CAPITAL MARKETS AND DEMOCRACY

Many countries have democracy's forms, but without capitalism's content. Instituting the right to vote while keeping capital markets closed is a prescription for stagnation and preservation of the status quo. It raises hopes but does not bring prosperity. Instead, it perpetuates a powerful elite, creates the seeds for political turmoil, and thus brings democracy itself into disrepute. Whether a democracy succeeds is said to depend on its system of checks and balances—that is, on the effectiveness of its mechanism for correcting mistaken policies. For example, extending the vote could be inimical to prosperity if there are no rules and institutions that serve to constrain government spending. Among the most important of these institutions are open and well‐functioning capital markets. In case after case, the liberalization of financial markets has been accompanied by impressive economic growth and higher standards of living—even in countries that we would not recognize as democracies. Indeed, as the example of Hong Kong suggests, the establishment of open capital markets is not only by itself a fairly reliable prescription for prosperity—but more free and democratic institutions are likely to follow as a consequence.