Skip to main content

by Robert E. Mitchell

The Issue

Economics is a data-rich discipline with quantitative evidence that can check errant theorizing. Other social sciences are less fortunate, an especially challenging problem in analyzing changes in data-weak developing countries. Development assistance agencies with programs in these countries can be too easily guided by theories of growth that run ahead of supporting evidence, a problem for all the social sciences.1

In this context, it is perhaps not surprising that there are conflicting views and evidence on the causal linkages between democracy (or democratic governance, hereinafter D/G) and economic growth. The United States Agency for International Development (USAID) assumes such a linkage. Two of the Agency’s five major goals include building democracy and encouraging broad-based economic growth. Field missions are challenged to develop and implement strategic plans that include initiatives (intermediate results below the level of strategic objectives) that contribute to both D/G and economic growth. The usual assumption is that D/G is the independent causal factor that improves an economy’s performance. In the absence of widely accepted evidence supportive of these linkages, there are advocates of the opposite causal relationship, as partially reflected by those who would delink trade and human rights policies toward growing overseas markets for U.S. exports. These advocates argue that market-based economic growth will lead to greater democracy, although the reasons for this are not always clear.

The current focus on markets and exports helps to narrow the meaning of economic growth and the means to achieve it. Economic growth is thought to be generated by increased private sector trade and investment (hereinafter T&I). Increased T&I in turn is thought to be contingent on the creation of market-friendly policies. These policies are produced by governments, and, therefore, D/G plays a central role in increasing economic growth through the policies issued and implemented by governments.

How market-friendly policies are produced and then implemented involves political processes not adequately captured by economics, theoreticians of democracy, and those who would link D/G to economic growth. Analysts tend to limit themselves to assessing the relationships among various quantitatively and qualitatively-based indices of economic growth, policy environments, government performance, democracy, and governance. The black box that helps explain how independent policy variables act on dependent growth ones is left unopened.

These independent variables can be drawn from various readily available indices, such as:

The conservative Canadian Fraser Institute’s Economic Freedom of the World: 1975-1995 (James Gwartney, Robert Lawson and Walter Block) assigns scores to seventeen dimensions, weights for each, and an overall Freedom Index. The dimensions cover such items as foreign currency accounts, government consumption, equality under the law, tax rates, and constraints on capital mobility.

The conservative Heritage Foundation’s 1996 Index of Economic Freedom (Bryan Johnson and Thomas Sheehy) bases its overall scores on ratings assigned to ten dimensions, including trade, taxation, property rights and regulations.

The human rights group Freedom House bases its World Survey of Economic Freedom, 1995-1996 (Richard Messick and Kaku Kimura) on six dimensions ranging from freedom to own property to freedom to participate in a market economy.

Under its PEDS III USAID project, SRI International ranked countries on nine dimensions ranging from import and export regulations to start-up, foreign direct investment, and labor matters.
Private-sector risk-assessment agencies also provide multi-dimensional and overall subjective assessments.
The International Country Risk Guide (ICRG) rates political, financial and economic risks separately, and also has scores for corruption in government, the military in politics, political party development, quality of bureaucracy, etc.
The Business Environmental Risk Intelligence (BERI) index takes a similar multi-dimensional approach to its overall indices.

USAID/Washington offices have similar indices — for example, the Africa Bureau’s multi-dimensional Economic Performance Index.2
There are analogous measures of democracy and political regimes — for example, two transfers of power after free and open elections, which assumes that everyone is playing by the rules of the democratic game. Freedom House’s annual survey of political and civil rights is a leading example of these measures.

The plethora of variables, indicators of them, and analytical approaches help explain why it has been difficult to gain a consensus on linkages between D/G and economic growth (or T&I). However, several threads in the recent economic growth literature suggest some new approaches to conceptualizing D/G and the mechanisms through which if affects an economy’s performance. This paper reviews selections from this literature to suggest how independent and dependent variables appear to be linked at the (micro) project level, how national-level D/G environments affect project-level performance, and how certain features of D/G and economic growth are related at the national level.

