What are the institutions that are needed for high quality growth? Do democracy and economic growth go together? We argue that participatory political systems are the most effective ones for processing and aggregating local knowledge. Democracy is a meta-institution for building good institutions.

Some people contend that one might have to sacrifice democracy for economic development. They argue that one first needs to increase the economic pie and then effect political liberalization. Now this may be possible in smaller countries or city states like Singapore but for bigger nations like Indonesia, the social cohesion required for economic growth cannot be achieved any other way.

Also in today’s rapidly globalizing world, external institutions and factors play a role in bringing about change. The triad - the World Bank, the IMF and the WTO – and dominant states immediately come to mind. However, these changes which are often imposed do not have the desired effects because of the short time frame in which they are to be implemented and the consequent institutional deficits. Rules for greater transparency, and corporate governance rules are no good if they are not effective on the ground. The point is that the ‘rule of law’ cannot be given; a self-sustaining mechanism has to be built and this cannot happen overnight.

It is a great moral tragedy that, today; over a billion people live on less than two dollars a day. Also the disparities in incomes across countries have increased tremendously. In the 19^th century the richest country was only about twenty times richer than the poorest one, today Luxembourg has a PYC of US$42, 000 compared to US$440 in Sierra Leone. That’s a hundred times.

The comparative experience with economic growth over the last few decades has taught us a number of important lessons, though we cannot establish a causal relationship, democracy and economic growth are correlated. One of the more important of these is the importance of private initiative and incentives. All instances of successful development are ultimately the collective result of individual decisions by entrepreneurs to invest in risky new ventures and try out new things.

The encounter between neo-classical economics and developing societies served to reveal the institutional underpinnings of market economies. A clearly delineated system of property rights, a regulatory apparatus curbing the worst forms of fraud, anti-competitive behavior, and moral hazard, a moderately cohesive society exhibiting trust and social cooperation, social and political institutions that mitigate risk and manage social conflicts, the rule of law and clean government--these are social arrangements that economists usually take for granted, but which are conspicuous by their absence in poor countries.

So what roles can NGO’s, businesses and private foundations play in making existing democracies more democratic and promoting democratic change in places where it does not exist. We take two countries – Turkey (Appendix 1) and Haiti (Appendix 2) as examples.

Recommendations for the Community of Democracies Governmental Forum

1. To strengthen the foundation for the functioning of markets and to improve democratic governance, we propose that the Community of Democracies commit themselves to establish a private property regime, also as a key component to support entrepreneurship. We strongly urge the Community of Democracies to include property rights within the Warsaw Declaration.
2. To build a middle class supportive of democratic development, governments must reduce the costs of entry into the economy for entrepreneurs, the informal sector, and especially the poor, by simplifying business registration, licensing, and tax procedures.
3. To increase business association and labor union participation in democracy promotion programs.
4. To increase the democratic component of economic reforms, governments, including donors, should provide for more intense public participation by increasing disclosure of draft regulations and legislation.
5. To increase disclosure and transparency in society, governments must adopt freedom of information laws that will increase the flow of financial and economic information. Also, donors should provide training and support for financial and economic journalists.
6. To strengthen markets and democratic governance, it is essential to have independent regulatory and economic institutions. To develop the necessary public support and local capacity for such institutions, especially in developing and transition economies, donor countries should support local policy institutions or think tanks.

Appendix 1
Presentation of Can Parker

DEMOCRACY AND THE BUSINESS COMMUNITY IN TURKEY

In the last 70 years of the Turkish Republic, the state run economy has gone through the same phase as its counterparts elsewhere in the world. It began with completely state owned companies and some small private industry was promoted with customs protection and the state was the main purchaser of the goods produced. Military and civil bureaucracy composed the state and had absolute power and acted as the ruling class. The legal system was set up to protect the state as opposed to individual rights and freedoms. This created an inefficient economy characterized by inflation, periodic sudden and sharp devaluations and systemic crises.

Amazingly, even under such conditions, industrialization did take place and through the years some private enterprises did develop. Slowly this private business community acquired some economic and political clout.

