Economic Transitions and Political Transitions: What’s the Big Deal?

11.11.2020 | John Fei

The past year has not been kind to democracy. Social and economic dislocations caused by the COVID-19 pandemic as well as the growing appeal of authoritarianism have dealt twin shocks to the attractiveness of consultative and representative forms of government worldwide.

As analysts and politicians debate democracy’s slide, one recurring puzzle emerges: the link between economic growth and democratization. The vast literature suggests correlation, if not causality, between economic growth and democratic transition.

To explore existing assumptions and lessons learned regarding the role of market transition in democratization, the Center for International Private Enterprise (CIPE) recently started a project that examines the interplay of political and economic forces. Supported by the National Endowment for Democracy, the project also seeks to establish local transition knowledge hubs in three pilot countries actively undergoing both economic and democratic transitions: Bolivia, Tunisia and Ukraine.

In the first stage of the project, CIPE staff have been in listening mode, and have identified the following themes and trends:

The debate over the factors that predispose or facilitate economic growth has evolved, and will continue to evolve, over time. While some data imply that democratization may dampen economic growth in the short run, other evidence suggests that the longer a country remains democratic, the stronger its rate of growth. Scholars still do not fully comprehend how well institutions work to promote economic growth. For example, experts had previously touted the importance of property rights as a determinant of growth. Yet, while China does not possess property rights, it had a functional equivalent that helped to propel the country’s rapid economic development.

Evidence suggests that economic growth and a stable middle class do not necessarily inoculate a country against democratic backsliding. In Brazil, India and Turkey, economic growth in recent decades has surprisingly been accompanied by democratic backsliding. Brazil had been a poster child for implementing successful economic reforms starting with the Cardoso administration. These reforms had been extended by Lula. Yet despite fairly-decent wealth distribution, the 2013-14 economic crisis caused citizens to direct their anger against corruption, a phenomenon that Bolsonaro leveraged to his favor in 2018. A stable democracy, India, implemented economic reforms in the 1990s that propelled its rapid economic growth and benefitted the Hindu majority. Yet Prime Minister Modi weakened India’s democratic tradition by building a sense of grievance among the Hindu majority against previous governments’ progressive and multi-faith agenda. Rousing the emotions of a well-off majority to push the country in an illiberal direction also occurred in Turkey, where the Justice and Development Party (AKP) and the Islamic Business Coalition—which had benefitted from the country’s tremendous economic growth—started to steer the country against secularism and liberalism.

Many variables affect economic and democratic transitions. A variety of factors shape the outcome of transitions. Despite the confounding case of Brazil, decreasing levels of inequality tend to maintain a stable transition to democracy. For example, in Chile, rising levels of prosperity did not prevent an erosion of political stability due to concomitant rising levels of inequality. Corruption, economic and ethnic grievances can lower the chances of a successful democratic transition, whereas a strong education system and civil society increase the odds of success.

Though far from definitive, business communities have played positive roles in economic growth and transition. Business communities, especially small and medium sized enterprises (SMEs), are crucial to a country’s democratic and economic transition. In Slovakia, independent businesses pushed for innovative reforms and advanced progressive agendas, thereby aiding that country’s successful economic and democratic transition. SMEs also have the potential to capture a larger share of credit to help stimulate growth.

In countries where transitions tend to be “stuck”—such as Bolivia, Tunisia and Ukraine—major trends emerge. One common problem afflicting Bolivia, Tunisia and Ukraine is the absence of strong, independent political parties. In Bolivia, Evo Morales severely weakened political parties, whereas in Tunisia, businesses form parties for rent-seeking purposes. Entrenched interests, such as labor unions in Tunisia, or oligarchs in Ukraine, also impose high hurdles to transitions.

To “unstick” a transition, major players (champions, influencers and veto players) often just need to agree on one thing. Entrenched interests and other parties can seek to agree on one agenda item, while agreeing to disagree on other important issues, to move economic and democratic transitions forward. In the case of Mexico, the business community coalesced into a powerful force that was able to push for change.