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Investigating political regimes and its implications on economic growth: What fosters robust economic growth: Democracy or Autocracy?

A certain political framework sustains every economy, thus it is extremely important to study political regime and its impact on economic performance (Przeworski and Limongi, 1997). Despite the fact that most countries have democratized over the last 30 years, there is still a lot of debate regarding democracy and economic development (Przeworski and Limongi, 1997). While many economists believe that democracy is essential for sustained economic growth, there is very little empirical evidence supporting this assumption (Przeworski and Limongi, 1997). Few economists provide empirical evidence that suggests that autocracy leads to long-term economic growth provided autocratic regimes practice peaceful order and provide public goods that increase productivity (Przeworski and Limongi, 1997). This research paper aims to investigate which political regime facilitates sustained economic growth, democracy or autocracy? This article firstly explores normative theories of democracy and autocracy. Following, the article synthesizes previous empirical evidence and to what extend does it correspond to the normative theories. Lastly, the article briefly examines China and how it is being able to achieve economic growth under autocratic regime. While no deterministic relationship between democracy and economic growth or autocracy and economic growth has been established (whether democracy or autocracy is better for economic growth is inconclusive), previous research does point towards factors that are important for political stability.

Democracy and Economic Growth:

Democracy is a government system in which the citizens are able to elect representatives and a governing body that carries out agenda with shared interests (Gleditsch, 1997). The third wave of democracy indicated the last major shifts from authoritarian societies to democratic societies in Asia, Africa and South Africa (Gleditsch, 1997). These democratic transitions allow us to analyze the extent to which democracy lead to economic growth (Gleditsch, 1997). Typically, free markets and economic growth (GDP) are the two main variables studied when looking at implications of democratization of societies. The main reasons why democracy is inherently desirable are because it facilitates free human choice, effective political participation, wide distribution of benefits of growth, and lastly, secure property rights (Gleditsch, 1997).

Normative democratic theory asserts that democracy insulates economic growth because firstly, all members are given the status of citizens; there are universal political rights for different groups of people within the polity (Durham, 1999). Secondly, democratic regimes strive to establish sovereignty of the citizens and pursue an agenda that caters to the interest of the citizens (via legislations) (Durham, 1999). Thirdly, democratic regimes weight no individual's or group's preferences over other individuals or groups (equal weight principle) (Durham, 1999). Fourthly, unlike in autocratic regimes, democratic regimes don't limitations on individual liberty (Durham, 1999). Additionally, democratic regimes chose development pathways that produce wide distribution of the benefits of growth and strive to improve incomes for poor populations (Durham, 1999). Lastly, democratic regimes are less prone to corruption and rent-seeking activities than autocratic governments (Durham, 1999).

Theoretically, democracy leads to economic growth because it exacerbates ones right to influence the market in terms of allocation of resources (Durham, 1999). Specifically, democracy 'unchains the class struggle' by securing property rights (Durham, 1999). Property rights refer to the ownership of specific property by individuals by really forms the basis for all market exchanges and allocations of efficient resource use in a society (Durham, 1999). Presuming that resources are always distributed unequally in a market, democracy helps efficient and equal allocation of resources. The low-income populations, most vulnerable and marginalized are able to redress via a democratic state and 'expropriate the riches and the universal suffrage' (Przeworski and Limongi, 1997).

