Democracy and the Economy: The Cost of Non-Democracy
Populism is on the rise. What does that mean not only for the state of our liberal societies but also for the economy? Is economic growth thinkable under non-democratic rule? Joost Haddinga explores the interchange of the two. He is awarded first prize for his contribution to our essay competition organized by WirtschaftsWoche and Center for Liberal Modernity.
How do the economy and democracy go together? According to standard eco- nomic theory the answer is simple: Inclusive institutions, and democracy in the form of the rule of law and central government together with limited power of politicians pave the road towards economic prosperity in the long-run and permit societies to break out of their growth-preventing shackles of the past.
Non-democratic economic prosperity: A mere pipe-dream?
Despite this, the demand for more authoritarian governments or populist leaders, however, has not subsided in western societies. Either due to genuine appeal of their solutions and simple answers, or sheer dissatisfaction with established parties, more people have turned to populists in the West in recent years. In recent elections, nationalist and populist leaders across Europe have regained power, such as Giorgia Meloni in Italy in 2022, during the 2024 European elections, the near-win of the National Rally in the French parliamentary election in July 2024, while especially in Eastern Germany the ”Alternative for Deutschland” (AfD) remains a significant force. The question thus arises which case, if any, can be made for non-democratic economic prosperity. Is it a pipe dream or real alternative to the past, in which sustainable long-run growth was only achieved by liberal democracies?
Lessons from history
The first question is what the historical record shows for populists and au- thoritarian leaders. Recent research by Moritz Schularick, Manuel Funke, and Christoph Trebesch strongly suggests that populist leaders damage economic pros- perity and inhibit progress rather than accelerating it. Further, the question is less whether they can achieve higher growth rates but more whether they can sustain prosperity for a long time and prevent episodes of shrinking. Economies grow mainly because they stop shrinking and experiencing fewer crises (instead of growing quicker in calm periods) and for the past 200 years only developed democracies have sustained such a pathway even though also dictatorship experienced temporary growth spurts.
But dictators and populists can create prosperity if they adhere to fruitful policies and work on replacing themselves by a set of more inclusive institutions — especially for countries with a weak institutional framework. To remain prosperous for long, however, all evidence points towards only democracies being able achieve this. Daron Acemoglu and James Robin- son have popularised the connotation that only a sufficiently strong and inclusive institutional framework guided by a strong civil society leads to long-run pros- perity. If either is too strong or too weak, no long-run economic growth will be observed.
Non-democratic economic growth relies on exploitation
Non-democracies, while capable of catch-up growth, rely on extractive and exploitative growth. Once all sources of exploitation have been tapped, the economy stagnates and no further prosperity is observed. This phenomenon was what plagued the Soviet Union which first observed miraculous growth rates in the 1920s and 1930s, but stagnated for most of the postwar period. One may view this similarly as a medium-income trap: for non-democracies it is possible to attain levels of prosperity that guarantee basic needs for their citizens. With growing income, however, also the expectations and standards of people grow, especially in terms of what personal liberties they require. As a non-democracy cannot guarantee them, the only way towards more prosperity lies in a democratic transition, unless new sources of exploitation are discovered. Acemoglu et al. further back this argument by studying the impact of democracy on growth, showing that democratic turns boost GDP per capita by about 20 percent in the long run. Consistent with the research by Funke, Schularick, and Trebesch non-democratic turns are therefore not conducive to economy.
Who benefits?
The second question is whether non-democratic governments raise the welfare of their citizens (i.e. by deficit spending in the present and large transfers while sacrificing future prosperity) or whether only particular groups benefit from their rule. Even though populist leaders like to portray themselves as saviours of the ordinary citizenry, the evidence on them raising economic welfare is rather scant. A forceful historical case comes from the Third Reich. Despite Hitler being known for his large spending on transport infrastructure and labour programs to alleviate unemployment, he was not an advocate of Keynesian economics. First, most of his spending was geared towards the military, and second he was careful not to extend the German government budgets too much, hence cutting in other places such as social spending. Even though his highway-building programmes are often cited colloquially, there is no evidence to see Hitler as being preoccupied with the welfare of the German population beyond nourishing a capable army as increases in public spending were devoted to the military almost exclusively. Though elites and people 3
rhetoric strongly emphasised the positive welfare consequences of national socialism, the general population did not experience substantial increases in per capita incomes.
