Does Democracy Lead to Economic Growth, or Vice Versa?

I'm loving every minute of my International Business course this semester.  Both the professor and the textbook we're using are quality sources, and we've had some great class discussions.  Coming from an entrepreneurship point of view, it's been neat to see how the authors of the text approach entrepreneurship in the context of international trade and politics, and global economic growth and development.

After establishing that innovation and entrepreneurship require strong property rights, the chapter on National Differences in Political Economy takes us right into a discussion on the "The Required Political System" for entrepreneurship to flourish. Here's just a taste of that...

Much debate surrounds which kind of political system best achieves a functioning market economy with strong protection for property rights. People in the West tend to associate a representative democracy with a market economic system, strong property rights protection, and economic progress. Building on this, we tend to argue that democracy is good for growth. However, some totalitarian regimes have fostered a market economy and strong property rights protection and have experienced rapid economic growth. Five of the fastest growing economies of the past 30 years--China, South Korea, Taiwan, Singapore, and Hong Kong--had one thing in common at the start of their economic growth: undemocratic governments. At the same time, countries with stable democratic governments, such as India, experienced sluggish economic growth for long periods. In 1992, Lee Kuan Yew, Singapore's leader for many years, told and audience, "I do not believe that democracy necessarily leads to development. I believe that a country needs to develop discipline more than democracy. The exuberance of democracy leads to undisciplined and disorderly conduct which is inimical to development."

The author goes on to point out that following Yew's line of reasoning, we should have seen rapid growth in much of Africa, Asia, and Latin America from 1960 - 1990, during which time these regions were primarily under the rule of totalitarian dictators.  We may see correlations between totalitarian rule and economic growth in some situations, but "dictators are rarely so benevolent" and often use the political system to further their own interests, rather than focusing their efforts on the advancement of their "kingdom." The paragraph concludes, "Only in a well-functioning, mature democracy are property rights truly secure."

It's interesting to note that "seven of the fastest growing Asian economies adopted more democratic governments during the past two decades, including South Korea and Taiwan."

"Although democracy may not always be the cause of initial economic progress, it seems to be one consequence of that progress." 

It seems to me that the correlation between a democratic government and economic growth is certainly evident.  What both Yew and the author of this textbook are trying to do is to establish causation -- they each argue that one system CAUSES the other.  In Yew's case, it's that totalitarian ethic and control causes progress; our author argues that an opposing political, the democratic system, causes economic progress.  And then we are presented with the fact that economic progress has caused totalitarian states to become more democratic.

So if 
totalitarianism leads to growth,
democracy leads to growth,
and growth leads to democracy,
I think the situation is pretty clear.  Ceteris paribus, all other things held constant, economic growth and democracy perpetuate each other.  I see it as a cycle: once you establish a strong trend of growth or of democracy, you're on the right track.  A good totalitarian dictator probably won't get you on the road to democracy, but with benevolent policy-making he or she could get your economy into a growth spurt, from which, through the people and totalitarian government working together, you may be able to transition to a more democratic system.  Democracy is where you eventually want to be, as it's more conducive to continued economic growth, but all hope is not lost simply because a state is currently under totalitarian rule. 

Thoughts on this?


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Text: Hill, Charles W. L. Global Business Today, 6e. McGraw-Hill: 2009.