Despite the fact that normative democratic theory asserts that democracy leads to economic growth, empirical evidence that have been undertaken in the past 30 years is suggestive but inconclusive (Przeworski and Limongi, 1997). While data shows that democracy is positively correlated with GDP (a measure of economic growth), the data is empirically weak Przeworski and Limongi, 1997). Economic scholars like Lipset, Przeworski, Limongi, Boix and Stokes initially studied the relationship between economic growth and democracy. Lipset insisted that economic growth is a prerequisite for democratic transition. Similarly, Przeworski and Limongi (1997) argued that economic development influences democratic survival more than it influences transitions from dictatorship to democracy. Boix and Stokes (2003) challenge their by investigating a larger dataset with a more sophisticated statistical assessment. Lipset (1959) makes a classic connection between modernization and democracy by establishing a link between per capita income and democracy. He asserts that rise in per capita GDP influences the transition to democracy. Przeworski and Limongi think that Lipset's research only provides an endogenous explanation between democracy and development. Przeworski and Limongi (1997) provide an alternative view on democracy and economic growth. They point out that economic development cannot explain transitions to democracy from 1950 to 1990 and that there are 'exogenous' causes of democratization (Przeworski and Limongi, 1997). Their data shows that democracy becomes more durable and stable at higher levels of per capita income. They conclude that 'it is not that democracies are more likely to emerge when countries develop under authoritarianism, but that, however they do emerge, they are more likely to survive in countries that are already developed' (P. 167). In other words, democratic regimes are less likely to collapse in richer countries. Hence, a positive correlation between democracy and economic growth is evident. Boix and Stokes (2003) reassess Przeworski and Limongi's conclusions with a larger database and admit that development has a much greater positive effect on the probability of maintaining a democracy. Tavares and Wacziarg (2000) carry out more robust research where they look at correlations between democracy and variables such as growth, investment rate, human capital, Gini coefficient, political instability, black market premium, trade openness, and government consumption. The results show statistically significant evidence that higher level of democracy leads to increase in GDP by 1.3%, higher educational attainment, higher government consumption, lower investment rates, smaller degree of openness to trade and lower income inequality (Tavares and Wacziarg, 2000). There was no statistically significant evidence for democracy and political instability. As indicated in this research, democracy more or less hinders investment, which directly lowers growth. Galenson and Schweinitz (1959) argued that democracy generates demands for current consumption. Current consumptions threaten profits and thereby, reduce investments and slows down growth (whereas dictators are future-oriented). In conclusion, the overall effect of democracy on economic growth is inconclusive as illustrated by previous studies. However, we can make some educated guesses. Evidence from previous studies suggests that democracy is more stable in countries with higher levels of economic growth (GDP per capita). Democracy increases human capital accumulation by decreases physical investments. Democracy does not lead to robust improvements in income inequality and has no statistically significant impact on political instability and trade openness. That being said, democratic regimes are more desirable because they respond to demands of the poorer fractions of society by increasing access to education and although debatable, they are less likely to partake in 'rent-seeking' activities.

Autocracy and Economic Growth:

Simply put, autocracy is a regime where 'few govern the many' (Gleditsch, 1997). Autocratic regimes usually restrain certain rights through excessive rationalization and the marginalization of political pluralism (Gleditsch, 1997). However, other autonomous groups also exist within the system (Gleditsch, 1997). Research shows that state autonomy also improves economic growth as illustrated by Asian miracles. Haggard (1990) argued 'Since authoritarian political arrangements give political elites autonomy from distributionist pressures, they increase the government's ability to extract resources, provide public goods, and impose the short-term costs associated with efficient economic adjustment' (p 262). Autocratic regimes are better at mobilizing savings and allocating investments as well (Gleditsch, 1997). As long as autonomous states behave towards shared interests of the citizens, then autocracy may not be an undesirable regime (Limongi and Przeworski, 1993).

Limongi and Przeworski (1993) write that if autocratic leaders behave in 'developmentalist' fashion, then autocracy can lead to superior economic growth than democratic regimes. An autocratic state is able to foster growth because firstly, the state aims to make the economy function efficiently (Limongi and Przeworski, 1993). Secondly, the state puts pressure on private markets to perform their role well (Limongi and Przeworski, 1993). Thirdly, the state looks at citizens as economic agents and organizes them into interests groups (Limongi and Przeworski, 1993). When interests groups compete for rents and each try to maximize their profits, this fosters growth. However, Becker (1983) argued that it is often rare for preferences and interests of the state and the civilians to be aligned, shared and fixed mainly because there are very few avenues through which the public officials know what the preferences of the citizens are. The only way to make a collective decision is to go through a process where the groups organize, pressure and influence the public officials, which is not hospitable in an autocratic regime (Becker, 1983).

That being said, Limongi and Przeworski (1993) mention that it is rare for autocratic regimes to establish shared preferences and interests and behave in a 'developmentalist' fashion because autocratic rulers are predatory, which results in slow economic growth. Autocratic regimes prey on society by enforcing favorable laws and contracts, defending private parties, and providing those inputs to private production that is not efficiently supplied by the market (Limongi and Przeworski, 1993). In this way, the state tries to maximize efficiency and growth but then they partake in rent-seeking (Limongi and Przeworski, 1993). Crony dictatorships in Nicaragua, Dominican Republic and Philippines are famous examples of how the autocratic regimes favored industries where they state could seek rents and make personal profits (Limongi and Przeworski, 1993). Critics of development argue that dictatorships are better at mobilizing savings because autocracies are future oriented and far sighted (Limongi and Przeworski, 1993).