Although the variables to be introduced can be labeled independent (causal) or dependent (result), the relationships between them have a static, black box quality. Successful strategic plans and the management of change require an understanding of mechanisms and dynamic forces that help explain the observed statistical relationships. New (or almost new) approaches to providing this understanding will be introduced, followed by observations on the implications these approaches have for program strategies and their management. The simple but basic distinction to be introduced is between institutionalized participation and how participants are structured.

Key Concepts and Distinctions

Aside from different measures of actual economic performance, the research literature distinguishes between the policy environment and (domestic) sociopolitical processes that influence this environment. Policies have a substantive content — for example, credit, investment, and deficit-reduction policies on paper and as implemented. The different meanings of process include participation, one of USAID’s current priority operational approaches. The Agency’s Strategies for Sustainable Development devotes two paragraphs to participation, giving examples of what field missions should include in their strategic plans and the management of their implementation.

Participation is generally thought to be a means to achieve different ends (in USAID’s current lexicon, results and higher-level strategic objectives). These results (for example, specific market-friendly policies) can, of course, be produced with a minimum of participation. A few key decision-makers, for example, can decide to remove price controls. Other policies may require citizen pressure (participation) to effect their reform, and participation will be required to implement and enforce the reforms.

There is much to be learned about how participation affects policies and their implementation. The literature review here is still at a fairly high level of generality. One study reports on how participation at the project level affects that particular project’s performance. A World Bank economist proposes to scale-up project-level relationships to the level of (national) institutions. A third study reports on how national-level participation seems to affect project-level performance.

This highly abbreviated review of this research is followed by some suggestions on the implications this research has for institutional analysis more generally and for D/G programs in particular. Here the emphasis is on how institutions can structure participation in different institutional spheres. The implications this research has for USAID’s traditional approach to institutional development awaits attention in a separate forthcoming paper.

Recent Research

1. Participation and Performance at the Project Level.
Researchers at the World Bank and the USAID-funded Center for Institutional Reform and the Informal Sector (IRIS) at the University of Maryland analyzed the extent to which project performance is influenced by beneficiary participation in 121 World Bank rural water projects. (Jonathan Isham, Deepa Narayan and Lant Pritchett, Does Participation Improve Performance? Establishing Causality with Subjective Data, IRIS Report No. 67.) Much of the analysis is devoted to establishing the quality of the subjective ratings on both independent and dependent variables. The authors conclude “that increasing participation directly causes better project outcomes, at least for the water sector.” Their research, however, does not identify the “policy instruments” that “help to achieve more effective participation.” The authors note than “[a]n analytical approach that incorporates participation might examine the various mechanisms whereby cooperative action by groups can overcome the inefficiency of individualist solutions — for example, from free riding or strategic (mis)revelation of private information — while avoiding the limitations of centralized government.” Elinor Ostrom, Larry Schroeder and Susan Wynne, among others, have addressed this challenge in their Institutional Incentives and Sustainable Development: Infrastructure Policies in Perspective, Westview, 1993.

2. Scaling-up Participation from Projects to Institutions.
In his introduction to Robert Picciotto’s Putting Institutional Economics to Work: From Participation to Governance (World Bank Discussion Paper 304, 1995), Ismail Serageldin notes “the changing role of development projects, which began as instruments of public or investment finance but have become a key vehicle for institutional and policy reform.” Picciotto

proposes a systematic approach to the design of institutional arrangements. . . . The implications for development practices are clear. Markets should be used where feasible and effective. But there is no efficient market, nor a strong civil society in the absence of good government. Projects can thus be viewed as inputs into balanced institutional development strategies. Picciotto builds on a project data base (probably used by Isham and his associates) to support the view that the traditional project is becoming an instrument for institutional and policy reforms, rather than just a “production function.” His report, however, does not present systematic evidence on the success of project-level participation being scaled-up to improve governance and broader institutions. Nor is there evidence on how the structure and operations of institutions relate to democracy, although one might assume that Picciotto’s “governance” incorporates the meaning of D/G.

