Ruling over a growth economy

Lowy Interpreter

Steve Grenville's recent post on democracy and Indonesia's economy brought to mind old debates about the relationship between a country's political regime and its economic growth performance.

The view that the absence of political and other civil rights can in some way be 'good' for economic growth and development has a long history. It's also an argument that is often heard in specific regard to East Asia's growth performance, where a series of countries have been able to combine spectacular economic success with non-democratic political systems, with China and the 'Beijing consensus' currently the most powerful example of this kind of story.

Similarly, as India's economic promise has suffered an extended period of disappointment and setbacks, that country's democracy is once again being cited as an important bottleneck for growth.

As this classic survey of the democracy and growth literature suggests, it's quite possible to mount plausible theoretical cases as to why either democracy or autocracy might deliver superior growth outcomes.

Democratic regimes are often thought to do a better job of protecting property rights, of constraining potentially predatory rulers, and of encouraging the kind of flexible environments that tend to be more supportive of technological development. Autocrats, on the other hand, are supposed to be superior at delivering higher investment rates (since they feel less compelled to produce high consumption rates for their people) and are thought to benefit from being relatively insulated from political pressures likely to be inimical to growth.

If the theory can go either way, what do the data actually say? The empirical literature seems to have generated two broadly accepted stylised facts on the relationship between the political regime and growth performance at the global level:

– There is no statistically robust difference in average growth performance between autocracies and democracies.

– Variance in growth performance is higher in autocracies than democracies.

This implies that most high (and low) growth episodes will tend to occur under autocracies. Or, put a bit differently, autocracies might deliver either a growth-destroying Mobutu or a growth-inspiring Deng Xiaoping. Democracies are more likely to avoid both extremes.

These two stylised facts are broadly in line with the conclusions reached by a major study by Przeworkski et al looking at the experience of 135 countries over the 1950-1990 period. A more recent meta-analysis that looked at 81 papers on the democracy-growth relationship also concludes that there is no evidence of democracy being harmful to growth, and finds some evidence that there are actually positive indirect effects of democracy being associated with higher human capital accumulation, lower political instability and higher economic freedom.

Does the same result hold at the regional level? Interestingly, the same study also found that the balance of studies conducted to date suggests that the growth effect of democracy is higher in Latin America and lower in Asia, presumably reflecting the strong growth performance by many East Asian non-democracies noted above. Still, two recent studies that have looked explicitly at the Asian experience both found no significant democratic penalty for regional economic growth.

If democracy itself is not a drag on growth, it's still possible that the process of transitioning to a democratic regime could involve a significant growth penalty. Here too, though, the evidence offers no strong support (in this context, Lant Pritchett gave an interesting paper on Indonesia's transition at the 2010 Indonesia Update in which he tried to benchmark Indonesia's experience against previous transitions).

Finally, I recently came across a paper by William Easterly looking at the concept of benevolent autocrats. Beginning from the stylised fact of greater growth variability in autocracies than democracies, Easterly's explanation focuses on the proposition that democracies do a better job of managing shocks than do autocracies, rather than on alternative hypotheses such as the idea that autocracies are more likely to produce either very good or very bad leaders. Easterly also asks why 'benevolent autocrat' explanations are such a popular feature of policy discussions around economic growth, and his paper concludes with a stimulating discussion of the potential role of cognitive biases in supporting a persistent belief in the story of the benevolent autocrat.

Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.