Democracy Cant Provide Global Economic Growth We Need
BY Dr. Dambisa Moyo
Global Economist, Author, Investor in the Future, Marathon Runner
Growth is imperative for fulfilling human demands and improving lives. Economically, growth promises to reduce poverty and raise living standards; politically, growth is the sine qua non for free markets, free people, and the rule of law; individually, growth is essential to allowing people to maximize their potential.
But today, economic growth across the global economy is patchy and anemic. Most of the world’s largest and most strategically vital emerging nations — including Argentina, Brazil, Colombia, India, Indonesia, Mexico, South Africa, and Turkey — are only growing at 3 percent or less a year. This is far below the roughly 7 percent minimum needed to double per capita incomes from one generation to the next and consign poverty to history. Although there is some evidence that Europe emerged from recession in early 2017, the growth forecasts remain stalled at around 1 percent, hampered by the structural challenges of high unemployment and political uncertainty. The Japanese economy continues a twenty- five- year period of malaise and tenuous prospects. And in the United States, despite recent GDP and job growth, and in spite of the initial positive reaction of financial markets to Trump’s election, the continued erosion of infrastructure and education dampens prospects for long- term growth. Most alarming, the International Monetary Fund has almost consistently cut its global growth forecasts over the past half decade after the 2008 financial crisis, warning in 2014 that the world economy may never regain its pre- 2008 pace of expansion. This evidence of economic decline signals a more serious and deleterious corrosion of the global economy as it faces extreme long- term structural impediments or headwinds.
Three key drivers of growth — capital, labor, and productivity — have eroded under unprecedented headwinds. We face massive demographic shifts yielding too many young, unskilled, and disaffected workers in emerging economies, and aging populations already draining pension and health systems in developed economies. Widening income inequality, diminishing social mobility, commodity scarcity, and technological advances that enhance productivity at the cost of putting more people out of work all threaten to further dampen growth worldwide. The result of leaving these headwinds unanswered will be economic depression — a catastrophe for which existing policy tools are “impotent,” as the economists Lawrence Summers and Paul Krugman have both argued.
As much as the US economy will struggle to overcome these headwinds, other economies will likely struggle even more, particularly those that have depended on the United States for trade and foreign direct investment and as the largest bill payer of public goods and police of international sea-lanes. Moreover, at roughly 22 percent of the budget, the United States is the largest contributor to the North Atlantic Treaty Organization (NATO), a group of twenty- nine countries committed to mutual defense in the event of an external attack.
In the face of these economic headwinds, liberal democratic capitalism is in retreat. After the fall of the Berlin Wall, this political and economic model — characterized by universal suffrage, civil rights and personal freedoms, and the individual control of capital and labor — had seemed ascendant. But now alternative models, such as authoritarianism, state capitalism, and illiberal democracies, have proliferated, offering formidable challenges to liberal democratic capitalism’s model of achieving growth. Meanwhile, liberal democratic capitalism itself has become weak, corrupt, and oblivious to its own ailments.
As they confront these challenges, leaders of liberal democratic capitalist nations are hobbled by the quirks of their own political systems. Needing to satisfy the electorate in order to remain in political office, policymakers tend to favor short- term policy responses. In focusing only on the gains that can be won today, they ignore the costs and consequences borne tomorrow. The short-termism that clouds policymaking leads politicians to embrace inferior policies.
Protectionism, for example, is now on the rise. According to Global Trade Alert, the G20 imposed 644 discriminatory trade measures on other countries in 2015. And as a result of increased capital controls on banks, cross- border capital flows have declined — with international loans having decreased 9 percent from 2014 to 2016, according to the Bank for International Settlements. State intervention in the economy is increasing even in traditionally capitalist societies. This is evident in the growth of welfare states, the expansion of the public sector, and the rise of governments as employers and allocators of capital. In the long term, such policies are likely to exacerbate military as well as economic conflict over scarce resources — pressuring politicians to make even worse decisions and fomenting a vicious downward cycle. Most importantly, such policies will only produce lower global growth.
The defining challenge of our time is to create solid and sustained economic growth that continues to meaningfully improve people’s lives. This is true in the United States, the Eurozone (countries using the euro), and other industrialized economies that are creaking under mounting debt, challenging demographics, and stagnating productivity. It is just as true in the developing world — home to 82.5 percent of the world’s people, 70 percent of them, on average, less than twenty- five years old. A period of unprecedented economic expansion has slowed in some places and has ended in others, and there can be no substitute for restoring growth everywhere.
I argue that liberal democracies of the sort prevalent in the West simply cannot deliver this growth without substantial reform. Without fundamental changes, democratic politicians will struggle to address the numerous headwinds the global economy faces today. Indeed, the myopia within democracy leads to the misallocation of scarce resources, such as capital and labor, and shortsighted investment decisions by politicians and business. Ultimately, the myriad economic challenges are a manifestation of a corrosive problem in the democratic political process.
We need far- reaching reforms to democracy that are designed to combat this myopia, overcome the headwinds challenging the global economy, and galvanize economic growth. We need to transform the way elections are held, alter how politicians are judged, and ensure that both voters and politicians take a long- term view. To this end, we need lengthened political terms to better match long- term economic challenges, minimum standards on both politicians and voters, and much more.
Stagnant growth, entrenched poverty, high unemployment, unwinding globalization, and geopolitical unrest have become the new normal. The skepticism among policymakers, politicians, and ordinary people about the capacity of democratic capitalism to deliver growth and reduce poverty over the long term is in fact very rational. The state capitalism of China, Lee Kuan Yew’s Singapore, and Chile under General Augusto Pinochet have all moved hundreds of millions of people out of poverty and in some cases delivered impressive advances. The formidable economic performance over recent decades of such nations and others that are not liberal democracies — 64 percent of the world’s elected governments in all — seems to suggest that democracy is not a prerequisite of economic growth.
Yet I believe in the promise of liberal democracy. After all, per capita incomes in liberal democracies continue to rise, albeit sluggishly. Meanwhile, the problems of growth are not confined to market capitalism — and real problems such as corruption infect state capitalist and other competing systems. Rather than turning away from liberal democracy, nascent democracies need to prioritize creating growth over the immediate devotion of some paradigm of democratic perfection. And established democracies must put their own houses in order by passing aggressive constitutional reforms.
Above all, policymakers must face up to the facts of the twenty- first century. In an interconnected world of anemic growth, other countries’ crises will become our crises, whether they take the form of terrorism, income inequality, refugees, the resurgence of infectious diseases, or illegal immigration, and governments will grow ever more fragmented and weak, further undermining an already fragile international community. For Americans, and policymakers in the world at large, protectionism and isolationism are no remedy. Historical evidence makes clear that protectionism will be accompanied by higher unemployment, lower economic performance, and stagnating living standards in the United States and elsewhere. An economically weakened and isolationist America will call into question the Pax Americana, whereby the United States oversees international peace and security, and thus expose the world to the unpredictable whims and values of non-democratic powers. These are not the solutions the world needs.
Creating sustainable economic growth in the twenty- first century requires no less than aggressively retooling history’s greatest engine of growth, democratic capitalism itself. This requires a clear- eyed assessment of how ineffective the system is in its current state, politically as well as economically — and then implementing the repairs that will yield better outcomes. Too much is at stake for us to remain wedded to the status quo. The ominous rise of protectionism and nationalism throughout the world portend that the global economy and community are eroding already. The only way forward is to preserve the best of liberal democratic capitalism and to repair the worst. We cannot cling to past practices and old ideologies simply for their own sake. Doing nothing is no choice at all.
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