Where to Find Democracy and the Market

Last year, we said that a market and democracy need each other.

This year, comparing the Economist’s Democracy Index and the Index of Economic Freedom, we see the correlation (with one huge exception) and the concerns.

Democracy and Markets

The EIU

As in the past, The Economist’s EIU 2024 “Democracy Index” places 165 nations and two territories in four buckets. Below, the dark and medium blue indicate “full democracies” while the lighter blue identifies the “flawed democracies.” Then, moving to the left on the scale, the regimes are grouped as “hybrid” and “authoritarian”:

Reflecting the slide, 10 years ago, 12.5% of the world’s population had “full democracies” while now we are down to 6.6 %. At the other extreme, 39.2 percent of the people in the world live in the 60 “authoritarian regimes.”

You can see the downward trend:

Among the notable changes, Portugal moved up to “full democracy” while Bangladesh had the largest plunge of 25 places to #100:

The 25 full democracies are primarily OECD countries from the developed world. The next group, the “flawed democracies,” include the U.S. (a full democracy until 2016) at #28. Also “flawed” were nations that ranged from France (down to #26, a full democracy until last year) and South Korea (#32, down a whopping 10 spots) to India (#41) and Singapore (#68). Having been “hybrid” in 2019, now China is “authoritarian” (#145) with the Central African Republic, North Korea, Myanmar, and Afghanistan at the bottom.

In the following top 10, Norway has led the list for 16 years:

The Index of Economic Freedom

Because the connective tissue is complex, comparing top democracies and the most freely functioning economies could be misleading. However, with Singapore the anomaly, most correlate. I’ve highlighted the countries that are in the top ten in both lists.

The top 10 in the Index of Economic Freedom with the EIU top democracies highlighted:

We should add that for the EIU democracies, Australia is #11, and Taiwan, #12. Again, the exception is Singapore with its #68 EIU “flawed democracy” rank.

Our Bottom Line: The Concerns

As economists, we can always return to tradeoffs. In Equality and Efficiency The Big Tradeoff, economist Arthur Okun explained that we have a tension between democracy and the economy. While a democracy requires fairness and equal rights, the market’s competition tilts it toward inequality. This year’s EIU report emphasizes how inequality is chipping away at trust in government.

In many of the more affluent countries, trust in government has declined because of economic inequality. The report tells us that, “When special interest groups exert undue influence over the political process, they end up undermining majority rule” and then they continue with, “The smooth functioning of democratic political systems is probably not compatible with extremes of social and economic inequality.”

My sources and more: The Economist had the summary of this EIU report. I also recommend reading this Pew research report.

Please note that today’s post was an update from 2024.