democracy and institutional infrastructure to get established in the first place. Similarly, countries such as Afghanistan, Cambodia, Iraq and Indonesia would be investments in human capital and economic wealth creating opportunities because investments in furthering human rights along with uplifting media would be useless due to the inability of people to look after themselves economically. (Rodrik, 1992) The second approach can be termed as the economic development first approach where the researchers Siegle, Halperin and Weinstein contend that the societies continue to remain in economic poverty under autocratic regimes and with the relative income structure in mind, low income democracies usually outperform the low income autocracies in promotion and providing social welfare. They go on to pursue the line of thought that undertaking the development first and democracy later approach has the risk of exposing the population to economic stagnation and political oppression. They in fact, argue that democracies are able to bring in accountability through the processes of checks and balances and instilling in the government to be more socially active and responsive of the needs of its citizens and take conscious steps to alleviate poverty and pursue economic developmental policies. Only with democracy can the investment in human and intellectual capital be made. Developmental aid can pave the way as the center of economic policy formulation as well which will lead to augmentation of the quality of life on the peripheral countries of the world which are democratic because developmental aid in the autocratic countries can be devoured by the authoritative leaders for their personal gain. (Kosack, 2003) The third approach revolves around the state building which would lead to not only democracy but also leading to economic wealth. The policy implications for this mean that the formulation of strategy would be such that the state capacity is rendered effective through the provision of social services to enhance human development. This would lead to the creation of institutions that are not patronage based whereby creating conditions for prospective democratization, good governance and transparency. (Feng, 2003).

CONCLUSION:
In light of the above mentioned literature, evaluation and analysis, I have come to the conclusion that there exists a strong connection between democracy and economic wealth. The nature and direction of the connection remains disputed and debated upon. Whether we take into account the fact that democracy leads to higher levels of economic wealth due to the creation of economic opportunities or we consider that the creation of economic wealth paves the way for democratic institutions in the country, both of the scenarios go on to delineate that there exists a relationship between the two variables. Either side has examples ranging from United States of America and the European countries

for the former where as examples including South Korea for the latter. What is maintained throughout the literature reviewed is the underlying premise that the relationship between democratic consolidation and economic wealth can be established by taking into account a variety of circumstances and contexts. Hence there is no denying the fact that the relationship between the underlying characteristic and the nature of the regime in question is probabilistic depicting variance through the democratization process divulged through the analysis of the third wave period. This in the end leaves us with the inconclusive evidence of the direction of the relationship between democracy and economic wealth and with the question about presence of the third variable by the name of state capacity. However what we stand sure of is the strong connection between democracy and wealth whether it be a causality or a correlation.

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