Authoritarian Regimes and Economic Growth

1
Authoritarian Regimes and Economic Growth

• Lessons for Developing Democracies
• Curtis J. Milhaupt
• Columbia Law School
• Based on Working Paper with Ronald J. Gilson

2
The Development Conundrum

• Succession of theories on how to promote economic
  development have failed.
• Easterly (2006) contains depressing catalogue.
• Even undeveloped economies have
• lock-in problem by vested groups
• There are many ways to fail
• No clear way to succeed?

3
Motivating Observation

• Only a handful of countries in post-war period
  have successfully developed.
• Common characteristic of many (most?) is an
  authoritarian political regime in power during
  transformative period of growth.

4
Political Regimes and Economic Growth Empirics

• On average, no clear winner between autocracy and
  democracy.
• Barro (1996) finds nonlinear relationship
  between democracy and growth
• Brunetti (1997) (reviewing 17 empirical studies)
  no clear relationship between democracy, at
  least as measured in these studies, and economic
  growth.
• Przeworski (2004) political regimes have no
  impact on the rate of growth.

5
Political Regimes and Economic Growth Theory

• Theory supports this empirical ambiguity
• Recall that the empirical studies are averages
• Authoritarian rulers reduced political
  transaction costs v. kleptocracy
• Democracies better institutions v. rent seeking
  and instability

6
Theoretical Perspective

• Economic development as incomplete contract
• Importance of simultaneity/increasing returns to
  industrialization (Rosenstein-Rodan 1943
  Murphy et al. 1989)
• Importance of credible commitment (carrots and
  sticks)
• Authoritarian rulers comparative advantage in
  making credible commitment
• Visible hand scaling up from trust to market
  (but not through central planning)

7
Hypothesis
Preferences of
Development Strategy Credible
Commitment Decision Makers
8
Exploring the Hypothesis
9
Growth Strategies

• Chile Washington Consensus menu (15 years ahead
  of its time)
• South Korea export-driven, with national
  champions and protection of domestic market
• China SOEs pervasive, export-oriented, but
  fairly open market

10
Chile

• Rent seeking democracy, then socialist experiment
  under Allende replaced by military dictatorship
  in 1973
• Pinochet desires transformation of country
• Eventual embrace of free market policies/Chicago
  Boys
• Growth of new business groups (esp. financial) in
  open market system
• Strategic retreat from reforms in recession of
  1982, followed by further reforms
• Link between regime and business groups broken
• Constitution of 1980 secures economic freedoms
• Return to democracy in 1989
• Major increases in investment and economic growth
  in 1990s

11
South Korea

• Rent seeking/corruption in post-Korean war period
• Park seizes power in 1961 seeking economic
  revolution influenced by Meiji Model in Japan
• Begins to prosecute business leaders, then
  decides to work with them
• Chaebol as brainchild of government
• Continued influence of chaebol in political
  economy after democratization

12
China

• Dengs opening in 1978, reinforced in early 1990s
• 1980s focus on local cooperatives
• 1990s-present reform of state owned enterprises
• Private Equity Analogy (high powered incentives)
• High level connections between party and SOEs
  (elite privatization)
• Economic federalism (within limits) regional
  competition and compensation based on growth
• Experimentation and scaling

13
Cross-Country Analysis

• Dramatically different growth strategies
  dramatically different institutional designs
• Importance of leader preferences
• Pecuniary/Non-pecuniary PBOC at political level
• Importance of historical circumstance to
  leadership
• Role of culture?
• But leaders commitment to growth is not
  sufficient condition (contrast Shleifer et al
  (2004))
• Preferences of leaders are idiosyncratic
  credible commitment is not
• Importance of business groups (contrast law and
  finance literature)
• Reduces coordination, communication and
  enforcement costs
• Creates bilateral monopoly between state and
  business (mutual benefits and legitimization
  through growth)
• Scaling up trust model from family to market
  through privileged access to credit and inside
  information on economic policy

14
Institutions Form v. Function

• High growth rulers have used both formal and
  informal mechanisms as commitment devices.
• It is not the character of the devices that is
  important it is their function.
• World Bank and others made mistake of
  over-emphasizing need for formal institutions to
  support growth.
• Allen Qian (2009) err in opposite direction by
  emphasizing informality as key to Chinas growth.
  (And by overlooking role of government in making
  informality work.)

15
Institutional Substitutes

• Regional commercial court
• Government sponsored investor protection
  organizations (e.g. SFI in Taiwan PSPD in Korea)
• Constitutional commitment to economic freedoms
  with high barriers to amendment

16
Economic Growth Democratization

• Popular account (e.g. Zakaria (2003)) economic
  growth leads to political liberalizationkey role
  of intermediate organizations in society
• Chile and Korea often cited as examples, but
• Misreads Chiles history overlooks South Koreas
  chaebol problem
• Different hypothesis Growth and globalization
  increase power of business groups vis-à-vis
  state. May be anti-democratic even if rule of
  law/political process improves
• Consistent with trapped transition (Pei 2006)

17
Wrap Up

• For democracies seeking growth, the choice of
  development strategy and the form of its
  institutions are far less important than the
  creation of devices to secure commitment to
  growth.
• Creativity in commitment devices may be richly
  rewarded (see China).
• Historical record does not clearly support link
  between economic growth and democratization.
• Business groups engines of growth but brakes on
  democracy?