Is there a link between democracy and economic prosperity? Generally, democracy correlates with a good economic performance but not always. For example, why does Ghana have a high level of political and civil freedoms, according to Freedom House, but is so poor, while Singapore is not a free country but outstandingly prosperous? Why don't Ghanaians vote out politicians that fail and vote in politicians that deliver, as democracy is supposed to work?
The premise of the question that Ghana does not do well despite being a democracy appears to be flawed.
Ghana became a multi-party democratic republic in 1993. Since then:
- The GDP increased by a factor of 6
- The per-capita GDP increased by a factor of 4
- There has been a stable economic growth every year
- Over 50% of the GDP is created in the service industry
- They became the first African country to manufacture their own consumer electronic products like notebooks and smartphones
- They are even manufacturing cars, both combustion and electric
Yes, the quality of life in Ghana is still far behind that of Europe or North-America. There is still a high income inequality. Over 50% of the population are still employed in the agricultural sector (which only represents 20% of the GDP). But economic changes don't happen over night.
Prosperity comes from useful, well-supplied hard work
I say useful, because people digging ditches and filling them back in doesn't create prosperity, no matter how hard they work at it. But if you have a good field, and good seed, and good weather (all contributing to well-supplied), and you work effectively, then hard work can produce a good crop.
The same logic applies to non-agricultural businesses, as well. A business that fills a niche and works effectively will generally be prosperous, as well as beneficial to the prosperity of the economy as a whole.
Sometimes countries are not prosperous because there is not good farmland, useful supplies, properly-skilled and motivated laborers, or good organization.
Civil disorder undermines prosperity
Imagine a war-torn country. (Not difficult; there are plenty of real-world examples.) From day to day, potential workers may be pressed into service in a militia, they may be robbed or killed. They're distracted, because they are worried about their family members' immediate safety.
In such conditions, people cannot be dedicated and productive workers. For that matter, they may not want to be. Imagine you are the most successful guy in town. Who are the insurrectionists going after first? Who are the thieves going after, when there's no functioning law enforcement? Why work hard for the honor of being robbed by the local warlord?
If the government is in a state of collapse and there is no security, a country will not be prosperous.
Political corruption undermines prosperity
As in the case of civil disorder, corruption can also dis-incentivize productive work.
If the police exist, not to protect the shopkeeper from the thief, but to protect the wealthy families shaking down the shopkeepers, what good does it do to work hard? For that matter, the people who are being the most productive must spend their savings in bribing officials to leave them alone, or to let them make arrangements which, in a more law-abiding society, would rather be encouraged than stifled demands for greased palms.
In a rule-of-law company, the business which appoints incompetent management (because he's the owner's son, say) will be less successful because it is poorly managed. In a politically corrupt country, the business which appoints incompetent management (because he's a high-ranking official's son, say) will have work directed towards it and competition suppressed by government fiat, propping up ineffectiveness.
Democracy (sometimes) reduces political corruption
When you have a non-democratic state, there are (usually) fewer controls on government officials to rein them in and prevent them abusing their offices for personal gain/vendettas. To the extent which culture or other factors keeps these abuses at a minimum, a non-democratic state can still be a good place for the kind of productive work that leads to prosperity.
And even a well-functioning, rule-of-law democracy will not be perfect. Some private business people and some public officials will be on the watch for opportunities to be corrupt, because they expect to be personally better off, even if society is ultimately harmed.
Democracy itself can sometimes be a source of corruption and instability
When the people realize that the poor outnumber the rich, and start voting stuff for themselves, or when demagogues begin pitting people against their neighbors in order to win elections, you can end up descending into civil disorder and/or corruption.
There is a correlation, but not a perfect one, between democracy and prosperity. To some extent, this is because of unrelated factors (culture of work, available resources, internal and external investment, security from invasion, etc...). To a great extent, it varies depending on the democracy - whether democracy is a tool to keep corrupt people in check and guarantee long-term legal protections and stability, or just the game by which corrupt leaders gain the power which they will then abuse.
