ECONOMIC GROWTH THROUGH DEMOCRACY OR
AUTHORITARIANISM
By Kazi
Anwarul Masud( former Secretary and ambassador)
FOR
PUBLICATION ON FRIDAY THE 2ND MAY 2014
The old debate on the
appropriateness of authoritarian or democratic system of government suitable
for economic growth has been getting
attention these days. The financial crisis of 2008 that started in the US and
engulfed Europe and the rest of the world has raised the question in the minds
of many of the efficacy of market oriented economy that would answer the needs
of the great majority of the people. Should democracy be dumped for a while(
definition of "while" being indeterminate) and a chosen few be
entrusted with the responsibility of conducting global affairs? Fortunately
most of the world having traversed Samuel Huntington's three waves of democracy
and facing the fourth wave in the Middle East would refuse to accept an authoritarian
system, be it homemade or foreign exported, because they would like to be the
master of their own fate. Democracy is a difficult process to arrive at and
many "democratic" countries hold elections to elect President
virtually for life ( Robert Mugabe in Zimbabwe for example) regarded by the
advanced nations as sham elections aimed at perpetuation of rule by a coterie. Princeton's
Michael
Walzer agreed with many when he wrote: "Democracy has social and cultural
as well as political and legal prerequisites, and its creation is a long-term
project. It requires a strong public education system, vibrant universities,
independent churches, associations of many different sorts, local governments
that work, and much more. It requires a certain kind of public space for group
interaction, where citizens can learn the value of compromise and the
possibility of living with ongoing disagreement and partial settlements of
political disputes"(Ethics & International Affairs, Volume 22.4
(Winter 2008.) Walzer better known for his books and essays on a wide
range of topics, including just and unjust wars, nationalism, ethnicity,
economic justice, social criticism, radicalism, tolerance and political
obligation like many intellectuals have delved into the question of
democratization. Sometimes possession of natural resources can be a bane as has
happened in several Arab countries Another Princeton luminary Charles Boix observed
that unconstrained by any domestic mechanism of control, the existing political
and economic elites alone benefit from those natural riches and illiberal countries that suddenly strike oil
or any other mineral wealth get trapped
in authoritarianism. This is the standard story of many oil- and gas-rich
Middle Eastern and North African countries. It is the tale of all the former
Soviet Union states in Central Asia. It partially explains the fragile nature
of liberal institutions in Russia. It fits the pattern of violence and
dictatorship that devastates many African nations. And, in combination with
appalling levels of inequality, it is behind the turmoil of several Latin
American economies, such as Venezuela, Ecuador, and Bolivia. Russian flexing of
muscles following the annexation of Crimea and her indifference to the Western
threats of economic sanctions can be accounted for by Russia having abundant
oil and gas reserve and European dependence on Russian gas to sustain Europe's
prosperity. Despite Condoleezza Rice's exhortation of the US to be independent
of Russian and Middle East oil to advance the interest of the petroleum
industry she has faced criticism for oversimplifying the fate of Ukraine with
North America's bounty of natural gas. In an op-en in the Washington Post Rice
writes " :“Soon, North America’s bounty of oil
and gas will swamp Moscow’s capacity. Authorizing the Keystone XL pipeline and
championing natural gas exports would signal that we intend to do precisely
that. And Europe should finally diversify its energy supply and develop
pipelines that do not run through Russia.” Her critics find her recommendation
troubling. They think that this impulse to accelerate the pace of
extraction and combustion of fossilized solar energy is wildly at odds with the
bulk of peer-reviewed science that strongly recommends a move in the opposite direction.“Swamping”
Russia’s capacity also means swamping the planet with yet more
CO2 emissions. The result of accelerating climate change will certainly
result in negative outcomes that
are far more terrifying than the specter of WMDs that Rice helped conjure
up to sell the American public on a costly intervention
in an oil-rich region over a decade ago. But then powerful people have been
known to become handmaiden of plutocrats once out of power. In our discussion
on democracy political stability occupies a central figure. Historians agree
that intra-European wars that characterized both pre-colonial and colonial
periods were an integral part of the theory of divine rights of the monarchs to
rule as they pleased. Louis XIV's famous remark L'etat c'est moi( I am the
state) though a demonstration of France's glory at its peak yet foretold the bloody 1789 French
