Tuesday, June 11, 2013

Party monopoly = less competitive economy?

Jun 10, 2013

The jury is still out on whether party monopolies boost or impede a country's competitiveness

By Amit Jain For The Straits Times

THE post-election ruckus in Malaysia and the subsequent crackdown on opposition activists had investors in jitters. The business mood could easily have turned from rosy to gloomy if the acrimonious stand-off between the long-ruling Barisan Nasional (BN) coalition and the opposition had continued on the streets.

For now though the crisis appears to have blown over. Last Monday, opposition leader Anwar Ibrahim told journalists he will participate in Parliament, push for electoral reforms and contest the election results through legal petitions.

Perhaps it is time to revisit that old debate: is there a correlation between party monopoly and economic competitiveness?

A recent World Bank and University of Pennsylvania study compared firms in African countries with a GDP per capita of less than US$3,000 (S$3,750) with those in other economies of similar size.

It found an inverse relationship between the companies' performance and the length of time that a party remained in power: the longer a party stayed in power, the lower the firm's productivity.

They drew this conclusion after adjusting for geographic, infrastructure and access to finance disadvantages that many African firms endure.

This African study raises the natural question whether the same would hold true universally. Growth stories of China and the Asian "tigers" (Singapore and Malaysia included) seem to suggest otherwise.

The report's argument goes something like this: when a party has been in power for a long time, there is a tendency for it to lose touch, not just with the electorate but also, by extension, the small and medium enterprises that ultimately determine an economy's competitiveness.

In a single party monopoly, the government becomes less accountable and can extract "rent" from investors and local businesses with impunity. The only way to do business is to cultivate ties with those in power and "grease palms". This raises the cost of doing business, breeds corruption, promotes special interests and hurts competitiveness.

There is some evidence to back this argument. Eight of the top 10 most competitive economies in the World Economic Forum's Global Competitiveness Index (GCI) 2012 are robust multi-party democracies that have changed governments through elections at some point or the other. Singapore is the only exception.

Sub-Saharan Africa is the least competitive region of all. But even here, two of the three best performing economies are multi-party states - South Africa and Mauritius.

But let us test the hypothesis.

Competitiveness depends on a set of institutions, policies and factors that determine productivity. The more independent the institutions, predictable the policies and favourable the productive factors, the more competitive an economy is likely to be. Single-party monopolies have little incentive to establish strong public institutions that promote competitiveness - doing so would compromise their ability to seek rent.

Multi-party systems on the other hand thrive only if they have independent institutions in place.

India should be far more competitive than China, yet India ranks a middling 59 in the GCI while China is at 29. That is because institutional attitudes towards markets are also very important. While India's institutions are more independent than China's, they are less efficient and not very market friendly.

The next important pillar of competitiveness is infrastructure. A well-developed supply chain connected with reliable transport, energy and communications networks reduces business costs and makes an economy efficient.

Here, the record of single-party monopolies has been sterling. Few multi-party states have succeeded in matching the kind of "hub and spoke" logistics and value-chain infrastructure that Singapore, China, the Gulf Emirates and even Malaysia have created.

Large infrastructural projects boost competitiveness and also prestige and wealth of those in power (and their cronies). Although a party monopoly does not fear elections, it does fear losing legitimacy.

One way to sustain that is by delivering good roads, power and communications. Another is to build iconic towers or monuments. Big projects whet appetites for "rent" and are championed more vigorously by party monopolies.

A multi-party system tends to put more checks on executive decisions thus limiting the scope for corruption as well as action - sometimes at the cost of competiveness. Moreover, since power in an electoral democracy is often transient, it creates perverse incentives for graft for elected leaders.

When it comes to nurturing creative human talent, productive labour and financial access, however, a multi-party system beats party monopoly hands down. London, New York, Rio de Janeiro and Mumbai share the quintessential multi-party system tolerance for immigration, dissent, chaos and new ideas. Even at its worst, this system allows more personal choice, freedom of organised action, and some form of insurance against excessive rent-seeking behaviour.

It also responds better to demands for social inclusion. Multi-party states show more enthusiasm for welfare and new models of poverty alleviation such as cash transfers, low-cost banking and mobile money than those run by single parties.

Party monopolies are better at attracting human talent, offering quick business facilitation and liberal tax concessions. Since they are in for the long run, party monopolies do not change policy directions abruptly. This helps investor confidence. But they can also be oblivious to simmering discontent that can explode into unrest like the kind we now see in the Middle East. A multi-party democracy is better at finding compromise even if it is prone to frequent policy shifts and populism.

So is there indeed a direct correlation between single-party monopoly and economic competitiveness? There is no irrefutable evidence of that yet.

Party monopolies are no better or worse at fostering competitiveness than multi-party systems. What matters is how well a system responds to the demands of the market and sustains growth.

The writer is a communications specialist who has worked for The World Bank as a consultant.

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