It is of supreme importance to also look at what empirical evidence suggests. Limongi and Przeworski (1993) summarize 18 studies out of which eight favored democracy and the other eight favored authoritarianism. The rest of the five studies found inconclusive results. The first study in favor of autocracy was published by Adelman and Morris in 1967. They sampled 74 underdeveloped countries including communist bloc between 1950-1964 and found out that authoritarianism improved economic growth in less and medium developed countries. In addition to this, Huntington and Dominguez (1975), Marsh (1979), Weede (1983), and Kormendi and Meguire (1985) all carried out empirical data for sample size bigger than 90 countries within the time period of 1950s to 1977 and found that authoritarian regimes led to higher levels of economic growth. Remmed (199) and Helliwell (1992) both concluded that democracy does not have a positive effect on growth but results were statistically insignificant. One interesting aspect to note is that all the research papers that were in favor of autocratic regimes were published before 1988. Whereas, the eight research papers favoring democratic regimes were published after 1988 (Limongi and Przeworski, 1993). It is safe to conclude that summary of previous research point towards inconclusive results. That being said, it is also important to note that good economic performance under autocratic regime really only benefits the highest rank elites of the regimes (Limongi and Przeworski, 1993).

China's economic performance under autocratic regime:

Despite the fact that many political scientists equate democracy with social and economic welfare, China is a great example of a country that exudes robust economic growth rates and social welfare without democratic regime (Huang, 2003). Many question as to why China did not end up transitioning into a democratic regime post Mao era and after facing three decades of unprecedented economic growth (Huang, 2003). Gerring et. al. iterates that democratization has not been a priority for China. Since mid 1990s, the regime had adopted more conservative political stance towards democracy despite enjoying higher standards of living. The government maintained a policy of zero-tolerance towards dissent (Gerring, 2005). Secondly, China has launched the policy of 'social harmony' in order to curb the increased social tension and fragmentation in Chinese society (Gerring, 2005). Thirdly, despite 30 years of economic reformation, the entrepreneurial class in China is weaker than expected (Huang, 2003). This is because the government policy aggressively supports foreign direct investment (FDI) and private businesses. In order to attract foreign investment, Chinese leaders discriminate against private and domestic businesses (Huang, 2003). Foreign direct investment has helped Chinese economy move towards capitalism, which is what induces high levels of economic growth (Huang, 2003). Lastly, the Chinese economy has been able to undergo process of liberalization without a political transition (Huang, 2003). This challenges Limongi and Przeworski's (993) study that states that high economic growth can create more favorable conditions for democracy. Historically, all former community countries transitioned to democracy only after a sudden breakdown of the old regime (Huang, 2003). Apart from this, China's autocratic regime has led to growth of foreign businesses, which leads to economic growth and does not put any pressure on the ruling elites to exit power or induce political change (Huang, 2003). Nevertheless, currently China has one the world's most powerful autocratic regimes thriving on one-party rule however, how long will autocracy-led growth suffice is questionable. Given that there are rise in protests challenging policies with regards to land acquisition, rising inequalities, lack of resources on the countryside, policies such as one child policy and censorship, autocracy-led growth may not be sustainable in the future (Huang, 2003).

Whether democracy or autocracy is better for economic growth is ambiguous and inconclusive. No deterministic relationship between democracy and economic growth or autocracy and economic growth has been established. Within the domain of democracy, much of the evidence dispute that democracy results in economic growth. In fact, results show the opposite; high levels of economic growth and performance make it favorable for the state to sustain democratic rule (Limongi and Przeworski, 1997). However, China's case is a big anomaly. As discussed earlier, democracy results in better investment climate, property rights protection, attract more foreign direct investment, enhances human capital accumulation, increases access to education (Limongi and Przeworski, 1997). Democracy does not lead to robust improvements in income inequality and has no statistically significant impact on political instability and trade openness (Limongi and Przeworski, 1997). That being said, democratic regimes are more desirable because they respond to demands of the poorer fractions of society by increasing access to education and although debatable, they are less likely to partake in 'rent-seeking' activities (Limongi and Przeworski, 1997). With regards to autocracy, high levels of economic growth can be sustained under autocratic regime provided that autocratic states follow 'developmentalist' policies and work towards shared interests of the civil society (Limongi and Przeworski, 1997). Further, good economic performance does not always favor all sects of society under autocratic regime; good economic performance is really only financially benefitting highest rank of elites. Tavaraz and Wacziarg (2000) also argue that type of political regime is inconsequential to economic growth to a certain extent. The level of political freedom, political stability and political security are more important aspects that influence economic development (Tavaraz and Wacziarg, 2000). These factors affect the basis of 'economic management' and influence factors such as inflation, investment, human capital, income distribution, property rights, population growth and more (Tavaraz and Wacziarg, 2000). The degree of political freedom, political stability and political security shape the political institutions of any political regime and lead to economic and social development in a country (Tavaraz and Wacziarg, 2000). Which political regime is best for economic growth remains controversial however, previous studies help navigate through the complexities of political economy.

By
Miha Alam
Currently pursuing Masters Degree in Development Practice and Sustainability Management at University of Waterloo

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