{"id":68624,"date":"2024-12-22T00:26:21","date_gmt":"2024-12-21T23:26:21","guid":{"rendered":"https:\/\/libmod.de\/trumps-triumph-freie-hand-fuer-bibi-copy\/"},"modified":"2024-12-23T09:08:57","modified_gmt":"2024-12-23T08:08:57","slug":"democracy-and-the-economy-the-cost-of-non-democracy","status":"publish","type":"post","link":"https:\/\/libmod.de\/en\/democracy-and-the-economy-the-cost-of-non-democracy\/","title":{"rendered":"Democracy and the Economy: The Cost of Non-Democracy"},"content":{"rendered":"

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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-democ\u00adratic rule? Joost Haddinga explores the inter\u00adchange of the two. He is awarded first prize for his contri\u00adbution to our essay compe\u00adtition organized by WirtschaftsWoche and Center for Liberal Modernity.<\/h3>\n

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How do the economy and democracy go together? According to standard eco- nomic theory the answer is simple: Inclusive insti\u00adtu\u00adtions, and democracy in the form of the rule of law and central government together with limited power of politi\u00adcians pave the road towards economic prosperity in the long-run and permit societies to break out of their growth-preventing shackles of the past.<\/p>\n

Non-democ\u00adratic economic prosperity: A mere pipe-dream?<\/h2>\n

Despite this, the demand for more author\u00adi\u00adtarian govern\u00adments or populist leaders, however, has not subsided in western societies. Either due to genuine appeal of their solutions and simple answers, or sheer dissat\u00adis\u00adfaction with estab\u00adlished parties, more people have turned to populists in the West in recent years. In recent elections, nation\u00adalist 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 parlia\u00admentary election in July 2024, while especially in Eastern Germany the \u201dAlter\u00adnative for Deutschland\u201d (AfD) remains a signif\u00adicant force. The question thus arises which case, if any, can be made for non-democ\u00adratic economic prosperity. Is it a pipe dream or real alter\u00adnative to the past, in which sustainable long-run growth was only achieved by liberal democracies?<\/p>\n

Lessons from history<\/h2>\n

The first question is what the historical record shows for populists and au- thori\u00adtarian 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 accel\u00ader\u00adating 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 experi\u00adencing fewer crises (instead of growing quicker in calm periods) and for the past 200 years only developed democ\u00adracies have sustained such a pathway even though also dicta\u00adtorship experi\u00adenced temporary growth spurts.<\/p>\n

But dictators and populists can create prosperity if they adhere to fruitful policies and work on replacing themselves by a set of more inclusive insti\u00adtu\u00adtions \u2014 especially for countries with a weak insti\u00adtu\u00adtional framework. To remain prosperous for long, however, all evidence points towards only democ\u00adracies being able achieve this. Daron Acemoglu and James Robin- son have popularised the conno\u00adtation that only a suffi\u00adciently strong and inclusive insti\u00adtu\u00adtional 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.<\/p>\n

Non-democ\u00adratic economic growth relies on exploitation<\/h2>\n

Non-democ\u00adracies, 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 mirac\u00adulous 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-democ\u00adracies it is possible to attain levels of prosperity that guarantee basic needs for their citizens. With growing income, however, also the expec\u00adta\u00adtions 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 democ\u00adratic 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 democ\u00adratic turns boost GDP per capita by about 20 percent in the long run. Consistent with the research by Funke, Schularick, and Trebesch non-democ\u00adratic turns are therefore not conducive to economy.<\/p>\n

Who benefits?<\/h2>\n

The second question is whether non-democ\u00adratic govern\u00adments raise the welfare of their citizens (i.e. by deficit spending in the present and large transfers while sacri\u00adficing 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 infra\u00adstructure 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 collo\u00adquially, there is no evidence to see Hitler as being preoc\u00adcupied with the welfare of the German population beyond nourishing a capable army as increases in public spending were devoted to the military almost exclu\u00adsively. Though elites and people 3
\nrhetoric strongly empha\u00adsised the positive welfare conse\u00adquences of national socialism, the general population did not experience substantial increases in per capita incomes.<\/p>\n

Taking a look at Russia and China<\/h2>\n

More contem\u00adpo\u00adra\u00adneous views are offered by Russia, that experi\u00adenced democ\u00adratic back- sliding after 2012, and China. Russia\u2019s GDP per capita declined by more than a third between 2013 and 2016 following its gradual inter\u00adna\u00adtional isolation and has not really recovered since. The Chinese experience of stable though during the 2010s slowing economic growth, sustained since the country\u2019s entrance onto the inter\u00adna\u00adtional stage under Deng Xiaoping in the 1980s seems to be the radical oppo- site and a role model of non-democ\u00adratic growth. Still, this has to be approached with caution as the treatment of minorities and regime-critical people remains alarming, and the surveil\u00adlance infra\u00adstructure 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 produc\u00adtivity 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.<\/p>\n

