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Royal Economic Society Essay Competition 2013

Should the experience of China silence those who think that democracy
is good for growth?

China's rise, as Napoleon once predicted, has shaken the world. Bellwether signs
of influence and prosperity abound for the Asian tiger: from the newly resident
pandas of Edinburgh Zoo, to the recent opening of a Sino - Burmese oil pipeline.
Such developments have been underlined by an average growth rate of 9.5%
since Deng Xiaoping's radical reforms first took hold. This remarkable growth
presents a challenge to western orthodoxy: could it be authoritarianism, not
democracy, which best caters for economic growth?

To properly address the debate, it is imperative to tackle the premise

of this notion: that a standard western assumption should be rethought on the
basis of Chinese success. Superficially, this appears prudent. China, Chile, Soviet
Russia, and even Nazi Germany, all to some degree illustrate the apparent
compliment authoritarianism can pay to growth. In more numerical terms,
multiple academics have unearthed a negative correlation between democracy
and economic growth. Barro found a correlation coefficient of -0.0074 in 100
nations from 1960 to 1990 a notion corroborated by Helliwells findings. Real
world evidence can be seen through the apparent quagmire in which the Indian
economy languishes with the popular comparison here being with our
voracious friend China (which has grown more quickly than India in every year
since 1980). However, while such comparisons are tempting, and take up many
column inches, they are unhelpful in establishing any sort of causal link between
democracy (or not) and growth. It is precisely this causal link, devoid of unproved
correlations, which we should endeavour to unearth. For this reason, we must
look beyond the isolated (albeit arresting) example of China.

In an examination of democracy's merits, some ancient philosophy can

be of use. Plato once likened democracy to a ship: in which the crew, as
the demos, bend the hapless captain to their will, and transform the voyage into
a drunken pleasure cruise. The allegory is obvious: the people are able to create
a populist policy environment, and squander the resources of the state. Plato
might happily point to the legacy of Hugo Chavez, a populist whose policies have
seen Venezuela become the worst performer for GDP per capita growth in Latin
America, according to Arturo Franco. As Aristotle feared, rhetorical flourish and

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charisma have allowed majority rule to negate property rights (think Chavez's
rampant nationalisations), facilitated, as Plato feared, through a leader who is of
the opinion that he has a right to steer, though he has never learned the art of
navigation. Concurrently, enlightened despots like Pinochet and Deng Xiaoping
satisfied a philosophical inclination towards concentrating power in the hands of
the wise, and in doing so created economic success stories. It seems then, that
democracy fails to deliver growth, because it often delivers incapable leaders
following popular, but economically unsound, policies.

Granted, democracy can be problematic: but what of a more inclusive

view that stresses the values of collective decision making? Here Aristotle eats
his words, for even he allowed that the people, "as a body...are as good or
better" at making decisions than individuals. The theory, quite simply, is that
even in economic decisions, the collective knowledge and judgement of the
people, shared through political participation, makes for sound decision making.
In Why Nations Fail, Robinson and Acemoglu enhance this understanding, noting
that inclusive nations tend to be more prosperous because they foster innovation
privately, and concurrence publically. Jones and Olken's view that enlightened
leadership matters only in dictatorships, and not in democracies, furthers the
impression that democracy aids development by pooling common wisdom.
Interestingly, it could be argued that even if a policy is not optimal, broad
support for the democracy it stems from should mean it endures long enough to
bear fruit. This would help explain why long run growth took hold in South Korea,
while the North suffered from whimsical economic policies. Furthermore, Paul
Collier notes that diverse nations require democracy to bind them in the face of
potentially divisive autocrats - giving the people a stake in the economic fortunes
of a nation. This goes some way to explaining why a fledgling USA developed far
more quickly than colonial Latin America: most people in the USA had a stake,
and faith, in their democracy and its economic decisions. The facts bear out the
theory: far from being a channel for populism and chaos, democracy is a conduit
of wisdom, which fosters economic growth.