3. National-Level Participation Effects on Project-Level Performance.
In another collaborative World Bank-IRIS paper, Jonathan Isham, Daniel Kaufmann and Lant Pritchett (Governance and the Returns to Investment: An Empirical Investigation, IRIS Working Paper No. 186) link measures of societal-level participation to project-level performance. The participation variable comes from Freedom House’s Civil Liberties Index, one that covers a checklist of thirteen participation-related items, including the right of peaceful assembly, freedom of opinion and expression, the right and opportunity to take part in the conduct of public affairs, the right to freedom of opinion and expression, and the right to form trade unions. (Freedom House’s Political Rights index relates to elections, electoral laws, opposition parties, freedom from the military, etc.) Project-level performance measures refer to economic rates of return from 1,155 World Bank projects in eight economic sub-sectors where the stream of benefits could be readily quantified and valued.

The researchers found that “[o]n average, improving a civil liberties indicator by one standard deviation increases the predicted ERR by over 3 percentage points (the mean rate of return is 16 percent).” Further, they conclude:

. . . this relationship suggests a causative effect from better civil liberties to better project performance. First, prior work suggests that beneficiary involvement and accountability of implementing officials, two aspects of governance related to civil liberties, are both key elements of project success. . . . We conclude with a growth accounting exercise that shows that the economic rate of return is related one-for-one to the economy-wide rate of return, suggesting that it is a good proxy for overall investment performance. Overall, we believe that this paper is an additional piece of evidence for the view that increasing public voice and accountability — through both participation and better governance — can lead to greater efficacy in government action, including development assistance. . . . This two-level relationship helps overcome a problem inherent in the earlier analysis of project-level participation’s effects on project performance. Those were local infrastructure projects (the kinds studied by Ostrom and associates). Such projects typically require local community responsibility for many operational and maintenance functions. Participation is central to the sustainability and success of the projects. Participation is not something external to the projects. The evaluations of project performance, therefore, address key features built into the project design and implementation. In contrast, the two-level relationship covers projects in eight different sub sectors, including non-infrastructure investments. And the measures of participation are external to individual projects, although one might hypothesize that open, participatory societies would more likely have the highest levels of project-level participation.

The above research points to promising ways of linking one dimension of D/G (i.e., participation) to economic growth. A number of questions, however, require further study. For example, the means and success of scaling-up from project-level participation to the larger institutional environment need to be identified, verified and better understood. The available evidence points to downward rather than upward-flowing linkages: society-wide participation (the civil rights index) affects project-level performance. Also, participation is more than a process, for it entails participants, the degree to which they are organized, the mechanisms they are able to use to influence public policies and their implementation, and different forms of participation. Traditional social science research (e.g., on constitutions and laws) provides one approach to investigating these questions. The New Institutional Economics (NIE), including the collective-action theories formulated by the late Mancur Olson and others, is another promising approach.

Examples from both traditional approaches and the NIE will be mentioned to suggest how participation and participants are structured in ways that provide mutually-supportive links between D/G and economic growth.

The Structure of Participation

1. African Ethnic and Political Structures
William Easterly and Ross Levine of the World Bank produced two recent Africa-specific policy research working papers: “Africa’s Growth Tragedy, a Retrospective, 1960-89,” dated August 1995, and “Africa’s Growth Tragedy: Policies and Ethnic Divisions,” dated April 1996. The authors argue that there is still much we don’t know about how African economies operate.3 We knew less thirty years ago. In the 1960s, the World Bank’s chief economist listed seven African countries that “clearly have the potential to reach or surpass” a seven percent growth rate. In fact, they had negative growth.

Economists are quick to lay the blame for this failure on bad policies. Easterly and Levine argue that the explanation must go well beyond this one set of claims:

The World Bank recently concluded that most African countries have made little progress in reversing the decline [in economic growth]. These studies identify a diverse set of potential causes of Sub-Saharan Africa’s ills ranging from bad policies, to poor education, to political instability, to inadequate infrastructure, to weak institutions, but are unable to explain why these factors all went so badly wrong in Africa. If economists are to claim much success in explaining why some countries are rich and others poor, why some countries choose growth-enhancing policies and others growth-retarding ones, an explanation of Africa’s tragedy must be part of the package. The authors do not argue against good policies and investments. Instead, the question is why these policies and investments have not been made or effectively implemented.

Easterly and Levine analyzed thirty years of data on standard measures of growth and other variables economists use to explain it. The explanatory variables include school attainment, political instability, poorly developed financial systems, distorted exchange rates, government deficits, inadequate infrastructure, etc. “These variables account for about half the growth differential between the countries of sub-Saharan Africa and East Asia.”

