Democracy and Economic Development Joseph Stiglitz Quito July 2006

Two sided relationship Democracy may promote development Development may promote democracy Picture complicated by No clear definition of democracy Some economic successes with limited democracy But governments felt themselves accountable to people And success in development was key to their legitimacy

Democracy promotes development Participation leads to design of policies, programs, projects reflecting needs, circumstances of country Leading to more country ownership Ownership leads to more involvement Better results Example in water projects At other extreme, civil strife undermines development

Democracy is more than periodic voting Meaningful democracy requires informed citizenry Importance of right to know laws (freedom of information act) Reflects view that governments work for the citizens rather than vice-versa Checks against special interests, corruption Uncovers incompetence Secrecy itself can be importance source of corruption Artificially created scarcity

Information key to reducing agency costs, including in public sector Helps explain why so often governments prefer secrecy Gives them more discretion Expands scope for corruption Can actually be source of revenues—”selling” information rents In US, other advanced industrial countries, often takes form of “trade”—better press coverage Less accountability Makes political markets less contestable Exemplified by Bush Administration’s unjustifiable attempt to greatly expand scope for secrecy

Privacy and secrecy Citizens should have presumption to know what government is doing Narrowly circumscribed exceptions Secrecy contributed to extending Cold War Citizens should have presumption in favor of privacy Limits abuses of government When there are exceptions, need oversight

Information and voting Voting affected by beliefs Beliefs affected by media Media affected by economic/political system Example—US Many Americans still believe there are weapons of mass destruction, link between Iraq and Al-quaeda Much less reporting of news stories concerning adverse effects on Iraq, Afghanistan (torture, human rights violations)

Information and voting Important to have diversified sources of information Which is why media concentration even more a concern that economic concentration in other arenas Regulatory discretion and access to “inside” information can lead to self-censorship and distorted news

“Managing Democracy” Electoral outcomes affected by Who is allowed to vote Who votes Voters’ perceptions Incumbents attempt to use powers to maintain themselves in office Use of insider information Reducing publicly available information Puts rivals at a disadvantage “buying” voters Media coverage Gerrymandering districts Similar to creating and maintaining entry barriers in market economics Electoral markets are often not highly contestable Outcomes can be affected by policies

Economic policies and political actions Can think of “joint” political and economic equilibrium Illustrated by Russia With high interest rates, open capital markets, weak rule of law, those who controlled assets had incentives to strip assets and support continuation of No Rule of Law There could have been another equilibrium, with wealth creation and strong popular support for rule of law

Implications Need to bear in mind long run political consequences of economic policies Policies can be used to enhance or weaken democratic processes With Capital market liberalization market participants may feel less urgency in creating rule of law, since they can obtain needed wealth protections by shifting assets abroad

Concluding Remarks A broad democratization agenda can strengthen democracy and economic growth Quality of public management is example of a public good: the public good of the public good Active government policies are required Focus should be on broadening participation and increasing contestability Participation will increase if people believe their views will be heard and their actions maker a difference Hence contestability will improve participation (and vice versa)

Information is a key instrument Right to know laws But also community radio, TV stations, newspapers Subsidies may be required Many of the economic failures of Latin America (and the U.S.) are related to political failures Democracies are imperfect Not all voices are heard, or at least heard with equal weight Campaign contributions in U.S. have a particularly pernicious effect Debates about economic reform need to be accompanied by discussions of political reform Ending military dictatorships was a great achievement Now the task to create true democracies