1. Democracy and Economic Development
Joseph Stiglitz
Quito
July 2006

2. Two sided relationship
Democracy may promote development
Development may promote democracy
Picture complicated by
No clear definition of democracy
Some economic successes with limited democracy
But governments felt themselves accountable to people
And success in development was key to their legitimacy

3. Democracy promotes development
Participation leads to design of policies, programs, projects reflecting needs, circumstances of country
Leading to more country ownership
Ownership leads to more involvement
Better results
Example in water projects
At other extreme, civil strife undermines development

4. Democracy is more than periodic voting
Meaningful democracy requires informed citizenry
Importance of right to know laws (freedom of information act)
Reflects view that governments work for the citizens rather than vice-versa
Checks against special interests, corruption
Uncovers incompetence
Secrecy itself can be importance source of corruption
Artificially created scarcity

5. Information key to reducing agency costs, including in public sector
Helps explain why so often governments prefer secrecy
Gives them more discretion
Expands scope for corruption
Can actually be source of revenues—”selling” information rents
In US, other advanced industrial countries, often takes form of “trade”—better press coverage
Less accountability
Makes political markets less contestable
Exemplified by Bush Administration’s unjustifiable attempt to greatly expand scope for secrecy

6. Privacy and secrecy
Citizens should have presumption to know what government is doing
Narrowly circumscribed exceptions
Secrecy contributed to extending Cold War
Citizens should have presumption in favor of privacy
Limits abuses of government
When there are exceptions, need oversight

7. Information and voting
Voting affected by beliefs
Beliefs affected by media
Media affected by economic/political system
Example—US
Many Americans still believe there are weapons of mass destruction, link between Iraq and Al-quaeda
Much less reporting of news stories concerning adverse effects on Iraq, Afghanistan (torture, human rights violations)

8. Information and voting
Important to have diversified sources of information
Which is why media concentration even more a concern that economic concentration in other arenas
Regulatory discretion and access to “inside” information can lead to self-censorship and distorted news

9. “Managing Democracy” Electoral outcomes affected by
Who is allowed to vote
Who votes
Voters’ perceptions
Incumbents attempt to use powers to maintain themselves in office
Use of insider information
Reducing publicly available information
Puts rivals at a disadvantage
“buying” voters
Media coverage
Gerrymandering districts
Similar to creating and maintaining entry barriers in market economics
Electoral markets are often not highly contestable
Outcomes can be affected by policies

10. Economic policies and political actions
Can think of “joint” political and economic equilibrium
Illustrated by Russia
With high interest rates, open capital markets, weak rule of law, those who controlled assets had incentives to strip assets and support continuation of No Rule of Law
There could have been another equilibrium, with wealth creation and strong popular support for rule of law

11. Implications
Need to bear in mind long run political consequences of economic policies
Policies can be used to enhance or weaken democratic processes
With Capital market liberalization market participants may feel less urgency in creating rule of law, since they can obtain needed wealth protections by shifting assets abroad

12. Concluding Remarks
A broad democratization agenda can strengthen democracy and economic growth
Quality of public management is example of a public good: the public good of the public good
Active government policies are required
Focus should be on broadening participation and increasing contestability
Participation will increase if people believe their views will be heard and their actions maker a difference
Hence contestability will improve participation (and vice versa)

13. Information is a key instrument
Right to know laws
But also community radio, TV stations, newspapers
Subsidies may be required
Many of the economic failures of Latin America (and the U.S.) are related to political failures
Democracies are imperfect
Not all voices are heard, or at least heard with equal weight
Campaign contributions in U.S. have a particularly pernicious effect
Debates about economic reform need to be accompanied by discussions of political reform
Ending military dictatorships was a great achievement
Now the task to create true democracies