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Regime Type and its Influences on Growth Essay

During the last period of the 20th century, the world has observed the so called “Asian Miracle”, the phenomenon refers to Asian countries that achieved a very high growth rate that western countries have never experience before. Interestingly, one common thing these Asia countries have in common are the experience of a certain level of dictatorship. For example, China’s economy during 1960-1980 was heavily centralized and the private sector was not allowed to exist. Singapore gained their independence in 1945 and started to develop with the leading role of government.

Japan, Malaysia, Korea, and Vietnam experienced the same level of dictatorship when they started to open their market and turn into market economies. The idea behind this phenomenon is because the government can quickly decide what industry to investment in and the large investment help these industries to acquire economics of scale quickly. The government takes the leading role as the distributor of resources instead of the market as in Western countries. My study aims at examine the relationship between the level of dictatorship and the growth rate.

Literature Review

That good governance is necessary for economic development was until recently the conventional wisdom. In 2002, for example, a USAID study asserted that “without good governance, it is impossible to foster development”. Lately, however, this paradigm has begun to lose ground. Robert Zoellick, president of the World Bank, argued in an October 2010 speech that development practitioners should embrace “differentiated policy approaches” noting that “what may safeguard (development) in one context my strangle in another”. The leaders of the G20 nations in November endorsed a “Seoul Consensus” that “there is no one size fits all formula for development success and that developing countries must take the lead in designing and implementing development strategies tailored to their individual need and circumstances”. The topic of whether democracy and autocracy is more appropriate for growth has received a lot of attention lately.

This paper will examine five papers as examples of the current state of knowledge. Wilkin (2011) provides several definitions of good governance that he use in his paper. The World Bank defines governance is the process and institutions through which decisions are made and authority in a country is exercised. Wilkin uses the governance metric offered by the Worldwide Governance Indicators Project. The indicators are grouped into six categories that are a useful guide to the dimensions of governance quality as it is generally conceived: (1) voice and accountability (2) political stability and absence of violent, (3) government effectiveness, (4) regulatory quality, (5) rule of law and (6) control of corruption. According to this metric, Wilkin point out that China continues to perform poorly on most of these indicators, ranking near or below the 50th percentile of countries assessed, while nonetheless achieving one of the fastest income growth rates of any country in the world. The reason that oligarchies in these countries can be beneficial to development is that they produce consistent policy choices.

There are many developing countries that have achieved brief spurts of rapid per capita income growth – in fact, Wilkin specifies that, more than 130 countries have experienced annual per capita income growth of 6% or more for five or more of the years between 1950 and 2007. The challenge is not to achieve growth of 6% or more for a few years, which is unremarkable, but to do so for decades. This produces exponential rates of development, doubling the population’s average income roughly every 12 years. To attain this kind of consistency, oligarchy or authoritarian governance is useful and highly effective. Rodan and Jayasuriya (2009) focus their paper on the transition process and how capitalism developed in several Asian countries.

They compare several regimes types across Southeast Asia and how the transition affect economic performance. The authors argue that a transition in Singapore from “competitive authoritarianism” to a more genuinely competitive political system requires a transformation in the political economy that suppresses bases for independent political organization. Meanwhile, political parties in post-authoritarian regimes in Thailand, Philippines and Indonesia do not operate quite as their counterparts historically have in earlier industrializing countries – not simply because of deficient institutions but because of the structural constraints on labor, social justice groups and other actors in civil society.

Chin-en Wu (2012) raise the question of “whether democracy or autocracy is better for economic performance?” By incorporating both institutional factors and structural incentives into his model, he find that the relative strength of political regimes in steering economic development is conditional on structural factors, which exert greater influence in autocracies than in democracies. For instance, when confronting external challenges, increasing national wealth becomes the most effective way for authoritarian leaders to reduce survival risk. Development provides incumbent governments with sufficient financial resources, which can finance the states apparatuses, including the bureaucracy and coercive forces such as the military and police.

Failure to cope with external threats could result in seceding territories and damaging domestic support, both increasing the probability of losing power. Given the unfavorable structural condition, i.e., low levels of external threats of abundant resources wealth, dictators have weak incentives to implement growth-supporting policies. In a democracies, by contrast, the presences of democratic institutions induces political leaders to deliver public goods and partially substitute the role of structural factors. Conversely, where structural factors are conducive to growth, democracies do not necessarily outperform autocracies and may even grow at a slower rate because the flaw that are inherent in this system.

Folch (2007) wrote a paper about the potential punishment under dictatorship. This paper explores whether the probability of being punished after losing power leads dictator to restrain their level of predation and, thus, increase economic growth. Holding dictators accountable is a difficulty problem, but under certain circumstances it might well improve their policy choices. Folch prove that dictators’ post tenure fate plays a key role in determining their level of graft and, hence, their economic performance.

The logic Folch provide is quite simple, if dictators expect that after losing or giving up power they will be able to enjoy their booty in pleasant exile or in their own countries, their level of rent-extraction will be higher and this will lead growth rate to shrink. On the contrary, if the probability of being punished is high enough, dictators will constrain their greed and economic performance will improve. To confirm his theory, the author employ a simple model of predatory rule, and the consequences of increasing probability of punishment after losing power is explored. The probability of punishment is proven to have a positive and significant effect on the rate of growth of GDP and alternative specification of growth regressions.