The incompatibility of a highly protected economy with resource development compelled Turkey to take the first steps of liberalization in 1985. This brought the business community into contact with the western world. At this point the businessmen were undecided and divided on whether they would prosper more with state protection or without it.

The Turkish businessman and Industrialist Association (TUSIAD) was the vehicle used by businessmen until the early 1990’s to advocate for the legitimacy of private enterprise in a strong leftist social climate. It was used to manage political relations with the state – the government and other political parties- playing the role of a subdued lobbying agency.

In the early 1990’s a small nucleus was formed in the business community which believed in a liberal economy, minimum state intervention and democratization as an indispensable part of liberalization. In a hastily called meeting called the ‘Search Conference’ lasting for three days, they discussed how democratization could effect the flourishing of the economy and how exorbitant state expenditures could be bought under control.

After intensive discussions, this small nucleus could convince a thin majority that TUSIAD should be concerned with matters of politics and develop ideas beyond the scope of business interests extending to social issues.

This small nucleus started with studies concerning education, health, poverty and bureaucratic procedures. Through these endeavors the association gained public respectability and increasing media attention. A business community discussing democratizing issues and criticizing the state was something new and soon the association came under pressure to limit itself to business matters.

To overcome the resistance they were facing, this small group then conducted many apolitical comparative studies of the penal law, laws for association and others concerning democracy and freedoms.

Soon there was a division in TUSIAD between companies that were still dependent on the state for their survival and those that were not. After a cathartic struggle the former group was able to capture the leadership. The scene was now set for widespread publicity of the association’s agenda for democratization. These proposals found widespread public acceptance even though the sate was not as welcoming. This also encouraged many NGO’s to support and contribute to the issues.

The Turkish businessman and Industrialist Association became the focus of ideas which led to general freedoms.

Appendix 2
Presentation of Lionel Delatour

NEW FACES, SAME OLD PRACTICES

In February 1986, Jean-Claude Duvalier, President-for-Life and heir to the system of repression, arbitrariness, corruption, cronyism and monopoly – both political and economic – that his father, François Duvalier, had put in place almost twenty-nine years before, fled Haiti for France. Almost seventeen years later Haiti finds itself mired in repression of political opponents, arbitrary application of its laws and of its Constitution, endemic corruption, overt and shameless cronyism, and monopolies throughout its political and its economic structures.

How does one explain a country that was once considered the richest colony in the world turning into the poorest nation of the western hemisphere?

How can a country that defeated Napoleon’s army and succeeded the second most important revolution of the Hemisphere after the United States and whose revolution in 1804- according to a resolution adopted by the General Assembly of UNESCO during it’s plenary session of November 2001- “symbolizes the triumph of the principles of liberty, equality, dignity and human rights, and has made its mark on the history of the liberation of peoples and the emergence of States in the Americas and the Caribbean.” have become a grave for Democracy and human rights?

How can a country that only a few decades ago was considered as the “Perle des Antilles” and a friendly place for foreign investment have lost all its winning cards to attract tourists and investors?

Obviously, the responses have to be found in the formation of the Haitian state and it’s evolution during the past two centuries. A Swedish economist, Mats Lundhal who has extensively studied the relations between the State and the Economy in Haiti suggests the concept of “kleptocracy” to describe the predatory practices of the Haitian State and its severe consequences for the economy, both from the point of view of distribution and in terms of efficiency and growth.

The Haitian State has always had a negative influence on the economy. Paradoxically, Haiti had the first agrarian reform in Latin America when President Alexandre Pétion (in 1807-1808) freed the agricultural workers and began distributing land to his officers and soldiers. This land reform saved Haitians from the effects of land concentration that beset most other Latin American economies, but the political effects were quite negative. The elite, having lost the capacity to obtain a work-free income by exploiting agricultural workers, turned to politics.

So, the way was paved for the establishment of kleptocracy as the predominant mode of government in Haiti. The majority of office holders were beset by the search of rapid pecuniary gains at the cost of not remaining long in power.

