Economic development + equality = democracy?

In my last column, I discussed the impact of rich natural resources on economic growth. I pointed out that they can keep a country poor, by slowing down the development of human capital. Today I want to carry the argument further by considering the impact of rich natural resources on the political system, and particularly on the possibility of democracy.

The link between natural resources and politics lies in the distribution of income. Years ago the American political scientist Seymour Martin Lipset noticed a strong correlation between ‘stable democracy’ and relative equality of wealth and incomes. He argued that economic growth leads to democratic politics by expanding the middle class and public spending on social services, both of which narrow the gap between rich and poor. Stable democracies are, by and large, bourgeois societies with large ‘welfare states’. The United States would seem to be a partial exception to this rule. Two-thirds of Americans are comfortably off, but social spending has lagged behind private enrichment, producing greater inequality than is to be found in Western Europe.

By contrast, the highly unequal societies of Latin America have been unable to produce stable democracies, alternating between corrupt oligarchic rule and dictatorship. The key measure of inequality –the ‘gini coefficient’ –shows X for Western Europe, Y for the United States and Z for Latin America. (The higher the ratio, the greater the inequality.)

A strong intuition supports this empirical relationship between equality and democracy. Where pre-tax inequalities in wealth and income are large, it is easier to mobilise poor majorities behind a programme of seizing the wealth and incomes of the rich. This was the impulse behind the Bolshevik Revolution and the populist dictatorships of Latin America. Popular feeling against the rich is easier to mobilise if the rich are members of easily identifiable ethnic minorities. Martin Wolf concludes that ‘the stability of democracy requires some limits on the extent of inequality’.

This takes us back to natural resources. By and large economic development based on the exploitation of natural resources produces a more unequal distribution of income and wealth than one based on manufacturing and services. This is because the rewards to ownership (‘rents’ in the old-fashioned phrase), whether this is ownership of land or minerals, race ahead of the rewards to labour. Politics becomes a struggle for the redistribution of ‘rents’.

Here lies the main threat to the prospects for a stable democracy in post-Communist Russia. As measured by the gini coefficient, inequality in Russia is not much higher than in Europe and is lower than in Latin America. It increased markedly in the first six years of post-Communism, and has since levelled off. But the gini-coefficient is an aggregate measure, which hides the way wealth and incomes are distributed between different sectors of the population. If one excludes the top (say) 10 per cent, Russia is one of the most equal societies in the world –everyone is equally poor. If one adds the tiny minority of very rich (almost all of them oil, gas, and mineral billionaires) and the larger, but still small group of the rich and well-off, it is one of the most unequal societies in the world. Among the very rich, ethnic minorities are disproportionately represented.

In the light of these facts, this week’s decision by the government to cut social entitlements to the poor is the reverse of what democracy needs. There is no immediate threat to political stability. Opposition forces are moribund. As last weekend’s events showed, the Communist Party is in dissolution. No one knows what will emerge from the wreck. The prospect is not for political upheaval but for a strengthening of autocracy. Whether economic development will shift the balance towards democracy in the long-run is the big unanswered question.