The dream of a benev\u00adolent dictator<\/h2>\n

The third question is which economic, political and insti\u00adtu\u00adtional framework is actually fit for prolif\u00ader\u00adating economic prosperity sustainably in the future. The desire for strong (author\u00adi\u00adtarian) leaders stems for a large part from the natural deficiencies of democracy. Democracy is inher\u00adently slow. Its majorital decision- making processed based around delib\u00ader\u00adation and compromise is slow and subject to changing elected officials. As more people contend that elected govern\u00adments are incapable of dealing with pressing societal needs such as public infra\u00adstructure, wealth inequality or global challenges such as global warming, and simul\u00adta\u00adne\u00adously gains from global\u00adi\u00adsation are distributed unequally, the demand for simple and straight\u00adforward answers has risen. The theory of the benev\u00adolent dictator that maximises the welfare of their citizens exists since Plato and has played a formative role in macro\u00adeco\u00adnomic 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 benev\u00adolent dictator being a mere illus\u00adtration of infea\u00adsible ideals given limited and dispersed infor\u00admation, the idea reemerges still from time to time.<\/p>\n

From Plato to Hayek\u2019s \u201cConsti\u00adtution of Liberty\u201d<\/h2>\n

These theories abstract from the corrupting elements of power and incen\u00adtives of political leaders to use their privi\u00adleges to benefit their interest groups instead of the entire population \u2014 which in the real world are readily present. Even if this were no problem, the problem of infor\u00adma\u00adtional asymme\u00adtries remains: Where Hayek, who would have turned 125 years old in 2024, defended liberal democracy and a decen\u00adtralised market economy against the threat of total- itari\u00adanism and socialism based the coordi\u00adnating mechanism of prices in a market- based economy, the same quest arises in the 2020s where prominent econo\u00admists and politi\u00adcians call for the central admin\u00adis\u00adtration of fighting climate change or other grand challenges.<\/p>\n

Hayek further acknowl\u00adedged the demand for authority in his Consti\u00adtution of Liberty as a means of being relieved of pressure and respon\u00adsi\u00adbility but declined its validity based on two grounds: First, govern\u00admental struc\u00adtures not aiming at minimising coercion lead to infringe\u00adments of personal liberties that in the end decrease innovation as fewer (randomly occurring) oppor\u00adtu\u00adnities 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 oppor\u00adtu\u00adnities of the economy severely. Even if they have all scien\u00adtific knowledge at their disposal, this cannot suffice to success\u00adfully predict innovation or successful inter\u00advention in other areas.<\/p>\n

Economic growth and well-being of citizens<\/h2>\n

A further question arises as whether the economic outcome should be defined as an advance in economic growth, or more holis\u00adti\u00adcally as advances in compre\u00adhensive well-being of citizens. While economies such as China have experi\u00adenced a growth surge, gains in non-democ\u00adratic 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 system\u00adat\u00adi\u00adcally discrim\u00adi\u00adnated against. Thus when consid\u00adering the detri\u00admental effects on personal liberties, the track record of non-democ\u00adracies elevating prosperity is even more scant. The belief that under a strong and non- democ\u00adratic government things would be better hence results from a pitfall that Federic Bastiat described already in the 1850s as \u201dthat which is seen, and that which is unseen\u201d14: 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 autoc\u00adracies may be more fast-moving than democ\u00adracies, they provide even more perverse incen\u00adtives for elites to abuse their power, often lead to restric\u00adtions in personal freedoms and human rights, and suppression of minorities or regime-critical discourses.<\/p>\n

Democracy and economic prosperity are interlinked<\/h2>\n

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 gener\u00ada\u00adtions. The historical record shows, however, that only democracy is capable of stimu\u00adlating 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 benev\u00ado\u00adlently while knowing exactly how to solve any mounting problem and not abuse any of their privi\u00adleges, let alone try to extend their privi\u00adleges. Especially in indus\u00adtri\u00adalised countries people should be careful what they wish for, as populist or non-democ\u00adratic rule have rarely provided grounds for economic prosperity. In the end answers for economic growth lie in inclusive insti\u00adtu\u00adtions and states having both the capacity and democ\u00adratic control not to be too pervasive.<\/p>\n

This year\u2019s jury consisted of Ursula Weidenfeld (freelance journalist), Karen Horn (University of Erfurt), Jan-Jonathan Bock (<\/i>Hertie Foundation<\/i><\/a>), Dieter Schnaas (WirtschaftsWoche) and Ralf F\u00fccks (Center for Liberal Modernity). This text has already been <\/i>published in<\/em> Wirtschaftswoche<\/i>.<\/i><\/p>\n

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\"Textende\"<\/p>\n

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