Social structures — that is, the way participants are structured — enter this analysis through an index of ethnic diversity. Easterly and Levine found that Africa’s ethnic diversity tends to slow economic growth and reduce the likelihood that good growth policies will be adopted. Although the authors lack hard data to explain their findings, they hypothesize that

It may be more difficult to achieve a consensus for good policies in a polarized environment…. We suspect that ethnically fragmented societies are prone to competitive rent-seeking by the different ethnic groups and have difficulty agreeing on public goods like infrastructure, education, and good policies. Furthermore, ethnic diversity may favor policies destructive to long-run growth like financial repression and overvalued exchange rates if such policies create rents for the group in power at the expense of other groups. Academics relying on more traditional qualitative research techniques come to similar conclusions. For example, Princeton political scientists Henry Bienen and Jeffry Herbst (The Relationship Between Political and Economic Reform in Africa, n.d.) argue that African politics and elections are non-ideological; they focus on individuals in power or seeking power, not on economic and policy issues; there is not a significant constituency that backs both economic and political reforms as a single package; civil society is weak, and there is a tendency for the disaffected to “exit” from the political and economic system rather than “voice” their protest. In fact, constituencies for political reform often oppose economic policy reforms supported by the World Bank, IMF, USAID and other donors.

Other relevant conclusions by Bienen and Herbst include:

  1. Political reform has mainly allowed autocrats to remain in power rather than bringing in ‘new brooms’ who might be assumed to be more committed to economic reform.
  2. Political change in most African countries has not been accompanied by the creation of constituencies that favor economic reform. Many of the groups in favor of democratization are opposed to structural adjustment.
  3. It is extremely difficult for African leaders to impose economic reform from above because they are so uncertain about the stability of their democratic systems. Indeed, African democrats are probably more insecure than those elsewhere, with the result that the need for new leaders to engage in old-style patronage politics will be relatively acute.

Similarly, Easterly and Levine link their findings to corruption, an especially damaging situation when different ethnic groups are competing for government payoffs.

Both the World Bank and Princeton researchers have black box models that link the structures of participants (constituencies) to government policies. Neither research team has systematic information on how participation and participants are really structured, forms of participation, and mechanisms through which participants influence decision-makers and implementers. Constituency analysis and the related stake holders analysis are general guiding ideas with gaps yet to be filled.

Easterly and Levine point to one such gap that has significant implications for D/G. Some countries are able to transcend their high level of ethnic diversity.

[I]n countries with very highly developed institutions, ethnic diversity does not significantly hurt policy choices. Institutional arrangements can overcome the negative implications of ethnic diversity. Although this suggests a reform strategy that focuses on improving a country’s institutions, altering institutional arrangements is fundamentally more difficult than changing, for example, exchange rate policies. Their indicators of institutional development refer to clear property rights, effective rules of the game, and an efficient bureaucracy.

2. Legal and Institutional Systems that Structure Participation.
The democracy literature tends to focus on vertical relations between the state and its citizens (and non-citizens). Donor agencies reflect this perspective in their support for programs on human rights, elections, and a free media. Similarly, many policy-reform programs call for removing governmental constraints on the private sector and different markets.

Less attention is given to horizontal relations between private individuals and entities. This is the arena (that is, the market) in which most economic activities are conducted. Government policies often distort the market. Equally important, the legal and institutional infrastructure to facilitate transactions between private individuals is weak or absent in (most) developing countries. How these infrastructures are structured (how they structure private transactions through positive and negative sanctions) provides a missing link in the participation, D/G and economic growth chain.

This is not to say that the key linkages are adequately understood, as much of the literature is still in the theorizing stage, and the relevant research relies on correlations, regressions, and qualitative judgments. This new generation of economic development theory argues that institutions play a critical role in economic performance. The difference between poor countries and rich ones, according to the IRIS perspective on the New Institutional Economics (NIE), has less to do with the existence of factors of production (land, capital and labor) or even of technology, than with the institutions that affect their deployment. Rules and implementing agencies determine how these factors are obtained, how they are transferred, and how they are used and exchanged. The NIE (including collective-action theories relating to the organization and effects of interest groups) provides a bridge between the rule of law, democratic governance, economic and financial policies and economic growth.