To grapple once more with proponents of authoritarianism, we can

challenge a central tenet of their case: the apparent stability of autocracy. Too
often, dictators are viewed as secure strongmen, figures whose continued rule is
as certain as their lust for power. From the Shah to Park Chung Hee, property
rights dictators have to some extent been seen as guardians of the economy,
using the security of their own position to imbue confidence and stability. This is
welcome, because as Alesina posits, instability can lead to an investment dearth,
and poor policy choices which fail to focus on the long term. This is particularly
true in a democracy, where interest groups can bring considerable influence to
bear in swaying politicians who are often focused on the next election, fostering
instability through short termism. Chomskys analysis of the American

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democratic system lends weight to this unearthing what he calls a subsidy to

the defence industry through enormous contracts resulting from their lobbying
efforts. Said efforts are made possible by politicians craving for funding in
regular election campaigns, and the pluralism of many democracies. Evidently,
defenders of autocracy would use this to argue that dictators rid themselves of
the destabilising and distorting effects of interest groups and elections , and can
thus achieve growth rates such as that of Chile (5%pa 1985-1996).

Gladly, we can present a convincing riposte to the above notion:

democracy can, and does, enhance stability, and thus avoids Alesinas
nightmare. As suggested earlier, democracy can engender unity within diverse
nations, and through emancipating the populace allows them the incentive to
help their country prosper. However, there are other, equally valid reasons why
democracy promotes stability, and in turn the investment, future planning, and
contractual obligations that are the basis of so much of our economic
development. As Daniel Bell has said: "every four years to 2000 Americans can
be certain there will be presidential elections". Now, while the timing is
somewhat off, this quote conveys the idea that democracies can promote
stability, first through their constitutions, and second, through the predictable
nature of democratic politics. In contrast, economic agents in an autocratic state
can never be wholly sure when a dictator's whim will endanger prosperity - it is
for this reason that dictatorships vary more in growth rates - according to a
Havard study. Furthermore, autocracies often face threats in the longer term,
which necessitate a transition to democracy. As economic growth takes hold, a
middle class often appears (China's should reach 630 million people by 2022),
which views democracy as a sort of 'luxury good': that is, the middle class comes
to want political rights that satisfy its newly elevated view of itself, which is
rooted in the improvements that economic growth provides. Such transitions
echo down through history, from the 1832 Great Reform act allowing property
owners the vote, to the Egyptian Revolution, which arguably took hold through
the laptop and the Smartphone: fruits of economic growth. Therefore, it can not
only be seen that democracies are capable of exhibiting initial stability in
contrast to some dictatorships, but that they are in fact the only safe option for
long term development.

Perhaps the crux of the differences between democracy and

authoritarianism is where power lies, and it is this matter of power which is the
next battlefield in our debate. Advocates of an authoritarian model for promoting
growth would argue that it is only this system which grants policy makers the
requisite power to achieve their aims. Using the apparatus of the state, they can
adopt sometimes harsh economic policies to promote growth. China's seizure of
homes to demolish and build factories upon is a good example, as is Pinochet's
use of political repression as his policies met resistance. Arguably, this ability to

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direct policies and resources without consequence, towards the growth objective,
is unparalleled in any democracy. A somewhat staggering illustration is China's
subsidy programme. Usha and George Haley estimate that since 1985 over $300
billion in subsidies has been given to Chinese firms. At the same time, the
exchange rate has been manipulated in Machiavellian style, allowing Chinese
firms to flood the globe with their exports, leading to rapid growth at home. This
is perpetuated by highly flexible (or exploitative) labour markets and appallingly
light regulation. In a democracy, such use of public funds, such economic
oppression, and so few working and pollution regulations would be unthinkable,
and so the advantages of China's authoritarianism, at least for growth, are
evident. Indeed, it seems that to implement long term policies against a
backdrop of public short termism, a degree of autocracy is required, even in a
democracy. Margaret Thatcher famously proclaimed that "the medicine is harsh,
but the patient requires it"- she was right, nevertheless her militarisation of the
police force, contempt for cabinet, and attack on civil liberties all betray the fact
that to achieve economic development, even democracies sometimes require a
degree of authoritarianism. To this end, it seems that democracy simply does not
provide the power needed to fuel growth - fortunately though, there is a
response.

Democracy, it has been argued, limits government power to the detriment

of growth. Contrary to this, it is more convincing to argue this is good for growth.
In his study of growth and democracy, Barro found that a 'goldilocks' zone exists
for growth, between autocracy and western democracy. In this zone, the power
of government is checked, however equally so is the power of the people. This is
particularly helpful, because it stops the expropriation of wealth by dictators
(something that Dambisa Moyo has shown is common in Africa), and stops Plato
turning in his grave as the demos ratchet up the welfare bill and sink the ship.
Here, China's subsidy program is again useful. It clearly aids development in
some ways; however, it has neutered Schumpeter's notion of creative
destruction. Chang and Wu found newer but more productive firms are far more
likely to fail that the state sponsored behemoths in China; such are the barriers
to entry and exit in markets that are now far from contestable. Under a moderate
democracy (such as Britain in the 1800s), it is conceivable that such waste would
be curtailed, but that the people at large would not have the opportunity to
demand a redistribution of the wealth to them. Evidently, democracy, in some
form, best facilitates growth, because it is the most effective means of limiting
the power of government to squander precious resources.