Revolution and the Robbespierre's Reign of Terror. Robert
Dahl recounts : There were ups and
downs, resistance movements, rebellions, civil wars, revolutions. For several
centuries the rise of centralized monarchies reversed some of the earlier
advances-even though, ironically, these few, monarchies may have helped to
create some conditions that were favorable to democratization in the longer
run. Looking back on the rise and decline of democracy, it is clear that we
cannot count on historical forces to insure that democracy will always
advance-or even survive, as the long intervals in which popular governments
vanished from the earth remind us .Democracy, it appears, is a bit chancy. The story of political instability and
authoritarian governments that burdened Germany and Italy in the first half of
the twentieth century ended only with American occupation. Similarly, the
United States democratized Japan and imposed key agrarian reforms in Korea and
Taiwan that would then sow the seeds for growth and liberal institutions. Similar
was the fate of the Soviet occupation of
Eastern Europe till the collapse of the USSR when the Eastern Europeans could easily transit to
democracy in a way they were unable to do before the end of the cold war. Can religion be an impediment to
democratization? Many would agree. During
the early days of the American quest to cobble together the "united
states" there was an attempt of Thomas Jefferson’s Virginia Statute for
Establishing Religious Freedom. A Baptist preacher demanded
that “The unlawful cohabitation
between Church and State, which has so often been looked upon as holy wedlock,
must now suffer a separation and be put forever asunder.”With support of
freedom-loving evangelicals, James Madison was able to push Jefferson’s Statute
through the Virginia legislature; later to became a foundation for the First Amendment.
Of
late thanks to few intellectuals of outstanding repute coupled with 9/11
terroristic carnage prompting the entry of neocons into George W Bush's inner
circle millennial rivalry between Islam and Christianity has come to the fore.
Famous Iranian scholar Abdul Karim Soroush views that the
key to understanding the root cause of the democracy predicament in Muslim
countries does not lie in the text or in the tradition of Islam but in the
context of modernity, politics, and culture. In response to the Western critics
Soroush adds that democracies are seen by some Muslim activists as systems in
which human whim is the source of law, whereas Islamic principles are
transcendental and cannot be undermined by popular whim. But what many of them
fail to understand is that democratic institutions are not just about law. They
are also about prevention of tyranny by the state. Regardless of where
sovereignty is placed theoretically, in practice it is the state which
exercises it and not God. Even though God was supposedly sovereign in Taliban's
Afghanistan, it was in fact the Taliban that was sovereign there; Mullah Omar
ruled, not God. Sovereignty in fact is always human, whether in a democracy or
an Islamic state. The issue is not whether people are sovereign, but how to
limit the de facto sovereignty of people, since they reign under both systems. Western
policy makers and intellectuals have to understand that the millennial rivalry
has not been between the Muslims and the Christians as the Thirty Years War(
1618-48) was fought in Europe would testify. If the Arab Middle East was the
only major region of the world that the Third Wave had bypassed completely,
leading some commentators to coin the phrase “Arab exceptionalism” to
characterize this phenomenon was a hasty conclusion. The Economist magazine, in
an article that appeared, ironically,
just two weeks before the beginning of the uprising in Tunisia, summarized the
various arguments that had been offered to explain the democracy deficit in the
Arab world—among them the "undemocratic character of Islam" and Arab
culture, the colonial inheritance of artificial borders and states that
weakened a focus on citizen rights, the manipulation by Arab rulers of the
conflict with Israel and the fear of the Islamists, and the abundance of oil
which both enriched the regimes and freed them from having to serve the needs
of tax-paying citizens( The New Republic- Carl Gershman-March 2011). President Barak Obama was prescient in his
Cairo speech in asking for cooperation between the two worlds( if one were to
take Samuel Huntington and Bernard Lewis
less seriously) and conclude that Nial Ferguson's "gated communities"
of prosperity is an impractical idea in today's flat earth politico-economic
environment. Lest we forget in the early twentieth century Theodore Lothrop
Stoddard, the author of the bestseller The Rising Tide of Color against White
World Supremacy (1920) invested early in Islamophobia and Niall Ferguson wrote
in The Telegraph( 21st May 2006) that " 'Islamism' was a militantly
political movement with an anti-Western political ideology that had the
potential to spread throughout the Islamic world, and even beyond it". There
