Last year showed that the durability of liberal democracy can no longer be taken for granted, even in the West. In fact, Harvard University political scientist Yascha Mounk’s analysis of world values survey data showed that, in many Western nations, public confidence in democracy has been declining for quite some time.
What explains this trend?
The political upheavals of last year suggest that many people are frustrated with democratic inaction. Slow income growth, unemployment, inequality, immigration and terrorism are supposedly not being tackled decisively enough. Democratic nations’ political establishments seem to be in a permanent state of torpor, fueling voter demand for strong leaders who promise to smash through political gridlock and sweep away bureaucratic resistance to bold new policies.
These leaders — who assert that they alone can fix their nations’ problems — are often sought, and found, in the corporate world. Many people regard a successful chief executive as someone who can deliver on well-defined objectives, so they conclude that a businessperson can solve social problems that a politician cannot.
However, this view is misleading, because political leadership is fundamentally different from corporate leadership. In economists’ parlance, it is the difference between general-equilibrium and partial-equilibrium analysis.
Corporate leaders must deliver for their shareholders and should not bother themselves too much with what happens to the rest of society. If profit maximization requires cutting costs and downsizing, the corporate leader can eliminate jobs and issue severance payments to redundant workers. What happens to those workers next is a concern for somebody else — namely, the state — to address.
Political leaders, on the other hand, are bound by the principle of “one person, one vote,” and have a responsibility to take care of both the haves and have-nots, the employed and the unemployed alike. A politician must ensure that unemployed workers have new opportunities or risk losing their votes.
This is not to say that the chief executive’s job is easier, but it is certainly more clearly defined. Leaders who approach a political task with a corporate mindset are likely to focus more on efficiency than inclusion, but if their reforms ignore or alienate too many voters, they could be reversed.
As we saw last year, Western nations urgently need to find ways to compensate or assist those who have lost out in the global economy. This is a painful lesson that post-communist nations learned during the 1990s. According to Transition for All, the European Bank for Reconstruction and Development’s latest transition report, the first years of market reforms hurt the vast majority of those nations’ populations.
Interestingly, many of the people who supported these reforms also favored “strong leaders.”
They argued that, because the reforms were unpopular, they needed to be imposed on the public, rather than being impeded by excessively democratic processes. Unfortunately, this argument backfired. While some strong leaders managed to implement reforms quickly, the measures benefited only a minority of people and many of them were eventually reversed.
A typical example is privatization.
State-owned enterprises are almost always inefficient and often hoard labor, so when they are privatized they become more efficient, but they also shed workers. This is a positive development from a firm-level, partial-equilibrium perspective, but it may not be if one considers laid-off workers’ well-being and the general-equilibrium implications for society.
If privatization displaces too many workers without compensation, a majority of citizens could come to see it as illegitimate, potentially undermining their support for private ownership of productive property. This is exactly what has happened in more than a few post-communist nations, where privatization has become a dirty word.
The damage caused by certain unpopular reforms lasted far longer than the reforms themselves. In many post-communist nations, the pain they caused created the political conditions for populist strongmen to take over and when some of these new leaders reversed the reforms, they also removed institutional checks on their power, to make it harder to challenge their decisions. Once they consolidated their hold on power, they redistributed the nation’s wealth to their cronies. Not surprisingly, income inequality in many of these nations is worse today than it was when they abandoned privatization and other reforms.
This is why democratic institutions are so important: They enable those who have been harmed by reforms to receive compensation.
With “one person, one vote,” the “losers” count as much as the “winners” because truly democratic policies must be inclusive. Implementing reforms in a democracy takes time and effort, but the painful process of building broad pro-reform coalitions also ensures that those policies endure.
In the long run, inclusive reforms stick, while quick and dirty reforms do not. The tortoise of democracy beats the hare of benevolent dictatorship.
Sergei Guriev is chief economist at the European Bank for Reconstruction and Development.
Copyright: Project Syndicate
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