Democracy Does Not Beget Prosperity

A recent report by the World Commission on the Social Dimension of Globalization, sponsored by the International Labour Organization, is long on pious advice and short on economic reasoning. It lists l6 developing countries, with 45 percent of the world's population, where the gross domestic product is rising by more than 3 percent a year. Among them are the world's giants, China and India. But in 23 countries, with 5 percent of the world's population, GDP per head is falling. In another 14 countries, with just 8 percent of the world's population, incomes per head are rising by less than 1 percent a year. In short, the age of globalization which has brought significant economic advances to many countries is not reaching 37 countries with some 750 million inhabitants. Lingering in dearth and want, many millions continue to struggle for food and shelter.

The report admonishes poor countries to pursue social and economic policies that characterize all Western democracies. It urges prompt adoption of a democratic form of government, of national independence and sovereignty, and high labor standards enacted and enforced by government. Unfortunately, the advice is apt to be as unrealistic as is its explanation of high standards of living in more productive countries.

Democratic institutions surely provide a broad basis for popular government and give people the noble notion and pride that the country belongs to them. Whenever they grow weary of their government, they can exercise their right to change it. Yet democratization is not a necessary condition for economic development. The most startling economic progress, over the past two decades, has been in China which labors under an authoritarian regime. And many new democracies, from Azerbaijan to Kazakhstan, show little ability to progress economically. Even established democracies stagnate economically, with millions of workers condemned to unemployment and declining standards of living when guided by economic ideologies hostile to economic productivity. Government by the people may be as injurious to economic well-being as any other form of government.

Similarly, national independence and self-government are no guarantee of economic progress. The world's poorest countries, such as the Democratic Republic of the Congo, Burundi, and Ethiopia, are as independent as the wealthiest countries, but are poorly governed. In fact, the world's poorest countries may even be poorer today than they were in ages past when they labored under foreign rule. In contrast, many countries that until the twentieth century lacked complete independence and self-government, such as Australia (1901) and New Zealand (1947), expanded rapidly as colonies of the British Empire. They enjoyed the ideological and legal preconditions of economic development, that is, safety of private property, entrepreneurial freedom, and the spirit of enterprise. The poverty of many countries, which moves wealthy countries to pity and foreign aid without end, obviously lacks these preconditions; the suffering of the people is likely to continue as long as the sovereignty of their disfunctioning governments remain unchallenged.

It cannot be surprising that the Commission report also acclaims stringent labor legislation while it condemns the omnipresence of informal, illegal labor markets. It obviously ignores the harmful consequences of labor legislation that creates huge surpluses of unskilled labor and thereby gives rise to informal labor markets, commonly called "black markets." Legal labor markets tend to be characterized by standards and benefit costs that exceed actual employee productivity and, therefore, condemn millions of workers to chronic unemployment. While some victims readily content themselves with lives on unemployment benefits and other forms of public charity, many prefer to descend to the underground economy where services are rendered at true market rates and contracts are concluded by word of mouth and a handshake.

Stringent labor legislation, such as that in old welfare states, invariably gives rise to dualistic national economies with a highly-paid legal sector and a huge illegal market sector. The former, stunted by legislation and regulation, generates the surplus of labor for the large underground economy which tends to grow with every new law and regulation that grant costly benefits to labor. In the old welfare states of Europe, where the official rate of unemployment rarely falls below ten percent of the official work force, the informal underground sector may exceed one-third to one-half of total economic production. Without the underground economy, many people would be immeasurably poorer.

The chronic conflict between the legal economy and the unregulated market – which is immune to regulation – begets corruption and decadence. Where the authorities are determined to enforce the myriad of labor regulations they turn their countries into "police states" that prosecute feverishly and meet out fines and imprisonment for petty infractions. To offer unregulated employment to unemployed workers is a grievous employer offense that is punished with heavy fines. They are rather effectual in maintaining high unemployment rates.

The Commission's report clearly reflects its sponsorship by the International Labour Organization. It spurns market economics and sows class conflict. Democracy, sovereignty, and labor regulation give no assurance of economic development; only private property in the means of production and the unhampered market order will encourage economic development and ever-rising standards of living.