are many walking around the corridors of power
pining for Stoddardesque laments about the emasculation of Anglo-Saxon
power who would like a Colossus(2004) and an Empire(2003) to be reincarnated to rule the waves. Fortunately however the
division of the world and the emergence of non-occidental competing powers coupled with the
refusal of the West to play John Wayne's
muscular roles will bring about cohabitation among the various parts of the
world.
DAILY STARMay 01, 2016 / LAST
MODIFIED: 12:00 AM, May 01, 2016 Increasing productivity to revive growth Shamshad
Akhtar
The Asia-Pacific region's successful
achievement of the 2030 Agenda for Sustainable Development needs to be driven
by broad-based productivity gains and rebalancing of economies towards domestic
and regional demand. This is the
main message of the Economic and Social Survey of Asia and the Pacific 2016,
published on April 28 this year by the Economic and Social Commission for Asia
and the Pacific. Such a strategy will not only underpin the revival of robust
and resilient economic growth, but also improve the quality of growth by making
it more inclusive and sustainable. How should Asia-Pacific policymakers go
about implementing such a strategy? Approaches
by developing Asia-Pacific economies, which are tilted more towards reliance on
export-led economic recovery, will be ineffective under the current
circumstances. Despite extraordinary measures, global aggregate demand remains
weak and China's economic expansion is moderating. The impact of further loosening of the monetary
policy is also likely to remain muted, and is not advisable. The key reason is
a confluence of macroeconomic risks that are clouding the economic outlook,
such as low commodity prices affecting resource-dependent economies, volatility
in exchange rates, as well as growing private household and corporate debt -
the impact of which is likely to be complicated by the ambiguous path of
interest rate increases to be pursued by the United States. The
contribution of export-led economic growth to overall development of economies,
supported by low interest rates and rising private debt, seems to have plateaued,
with economic growth in developing Asia-Pacific economies in 2016 and 2017
forecast to marginally increase to 4.8 percent and 5 percent respectively from
an estimated 4.6 percent in 2015. This is considerably below the average of 9.4
percent in the pre-crisis period of 2005-2007.Along
with the economic slowdown, progress in poverty reduction is slowing,
inequalities are rising and prospects of decent employment are weakening. At
the same time, rapid urbanisation and a rising middle class are posing complex economic,
social, and environmental and governance challenges. Such conditions can
undermine the significant development successes of the region in recent
decades, making it more difficult to deal with the unfinished development
agenda, such as lifting 639 million people out of poverty. Had inequality not increased, approximately 200
million more people could have been lifted out of poverty in the three most
populous countries of the region alone. To overcome these challenges, and to
revive the region's economic dynamism and effectively pursue the 2030 Agenda,
policymakers are advised to use all available policy levers, including
countercyclical fiscal policy and supportive social protection measures, which
critically calls for raising domestic resources. Such interventions would not
only support domestic demand but also strengthen the foundations for future productivity-led growth by
targeting areas such as: labour quality, including knowledge, skills, and
health of the workforce; innovation through trade, investment and R&D;
adequate infrastructure in transport, energy and ICT; and access to finance,
especially by SMEs. Fiscal measures underpinning such initiatives should be
accompanied by sustained reforms towards efficient and fair tax systems which
deliver the necessary revenues for the required investment in sustainable
development. Sustained increases in domestic demand will also require steady
growth in real wages. This requires linking labour productivity more closely to
wage levels. Strengthening
the enabling environment for collective bargaining is one necessary component
in the policy arsenal of governments, with the enforcement of minimum wages as
another important policy tool. After increasing significantly over the last few
decades, productivity growth has declined in recent years. This is worrying not
only because wage growth has
lagged behind productivity growth, but also because wage growth ultimately
depends on productivity growth. Specifically, compared to the period between 2000 to
2007, annual growth of total factor productivity has declined by more than 65
percent in developing countries of the region, averaging only 0.96 percent per
year between 2008 and 2014; labour productivity growth has declined by 30
percent, reaching just 3.9 percent in 2013.The
recently-adopted Sustainable Development Goals provide an entry point to