The best recent overview of this approach appears in the USAID-supported book Institutions and Economic Development: Applications of the New Institutional Economics to Growth and Governance in Less-Developed and Post-Socialist Countries, edited by Christopher Claque of the previously-mentioned IRIS Center at the University of Maryland. IRIS Center and World Bank staff have a number of other relevant publications — for example, “Institutions and Economic performance: Cross-Country Tests Using Alternative Institutional Measures” by Stephan Knack and Philip Keefer in Economics and Politics, 7:3, November 1995. Some of this work is in the tradition of Nobel Prize-winner Douglas North’s contributions, including his conclusion that “the inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary under development in the Third World….” (Institutions, Institutional Change, and Economic Development, Cambridge University Press, 1990).

Using a measure of contract-intensive money (the ratio of non-currency money to the total money supply) to indicate the state of contract compliance and security of property, the IRIS researchers

[F]ind strong evidence that those underdeveloped nations respecting property rights and contract rights accumulate capital and increase the incomes of their populations at substantially higher rates than other developing countries — even when controlling for the large variation in starting points, in levels of school, and in the price of investment goods. The IRIS researchers further establish the significance of institutions and the rule of law:

In addition to financial development and inflation, we have elsewhere considered the possibility that our institutional indicators are spuriously correlated with investment and growth due to omitted policy variables. In all our regressions, adding measures of government size, trade openness, and macroeconomic stability fails to reduce substantially the estimated impact of our property rights and contract enforceability indicators. Property rights and contract enforceability cover more than written laws and regulations (as well as customary law). They also include structures and mechanisms to implement and enforce the legal system. This larger institutional structure refers more generally to the rule of law.

One might expect that the rule-of-law relating to economic transactions would have spill-over effects on political rights, that good governance is tied to democracy so that the two concepts become democratic governance (D/G). Swaziland (and others) may be exceptions to this combination, as private property and contract enforcement would seem to score ahead of scores on variables of democracy, such as voice and choice. This apparent anomaly is one reason why some groups argue that donor emphasis on D/G can be detrimental to expanding U.S. T&I in particular countries — whether in Swaziland or in China.

What may seem to benefit U.S. T&I in the short run may be detrimental in the intermediate or longer term. Introducing this time dimension raises questions about the forces behind changes in political systems, as well as the legal, institutional, and policy environments for market-based, private sector-led economic growth (via T&I). Stake holder and constituency analyses tend to be static descriptions of current political structures.

Donor agencies — either consciously or not — have time trends built into their normatively-oriented programs. They have a mental image of what a market-friendly institutional environment is. Using this end point as their surprise-free projection, the agencies work backward to the intermediate steps required to move from the current status to the desired one. USAID’s traditional logical framework is a widely-used approach to making these linkages. The Agency’s current approach to strategic planning substitutes some new terms (e.g., intermediate results) and (in this writer’s opinion) confuses some concepts (e.g., the procurement mode as an input), but the underlying logic remains the same.

Again, the challenge is to use this logic to make linkages between D/G and economic growth (T&I) below the strategic objective level. Several suggestions on how to understand what has to be done are briefly noted in the section that follows.

(Part I)

1. For example, some experts question agricultural production and yield statistics reported by the Food and Agricultural Organization (FAO), the size and performance of the informal sector, and estimates of GDP.

2. These different indices rely on subjective assessments. Although agencies — such as the Fraser Institute — may base their scores on quantitative data, the cut-off points and score values are subjectively determined. Scores are not continuous variables with equal intervals between consecutive scores. For example, the real policy differences between a score of 2 and 3 may be much greater than between 7 and 8. At least one ranking (by the Heritage Foundation) is by an organization with strong ideological biases (against foreign assistance and USAID). Given the nature of the rankings, it is not surprising to find minimal inter-index consensus for the individual dimensions and, even, the overall composite scores, with exceptions.

3. For a discussion of some of the policy implications flowing from these knowledge gaps, see the author’s “What is In and Who is Out of Africa,” Foreign Service Journal, forthcoming.

