Autocracy and economic growth
Does an autocratic government lead to faster economic growth than a democratic government?
By Vivek Kaul | Sep 1, 2017
In 1990, the Chinese economy grew by 3.9 per cent. Between 1990 and 2014, it grew by greater than 7 per cent every year until 2014. These go-go years included a growth of 14.2 per cent in 1992 and 2007. After 2014, the growth has slowed down. In 2015 and 2016, the growth stood at 6.9 per cent and 6.7 per cent, respectively.
This massive economic growth pulled millions of Chinese out of poverty in a very short period of time of under four decades. And all this happened under a one-party regime, which made China effectively an autocracy.
Further, China has continued to grow even after the 2008 financial crisis. Even though growth has gone below 7 per cent in the last couple of years, it has been substantially more robust than the growth in the Western economies, which are primarily democracies.
As Edward Luce writes in The Retreat of Western Liberalism, 'Growth in China, the world's largest autocracy, picked up for several years after 2008. The contrast did wonders for China's global image. It was also a boon to its political reputation... Once China's economy visibly decoupled from the West in 2008, the tide began to turn.'
The whole world was watching and they did not take the right message from this. Luce quotes Andrew Nathan, a leading Sinologist (someone who studies China through language, literature, culture and history) as saying, 'By demonstrating that advanced modernisation can be combined with authoritarian rule, the Chinese regime was giving hope to authoritarian rulers everywhere.'
What helped advance the idea further was the loans that Chinese banks have been giving to many countries, without attaching any pro-democracy strings. As Luce writes, 'China's development banks pumped billions of dollars into Africa, Central Asia and Latin America - often displacing Western-dominated global institutions, such as World Bank, and the Asian Development Bank.'
The question is if an autocratic government actually leads to faster economic growth in a country. How does the economic evidence stack up on this front? If we look at the examples in Asia, there are many autocracies which did very well on the economic front. Other than China, South Korea, Taiwan and Singapore, are very good examples of the same.
Why is this the case? As Ruchir Sharma writes in The Rise and Fall of Nations: Ten Rules of Change in the Post Crisis World, 'Autocrats can supress special interest lobbies and any opposition to breakneck development, because the threat of the bullet keeps people in line. They can steer the population's pool of savings toward growth industries, and they can ignore popular demands for wage hikes so those industries become and remain globally competitive.'
Over and above this, they can acquire very easily all the land that is required to build the physical infrastructure necessary to create economic growth. This is something that is not always possible in a democracy. India has been struggling on this front over the last few years.
But if we come around to believing that autocracies are always good for economic growth, we would be becoming victims of the availability effect. The availability effect is at work here. Nobel Prize winning psychologist Daniel Kahneman defines the availability effect as the 'ease with which instances come to mind'. And our beliefs are shaped by what examples and stories that readily come to our minds. But that is not the way it should be.
The trouble is that there are stories in the other direction as well. There are autocracies which have messed up big time on the economic-growth front. These include Fidel Castro in Cuba, Robert Mugabe in Zimbabwe and the autocrats of North Korea. It's just that these names do not come to mind as readily as Deng Xiaoping of China.
The only way to answer this question for sure is to look at how the numbers stack up. As Sharma writes, 'I've studied the record for each of the last three decades, and during that period there were 124 cases in which a nation posted GDP growth faster than 5 percent for a full decade. Of those strong growth spells, 64 came under the rule of democratic regime, and 60 under an authoritarian regime.'
So, despite the success of China, there is no reason to believe that autocratic regimes do better on the economic-growth front. One point that the above data does not highlight is the fact that the growth under authoritarian regimes can be very volatile. Hence, growth can go from being very fast to being very slow in a period of just a few years.
As Sharma writes, 'The most accurate records go back to 1950 for 150 countries, and they show 43 cases of superfast growth, in which the economy grew at an average annual rate of 7 percent or more for a full decade.' In 35 out of the 43 cases, the government was authoritarian.
Isn't this enough evidence to come to the conclusion that authoritarian regimes are good for growth? The periods of superfast growth included many countries which we like to associate with authoritarian regimes and fast economic growth - the likes of Korea, Taiwan and China.
Nevertheless, it also includes many other countries which you and I would never associate with fast economic growth. As Sharma writes, 'It also includes many vanishing acts that grew superfast one decade only to disappear the next, including Venezuela, which vanished in the 1960s, Iran in the 1970s, and Syria and Iraq in the 1980s.' A clear case of now you see them and now you don't.
Also, in the same sample of 150 countries on which Sharma has based his analysis, there have been 138 cases of extremely slow growth, in which case the countries have grown at less than 3 per cent a year, for a decade. And 100 out of those 138 countries happened to be ruled by authoritarian regimes.
Of course, these examples don't come to mind as readily these days, as the example of China does. The lesson: everything that is obvious is not necessarily correct.
Value Research Stock Advisor now has 37 stock recommendations and new ones are added every month. Thousands of our members are using the current market conditions to buy great stocks at low prices.
Membership of this premium service is available at a 40% to 60% discount. Learn more and become a member