Monday, November 24, 2014

The Myth of Authoritarian Growth

CAMBRIDGE – On a recent Saturday morning, several hundred pro-democracy activists congregated in a Moscow square to protest government restrictions on freedom of assembly. They held up signs reading “31,” in reference to Article 31 of the Russian constitution, which guarantees freedom of assembly. They were promptly surrounded by policemen, who tried to break up the demonstration. A leading critic of the Kremlin and several others were hastily dragged into a police car and driven away.

Events like this are an almost daily occurrence in Russia, where Prime Minister Vladimir Putin rules the country with a strong hand, and persecution of the government’s opponents, human-rights violations, and judicial abuses have become routine. At a time when democracy and human rights have become global norms, such transgressions do little to enhance Russia’s global reputation. Authoritarian leaders like Putin understand this, but apparently they see it as price worth paying in order to exercise unbridled power at home.

What leaders like Putin understand less well is that their politics also compromise their countries’ economic future and global economic standing.

The relationship between a nation’s politics and its economic prospects is one of the most fundamental – and most studied – subjects in all of social science. Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?

East Asian examples (South Korea, Taiwan, China) seem to suggest the former. But how, then, can one explain the fact that almost all wealthy countries – except those that owe their riches to natural resources alone – are democratic? Should political openness precede, rather than follow, economic growth?

When we look at systematic historical evidence, instead of individual cases, we find that authoritarianism buys little in terms of economic growth. For every authoritarian country that has managed to grow rapidly, there are several that have floundered. For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.

Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies.

Authoritarian regimes, by contrast, ultimately produce economies that are as fragile as their political systems. Their economic potency, when it exists, rests on the strength of individual leaders, or on favorable but temporary circumstances. They cannot aspire to continued economic innovation or to global economic leadership.

At first sight, China seems to be an exception. Since the late 1970’s, following the end of Mao’s disastrous experiments, China has done extremely well, experiencing unparalleled rates of economic growth. Even though it has democratized some of its local decision-making, the Chinese Communist Party maintains a tight grip on national politics and the human-rights picture is marred by frequent abuses.

But China also remains a comparatively poor country. Its future economic progress depends in no small part on whether it manages to open its political system to competition, in much the same way that it has opened up its economy. Without this transformation, the lack of institutionalized mechanisms for voicing and organizing dissent will eventually produce conflicts that will overwhelm the capacity of the regime to suppress. Political stability and economic growth will both suffer.

Still, Russia and China are both large and powerful economies. Their example can sway leaders elsewhere to think that they can aspire to economic ascendancy while tightening the screws on domestic political opposition.

Consider Turkey, a rising economic power in the Middle East that seemed destined until recently to become the region’s sole Muslim democracy. During his first term in office, Prime Minister Recep Tayyip Erdogan relaxed some restrictions on Kurdish minorities and passed reforms that aligned the country’s legal regime with European norms.

But more recently Erdogan and his allies have launched a thinly disguised campaign to intimidate their opponents and cement government control over the media and public institutions. They have incarcerated hundreds of military officers, academics, and journalists on fabricated charges of fomenting terror and plotting coups. So widespread is wiretapping and harassment of Erdogan’s critics that some believe the country has turned into a “republic of fear.”

This turn towards authoritarianism bodes ill for the Turkish economy, despite its strong fundamentals. It will have corrosive effects on the quality of policymaking, as well as undermine Turkey’s claim to global economic standing.

For the true up-and-coming economic superpowers, we should turn instead to countries like Brazil, India, and South Africa, which have already accomplished their democratic transitions and are unlikely to regress. None of these countries is without problems, of course. Brazil has yet to recover fully its economic dynamism and find a path to rapid growth. India’s democracy can be maddening in its resistance to economic change. And South Africa suffers from a shockingly high level of unemployment.

Yet these challenges are nothing compared to the momentous tasks of institutional transformation that await authoritarian countries. Don’t be surprised if Brazil leaves Turkey in the dust, South Africa eventually surpasses Russia, and India outdoes China.

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    1. CommentedScott Wolfel

      Good article, but it is more of an assertion, with highly selective examples, than a causal theory or scientific explanation .

      The wealthiest countries in the world, particularly the U.S. which provides the template, are democratic and capitalist, because these two innovations developed together as Europe emerged from the Middle Ages with a new set of values and secular institutions. That said, until after WWII there were various mixes of authoritarianism and democracy throughout this long process of development, with the U.S. being the only major "pure" case (Platonic ideal?) because it imported the liberal Enlightenment principles of economic and political liberty onto an institutional tabula rasa.