Implications for Program Strategies and Their Implementation

In this context, although the concept of “participation” has been a cross-cutting theme and operational approach used by USAID for a number of years, the concept has not been systematically linked either to D/G or T&I. In the management philosophy of today, emphasis seems to be placed on how participation creates the social psychological feeling of empowerment, with an emphasis on vertical relations between governments and their citizens, as well as between employers and their employees (including contractual-type relations between the recently re centralized USAID and its field missions, as well as between mission managers and their so-called “team members”).

The present paper draws on several examples from current research that helps to distinguish between participation and participants. These concepts are placed in the political context of how institutions structure participation. The NIE is helpful in understanding how positive incentives and negative sanctions are structured in ways that affect voice, choice and market behavior. A dynamic, change-oriented element is introduced by viewing how participants (rather than participation) are organized, why many constituencies and groups evolve, and how the constituency environment affects how these groups act to influence policies affecting them. Theories of collective action are relevant to this perspective on participation.

Higher levels of project-level participation are associated with higher levels of project success, according to researchers who examined World Bank water projects. Bank staff proposed using projects to change institutions in general. Project-level participation is a central feature in the scaling-up process. Although systematic evidence on scaling-up processes is absent, there is research showing a statistical association between national-level participation rates and project-level performance in a number of sectors. This research, however, does not consider how participation is structured. The focus is on levels of participation, although it might be argued that structures would affect levels.

Structure is introduced in a World Bank study of how ethnic diversity in African countries affects the adoption of growth-encouraging policies and economic growth itself. Here the organization of participants has effects on policies and performance. But the World Bank research team notes that institutional arrangements are able to overcome the negative effects associated with how these participants are organized. That is, participation and participants are linked to one another. This linkage was used to move more generally to evolving approaches to using institutions in the design and implementation of strategic plans. The NIE was then tied to theories of collective action to provide a dual approach to linking D/G to economic growth (especially private sector T&I) in development programs.

It is worthwhile to repeat that, in the past, donors often only supported either democracy or economic growth strategic objectives, not necessarily the two in tandem. With the continuing emphasis on focus, the concentration of resources, and a limited number of generic strategic objectives, donors need a better understanding of how programs supportive of one of these two objectives can contribute to the achievement of the other. Without this understanding, the two objectives may only have a serendipitous positive relationship with one another.

Some observers might remark that the above perspective ignores the substance of good policies. To borrow Michael Sandel’s terms in his Democracy’s Discontent (Harvard, 1996), we have described a “procedural republic.” Sandel’s emphasis is on “choice.” Ours is on how participation is structured. However, real-world development programs that address structures are organized around (growth-enhancing) policies managed by organized implementing agencies. One advantage of the NIE is its attention to defining these policies so that they are based on an understanding of underlying economic and market principles. These principles help shift the sole attention that D/G and economic growth programs give to vertical relations between the state and its citizens. Horizontal relations among private individuals and entities are also crucial. Policies that create institutional arrangements to structure these relations are central to approaches covered by the NIE and theories of collective action.

These policies and structures can increase transparency and accountability, overcome the potentially anti-growth implications associated with different patterns of organized (and incipient) interests, and help assure that governments, the private sector, and markets operate in ways to increase economic growth.
Few developing countries are as densely inhabited by organized constituencies and interest groups as are the U.S. and other developed countries. Many developing countries have less social capital, as defined by Robert Putnam in his Making Democracy Work, Civic Traditions in Modern Italy (Princeton, 1993). As Easterly and Levine suggest, ethnic groups are perhaps the most significant constituencies in many countries.4

In addition to their traditional undifferentiated and often weak social-capital infrastructures, many countries also have high levels of economic concentration (monopolies and oligopolies in the formal sector). Most of USAID’s strategic plans for bilateral assistance programs in southern and eastern Africa report these high levels. Not all constituencies are equal in their voice and access.

High levels of economic concentration do not seem to limit entry to the market by informals. Instead, the market repercussions of concentration are expressed in the protection of local markets from foreign competition (for example, governments may prevent insurance companies from neighboring countries from providing their services locally), in failing to provide a level legal playing field, and in providing differential access to credit and other economic growth resources and services. Laws may be on the books providing for equal access and treatment, but the structures of interest groups and the institutions that structure their activities are not supportive of the legal regime.

