“That government is best which governs least”…..or is it?

It is widely viewed that the best form of government is one that allows people the greatest amount of freedom. Although deemed to be a straight forward statement in theory, when the goal of long term sustainable growth comes into consideration the interpretation can become somewhat grey in its results.

In any economy the main drivers of growth (infrastructure, human capital & openness) is subject to political as well as economic pressures, but the view that the absence of political and other civil rights can be good for economic growth has a long history. This has been linked to certain countries in East Asia with regards to their growth performance. These countries succeeded in achieving above average growth with non-democratic political systems. A great example of this is China which has been able to grow their economy at an astonishing rate over the last decade.

India on the other side of the coin faced some pressure on their economic performance which hindered their economic growth, but has increased since the country’s democratic economy is once again established. This has been seen as a great bottleneck for growth in India and some have argued whether this is not the better path to follow.

As literature indicates it is possible to link theoretical cases to why either autocratic or democratic political regimes would deliver superior growth outcomes.

On the side of democratic regimes they are thought of doing a better job in protecting property rights, constraining potentially predatory rules and are tend to be more supportive of technological development. On the side of autocratic regimes they are tend to deliver higher investment rates (but at the cost of lower domestic consumption rates) and benefit more from being relatively insulated from political pressures which could hinder economic growth.

Empirical literature has generated two generally accepted facts on the relationship between the political regime and growth performance on a global scale:

  • There is no statistically significant difference in average growth between autocracies and democracies.
  • The variance in growth performance is higher in autocracies than democracies. This is mainly due to the fact that business cycles in autocratic regimes are highly volatile.

When the above is taken into account it becomes evident that either higher or lower growth episodes will tend to occur under autocracies. When put in a different manner, autocracies can deliver amazing economic growth or destroy a country’s economy very easily. Democracies tend to stay away from either too high or too low economic growth and prefer an average economic growth. This has been substantiated by a study done by Przeworkski et al. which focused on the economic growth of 135 countries over a period of 40 years (1950 – 1990). A more recent analysis which focused on 81 papers on the relationship between growth and democracy indicated that democracy is not harmful to economic growth and has actually had positive effects such as higher capital accumulation, lower political instability and higher economic freedom. The same study indicated that economic growth is higher in Latin America and lower in Asia which was substantiated by the strong economic growth in none-democratic regimes in Asia.

As mentioned above, a democracy is not a drag on growth, but a transition from an autocratic regime to a democratic regime could hinder economic growth and could involve a severe growth penalty.

William Easterly looked at the concept of benevolent autocrats. He stated that although greater economic growth is possible in autocracies than democracies, democracies do a better job of managing shocks than autocracies.

The debate on which regime would be the best will never end, but a conclusion can be derived that an equilibrium between the regimes would be advantageous towards economic growth. Countries which have not yet experienced industrialization on an independent scale would benefit more from an autocratic regime and should later be reformed to a democratic regime once economic growth is self-sustainable on a macroeconomic level. Countries which have already experienced industrialization on a macroeconomic level should rather be advised against an autocratic regime and should only consider using a democratic regime.

S.M. Geldenhuys

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One comment

  1. It is an interesting take looking at the political structures/systems rather than the amrket failure and government intervention angle. Have a look at this week’s posts on the Why Nations Fail blog. A&R make a similar point with respect to Russia before and after the Communist revolution.

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