      While there are clearly flaws in the authoritarian capitalist model as Oligarchs and Princelings capture the King's Ransom and increased economic liberty leads to calls for increased political liberty, the democratic capitalist model is looking increasingly frayed at the edges. In democratic capitalist societies, there are elites who capture a disproportionate share of the economic spoils, often through their direct and indirect connection with the political elites. In addition, the surest way for politicians to get elected and re-elected is to transfer increasing amounts of a country's economic resources to various individuals and interest groups in exchange for votes. On the left, this manifests in increasing amounts of social programs and the modern welfare state, while on the right this is represented by tax breaks and other incentives that disportionately benefit the wealthy and corporations.

      While neither of these is per se "wrong," and both can provide economic and social benefits under certain circumstances, excesses over the last 3 decades are at the root of the current global sovereign debt crisis across the entire developed world. While peripheral Europe currently represents the worst case scenario, Japan and a second tier of European powers, including Italy and France, also have inescapable fiscal traps which are hobbling their economies and may well lead to future collapse.

      While the U.S. has thus far avoided the worst of the financial crisis, it's growth has been anemic at best and the future debt overhang from unfunded liabilities that are estimated at $65 trillion (more than 4 times GDP) in current dollars are truly daunting.

      The unfunded liability problem, which exists across the developed world, is indicative of the political failure of democracies in providing the foundation for long-term economic health. People work about 45 years give or take and are retired for about 25 years give or take with increasing lifespans. Logically, this means that you have to save enough during your working life in aggregate during the 45 years of working to provide adequate resources during the 25 years of retirement as well as all of the other social benefits that government's provide. Going back to Bismark, these social benefits were paid for current retirees by current workers, but the worm is now turning as the number of retirees will swamp the ability of the workforce to pay, let alone pay for the rest of the government.

      In general, politicians in democracies get elected through a combination of providing the most transfer payments with the least taxes. While the balance is different and shifts from election to election, for decades democratic governments have supplemented these two strategies with deficits (and ignoring the long-term liabilities), which offers short-term gain at the expense of long-term pain (ie: increasing amounts of debt), although the current "big lie" is that the debt 't is "free" and doesn't have long-term economic costs.

      The cracks in the foundation of this model were unmasked by the global financial crisis 5 years ago (24 years ago in Japan) and yet the "solution" is supposedly more of the same.

      Professor Rodrik is correct to point out the fundamental flaws in the authoritarian capitalist model. China in particular has fundamental structural weaknesses in its model that are beginning to be uncovered and will play out in coming decades. That said, comparing it to India, South Africa and Brazil, the latter 2 which have benefitted greatly from the China-fueled commodity boom, is premature and a mistake. Democratic and authoritarian countries in the developed and developing world all face fundamental structural problems domestically and are inextricably tied together in a global market. The fundamental drivers of long-term economic growth, namely investment in the productive capacity of a society including human capital, remain broken in the democratic capitalist "core" and this is flowing through to the entire system putting all regimes under pressure.

      The question is not necessarily one of authoritarian or democratic growth, but what is the fundamental driver of long-term growth and how do various political and social systems either facilitate or hinder this? In reality, both systems have strengths and weaknesses in this regard and both systems currently have structural imbalances and inefficiencies that will be made clear in the next crisis.

      The fundamental difference between democratic and authoritarian regimes in this regard is that democratic regimes have mechanisms for peaceful regime change when the economic engine breaks down as it periodically does. Ideally, this leads to a resetting of the social contract without killing the golden capitalist goose, but this isn't necessarily the case and will be the fundamental question for democratic capitalist societies in coming decades.

      On the other hand, authoritarian regimes only have a blunt instrument when economic discontent morphs into political dissent and social unrest. While the French Revolution is the classic example, and the Russian and CHinese Revolutions provide more modern counterparts, the Arab Spring is currently playing out in real-time. While none of these was capitalist per se, they provide the template for authoritarian regimes reactions to economic crises.

      The primary question for authoritarian capitalism is can regimes continue to provide the benefits of increasing economic liberalization, while suppressing demands for political liberalization and social unrest?

      The need is to go back to the fundamental drivers of long-term economic growth and to examine how authoritarian and democratic regimes hinder this process. Ceteris paribus, optimal economic growth is a social good, but all things are never equal. The distribution of that growth and externalities, like polution, are also important as is the character of a regime in promoting human rights and justice. These latter questions are the provence of political economy, which has become subsumed under other disciplines.

    2. CommentedLeo Arouet

      Rusia y su dictadura... Cuando Pedro el grande siempre quiso alcanzar a los occidentales. Cuando visitó Francia seguro que tuvo ganas de llorar como aquel congresista Indonesio que visitó Singapur y se echó a llorar al ver tan atrasada que estaba su nación. Luego de regresar se Europa Pedro el grande realizo reformas en todos los espacios de la vestidura, textos, cultura, la armada y edificaciones... Lo mismo sucedió cuando los rusos se apropiaron del marxismo alemán pensaron que con ello iban a estar en la vanguardia, pero sucedió que el costo fue millones de vidas perdidas (de los propios rusos que se negaron a apoyar la dictadura de Stalin)... Y hoy, otro dictador.