This appears to be a case of secondary correlation. The primary link is between capitalism & free market economics and prosperity. It's only secondary that most capitalist countries also happen to be democratic. Cne can certainly find examples of prosperous states that aren't democratic: China, of course, Chile under Pinochet, Singapore under Lee Kuan Yew, &c.
Once a state becomes prosperous, it usually sees pressure from citizens to become more democratic, as we saw with Chile and are now seeing with China.
Free citizens and corporations are better at allocating resources. They also generate economic opportunities from new ideas and new directions of economic pursuit and public interest. Gradual as well as qualitative innovation is faster in free societies.
The idea that a collective of "agents" (e.g. individuals, corporations) who are free to make their own economic decisions will lead to the optimal allocation of resources and hence to the strongest economic growth is the core of the idea of capitalism. There is a lot of evidence for it: Capitalist countries have generally performed far better than countries with various types of government controlled economies, for example the post-WW2 socialist block and China until the 1980s. The "unavoidable collapse of capitalism" predicted by some Marxist theoreticians never came.
Everybody who has ever been in contact with a bureaucracy can immediately understand why an economy run like a government administration will have, to put it mildly, certain friction losses. It seems obvious that innovation at all levels of an economic activity will be slower compared to a "free" economy.
In order to be free and competent economic agents people will need a certain individual freedom (choice of profession, choice of residence, access to relevant information). A market economy is not compatible with aligned, brainwashed individuals in a society that reprimands initiative.
An advanced economy will also need highly educated individuals.
The necessary economic freedom, the need to access information and the growing educated class were long thought to be incompatible with undemocratic systems. How could you grant freedom to information but censor newspapers? How could you let educated people compare your crap government to better ones around the world and not rebel?
There is a connection between culture and economic progress that is more subtle but in the long term perhaps even more important than resource allocation: Progress, even purely economic progress, is not only a quantitative affair. In the long term, it is not sufficient to simply increase material output of the same things. The East German government produced the same car model for decades because it didn't have to respond to consumer demand. That is not a sustainable economic strategy.
Another example from the city I live in: Around 1980 West Berlin squatters rebelled against a corrupt policy of tearing down traditional blocks of houses in order to erect "synthetic" new buildings. That policy tore apart grown neighborhoods and displaced its citizens. The squatters exposed the corruption and deficiencies of such programs. Consequently, official policy in West Berlin changed; citizen participation programs were enacted, reconstruction favored over replacement, protected areas were declared. Politics changed the framework in which the heavily subsidized construction economy operated. "Self-governed" houses became an important part of West Berlin culture, forming the breeding ground for a sub-culture that would 20 years later make Berlin attractive as a location for a new startup economy.
In East Berlin this change never happened. The "socialist" government continued to build concrete "residential silos" and continued to neglect the traditional quarters in the inner cities. It was unable to pick up, respond to and feed back the cultural changes. Other examples were fashion, electronics, entertainment and communication.
Another good example is the iPhone which was conceived on the fertile grounds of Hippie culture, hacking and esthetics of the late 20th century in California.1 The Soviets simply could never have invented anything like it: Charlie don't surf, and would thus have missed building one of the most valuable companies of the world and the direct and indirect innovations in the wake of smartphones which are transforming our economies as you are reading this.
But in the past decades, in particular China appears to be proving us wrong. The West is doing a double take: How is it possible that these technocrats manage to generate economic growth outperforming the free world? I'm particular curious about how the government will respond to cultural changes. One possibility is that the one child policy has led to a comparatively low proportion of young adults who always are the drivers of cultural and social change. Perhaps the gerontocracy will be able to suppress such change because they simply outnumber the youngsters. But how will the old men promote qualitative progress? Will the Chinese economy still produce the same things in 20 years, just more efficiently, while the West has embarked on totally new endeavors?
I think it is too early to tell, and the jury is still out. But personally, I'm much in favor of self-regulating, flexible systems. They are just so elegant.
1 To get an idea it's still illuminating and exhilarating to read Stewart Brand's The Media Lab. Brand is one of the hipp[i]est of the hippies. Granted, the MIT is not in California, but arguably the Media Lab was to the MIT what California is to the U.S.
