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Democracies vs. Autocracies: Economic Development

Introduction

Today a vast majority of scholars, including Magee and Doces (2014) and Rahman (2015), agree that democracy is a preferable political regime. It is considered to be associated with the development of social welfare and the promotion of individual participation in the community and public affairs to a greater degree than autocracy. The latter regime, in its turn, is linked to lower levels of accountability of citizens’ interests, intolerance towards opposing political views, and greater control over various power sources by one party. Many researchers in the field of political and economic studies are convinced that, besides more favorable social effects, democracy also has more beneficial economic impacts than autocracy. The recent scholarship indicates that democracies have indeed performed better in terms of their economic development (Croissant, Kailitz, Koellner, & Wurster, 2015; Knutsen, 2012). Nevertheless, such autocratic countries as Thailand and Singapore have demonstrated a significant increase in their economic development during the last decades as well (Croissant et al., 2015).

To understand the reasons for varying economic growth outcomes in states with distinct political regimes, it is firstly essential to identify the factors determining economic growth. Consequently, democracies and autocracies should be analyzed by applying the knowledge of those determinants. The present paper will aim to attain these two objectives in order to demonstrate which of the two types of political regimes is conducive to better economic performance and why. It will be argued that while democracies impact economic development positively by altering such economic growth factors as investment and human capital, autocratic states whose leaders implement effective growth-inducing policies also can perform well. To support the formulated thesis, evidence from high-quality academic sources will be critically reviewed in the following section of the paper.

Literature Review

Factors of Economic Development

Nowadays, a plethora of theories gives disparate explanations of economic growth. A unified theory that would provide a comprehensive concept of this process does not exist, but different economic models emphasize the importance of distinct factors in economic development (Petrakos & Arvanitidis, 2008). The majority of them include investment, human capital (that is, workers’ level of competence and skillfulness), demographic trends, innovation, economic policies, property rights, and openness to trade (Petrakos & Arvanitidis, 2008). It is acknowledged that institutional regimes can also affect the rate of economic growth. Any political framework mainly does so indirectly by affecting a large number of the abovementioned economic development determinants, including investment opportunities and transfer of knowledge and technology (Petrakos & Arvanitidis, 2008).

Additionally, such measures of institutional framework/governance quality as corruption, legal certainty, stability, and the nature of the bureaucratic system may contribute to economic performance (Petrakos & Arvanitidis, 2008). For instance, the meritocratic systems that are associated with predictability, lack of corruption, as well as unbiased and fair HR practices facilitate capitalist growth (Petrakos & Arvanitidis, 2008). Lastly, the overall quality of the political environment plays a role as well (Petrakos & Arvanitidis, 2008). It means that such factors as political violence and government instability can negatively affect a country’s economic performance.

Similar observations regarding the role of the mentioned factors in economic growth are made in other studies. Citing Douglass North in their article, Przeworski and Limongi (1993) stated that “secure property rights are critical for growth” (p. 52). For better economic performance, governments must grant enough property rights to all citizens and respect them in order to avoid the pursuit of their own benefits and interests at the expense of the common good (Przeworski & Limongi, 1993). The same applies to the presence of corruption in any form. According to Alon, Li, and Wu (2016), corruptive behaviors at the institutional level reduce public benefits, induce waste of talents, decrease investment and, thus, lead to macroeconomic weakness and impeded development.

A one-unit increase in the level of perceived corruption is linked to an average decrease in the economic growth of 0.91% (OECD, n.d.). In contrast, Ahmad, Ullah, and Arfeen (2012) revealed that “a one-standard-deviation increase (an improvement) in the bureaucratic efficiency index [or a decrease in corruption, in other words] is associated with an increase in the log of GDP per worker of 1.2%” (p. 294). In addition, consistent with findings by Petrakos and Arvanitidis (2008), Croissant et al. (2015) note that economic policies and regulations are essential prerequisites for economic growth. It means that the degree to which authorities are committed to the betterment of economic performance eventually leads to positive outcomes in this regard. It is valid to say that democracies and autocracies are characterized by the presence of the discussed factors to a varying extent, and the following chapter will demonstrate which characteristics of the two regimens allow increasing or decreasing their bureaucratic efficiency, openness, human capital, and so forth.

Overview of Democracy and Autocracy

To understand the impact of different political regimes on the economy, it is essential to define their major characteristics first. Democracy is commonly regarded as “a political system in which attempts are made to frame rules that maximize the well-being of people” (Rachdi & Saidi, 2015, p. 616). In the efforts to do so, democracies normally strive to promote equality, freedom, and progress in multiple spheres of performance (Rachdi & Saidi, 2015). The implementation of the principle of democratic elections may be viewed as one of the most significant features of democracies. This type of political succession serves the interests of the society even when newly elected governments differ in their economic goals and overall orientations (Faust, 2007). Thus, it is valid to say that democratic elections allow the preservation of democratic values and institutional security.