For example, during the last 16 years the country saw no less than 10 presidents or heads of State coming and going. Unfortunately, this is not an exclusive mark of the most recent period of our history. Indeed, it is worth evoking the word of Ecclesiastic: nil novi sub sole (there is nothing new under the sun).

The persistence of a predatory state in Haiti has had negative consequences on the economy, slowing growth, discouraging private investment and creating chronic interference with the market mechanism:

• Taxation is more a tool of harassment for political enemies and a source of private reward than a mechanism of efficient resource mobilization;
• Regulation ignores the potential of competition and is a mode of extension of special privileges to chosen collaborators;
• Resources are drawn out of their most productive uses to be channeled into sectors where the returns to society are lower;
• Inefficient monopolies are being protected by obsolete regulations and partisan practices;
• Bureaucracy is of very little assistance to citizens and to business and is open to corruption and inefficiency;
• Arbitrary application of the rule of law and disrespect for property rights discourages investors, creates an insecure business environment and increases economic transactions costs.

As an illustration, I would like to mention a recent study conducted by CLED with the support of the Institute Liberty and Democracy directed by the Peruvian economist Hernando de Soto, with the financial assistance of USAID.

This study could document that more than two billion dollars of assets of property are being kept dormant because those assets are not covered by formal and secure property rights and cannot be traded as secured titles in the financial market. Those assets mostly belong to the poor people and to the middle classes and are –to repeat the word of Hernando de Soto- considered as dead capital to the economy.

Regulations and bureaucracy are also deterrent to business development .While it takes a maximum of two to five days to incorporate a business in most countries,- it is a matter of a couple of hours in Chile- in Haiti the normal process for establishing a corporation requires 44 bureaucratic processes through a labyrinth of 24 different offices, with an average timeframe of 114 days and transaction costs up to US$12,000.

One of the consequences of this situation is that about 68% of all businesses in Haiti have to operate outside the legal system. There are approximately 213,000 businesses of this kind and they have accumulated about U$ 270 million of assets in machinery and equipment. Because of their legal condition, these extra legal businesses cannot use their assets as collateral to have access to bank loans.

Obviously, all these legal and institutional obstacles are excellent opportunities for bribery, arbitrariness and cronyism. That’s why non democratic governance requires bad laws, weak institutions, and inefficient bureaucracy. That’s why also, poor governance is a handicap to market development.

Social sectors suffer as well from kleptocracy. Some of our colleagues in Haiti used to speak of “the pays en dehors” to describe the enormous social fracture that characterizes the Haitian society leaving the vast majority of the Haitian population under the poverty line with an average per capita annual income under US$ 300.

To keep kleptocracy working has always required the support of the army or of any parallel armed forces, either called the “Tontons Macoutes” of François Duvalier regime or the “Chimeres” of the current regime. Methods have ranged from maintaining unbudgeted accounts and milking state-owned enterprises to fiscal harassment of private businesses or individuals or outright blackmail, extortion and confiscation.

Haiti faces a considerable number of challenges that have never been addressed and that will not be resolved by a flick of the wrist. Furthermore, there is currently an enormous deficit of good governance and vision from the part of our political elite. The breadth of this deficit, the indifference of the overall political elite vis-à-vis the problems that affect the citizens’ quality of life, and above all, the absence of a clear and relevant plan to move the country away from poverty and towards a sustainable development program, are legitimate causes of concern for citizens.

However, the emergence of Civil Society is one of the striking facts of political life over the past ten years. It reflects a growing need, in the face of disappointment in the political situation, of the engagement of the citizen in the affairs of the State.

Grassroots’ organizations, business organizations and private foundations have been blooming over the recent years showing a willingness to participate actively in the political debate, creating opportunities and mechanisms of policy dialogue and developing reform proposals.

These initiatives have been receiving enormous support from some bilateral and international organizations. They represent an excellent opportunity to create synergy among the actors and help in building the social contract that will lead the country towards good governance and sustainable development.