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Economics VATSANALYSIS

Does democracy make it difficult to introduce useful reforms?

NITI Ayog’s CEO Amitabh Kant was all over the news recently for the one line that he said in a video interview (that you can still see on Youtube) – “we are too much of a democracy”.

The context: relationship between dealing with democratic decision-making and ability to usher in “hard reforms”. Kant seemed to suggest an inverse correlation – the more democracy there is, the harder it is to introduce reforms. But is it really true?

Last week, I was having a conversation with a startup founder who said something similar. I don’t remember the exact words, but let me share an extract from a World Bank paper that sums up this intuitive logic that many seem to hold.

Reforms are often unpopular because they tend to reduce living standards in the short run. Even reforms that increase overall prosperity (measured in GDP growth) may be unpopular if compensation schemes for the losers are not credible; and if benefits are far in the future and costs more immediate.

These problems are compounded by the fact that democracies offer more channels of protest and influence on policy-making to subordinate groups than authoritarian regimes. Democratic rule may fragment decision-making authority among branches of government, allowing opponents of reform to interfere more easily with program design.

In contrast, authoritarian governments have less need to respond to either popular opinion or vested interests and hence can more readily base their decision on criteria of economic rationality. They are better able to make long-run plans than are democratic governments tied to electoral cycles; and have greater centralization of power that facilitates the implementation of reforms.

World Bank Policy Research Working Paper, 2016

Now comes the twist – this same World Bank paper goes ahead and analyzes 140+ countries to see if data supports this hypothesis and the answer is – NO! There is in fact robust evidence for a positive link between democracy and growth-enhancing reforms. A move from below-average to above-average level of democracy for example, increases the probability of reform by 20% +

Source: World Bank

Another paper from 2010 had a similar conclusion. The authors plotted a) the global democratic index from 1960 to 2004 and b) reform index for the same period (feel free to read up on how these indices were calculated in the linked paper). Almost always, the two graphs matched – implying that the more democratic the world gets, more reforms happen.

Now this is just a correlation, so causation may be debated but what the above charts show, is still significant – a belief that ‘hard reforms’ happen better in non-democratic setups is not backed by any statistical evidence.

So now we know the link between democracy and reforms. What about growth? Do democratic countries grow faster? Data says – yes. Below is a graph from a study by MIT, published last year.

So even when data doesn’t justify less democracy for the sake of better reforms / growth, why do some folks believe so? Amitabh Kant may have an agenda but what about the startup founder who is extremely rational and wouldn’t last in the industry if he didn’t rely on hard data to make business decisions (his company has been doing good)?

In the same conversation that I mentioned earlier, he narrated to me the story of chewing-gum ban in Singapore that was brought in at a time when miscreants were using the gum to block metro doors. He remarked how radical changes like the chewing-gum ban are so difficult to introduce in a democracy like India. But what he was telling me was a story – one that fed his intuitive idea of how the world probably works (by focusing on exceptions than what usually happens).

There is a deep gap between our thinking about statistics and our thinking about individual cases.

[…]

…even compelling causal statistics will not change long-held beliefs rooted in personal experience.

Daniel Kahneman – Thinking, Fast & Slow

The “China growth story” is another example that makes it easy for many to resist looking at the aggregate global evidence. It is easier to give in to the urge to conclude that democracy in general comes in the way of reforms / growth without asking – is China an exception or a rule? Has China grown in spite of democracy or because of its absence? Most of us never ask these questions; we simply form our opinions and beliefs based on stories that sound reasonable and once the opinion is formed, data becomes irrelevant – stories are all that remain.

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