Theories of collective action, as developed by Mancur Olson and others, provide a useful approach to understanding the dynamics of interest group formation and how these groups affect the institutional environment for D/G and economic growth. It is beyond the confines of this article to survey this action-relevant supplement to the NIE in ways that give a time and cause-effect dimension to stake holder analysis. Several quotations from Olson’s The Logic of Collective Action must suffice:

Since relatively small groups will frequently be able voluntarily to organize and act in support of their common interests, and since large groups will not be able to do so, the outcome of the political struggle among the various groups in society will not be symmetrical. That is, small, narrow groups have a permanent and inherent advantage. They “often triumph over the numerically superior forces because the former are generally organized and active while the latter are normally unorganized and inactive. . . . The great majority of special interest organizations redistribute income rather than create it, and in ways that reduce social efficiency and outputs.”

USAID and other donors encourage the growth of interest groups as a means to create democratic pluralism.5 This pluralism provides new opportunities for citizen participation and access to policy-makers. Both voice and choice are increased. But Olson argues that not all groups are equal in how they operate and in the influence they have.

The NIE provides possible options to level the playing field among interest groups, to maximize the voice of individuals who are not affiliated with interest groups, and to create an institutional infrastructure that helps assure that all citizens and interest groups are treated equally. That is, the NIE gives insights on how to overcome the anti-growth processes and structures that the theory of collective action helps explain. These suggestions include means to maximize transparency and accountability by structuring different forms of participation. Linking participation, laws, institutions, transparency and accountability are ways of relating D/G to economic growth through private T&I.

Suggestion 1: Structuring Parliaments
Legislative bodies differ in their type and the authority vested in them. The Westminster model often limits voting to up or down choices on legislation submitted by the prime minister (the ruling party’s leader). The American model allows legislation to arise from elected legislators or from the executive branch (but introduced by members of the legislature). Changes can and are made by committees, and committees have hearings that allow interest groups and members of the public to testify on problems and proposed legislative solutions for them. The legislature also conducts oversight hearings, benefits from its own (the General Accounting Office — GAO) audits and evaluations, and has access to other specialized research services — e.g., those provided by the Library of Congress.

U.S. executive agencies are also structured to provide public comment and participation, as reflected in hearings, comments on proposed administrative regulations published in the Federal Register, and administrative court proceedings. State and local governments are similarly structured to provide for citizen participation and public oversight. And there are many independent interest groups, think tanks, the media and others that provide comments and oversight.

As noted, Mancur Olson and his colleagues argue that, despite this rich texture of processes and structures, not all interest groups are equal in their voice and their influence over choice. Jonathan Rauch draws on Olson’s approach to explore the negative effects that interest group conditions have on American democracy because of these social and organizational conditions. (See his Demosclerosis: The Silent Killer of American Government, Random House, 1994.) Peter Skerry explores how weak-membership interest groups contribute to the confrontational environment in American politics, an environment that would weaken political, social and economic environments in many developing countries. (See his “The Strange Politics of Affirmative Action” in the winter 1997 issues of The Wilson Quarterly.)

Developing countries tend to be at the opposite pole to what Rauch found and Olson explains. These countries provide minimal opportunity for meaningful public participation (voice) in the development of legislation, implementation of government programs, and oversight of either the legislative or executive branches. As a consequence, there is neither much transparency nor accountability. This in turn allows for arbitrary and inequitable treatment that can adversely affect markets and economic growth — for example, access to licenses and credit, the enforcement of loan agreements, payment of taxes, and decisions by courts. Institutions are currently structured to inhibit participation and the resulting transparency and accountability. There is little wonder that many countries suffer from widespread corruption and its debilitating effects on T&I.

In short, parliaments and executive agencies can be institutionally structured to facilitate different forms of public participation that in turn can contribute to the creation and constructive operation of market-friendly environments. Democracy certainly has meanings extending well beyond the free and open elections of legislative and executive leaders.

Suggestion 2: Improving the Administration of Justice
Many developing countries (and former communist ones) had laws supportive of a command economy. These countries are now forced to change and update their commercial codes and civil procedures to protect private property, strengthen private contracts, and cast the state in a new role of adjudicating conflict among private parties representing their respective claims on one another — and on the state. Again, the NIE has a role in these developments, for the rules of the game should be based on an understanding of how competitive markets operate.

