Does democracy help or hinder economic growth? The miraculous growth of Taiwan, Hong Kong, Singapore, Korea and now China have led many to believe that a benevolent dictatorship is best for economic prosperity. However, recent research by top economists like Mancur Olson, John Williamson and Surjit Bhalla (reviewed in a recent issue of The Economist) suggests that democracies produce better economic results than dictatorships.
I suspect this is too simplistic. But certainly it must be emphasised that the Third World is full of tinpot dictators who have led their countries to rack and ruin. It is clearly foolish to assume that every dictator is a Lee Kwan Yew — the chances are he may be a Pol Pot or Mobutu.
John Williamson has looked at 13 countries which went for radical economic reform, involving plenty of transitional pain for citizens. It is widely assumed that dictatorship arc more easily able to take hard decisions, and that democracies shy away from them. In fact, Williamson found that the six unambiguously democratic countries in his sample were as determinedly radical if not more so than the four authoritarian ones: and that in nearly all cases the reforms were necessitated by the mess created by earlier autocrats.
Mancur Olson has long been famous for his theories on how dominant groups in a democracy and together to manipulate laws and rules to serve their own interests, weakening the country’s economic performance. But some dominant coalitions occur in dictatorships too. Olson notes that dictators are interested in maximising their loot, subject to keeping the economy going. How far will a vote-buying democratic leader go on looting taxpayers to reward the vested interests that put him in power? A lot, but probably less than the revenue maximisation that a despot would seek. Not only is a money-grabbing democrat less costly for the economy than a money-grabbing dictator, the democrat shares the loot with constituents like farmers or trade unions, while the despot may send it all to a Swiss bank. Finally, economic growth requires confidence on the part of investors in property rights, and these are generally more secure in democracies than in dictatorships (where you dare not cross the ruler).
Surjit Bhalla has looked at 90 countries in the period 1973-90. considering not only economic growth but social progress (infant mortality secondary school enrolment). He finds that civil and political freedom promote growth and social indicators better than autocracy. Ranking countries on a seven-mark scale ranging from most free (USA is 1) to unfree (Iraq is 7) he finds that an improvement of one mark in free raises economic growth by a full percentage point, a huge gain.
It is dangerous for me to scoff at these eminent economists after reading only a review in The Economist and not their full research papers but I am going take the risk. It seems to me that the researchers are dodging the issue in two distinct ways. First they are not allowing properly, for the pains of transition. Surjit Bhalla alleges that improving civic freedom improves economic growth. Really? What about Russia and Eastern Europe?. They have gained greatly in civic freedom but suffered a disastrous fall in living standards. Since his research looks at the period 1973-90, he could not have captured the travails of these countries but for that very reasons his conclusions are suspect. Maybe in the long run, democracy will indeed produce superior economic results, but the lay public must not be misled to believe that there is any automatic connection between civil rights and growth.
A second and more fundamental shortcoming of much research on this topic lies in the illusion created by averages. There is the joke of a farmer with a bullock-cart three feet high, which has to cross a stream. He finds the stream is five feet deep in the centre and zero at the edges. He calculates the average depth is only 2.5 feet and so concludes is safe for him to cross. Alas, he drowns mid-stream.
Autocracies can do very well or very badly. Democracies generally avoid extremes. Third World democracies have never consistently matched the 10 per cent GDP growth per year of East Asian autocracies, nor produced as terrible results as General Mengitsu in Ethiopia.
This suggests a different conclusion — that democracies generally far worse than efficient autocracies but better than inefficient ones. A democracy has several checks and balances and is buffeted by conflicting pressure groups. But an autocracy can embark on a single-minded pursuit of goals, grinding all opposition under its heel. The checks and balances in a democracy prevented it from soaring into double-digit growth or crashing into unremitting disaster.
So be careful in interpreting studies which show that democracies far better than dictatorships. Do not board the bullock-cart of democracy and assume it will safely cross the stream of autocracy. The East Europeans have already covered this.