Lastly, we should briefly consider a fickle area: education. Ed Glaeser has

reported that 95% of "well educated" democracies from 1960 remained such for
40 years, but that "less well educated" ones had a 50% chance of becoming
dictatorships within a decade. This speaks volumes. Education does not just

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enrich human capital, but is a pillar of the system that best supports growth, and
therefore is directly and indirectly complementary to growth. Educated people,
Glaeser suggests, are more likely to develop and defend democracy, and of
course contribute to a developed economy. Concurrently, economic growth
allows an emergent middle class to finance their children's education, with or
without the help of the state. From this phenomenon emerges a cycle: growth
supports education, education supports democracy, and democracy supports
growth. Even if we remove the link of democracy from this chain, and allow
autocracy to enter in, we can still see that a dictator who promotes growth will
indirectly promote education (they could of course, directly promote it, but there
is an obvious disincentive) and thus promote not just democracy, but stable
democracy. Education then, is key. It is the lifeblood of democracy, and the
dynamic for economic and political change. Even if an authoritarian government
promotes short-term growth, as countless hundreds have, they cannot escape
the march of human progress, and thus it is only democracy, engendered by
education, that sustains vibrant, long-term growth. The icing on the cake (which
of course, everyone shares in this equation), is the work of Nicholas De
Condorcet, who proved that if voters have an above even chance of selecting the
best policy, then the accumulation of more and more votes makes the probability
of a correct choice being made near mathematical certainty. Naturally, voters
must be educated to have such a chance, and in this manner, the theory falls
into place: education supports democracy because it allows all of us to become
Platonic 'philosopher kings', whose pooled wisdom draws us ever nearer to good
economic governance.

In the immediately preceding analysis, we found a natural close to the

debate and a comfortable dnouement. Authoritarianism, no matter the esteem
of its defenders, from Plato to Pinochet, fails to provide on its own terms: power
and stability, and further to this fails to match the incredible power of collective
decision-making. The death knell of despotism chimes ever louder when we
consider the reckoning force of education, and the inescapable conclusion it
presents: that no matter the roar of the Asian tiger, we should not be cowed in
avowing that democracy best promotes growth.

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References
Alberto Alesina: Poltiical Instability and Economic Growth (1996).

Aristotle: Politics.

Chang and Wu: Institutional Barriers and Industry Dynamics (August

2012).

Dambisa Moyo: Dead Aid (March 2009).

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Ed Glaeser and Daron Acemoglu: Is Democracy the Best Setting for Strong
Economic Growth? (The Wall Street Journal, March 2007).

John F. Helliwell: Empirical Linkages between Democracy and Economic

Growth (1994).

Jones and Olken: Do Leaders Matter? National Leadership and Growth

Since World War II (2005).

Kormendi and Meguire: Macroeconomic Determinants of Growth (1985).

Nicholas De Condorcet: Essay on the Application of Analysis to the

Probability of Majority Decisions (1785).

Noam Chomsky: How the World Works (October 2011).

Paul Collier: Implications of Ethnic Diversity (December 2001).

Plato: The Republic.

Robert J Barro: Democracy and Growth (1994).

Robinson and Acemoglu: Why Nations Fail (March 2012).

Usha and George Haley: Subsidies to Chinese Industry (April 2013).

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Bibliography

The Economist:

Growth: Autocracy or Democracy? (March 2013).

China's Economy: Perverse Advantage (April 2013).

Dominic Barton: Half a Billion: China's Middle Class Consumers (The

Diplomat, May 2013).

Is Democracy Bad for Growth? (Businessweek, 1993).

Jonathon Wolff: An Introduction to Political Philosophy: Revised Edition

(March 2007).

John Sudworth: Can China's Middle Class Spend the World out of
Recession? (BBC News, June 2013).

Robert Plummer: What Now for Venezuela's Economy? (BBC News,

October 2012).

Adam Porter