Only in that democracy is a better method than the alternatives for controlling corruption.
You can find several examples in the 20th century of countries with non-democratic gov'ts that did quite well economically for a time. But they all(1) fell when the amount of corruption in the system grew too expensive.
(1) The case of China is still open. I'd ask you to consider what will be the result of Xi being president for life. He will accumulate ever greater power and control over the country. Can he reasonably be expected to always make good decisions? How will they get rid of him if he goes off the rails?
Historically, democracy has been something that autocratic national leaders have provided in exchange for taxes and other forms of support for the regimes.
The extent of the franchise or the extent of allocation of real power in a society even if it has a formally broad franchise that is largely meaningless, depends upon how broad a base of support the leadership of the nation requires to gain the economic and other forms of support it requires to function. It isn't terribly uncommon for a society to have one class of citizens who participate in democratic governance and another that does not. The enfranchised participants can be as narrow as a thin layer of aristocrats or political party members, to a broad class of property owners or of people who aren't slaves or indentured servants, to almost everyone in a society but (or including) people in prison or children. Historically, "free cities" were democratically governed in some cases by councils of skilled trade guilds.
Societies where the economy is based upon "rents" from ownership of resources, like feudal farming based economies based upon rents from land ownership, and mineral resource based economies like Saudi Arabia, tend to be autocratic and to become more autocratic over time even if they are initially democratic. Some of these, like Saudi Arabia, are prosperous. Others are not.
Societies where the economy is based upon commerce by a broad based group of independent businesses and tradesmen tend to be democratic, because the government needs the support of this class to raise funds through taxes and to raise large volunteer armies. These societies must have commerce that is more prosperous than its available resource based income, or at least, a significant share of the economy based upon commerce, but beyond that need not be particularly prosperous.
In the abstract, there is. After all, the notion of a democracy is that everyone attains their full potential as a human being and how can this not be good for economic prosperity? The rule of the many means that the many prosper.
Democracy in this sense is what communism is about. It's about having democracy not just in the political sphere, but also in the economic.
Every government (be it more or less democratic) likes to represent itself as an effective one.
The most common way of obtaining a good image is to represent "doctored" numbers of different econometric values. In a democratic society, it is harder to doctor the numbers of the actual economic prosperity.
That's why the Soviet block looked pretty successful until it bankrupted (and some of the countries bankrupted more than once along the road to the communism).
And, human nature what it is, 30 years later we still have a lot of people insisting that they were better off under the ($dictator) even if they remember pretty well what is it not having anything to eat.
So yes, there is a link, but there is a stronger link between the democracy and the perceived prosperity.
Someone already did an excellent answer to my question comparing democracy to non-democracies in a few key criteria, including wealth. You can see the full answer here
They looked at all countries ranked as 'free', as a close approximation of democracy. There were a number of non-democracies that benefited from sale of petro, because with enough wealth coming in from oil you can be rich regardless of your goverment. However, I believe their results for non-petro non-democracies is pretty strong indication that on average democracies far better:
Using GDP per capita, the highest non-free country is Qatar at 3 or 4, depending on the measure you use. The highest non-free, non-petro state is Kazakhstan. Notably, Kazakhstan is actually below the global mean for nominal GDP per capita, meaning every single non-petro state, non-free country is below the global average.
Wealth distribution did not seem to get better with democracy though.
I think that Capitalism leads to prosperity and Democracy leads to a life worth living.
Capitalism without Democracy leads to slavery which will eventually end up in protests and then either the destruction of Capitalism or Democracy.
Democracy without Capitalism leads to laziness which will eventually end up in poverty and then in (National-) Socialism or Capitalism if allowed. (Which wasn't really the case in Germany 1930s due to the reparations)
The combination of Capitalism and Democracy provides the most stable long term prosperity for almost everyone. But it is still fragile because the power must be balanced. Capitalism must not take over Democracy and Democracy must not take over Capitalism.
The most likely outcome of pure Democracy is Democracy with Capitalism and the most likely outcome of pure Capitalism is Capitalism with Democracy.