strengthen productivity. For instance, raising agricultural productivity and
thus lifting rural households' income must be at the centre of the focus to end poverty (Goal 1), and to end hunger and achieve
food security (Goal 2). This is because
agriculture accounts for one in four workers in the region and more than half
of the region's people live in rural areas. Efforts to eradicate poverty and
increase agricultural productivity would also foster development of the rural
sector and encourage
industrialisation (Goal 9).Higher levels of
productivity in agriculture will also free-up labour, which would be available
to work in the non-agricultural sector. It is therefore imperative to consider
a broader development strategy that moves towards full and productive employment (Goal 8) to accommodate the “agricultural push” of labour.
This will require mechanisms to provide, particularly those with low skills, access to quality education and lifelong learning
(Goal 4).The need to
provide quality education cannot be overemphasised in view of the skills bias
of modern technology, which reduces the pace of absorption of unskilled labour
released from the agricultural sector.Thus, whereas the Goals will contribute
to strengthening productivity, which will also contribute to the success of a
number of the Goals, creating a virtuous cycle between sustainable development,
productivity and economic growth.The
writer is an Under-Secretary-General of the United Nations and Executive
Secretary of ESCAP. She previously served as Governor of the Central Bank of
Pakistan and Vice President of the MENA Region of the World Bank.READ
BROOKINGS Can Asia reach high-income?Donghyun Park, Abdul Abiad, Gemma Estrada, Xuehui Han, and Shu Tian
In a single
generation, Asia has transformed itself
from a low-income continent to a middle-income one. In 1991 more than 90 percent of the region’s population still
lived in low-income countries. By 2015, more than 95 percent lived in
middle-income countries (Figure 1). Rapid growth propelled most of the
region—including the most populous countries of China, India, and
Indonesia—into middle-income status. Is the continent now on its way
to reaching high income in the next generation? The experiences of
the newly industrialized economies might give some cause for optimism about the
region’s prospects. After all, the Republic of Korea
made the transition from middle to high income in only 23 years. Yet global experience is
far less reassuring. Historically it has taken the typical middle-income
country more than half a century to graduate to high-income status,
leading some economists to label this the “middle-income trap.”Moving up to high income is
particularly challenging, as the easy source of growth in early
stages—increasing the amount of capital and labor used in production—can only
take countries so far. Countries can only reach high income if their workers
and companies become more efficient in using these inputs; in economists’
language, this means that total factor productivity (TFP) will need to play a
larger role. TFP growth accounts for almost 30 percent of growth in middle-income countries
that graduated to high income, but less than 10 percent of those that did not
(Figure 2). But what can boost TFP growth? There is new evidence that TFP growth in
middle-income countries depends on innovation, human capital, and
infrastructure.( Total factor productivityFrom Wikipedia, the free encyclopedia In economics, total-factor productivity (TFP), also
called multi-factor productivity, is a variable which accounts for effects in total output growth relative to the growth in traditionally
measured inputs of labor and capital. TFP is calculated by dividing output by
the weighted average of labor and capital input, with the standard weighting of
0.7 for labor and 0.3 for capital. If all inputs are accounted for, then total factor
productivity (TFP) can be taken as a measure of an economy’s long-term
technological change or technological dynamism.Technology
growth and efficiency are regarded as two of the biggest sub-sections of Total
Factor Productivity, the former possessing "special" inherent
features such as positive externalities and non-rivalness which enhance its
position as a driver of economic growth.Total Factor Productivity is often seen
as the real driver of growth within an economy and studies reveal that whilst
labour and investment are important contributors, Total Factor Productivity may
account for up to 60% of growth within economies. It has been shown that there
is a historical correlation between TFP and energy conversion efficiency. Also, it has
been found that integration (among firms for example) has a casual positive
impact on total factor productivity.) As countries develop their economies, traditional sources of
productivity growth—such as shifting labor from agriculture to manufacturing or
the imitation of foreign technologies—decline in importance. Innovation assumes
a more central role, especially for upper middle-income countries.
