THE INVISIBLE HAND OF DEMOCRACY

THE INVISIBLE HAND OF DEMOCRACY: POLITICAL CONTROL AND THE PROVISION OF PUBLIC SERVICES

D.A. Lake & M.A. Baum

Comparative Political Studies Vol. 34, No. 6, (Aug., 2001)

 A Summary

In a Nutshell

Democracies provide a higher level of public services when compared with authoritarian regimes. Thus democracy has a profound effect on the daily lives and well-being of people around the world. This is argued theoretically and supported empirically and thus represents a step forward in democratic theory, as the causal link between democracy and growth has been tested many times without a consistent pattern emerging. There is no argument that democracy produces the socially optimal level of public services, only that democracy will produce more.

 An Economic Theory of the State

  • Traditionally it is assumed that politicians want to maximize their chances of re-election and thus they derive their preferences for policy from the preferences of the electorate. This electoral connection is only half the story. The departure point for this article is that politicians want to maximize the rents earned from using the monopoly power of the state. Whereas the electoral connection cannot apply to authoritarian rules that are insulated from the demands of the citizens (at least up until a revolution is looming), this rent maximizing motive is consistent across democratic and authoritarian rulers. The only distinction is that authoritarians can get more rents as the state monopoly is stronger.
  • States are like firms that produce public goods (to correct market failures) in exchange for revenues from taxes. They are able to do this as they have monopoly power of the use of force. When barriers to exit and costs of participation in government are low, the state will produce as a regulated monopoly, whereas if exit and participation is high they produce as an unregulated monopoly. Clearly more public goods are provided in the former case.
  • In a contestable market where monopolist is constrained by the threat of new entrants, they do not have the same market power.
  • Barriers to exit in democracy is low, the losers go home. In autocracies by contrast the exit could involve execution or exile.
  • Also important are the costs of participation for the citizen, and particularly the median citizen. Societies have different cost distributions, meaning that participation for some citizens is much cheaper than for others. If costs are skewed such that the median voter faces costs significantly higher than the average cost, then only a few citizens will be able to participate. This small group will be better able to organize (Olson) to capture rents from the state (Bates) whether directly, or through lower taxes. The ability of the median voter to punish politicians will be low, whilst the favoured few will argue for increased monopoly power of the state. In democracies the cost of participation is low (a free vote), whereas in autocracies it is high and potentially dangerous to participate.
  • The rent earning may come in the form of corruption (with the problems associated with hiding that corruption – see Shleifer) or budget manipulation.
  • These theories are borne out by the data which suggest that there is a large increase in the provision of public services when countries move from autocracy to democracy.

 [Discussion

  • The recognition of the importance of democracy and an effective state was recognized in the shift of thinking of the development institutions and is characterized in the World Development Report of 1997 from the World Bank. This was the result of the new institutional arguments of North and AJR that began to seep into the development thinking.
  • This article is partially about feedback mechanisms that exist under democracy, and how they can have a positive effect upon conditions in a country. Another example is given by Sen in his essay on famines where he shows that a famine never occurred in a democracy. Famine, he argues, is not about a lack of food, but a lack of entitlements. Democracy allows for feedback to be given to the government through the press and other networks of accountability, and acts as an early warning system when a famine looks set to occur. Additionally, if the state is not responsible to its citizens, meaning it can lose elections, or more generally it has protected monopoly rents, then there is no motive for government to prevent famines.

 This article argues that democracy is instrumental to development, but it could also be definitionally part of what it means to develop – see Sen Development as Freedom.]

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