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Direct Democracy and Economics

By Colin Twiggs
January 8th, 2012 7:00 p.m. ET (11:00 a.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.


Reproduced with kind permission from Steven Spadijer at Australian National University:

What is Direct Democracy?

Direct Democracy allows a prescribed number of citizens' to veto an existing law or enact a constitutional amendment or statute independent of the legislature at a referendum. Today, these procedures complement the day-to-day representative government found in Switzerland and its 26 cantons, 7 German Länder, Liechtenstein, 24 American states and parts of Latin America.

Readers might notice that these regions are some of the wealthiest, well-governed and most stable countries in their region today. But do constitutions matter for economic performance? In particular, does the use of direct democracy matter from an economic perspective?

The Swiss Experience

Authors Feld and Savioz (see references below) found that per capita GDP in cantons which use Direct Democracy more frequently, and have easy access to these rights, are some 5 percent higher than in cantons which have infrequent use (even when controlling for income and other demographic variables). Feld also shows that direct democracy is associated with sounder public finances, lower levels of public debt, better economic performance and higher satisfaction of citizens.

Schaltegger with Feld then reveal centralization of public resources is more likely to occur under representative government while direct democracy is more likely to decentralize the provision of public resources, concluding that :

the empirical analysis provides evidence that referendums induce less centralization of fiscal activities.

In turn, such decentralization prompts vigorous tax competition between the cantons of Switzerland attracting capital from aboard as well as better education outcomes for all.

More recently, Funk and Gathmann find using Swiss data from 1890 to 2000 that a mandatory budget referendum reduces canton expenditures by 12 percent while lowering signature requirements for the voter initiatives by 1 percent reduces canton spending by 0.6 percent.

Pommerehne then examines the effects of direct democracy on the efficiency with which government services are provided. He finds that waste collection in Swiss towns having both a private contractor for the service and direct democratic elements is provided at lowest cost. Additional efficiency losses materialize if waste collection is provided in towns without direct democratic elements.

So far as its economic impact in Switzerland, direct democracy has brought with it unparalleled economic prosperity, despite the country being far from resource-rich.

Progressivism and Direct Democracy

It is important to note that Direct Democracy per se does not lead to lower spending. Rather, it accords with what citizens require given the context. If your infrastructure is state-of-the-art, then there is no need for lavish expenditure. Conversely, if it is dwindling (try taking a train from Western Sydney to the city), then it is a gun behind the door.

In Uruguay, for example, voters repealed privatization of the countries water supply and oil companies, "Norwegian-izing" their natural resources via the initiative process. Matsusaka noted that during the first half of the twentieth century in the United States, which was characterised by massive urbanisation and movement of people from rural to urban areas all of which required railways, roads and schools to be built), initiative states spent more — both statewide and locally, but lower state and higher local expenditure after controlling for income and other demographics.

This was used to bypass the legislature dominated by farmers and allowed the US to urbanise itself. Together with existing evidence from later in the century which shows its 'libertarian' streaks, suggests that the voter initiative does not have a consistent effect on the overall size of state and local government.

However, in all cases Direct Democracy systematically leads to more decentralized expenditure. Indeed, Blume and Voigt note in Germany that the introduction of direct democratic elements in local constitutions led to higher rates of expenditures on local infrastructure. For example, Bavaria — one of the most efficient, well governed parts of Germany — has had over 1500 referendums locally from 1995 to 2005.

Reasons?

But why does direct democracy deliver results far superior to that of representative government? There are 3 broad reasons......



Democracy... while it lasts is more bloody than either [aristocracy or monarchy]. Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.

~ John Adams, 2nd US President

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