Democracy or Autocracy: Which is Better for Economic Growth? Becker

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The Economist in its October 2-8 issue has a cover page with the title: “How India’s growth will outpace China’s”. One of the main reasons they give for this claim in their leader on this topic is that India is democratic while China is autocratic. The other is that India has higher birth rates, and hence a younger population. Both arguments can be questioned, although I concentrate my discussion on whether democracies favor economic growth.

Visionary leaders can accomplish more in autocratic than democratic governments because they need not heed legislative, judicial, or media constraints in promoting their agenda. In the late 1970s, Deng Xiaoping made the decision to open communist China to private incentives in agriculture, and in a remarkably short time farm output increased dramatically. Autocratic rulers in Taiwan, South Korea, Singapore, and Chile produced similar quick turnabouts in their economies by making radical changes that usually involved a greater role for the private sector and private business.

Of course, the other side of autocratic rule is that badly misguided strong leaders can cause major damage. Mao’s Great Leap Forward is one prominent and terrible example, but so too are Castro’s forcing Cuba into a centrally planned government-controlled inefficient economy, or Iran’s mullah-led government that created monopolies controlled by religious foundations and other groups.  The overall effect of autocratic governments is some average of the good results produced by visionaries, and the bad results produced by deluded leaders.

Democracies help control the range of outcomes. Visionaries in democracies can accomplish much sometimes, as did Manmohan Singh when Finance Minister of India from 1991-1996, Margaret Thatcher after she became Prime Minister of Britain in 1979, Ronald Reagan as US president during the 1980s, and Japan’s leaders after World War II. However, their accomplishments are usually constrained by due process that includes legislative, judicial, and interest group constraints. On the other hand, bad leaders in democracies are also constrained, not only by due process, but also in addition by the reporting of a free competitive press and television, and nowadays too by a competitive Internet.

Whether on average democracies are more conducive than autocracies to economic growth is far from well established. What is clearer is that democracies produce less variable results: not as many great successes, but also fewer prolonged disasters. Since the bad outcomes tend to produce more damage than the good ones, less variable outcomes would be an attractive feature of democracies compared to autocracies, even if democracies on average did not produce greater economic growth.

Comparisons between the effects of these different systems of government on economic growth are muddied by the fact that personal freedoms usually increase substantially under autocracies that have been growing at a fast pace. China is an excellent example. Although China has remained a one party autocratic system since it started growing rapidly 30 years ago, the degree of personal freedom has expanded enormously. Personal freedoms in China did not exist when I first visited there in 1981 shortly after the economic reforms had begun. Changing domiciles was virtually impossible, and Chinese men and women could not even enter Western style hotels and shops.

I have returned a few times since then- most recently a few weeks ago- and the contrast is simply amazing. Students and many others criticize economic and social policies of the government, including the one child policy, although they cannot openly criticize the one party government, as jailed dissidents show. Many Chinese have traveled abroad and have seen first hand the freedoms in other countries, and the Internet provides access to opinions and facts on many thousands of subjects. The government does try to censor out opinions and information from the Internet that are considered damaging to the government, but cheap software has enabled many to bypass the government censors by connecting directly to Hong Kong, which is free of government censorship.

Other examples of growing freedoms under autocracies include Taiwan, South Korea, and Chile. They all started their economic booms under single party dictatorships, but after a period of quite rapid growth, fierce opposition to the dictatorships emerged. Before long all these countries did become democratic, with competing political parties.

To return to the comparison of China vs. India, the analysis I have given indicates that it is far from obvious whether democratic India has an advantage in the economic growth race over autocratic China. Each has its own strengths and weaknesses from a growth perspective, although India clearly dominates in political and social freedoms. Yet if, and this is a big if, China continues to have effective leaders, I would give China the edge in terms of future economic growth. This edge is partly because of the enormous enthusiasm to regain its former great country position among all strata in China’s population: entrepreneurs, professionals, and workers. On the other hand, a dismal leader could come to power in China and cause considerable damage to the economy. Overall, I expect India’s growth rate to be lower but more stable, and that stability might be worth a lot.

 

Comments

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Great blog. Some interesting theories but I am not sure whether I would call Margaret Thatcher a visionary. She did more harm to our economy and created more diversity and struggle between unions and the government than probably any other prime minister we have ever had. I left school at the height of her power and there were 6 million unemployed!...not a great vision!

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[Liang Zheng]

Very good observation.
How to constrain leaders' power and make the economic growth more stable and efficient. Even though there is constrain on individuals' freedom, People can at least benefit from economic reform firstly. We need food and clothes firstly, then need other rights on the second order.
A stable autocracy vs a unstable democracy.
Does competition for leadership within single party dictatorship improve democracy?
How to achieve democracy with least costs.

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monarchy since there is a tradition that a particular monarch rules within. If he acts too precipitously against the tradition that he governs from, he can destabilize his own power. If he does not recognize this crucial aspect of maintaining his rule, his family is apt to and rein him in. A monarch has a further incentive to act responsibly since he views his realm as his own property and is more concerned to preserve it for the future than a transitory majority or a lone dictator. Monarchs have a track-record of financial responsibility that is far more conservative than democracies or dictatorships.

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We can see the danger posed to the economic prosperity and stability of a nation by democracy when we consider the work of Mancur Olson is his *Rise and Decline of Nations.* We have to keep in mind that collective decision making is not synonymous with liberty nor is it necessarily conducive to responsible polity.

Democracies also do not necessarily avoid the wild swings of policy as we can see in Parliamentary systems or what we are in the process of witnessing in the U.S. The constraints on democratic elements in our system such as the Senate with its extended debate and our constitutional limitations on policy implementation serve to make our government somewhat more stable than a purer democracy.

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Democracies also do not necessarily avoid the wild swings of policy as we can see in Parliamentary systems or what we are in the process of witnessing in the U.S. The constraints on democratic elements in our system such as the Senate with its extended debate and our constitutional limitations on policy implementation serve to make our government somewhat more stable than a purer democracy.

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Even though China's medium-term economic growth is forecast to outpace the average of developing countries, the country's capacity of income per capita convergence with industrialized countries entirely depends on domestic structural change in the institutional environment as well as the quality of economic growth. First of all, without a robust rule of law, comprehensive protection of physical and intellectual property rights and low transaction costs in contract enforcement, China's long-run GDP per capita prospects are far less bright than current growth figures suggest.

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I would choose autocracy if development is in vain of too much freedom. But both have disadvantages. I guess it depends on the countries situation. As what you have sited on your example about China and India.

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It appears to me that democracies, while specializing in mediocrity, provide better long term policies. The erratic gains and losses we see in dictatorships and other autocratic societies aren't mirrored in democratic governments. Democracies take policy making slowly and deliberately, and there is immense inertia when it comes to going backwards or forwards in development. Because of this, it seems that once a "positive" development occurs, it is much less likely to simply be undone unless it is truly not positive. This feature of democracy provides a framework for long term development of human rights and economic policy.

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I think that everyone has their own strengths and weaknesses, like democratic and dictatorship.

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