Monday 21 September 2020

Respect democracy: it safeguards our prosperity

Photo: DutchNews.nl

Democracy is the safeguard of prosperity. We tamper with it at our peril, warns Coen Teulings, professor of Economics, Institutions and Society at Utrecht University. 

From Roman times until the 19th century the average standard of living remained virtually unchanged, and differences in prosperity between countries were minimal as well. We know this thanks to the work done by economic historians Paul Bairoch and Angus Maddison.

Around 1830 the income in ‘the West’ (Western Europe, North America and Japan) was only a third higher than elsewhere. Since then the Western standard of living has increased by a factor of 15. As income inequality within countries fell, those who earned less profited to an even greater degree. It’s a rise in prosperity unprecedented in world history.

This wealth was not shared by the rest of the world: the prosperity gap between the West and the rest widened significantly between 1830 and 1990. The rise in inequality between countries has now come to a halt, with a number of countries in the process of catching up, and very successfully too.

To what did the West owe this exceptional growth in prosperity? And why did other counties fare so much worse? This question has been puzzling economists and other scientists for years.

Property

The central premise of the seminal book Violence and Social Orders, by Nobel laureate Douglass North, co-authored with John Wallis and Barry Weingast, is that this growth was made possible by a better protection of property against robbery and theft, the introduction of the rule of law and the separation of powers, and by a system of democratic checks and balances to assure this protection remained intact. This is how the market economy flourished.

In total 30 of the 180 countries in the world have GDP of over €20,000 a year per capita. Leaving oil-producing countries, tax havens and city states such as Hong Kong and Singapore out of the equation, that group has not changed for decades. The most prosperous country in this group (the United States) is 70% richer than the poorest (New Zealand). Technology-led innovation and new ideas are continually pushing up the limit put on prosperity.

If countries have good institutions and access to the world market new technologies are adopted easily. By sharing innovations all countries in upper echelons of prosperity will grow at roughly the same rate.

The group of runners-up consists of around 60 countries with a GDP of between €5,000 and €20,000 per capita. The pecking order in this group is changing rapidly. Argentina has been falling in the ranks for years while other countries are copying western technologies increasingly successfully and taking their place in the international production network.

Catching up requires them to grow more rapidly than the current top 30 countries, as Japan did before them. The runner-up group represents 40% of the world’s population, with China and India as the most populous among them.

Indestructible beacon

The West should not fear the emerging economies, quite the contrary. The runners-up are inventing new technologies too and that benefits the top economies. Why not adopt innovation from China and India?

Donald Trump’s attempts at excluding Chinese innovation are harming the West’s interests. It goes without saying that China will use its technology to spy on the US just as the US spies on China. The Netherlands does it too. It’s an occupational hazard, as chancellor Angela Merkel found in 2014 when her phone was tapped by the Americans.

Since 1990 the group of runners-up has been growing. More innovation is becoming available and income inequality between countries is becoming smaller. It is not something that is widely commented on.

And then there are the stragglers, 90 countries that are incapable of finding their way up. New technologies from the West are barely adopted, and any progress is negated by a subsequent fall in fortune. Something is (still) lacking in these countries’ institutions.

Democracy

So which institutions does it take to succeed? According Monty Marshall, Keith Jaggers and Ted Gurr’s democracy index, the most prosperous countries are among the 32 most democratic countries. Democracy has proven its prosperity-creating credentials before, in ancient Athens, the Italian cities of the Renaissance and our own Dutch Republic – the richest country in the world between 1600 and 1800.

With democracy such a vital ingredient for success – democracies maintaining the rule of law and access to the world market are approximately six to eight times richer – you’d think countries would treasure it more.

As the Economist wrote, the assumption was that the Chinese economy would start to look like the American economy. It is beginning to look like the opposite is true.

Trump’s United States is starting to look like China. His interventions are jeopardizing the rule of law and changes to voting district boundaries and voter registration laws are undermining democracy. Under prime-minister Boris Johnson of the by now not very United Kingdom, democracy may also be in for a bumpy ride, if his recent tirade against the Supreme Court, which tried to block him earlier, is anything to go by.

Call me an optimist but I still think Europe is an indestructible beacon of democracy and rule of law in which checks and balances contain abuse of power. This is what we owe our prosperity to.

This column appeared earlier in the Financieele Dagblad

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