Does democracy help or hurt economic growth?

The question of whether democracy helps or hinders economic growth is a hotly debated one today. In a recent Foreign Policy article, Professor Yasheng Huang of MIT addresses this issue in the Asian context. The most obvious case study that comes to mind is the China-India comparison that supposedly gives the former an authoritarian edge of fast economic growth. Many believe that…

    Democracies are peaceful, representative—and terrible at boosting an economy. Or at least that’s the conventional wisdom in Asia, where for years growth in India’s sprawling democracy has been humbled by China’s efficient, state-led boom. But India’s newfound economic success flips that notion on its head. Could it be that democracy is good for growth after all? If so, China better watch its back.

Indeed, for decades India had only 2 to 3 percent annual “Hindu rate” of growth. But that has changed. Once the democratic Indian government embarked upon implementing market-oriented reforms, the country achieved “East Asian rate” of 8 to 9 percent a year. What has changed? Above all, India was successful in improving governance and raising the quality of its democracy. And while China remains authoritarian, its economic success to a large degree is similarly attributable to liberalizing political and economic reforms – partial and incomplete as they may be. Professor Huang explains:

    From an economic perspective, it is not the static state of a political system that matters, but how it has evolved. The growth India enjoys today sped up in the 1990s as the country privatized TV stations, introduced political decentralization, and improved governance. And contrary to the conventional wisdom, India stagnated historically not because it was a democracy, but because, in the 1970s and 1980s, it was less democratic than it appeared.

    The cumulative effect of [Indira] Gandhi’s actions [as prime minister during much of the period from 1966 to 1984] is that the Indian political system, though still retaining some essential features of a democracy, became unaccountable, corrupt, and unhinged from the normal bench marks voters use to assess their leaders. (…) The economic consequences of this period of illiberalism were long lasting.

Many contrast India’s experience with that of China, implying that its economic success is derived from “an efficient, massive, and rapid embrace of the global economy” by a closed communist regime. But…

    The idea that China grew because of its one-party rule stems from a mistaken focus on a single snapshot in time at the expense of an understanding of shifting trends. China did not take off because it was authoritarian. Rather, it took off because the liberal political reforms of the 1980s made the country less authoritarian.

    One of the first acts by the reformist leaders was to signal an improving environment for private property. (…) The reformist leaders also began to embark on meaningful political changes. As scholar Minxin Pei has noted, every single important political reform—such as the mandatory retirement of government officials, the strengthening of the National People’s Congress, legal reforms, experiments in rural self-government, and loosening control of civil society groups—was instituted in the 1980s. The Chinese media became freer in the early reform era. The timing here is critical. This “directional liberalism” of China’s politics either preceded or accompanied China’s economic growth. It was not a result of economic success.

Huang concludes that even though the economic dividends of political reforms do not appear overnight, political liberalization has spurred rather than stunted growth in both China and India by nearly every metric. Therefore, political and economic reforms are intertwined and mutually dependent rather than contrary to each other.

    If India, with its noisy, chaotic, and lumbering political arrangements, can grow, then no other poor country must face a Faustian choice between growth and democracy. A deeper look at the two countries shows that they have succeeded and failed at different times for remarkably similar reasons.

    The emerging Indian miracle should debunk—hopefully permanently—the entirely specious notion that democracy is bad for growth. And the emerging Indian miracle holds substantial implications for China’s political future. As Chinese political elites mark the 30th anniversary of economic reforms this year, they should reflect on the Indian experience deeply and absorb the real reason behind their own miracle.

    How India managed to emerge from its own long shadow of illiberalism offers some valuable lessons. In the past, China taught India the importance of social investments and economic opening. It is time for today’s China to take a page from India—and from the China of the 1980s—that political reforms are not antithetical to growth. They are the keys to a healthier and more sustainable foundation for the future.

Published Date: June 30, 2008