[SOUND]

[MUSIC]

The topic of this lecture is about the role of political factors

in market transition and interrelations between political and economic reforms.

We'll start from general consideration about how market and

democracy interact, whether they go together or they can go separately.

Let's start us from some stylized historical facts.

We have a lot of examples of market economy without

democracy while we have no democracies without market and private property.

This is one very important In the era of early capitalists,

18-19th century, there was no or there was very limited democracy.

And today, end of 20th century, early 21st cent,

century, we have also some examples of market-friendly authoritarianism.

Especially in Asia, in Southeast Asia and East Asia.

But on the other hand we have examples of authoritarianism and dictatorship

which are anti-market and populist, or were anti-market and populist.

I mean several episodes in Latin America and Africa.

And here this graph presents, attempts to make some global analysis.

On horizontal axis who have index of economic freedom,

as calculated by the Heritage Foundation, and

on vertical axis we have freedom house,

freedom in the world index both for 2010, 2011.

So we see that there is some correlation, but not very close.

And we have clear outliers on the right hand, on the print line.

We have quite many countries, so

countries which are more economic, economically and politically free.

And I distinguish here two cases.

One is [FOREIGN] letter B, and another one, letter S.

This is Singapore, a country which is a leader in many

rankings of economic freedom of ease of doing business,

of global competitiveness, but where democracy is limited.

We have also another kind of outliers, and here I well

there is more political freedom than economic freedom.

And I distinguish here, one interesting example is Argentina, the letter A.

In Argentina this is among countries which I mentioned before,

so countries which had experience, very set experience with militaristic

partnership and no, the central one, but several one in 20th Century.

And a lot of populist economic and social pol, populist episodes, which

led to hyperinflation, to led, to, to financial crisis, to government default.

Currently as picture in the early 2010s

in Argentina, the democracy is more developed than economic freedom.

But this means that democracy itself is under questions.

So it may be undermined if a populist economic policy and

condense to it administrative control, the prediction is it will be continued.

As it happens several times in the past.

Let's now to discuss how market can help democracy.

And why democracy cannot exist without market and private property.

First market makes citizens independent economically from government.

And like in the communist for example, totalitarian style system,

government in a market economy is not single owner and not the single employer.

So people can economically be outside government control and

this helps also in political freedom.

Market also obviously limits power of government bureaucrats,

which cannot control everything and this economic aspect of, of citizens' life.

And it also force country to be at least partly open to external wealth because

few countries can live without trading to others.

Then in the market economy we, we must have demand for rule of law.

This is again obvious.

Market economy requires horizontal transaction and

transaction requires respect for rule, rule of law and for property rights.

So market helps increase the rule of law.

It helps also to develop civil society institutions, a broad middle class,

which is usually considered as the base for democratic culture,

culture of cooperation based on self-interest, and

all these factors reinforce democracy.

Finally, market economic, free market economic, helps in economic development,

which in turn creates demand for political freedom and democracy.

And there is a number of interesting studies of Barro, of Lipset, Przeworski,

Limongi, Fukuyama, which demonstrate that with the increase of GDP per capita,

there is more likely, likelihood the country would become democratic.

There is of course one corrective factors.

This is the availabid, availability of natural resources and

natural resource rent, mostly oil and gas.

So many oil and gas-producing countries, even if they represent

upper middle income level of higher income levels, they still remain undemocratic.

We can demonstrate examples of gulf countries.

We can demonstrate examples of Venezuela, of Russia, and few others.

Here is an attempt to demonstrate how it works.

This is starting of Chancellor Robertson into

which shows which level of GDP per capita,

country move to democracy in the last 30 years.

And we see that there is much more incidence of, of transition to democracy

under higher level of GDP per capita than lower level of GDP per capita.

Still number of low income countries especially in

Africa became Democrat in the last two decades.

But very often this democracy is more fragile and

less systematic in countries which already achieve mid of higher income level.

Now let's to analyze opposite relationship.

How democracy helps market system?

First, democracy involves the system of checks and balances.

For example, parliamentary or judicial control of executive power.

This is very important for limiting abu,

abuse of power and acting within the rule of law.

It also increased transparency of government action,

constrains opportunity of rent-seeking of interest group, and

capturing state institution by such interest groups.

And also gives chance for

long-term guarantee and stability of property rights.

There are extremely important things for,

for proper functioning of the market system.

Then democracy provides the democratic rotation of political elites.

So if anything is going wrong with government there is more chance to

correct it by changing the government, changing the ruling parties.

And under a utilitarian system where usually correction came with,

with a price of a revolution and much more serious political turbulence.

Then civil liberties support economic freedom.

It's very important.

Things like, like freedom of speech,

freedom of press, freedom of free association, et cetera.

They very much help economic activity.

And finally, democratic legitimacy of government in

many instances helps in taking unpopular but badly needed economic decisions.

While contrary to some stereotypes authoritarian government,

which theoretically have absolute power.

But still they are very concerned about legitimacy,

very concerned about potential resistance of population.

So this is the reason why many author, authoritarian regimes are populist.

The next part, we will turn to more concrete political environment

of formal and central private economy and we will analyze how these two factors,

economic and political reforms interact with each other in

the country of central eastern Europe, and former Soviet Union.

[MUSIC]

[NOISE]

Market and democracy

Economics of Transition and Emerging Markets

Conheça os instrutores