Middle-income economies that successfully graduated to high income had 2.5 times more research and development stock per worker as those that did not, for
example.Risk-taking entrepreneurs often lead in fostering innovation, turning
new ideas or technology into innovation-based productivity growth. As economies
become more sophisticated, “opportunity-driven” entrepreneurship, which builds
on new ideas or technology, outweighs “necessity-driven” entrepreneurship,
which responds to existing market needs. The ratio of opportunity-driven to
necessity-driven entrepreneurship is
1.6 times higher in high-income economies than in middle-income ones.
Middle-income economies should encourage and nurture entrepreneurs to pursue
new business opportunities and provide novel products and services.In addition
to entrepreneurship, innovation requires a skilled and knowledgeable workforce
capable of using and creating new technologies. In Asia, like elsewhere, human
capital accumulation can promote both growth and equity. Estimates indicate
that a 20 percent increase in human capital can
raise labor productivity by up to 3.1
percent and narrow labor income inequality by up to 4.5 percent. The bonus in
income growth is more salient among poorer families, which may explain the
income-equalizing effect. The emphasis needs to be on ramping up the quality of
Asia’s education. Economies with relatively high cognitive skills benefit from
having a critical mass of students likely to become innovators. Research
indicates that as economies move closer to the technological frontier the
returns on research-oriented innovation pick up tangibly. In globally
standardized math and science tests, the proportion of top-performing
15-year-old students in the advanced economies is on average 5 times the
proportion in middle-income economies. An exception like Vietnam, which ranks
eighth among the 72 economies covered, demonstrates that the gap can be closed
with sound education policies. Advanced infrastructure such as information and
communication technology (ICT) can help sustain growth in middle-income
economies. The fastest-growing middle-income economies invest more in infrastructure and tend to have more of their infrastructure in
sectors such as ICT. Middle-income economies that graduate to high income have
18 more internet users per 100 people and 31 more mobile phone subscriptions
than their peers, for example. Mobile telephone and broadband networks are
vital tools for creating and disseminating knowledge. Investment in advanced
infrastructure can boost growth by promoting both innovation and human capital.
Analysis of developing economies shows that a 1 percent GDP increase in public
infrastructure investment lifts
output by 0.3 percent in the same year and by nearly 1.2 percent after seven
years.Sustaining rapid growth is not easy, but is within reach for
middle-income Asia. Many norms that served the region well in the past, such as
macroeconomic stability and high investment, still serve it well at middle
income. Empirical estimates show that when a country reaches middle income, its
growth rate is more vulnerable to indicators affecting macroeconomic
stability—such as whether the country faces a banking or currency crisis, the
extent of capital inflows other than foreign investment, and government debt as
a share of GDP. At the same time, patterns of growth must evolve if Asia is to
sustain rapid growth and eventually reach high income. The productivity-enhancing trinity of
education, innovation, and infrastructure all have vital roles to play. The
nexus of advanced infrastructure, highly developed skills, and innovative
entrepreneurship can support Asia’s productivity growth and enable a successful
transition to high income. The transition
will not be easy, but Asia’s dynamic track record and strong fundamentals
encourage optimism that the region can meet the middle-income challenge.Donghyun Park,
Abdul Abiad, Gemma Estrada, Xuehui Han, and Shu Tian are Principal Economist,
Advisor, Senior Economics Officer, Economist, and Economist in the Economic
Research and Regional Cooperation Department at the Asian Development Bank.
