PopovPolterovich.doc

8 in what follows we concentrate on law and order as

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In what follows we concentrate on law and order as the most important prerequisite for successful democratization and try to understand through which channels democratization influences economic growth. One may expect that democratization under poor law and order leads to the decay of state institutional capacity because it undermines the effectiveness of the government regulations, including tax regulations, leads to the expansion of the shadow economy, and limits the growth of government revenues. Besides democratization under poor law and order makes it difficult to carry out prudent macroeconomic policy (low budget deficits and inflation) because the state becomes a hostage of industrial lobbies and populist groups. The process of democratization is associated with little costs and many benefits, if carried out in liberal autocracies (Zakaria, 1997), i.e. in countries that have already created a system of protection of civil rights (except for political rights), or, to put it differently, established mechanisms and traditions for the law and order . But when democratization occurs in illiberal autocracies, i.e. in countries that maintain order, but not based on law, the result is the emergence of illiberal democracies, whose record in ensuring institutional capacities is the worst, which predictably has a devastating impact on economic growth. Weak democracies produce weak governments that are prone to the pressure of industrial lobbies and populist groups; civil service in weak democracies is being corroded by corruption and crony relationships. Their governments cannot ensure high tax compliance and cannot contain the expansion of the shadow economy. They cannot collect enough revenues to finance their expenditure and have to resort to inflationary financing. As a result, growth rates in weak democracies are low; increases in life expectancy are held back by the collapse of the preventive healthcare, by growing income and social inequalities, crime and murder rates (Przeworski et al., 2000). The mechanisms at work in illiberal democracies that undermine growth are shown on a tentative scheme below; thick arrows indicate most important links. 9
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THE RISE OF ILLIBERAL DEMOCRACIES: ECONOMIC AND SOCIAL COSTS 10 ILLIBERAL DEMOCRACY RISE = Democratization + Poor law and order (Poor protection of civil rights, contract and property rights, high corruption) Decline in the effectiveness of the government Poor tax compliance Expansion of the shadow economy Difficulties in tax collection Slow growth of government revenues Lower investment Slower economic growth Government failure to improve institutions (law and order, protection of investor’s right, etc.) Lack of consensus Government budget deficit, inflation, etc. Budget redistribution due to lobby activities Property redistribution Government failure to conduct effective macro, social and industrial policies Higher income inequalities Higher crime rates Lower life expectancy High income inequalities Differences in efficiency & between sectors of the economy Resource abundance
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3. Experience of developed countries
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