Growth and political stability
Vinod Anand | 06 Dec 2011

THERE exists a strong relationship between a country's development strategy and its political system. Authoritarianism or democracy has an unfailing influence on the pace of development and justice. Political institutions always dominate the fate of nations in many ways. The strategy of economic development pursued by a country is an outcome of its political system, which, in turn, also determines its success or failure.

THERE EXISTS a strong relationship between a country's development strategy and its political system. Authoritarianism or democracy has an unfailing influence on the pace of development and justice. Political institutions always dominate the fate of nations in many ways.

The strategy of economic development pursued by a country is an outcome of its political system, which, in turn, also determines its success or failure. The rate of economic growth and the level of economic and social development represent the well-being and prosperity of an economy, and political stability indicates the well-being of its political institutions.

When one looks at the economy and politics of a country, there arise a number of questions. For example, what is the role of political institutions in economic growth and development? Which kind of political institutions (democracy or dictatorship) helps or hinders economic growth and its "trickle-down" effect? Is there a trade-off between economic, political and civil liberties and economic growth?  What is the role of income distribution, poverty alleviation and other social welfare provisions in determining economic performance?

The conventional economics, somehow, fails to answer these questions mainly because it is devoid of the role of the State or that of political institutions, which are treated "exogenously" in all discussions. The answer can only emerge if the role of the State is treated "endogenously". This is done in what is termed as the "New Political Economy" which is, in fact, a revival of what, at one time back in history, was known as "Political Economy".

The "New Political Economy" unlike the mainstream conventional economics, incorporates government's impact on the economic system and its components, without going into the questions of the development of political systems, constitutions and their processes.  In essence, it accounts for the behaviour of the electorate, the legislatures and the bureaucracy. It is only then that we are able to answer various questions related with the behaviour of the State and its impact on the economic functioning of a given system.

There is a strong relationship between economic growth, capital accumulation and democracy on the one hand, and between political instability and income inequality on the other. Let us now find answers to the question with regard to the linkages between the well-being of an economy and its political set-up. These answers emerge from the experience of different countries and take the form of distinct hypotheses as given below:1) Democracy retards economic growth (India's experience up to the eighties).2. Democracy helps achieving high rates of economic growth.3. Authoritarian regimes lead to faster economic growth (East Asian experience).4. Dictatorial regimes lead to poor economic growth (African and Latin American experience).As the hypotheses are contradictory and inconsistent, the picture is hazy and no categorical conclusion can be made.

Nonetheless, the fact remains that political institutions play a crucial and relevant role in the process of economic growth and development. The way political institutions influence the pace of economic growth is not something which is quantifiable nor is it a matter of trade-off between economic and civil liberties and economic growth.  It is something which is not easy to notice, understand, or explain in concrete terms.  It is, in fact, a subtle relationship, which has to be qualitatively analysed and that too with great caution. An attempt to reconcile hypotheses (1) and (2) and again (3) and (4) makes it clear that both democratic institutions and dictatorial regimes are practised in different countries in different ways, and it is this variation that makes all the difference to the attainment of economic growth. Countries can be more democratic or less democratic in terms of the basic democratic tenets of regular and reasonably free and fair, multi-party elections and dispensation of economic and civil liberties. It, therefore, follows that in democratic countries, where these two conditions are partly met, other things being given, the pace of economic growth gets retarded, and where these two conditions are honoured, and economic growth gets accelerated. We can make similar statements for dictatorial regimes.

All this leads to the conclusion that whether it is a democracy or a dictatorial regime, what matters is its political stability. The degree of political stability cannot be measured directly. It depends on a number of factors like, political upheavals; riots, strikes and lockouts; crime and (political) assassinations; coups and change of power; infighting amongst political parties; scams including rent-seeking and directly unproductive profit seeking activities; lack of people's faith in the government; poverty and income disparities. One may use these indices to work out the degree of political stability in different countries/regions over different periods. This would lead to a number of interesting hypotheses establishing a link between the indices of political stability and economic growth.  For example, during the periods of political unrest, or coups, or change of power, or even intense infighting within the ruling party, the rate of growth has been seen to slow down, and even become negative, essentially through lower savings and investment rates, and also through a lack of vision in the part of the bureaucracy.

It is now understood that the magnitude of these activities and political instability reinforce and strengthen each other to quite a great extent with the result that, taken together, they work against the growth process. They require being neutralized, weakened and counter-acted. Beyond?Rent-Seeking? and?Directly Unproductive Activities?, there are two other explanatory socio-economic factors of political instability that require our attention. These are Poverty and Inequality of income distribution. There is a two-way relation between poverty and political instability in the sense that they lead to each other and are mutually reinforcing.  It is a known fact that poor countries are, by and large, politically unstable. It is also known that political instability is not conducive for saving and investment, and, thus, adversely affects growth efforts which, in turn, perpetuate poverty. The two-way cause and effect link between the two traps the economy into an acute vicious circle.

To say that economic growth would lead to equality of income distribution has became a myth in recent times, though it was an accepted belief during the fifties, when it was thought that in the initial stages of economic growth, inequalities would rise, but eventually they would fall. During that era, countries, therefore, depended on the growth process to attain equality of income distribution.

Recent research suggests that income distribution is a key factor to promote economic growth. There are two ways in which this happens. Income distribution influences growth via its impacts on political stability, and also through other means. For example, unequal income distribution leads to social unrest, which, in turn, creates demands for changes in the status quo. In such situations, savings and investment are adversely affected which imply low growth. Inequality of income distribution has a dampening effect on economic growth through other means as well. It encourages private rent-seeking activities creating distortions in the market-behaviour, which results into poor investment, and thus low growth.

It, therefore, means that apart from adopting an appropriate macro strategy for growth with implications for poverty alleviation, employment generation and social justice, we will have to devise direct programmes targeted at the poor and the lower income groups and aimed to provide them with entitlements, employment and (productive) assets, and also to pursue welfare-oriented minimum needs programmes which aim at improving the social consumption of essential goods and services by the poor and the downtrodden, notably in the areas of health, education, housing, drinking water, and also in a number of other areas through discriminatory pricing and subsidies.

We also have to evolve an optimal mix of new and strong (economic, political, social, and legal) institutions to provide the necessary support for the promotion of growth, prosperity, and social justice. For example, a strong legal system, with an authoritarian regime within the framework of democratic traditions, will play an important role to provide the required built-in mechanisms to correct distortions and malfunctioning in the government as and when they occur. Equally important would be the integrity and political honesty of the people who are at the helm of political affairs.