This article is based on Asian Development Outlook 2017 special theme chapter
“Transcending the Middle-Income Challenge.”READ
Asian Development Outlook (ADO) 2017: Transcending the Middle-Income
ChallengeApril 2017 Developing Asia
has continued to perform well, even as recovery in the major industrial
economies remains weak. The region is forecast to expand by 5.7% in 2017 and
2018, nearly the 5.8% growth achieved in 2016.Decades of
rapid growth transformed developing Asia from a low-income region to middle
income. Sustaining growth to power the transition to high income will depend on
much greater improvement in productivity. Innovation, human capital, and
infrastructure are the three pillars of productivity growth. Supportive
institutions and policies, underpinned by macroeconomic stability, can
strengthen all three pillars. Asia’s dynamic track record suggests that
attaining high income status, while challenging, is achievable.
Raising
Productivity Growth is Critical for Middle-income Asia — ADB Study 6 April 2017
HONG KONG, CHINA
(6 April 2017) — Reforms to increase productivity on the basis of better innovation, education, and
infrastructure can help developing
countries in Asia and the Pacific graduate to high-income status, says a new
Asian Development Bank (ADB) report.Transcending developing Asia’s
middle-income challenge is the subject of the special theme chapter in the Asian
Development Outlook (ADO) 2017
report. ADO is ADB’s flagship economic publication.“Past development
success in Asia and the Pacific means most citizens in the region now live in a
middle-income country,” said Yasuyuki Sawada, ADB’s Chief Economist,
“Policymakers will need to change their approach to reach high income. It is no
longer a question of them using more resources to sustain growth, economies
must become more productive to clear the final hurdle.”The report notes that in 1991 only 10% of
the population in Asia and the Pacific lived in middle-income economies. By
2015, this had increased to over 95% of the region’s population, fueled by
growth in the region’s most populous countries: the People’s Republic of China
(PRC), India, and Indonesia. To raise
productivity, countries in developing Asia will need to focus on innovation.
Middle-income countries that successfully moved up to high income have more
than two and half times as much stock of accumulated research and development
as other middle-income countries. Innovation requires a skilled workforce,
and hence an emphasis on improving education quality. The report
estimates that a 20% increase in human capital spending per capita can increase
labor productivity by up to 3.1%. Sound educational policies can also promote
equity and close the wide education gaps between developing Asia and
high-income economies, while encouraging innovation and entrepreneurship.Infrastructure investment, particularly in
energy and information and communications technology, can contribute to
innovation and human capital, and thus sustaining growth in middle-income
countries. A one-time public investment
in infrastructure equal to 1% of gross domestic product can lift a country’s
output by as much as 1.2% in 7 years. Asia’s dynamic track record suggests
that the journey to high income, while challenging, can be completed.
Supportive institutions and policies, underpinned by macroeconomic stability,
can strengthen the pillars of productivity growth — innovation, human capital,
and infrastructure.ADB, based in Manila, is dedicated to reducing poverty in
Asia and the Pacific through inclusive economic growth, environmentally
sustainable growth, and regional integration. Established in 1966, ADB is
celebrating 50 years of development partnership in the region. It is owned by
67 members—48 from the region.READ
MIDDLE INCOME
TRAP
WORKING PAPER NO. 715 | April 2012
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