Taking a look at Russia and China
More contemporaneous views are offered by Russia, that experienced democratic back- sliding after 2012, and China. Russia’s GDP per capita declined by more than a third between 2013 and 2016 following its gradual international isolation and has not really recovered since. The Chinese experience of stable though during the 2010s slowing economic growth, sustained since the country’s entrance onto the international stage under Deng Xiaoping in the 1980s seems to be the radical oppo- site and a role model of non-democratic growth. Still, this has to be approached with caution as the treatment of minorities and regime-critical people remains alarming, and the surveillance infrastructure and social credit system installed by the Chinese Communist Party create strong pressure to not deviate from official lines. Similarly, even though China has surpassed the US as the largest economy worldwide, its per capita incomes remain much lower, highlighting that much of its power its derived from its sheer size instead of high prosperity and productivity of the Chinese population overall. Prosperity and welfare enhancement in these societies is therefore limited and often constrained to conforming people and elites, leaving minorities and dissenters behind.
The dream of a benevolent dictator
The third question is which economic, political and institutional framework is actually fit for proliferating economic prosperity sustainably in the future. The desire for strong (authoritarian) leaders stems for a large part from the natural deficiencies of democracy. Democracy is inherently slow. Its majorital decision- making processed based around deliberation and compromise is slow and subject to changing elected officials. As more people contend that elected governments are incapable of dealing with pressing societal needs such as public infrastructure, wealth inequality or global challenges such as global warming, and simultaneously gains from globalisation are distributed unequally, the demand for simple and straightforward answers has risen. The theory of the benevolent dictator that maximises the welfare of their citizens exists since Plato and has played a formative role in macroeconomic theory as well: Fully informed decision-makers with perfect foresight choose a policy rule that eventually maximises social welfare. While economic theorists are usually aware of the benevolent dictator being a mere illustration of infeasible ideals given limited and dispersed information, the idea reemerges still from time to time.
From Plato to Hayek’s “Constitution of Liberty”
These theories abstract from the corrupting elements of power and incentives of political leaders to use their privileges to benefit their interest groups instead of the entire population — which in the real world are readily present. Even if this were no problem, the problem of informational asymmetries remains: Where Hayek, who would have turned 125 years old in 2024, defended liberal democracy and a decentralised market economy against the threat of total- itarianism and socialism based the coordinating mechanism of prices in a market- based economy, the same quest arises in the 2020s where prominent economists and politicians call for the central administration of fighting climate change or other grand challenges.
Hayek further acknowledged the demand for authority in his Constitution of Liberty as a means of being relieved of pressure and responsibility but declined its validity based on two grounds: First, governmental structures not aiming at minimising coercion lead to infringements of personal liberties that in the end decrease innovation as fewer (randomly occurring) opportunities can be exploited. Second, no leader possesses the knowledge to foresee the necessary steps to promulgate economic growth and by constraining market forces they limit the growth opportunities of the economy severely. Even if they have all scientific knowledge at their disposal, this cannot suffice to successfully predict innovation or successful intervention in other areas.
Economic growth and well-being of citizens
A further question arises as whether the economic outcome should be defined as an advance in economic growth, or more holistically as advances in comprehensive well-being of citizens. While economies such as China have experienced a growth surge, gains in non-democratic societies remain distributed unequally: elites and regime-uncritical people gain while minorities and groups invoking personal liberties that exhibit potential danger for the ruling elite are systematically discriminated against. Thus when considering the detrimental effects on personal liberties, the track record of non-democracies elevating prosperity is even more scant. The belief that under a strong and non- democratic government things would be better hence results from a pitfall that Federic Bastiat described already in the 1850s as ”that which is seen, and that which is unseen”14: people pay attention to the deficiencies of the current system and point to other systems that correct exactly these deficiencies, not realising that these new approaches create novel (though different) deficiencies, which may be even more grave. For the current debate this means while autocracies may be more fast-moving than democracies, they provide even more perverse incentives for elites to abuse their power, often lead to restrictions in personal freedoms and human rights, and suppression of minorities or regime-critical discourses.
Democracy and economic prosperity are interlinked
Non-democracy and populism are enticing sins. In their proposals they showcase the apparent benefits without even alluding to the inevitable costs, whether they would fall on current or future generations. The historical record shows, however, that only democracy is capable of stimulating long-run economic prosperity by not relying on exploitation and preserving personal liberties. Though it might seem appealing to go elsewhere and to rely on a strong leader to get things moving, this quest is misleading in the naive thought that such leaders would act perfectly benevolently while knowing exactly how to solve any mounting problem and not abuse any of their privileges, let alone try to extend their privileges. Especially in industrialised countries people should be careful what they wish for, as populist or non-democratic rule have rarely provided grounds for economic prosperity. In the end answers for economic growth lie in inclusive institutions and states having both the capacity and democratic control not to be too pervasive.
This year’s jury consisted of Ursula Weidenfeld (freelance journalist), Karen Horn (University of Erfurt), Jan-Jonathan Bock (Hertie Foundation), Dieter Schnaas (WirtschaftsWoche) and Ralf Fücks (Center for Liberal Modernity). This text has already been published in Wirtschaftswoche.
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