What these elections mean for the economy

Sure, the free flow of money, come election time, will boost economic activity in the short run. But it is rather like a booster shot after imbibing a sugar-high ‘energy drink’:

it will only leave you drained afterwards. And from all accounts, including reports of the extraordinary seizures of currency hoards, the money taps seem to have opened fully during these elections. But I’m not talking of the short-term effects of a system flush with cash.

I’m talking instead of the correlation between democracies and economic growth. Elections in India, the world’s largest democratic exercise in terms of the number of voters, are a validation of the hypothesis that with all their faults, democracies deliver the best results in terms of economic growth over the long term.

Why would you say that?

There is something to that argument. For instance, business baron Lakshmi Mittal’s son Aditya has in the past gushed about the ease of doing business in China, particularly relative to India. He noted that Chinese officials promised to displace an entire village “in 90 days” to help the Mittals set up a factory. In India, setting up operations can be difficult, Aditya said. So, to that extent, there is a ‘democratic disadvantage’ in project execution. It’s a point that New York Times columnist Tom Friedman has belaboured.

Friedman is on record as saying that while a one-party non-democracy (as in China) has its drawbacks, it can have great advantages if it is led by a “reasonably enlightened group of people” as China is today. “That one party can impose the politically difficult but critically important policies needed to move a society forward...” In a 2005 paper ‘Democracy and Economic Growth’, political scientist John Gerring et al propounded that while democracies have some positive indirect effects — such as greater stability or property rights — the econometric evidence suggests that these are balanced by negatives such that the net effect of democracy on growth performance cross-nationally over the past five decades is negative or null.

Likewise, economist Robert Barro at Harvard has argued in his 1996 book Getting It Right: Markets and Choices in a Free Society that “more political rights do not have an effect on growth… The first lesson is that democracy is not the key to economic growth.” In fact, he argued, the relationship works the other way. By encouraging prosperity, economic freedom does more to promote democracy than political rights do to encourage capitalism.

Not everyone agrees. As scholars Daron Acemoglu, Suresh Naidu, Pascual Restrepo, and James A Robinson argued in a 2015 paper ‘Democracy Does Cause Growth’, democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public good provision, and reducing social unrest. In their estimation, there is “little support for the view that democracy is a constraint on economic growth for less developed economies.”

Mere abidance by the ritual of going to elections periodically does not make for a vibrant democracy. In India, as the campaign promises by the leading parties shows, the embrace of a bigger role government in people’s lives is near-total. That is not exactly the best recipe for economic growth.

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