Pitlik’s paper (2008) put an emphasis on the impact of growth performance on economic policy liberalization. He rejects the benefit of authoritarian regimes. In his paper, he investigates empirically the interaction between economic growth performance and political institutions in producing free-market reform. Using the data of up to 120 countries over the period of 1970-2004, Pitlik shows that political regime types systematically shape government policy responses to economic growth performance. In line with several other contributions, the author finds that democratic rule is favorable for reform in general. Contrary to conventional wisdom, he argues Economic policy reform is a conflict-ridden political process.

Policies beneficial for society as a whole are often not implemented due to a fierce opposition from politically powerful prospective losers from reforms. In this respect, it is often claimed that a very poor economic performance can help overcome resistance to economic policy liberalization. Furthermore, political authorities not constrained by democratic checks and balances are often supposed to be more decisive and thus expected to carry out market-friendly policy change in times of crises more easily. Later, Pitlik concludes that there is no need for autocratic rule to implement economic policy reform in times of crises. Democracies not only carry out more liberal economic policies in general, but they are also more responsive to economic growth crises.

Barro (1996) did a throughout research on determinate of growth in his paper. First variable he analyzed is the convergence of economies. He pointed out that, based on the neoclassical growth model developed by Ramsey (1928), Solow (1956), Swan (1956), Cass (1965) the lower the starting level of real per capita gross domestic product (GDP) the higher is the predicted growth rate. That is, if all economies were intrinsically the same, except for their starting capital intensities, then convergence could apply in an absolute sense; in other words, poor countries would tend to grow faster per capita than rich ones. However, if economies differ in various respects – including propensities to save and have children, willingness to work, access to technologies, and government policies- then the convergence force applies only in a conditional sense. He conclude that, the growth rate should be higher if the starting per capita GDP is low in relation to is long-run or steady-state position; that is, if an economy begins far below its own target positon.

He gives an example of a poor country that also has a low steady-state position – possibly because its public policies are harmful or its saving rate is low- would not tend to grow rapidly. Barro also made a very important contribution in analyzing the interplay between economic and political development. He shares the same idea with Friedman (1962) that the two “political freedom and economic freedom are mutually reinforcing”. Though, he stressed on the growth retarding aspects of democracy: The tendency to enact rich-to-poor redistributions of income. Authoritarian regimes may partially avoid these drawbacks of democracy. Moreover, nothing in principle prevents non-democratic governments from maintaining economic freedom and private property rights. A dictator does not have to engage in central planning, he said.

Some examples of autocracies that have expanded economic freedoms include the Pinochet government of Chile, the Fujimore administration in Peru, the Shah’s regime in Iran and several current governments in East Asia. Schwarz (1992) observed that most OECD countries began their modern economic development in system with limited political rights and became full-fledged representative democracies only much later. Barro concludes that an increase in political rights tends to enhance growth and investment because the benefit from limitations on governmental power is the key matter. But in places that have already achieved a moderate amount of democracy, a further increase in political rights impairs growth and investment because the dominant effect comes from the intensified concern with income redistribution.

Lipset (1959)’s paper focuses on the relationship between propensity and democracy. He apparently prefers to view it as the Aristotle hypothesis: “From Aristotle down to the present, men have argued that only in a wealthy society in which relatively few citizens lived in real poverty could a situation exist in which the mass of the population could intelligently participate in politics and could develop the self-restraint necessary to avoid succumbing to the appeals of irresponsible demagogues”. Lipset emphasized increased education and an enlarged middle class as elements that expand “receptivity to democratic political tolerance norms”. Therefore, he conclude that for a country to maintain democracy regime, it is necessary to attain a certain level of education and prosperity. Otherwise, forcing democracy without its prerequisite would lead to reduction in growth rate and political instability.

Cheibub (1998) also studies the relationship between political regimes and particular aspect of economic performance. Specifically, it addresses the question of whether regime type, classified as democracy or dictatorship, has a causal impact on the extractive capacity of government, as measured by the level of taxes it collects. The findings reported in his paper are unambiguous: there are no grounds for believing that democracies are less capable of collecting taxes than dictatorships. Although taxes are higher in democracies than in dictatorship, we should not infer that this is due to any inherent feature of democratic regimes. Once we control for the conditions that make us observe countries as one regime type or the other, and conjure up counterfactuals in which countries experiences conditions that are identical in every respect except for their political regime, we observe that the difference in level of taxes between the two regimes disappears.

It is not that the two regimes do not matter for taxation. Even though taxation under democracies and dictatorships is influenced by broadly similar factors, there are also notable differences from one regime to the other. Per capita income, however, affects taxation only in democracies, whereas the pressure of servicing foreign debts only affects the level of taxes in dictatorships. Therefore, although there are factors that influence differently the level of taxes collected by the government in each regime, regime type does not affect the overall level of taxation. Democracies are not any less capable than dictatorship of extracting taxes from society.

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