As important as legal reform is, it will be a wasted investment without a judicial system to administer it in an impartial and expeditious manner. Developing this system is a challenge extending well beyond training judges and lawyers, as well as supplying the physical infrastructure and support services for courts. This is because the judicial system, along with the legislative and executive branches, exists within the unbalanced and often thinly developed structures of interest groups that Olson and others analyze. Access to justice can be as constrained as are other forms of voice, choice and participation.

Increasing the transparency and accountability of judges and other court personnel can also be done through institutionalized arrangements for participation. Relying exclusively on executive or legislative oversight, however, may not be the best solution under some governance systems. Nor would court-appointed overseers be in the best position to identify and act on corruption and other deficiencies in their own industry.

Donor agencies concerned with this governance challenge — of making important government services responsive to broad public interests — might look for independent oversight possibilities. Human Rights groups do this for one segment of the law. Chambers of Commerce might make periodic reports on the administration of commercial justice; bar associations could perform related services. Mechanisms would also be needed to bring the findings of these overseers to the attention of policy-makers for corrective action.

Oversight services that increase transparency and accountability strengthen the rule of law that extends beyond commercial codes to cover the rights of individuals and groups, regardless of their sector of activity. Modes and structures of participation make these developments possible. Although this approach to participation and the sectors in which they apply have not been viewed as “political” by many analysts, the distribution of opportunities for voice and choice, the way institutions structure participation, and the consequences these structures have for transparency and accountability are political in nature, they further define governance, and they suggest ways that donor agencies are able to link D/G to economic growth.

Summing Up

Democracy and D/G are extremely important ends in themselves, but donor agencies such as USAID are challenged to link the pursuit of these ends to programs that increase private sector T&I and, therefore, broad-based, sustainable economic growth. There are different views on what constitutes D/G and market-friendly policy environments that will increase T&I. Analysts using different concepts, variables, and measures, as well as different time periods and countries, yield mixed but generally negative findings on the relationship between D/G and economic growth.

To borrow a thought from C. Wright Mills, democracy and the other concepts discussed above are sponge terms. My use of “generally negative findings,” therefore, is not meant to end the debate or to criticize donors for misallocating their resources. Instead, democracy programs typically have ends that are valued in their own right. But donors need to broaden their understanding of democracy and not truncate their approaches (e.g., focusing only on elections).

Some might argue that democracy becomes confused with other popular terms – – such as civil society, the rule-of-law, and institutional development. Perhaps it is time for new concepts and terms for them. Our concern has been with how recent studies have made operational older and newer concepts; how donor programs can influence the reality underlying these concepts; and how programs in apparently different sectors (governance, markets and economic growth) can be mutually supportive of one another.

Return to
How to Link Democratic Governance
with Economic Growth (Part I)

(Part II)

4. Ethnic groups differ in how tightly they are organized. For example, the Fula and Mandinga ethnic groups in Guinea-Bissau have fairly strong lineages allocating considerable legitimate authority to lineage leaders. In contrast to these two Muslim groups, the acephalous (without a head) Balanta diffuse authority much more widely. An acephalous, more pluralistic structure might be considered more democratic. Similarly, despite the existence of two major tribal confederations in Yemen, the individual member tribes are able to act in an organized manner in a pluralistic tribal governance environment that represents a form of local voice and choice (democracy). National governments typically attempt to strengthen themselves in ways that weaken these centrifugal forces. South Africa’s decentralization of government powers is an interesting exception, one similar to Italy’s that Robert Putnam studied over time.

5. In institutionally weak (low social capital) countries, support for a narrow interest group — for example, a chamber of commerce or other trade association — may be the only feasible countervailing power to a government wedded to command-economy policies. D/G and growth strategies would not, however, stop with these initial interest groups.

Robert E. Mitchell, a retired USAID official who served in the Near East and Africa, has been a marketing consultant, professor of urban and regional planning, has directed university research centers in the United States and abroad, and has consulted widely on marketing questions. He earned an undergraduate degree from the University of Michigan, an M.A. in China studies at Harvard University, and a doctorate in sociology from Columbia University.
Comments are closed.