As for autocracy, it is characterized by less inclusiveness of citizens in the political decision-making processes. Due to this, there is an elevated risk that autocratic leaders “can provide themselves and their narrow group of supporters with economic privileges,” while excluding large groups of the general population from policy-making (Faust, 2007, p. 309). Besides, compared to democracies, decision making in autocracies is less transparent and, thus, authoritarian politicians have fewer power constraints, which allow them to engage in such predatory behaviors as fraud and other types of corruption more easily (Croissant et al., 2015; Przeworski & Limongi, 1993). Succession rules in autocratic governments also tend to allow their leaders to protect their own interests (Faust, 2007). Noteworthily, autocratic leaders often remain in power long-term while gaining substantial wealth and extracting more benefits from the national economy like in the case of the 1970’s Mexico were a privileged ruling coalition developed strong ties with the business elite and, in this way, maximized profitability opportunities for a limited group of people (Faust, 2007). Thus, the preservation of political stability and security is always associated with coercive measures and exclusion of competitors from decision-making in the autocratic regime (Faust, 2007).

When speaking of social indicators in democracies and autocracies, they differ as well. For example, the literacy rate in full and flawed democratic states with scores between 6-10 based on the 2012 Democracy Index is 98% and only 69.7% in autocratic countries with scores below 4 based on the 2012 Democracy Index (Rahman, 2015). The rate of unemployment is 7% in democracies and 25.7% in autocracies (Rahman, 2015). Moreover, countries with authoritarian regimes have lower security as indicated by an elevated murder rate that is approximately six times higher than in democratic regimes (Rahman, 2015). As it was mentioned in the previous section of the literature review, all these indicators may indirectly affect economic growth by mediating the development of human capital. Nevertheless, before making final conclusions regarding the impacts of either political regime on the economy, it is appropriate to look at the statistics and take into account the unique experiences of different countries.

Economic Effects of Democracy and Autocracy

Democratic regimes indeed seem to lead to greater economic prosperity. In his study, Knutsen (2012) analyzed the rates of annual GDP growth between 1855 and 2003 for democratic and authoritarian states. The findings of his analysis indicate that the economic performance in democracies is on average better than in autocracies (Knutsen, 2012). Findings reported by Croissant et al. (2015), also verify the links between the democratic political framework and economic growth. Throughout the period between 1950 and 2000, the GDP per capita growth rate in democracies equaled 2.14% compared to 1.94% in autocracies (Croissant, Kailitz, Koellner, & Wurster, 2015). However, the ability of a political regime to induce economic development may not be as straightforward as it seems based on the provided statistics.

The economic effects of political regimes depend on social and economic contexts to a significant extent. In their study, Nosier and El-Karamani (2018) examined the indirect effects of democracy on the economy through such variables as education, human capital, government size, and trade openness. It was found that democracies have positive impacts merely in higher-income countries where the political regime is well-functioning (Nosier & El-Karamani, 2018). Similar findings were obtained in the study by Rachdi and Saidi (2015) who evaluated the impacts of democracy on the economies of seventeen mostly authoritarian Middle East and North Africa (MENA) states. Rachdi and Saidi (2015) revealed that democracy had negative impacts on the economy in the selected countries, and the researchers suggested that these outcomes are due to the states’ institutional strength. In other words, to make democracy produce favorable economic effects, some countries need to improve their political systems and increase democratic accountability, for instance, through the implementation of relevant policies and standards aimed to prevent predatory behaviors and maximize opportunities for the promotion of social-economic welfare.

In their study, Nosier and El-Karamani (2018) revealed that democracy impacts economic growth mainly through education and human/physical capital in developed countries and health in developing ones. At the same time, the political regime always strongly affects economic development in both poor and rich, more democratic, and less democratic states by mediating trade openness (Nosier & El-Karamani, 2018). However, as specified by Nosier and El-Karamani (2018), in the MENA region, democracy results in growth in “free and partly free countries, electoral and liberal democracies, and democratic countries according to the electoral democracy index” and prevents growth in countries that are not free, “closed autocracies, and the autocratic countries according to the electoral democracy index” (p. 61). It means that while democracy indeed may lead to better economic performance, the extent of its positive impacts largely depends on the level of countries’ democratization.

Overall, Nosier & El-Karamani (2018) and Knutsen (2012) are convinced of the superior role of democracy in fostering economic growth compared to autocracy. However, empirical findings in favor of democracies have been controversial so far. The review of evidence from eighteen different studies by Przeworski and Limongi (1993) revealed that eight research projects provided data in support of favorable economic effects of democracies. At the same time, eight others were in favor of autocracies, and five did not find a significant difference between the two regimes (Przeworski & Limongi, 1993). Additionally, the majority of studies published before 1988 demonstrated that autocratic states developed faster, whereas studies published after that year did not back those earlier findings (Przeworski & Limongi, 1993). Changes in the macro-environment within distinct periods could explain these discrepancies in research results. For example, as mentioned by Knutsen (2012), during the first half of the 20th century, authoritarian regimes usually grew faster while democracies were struggling to recover after the Great Depression and World War I, and the economic decline and uncertainty that they had induced. It means that the overall economic condition of the state can either support or hinder the implementation of practices aimed to stimulate further economic growth.

The states’ orientation towards industrialization plays an important role in economic development as well. For instance, during the first half of the 20th century, some dictatorships also implemented highly effective policies, such as Stalin’s 5-year plans, which helped them to enhance economic performance (Knutsen, 2012). In contrast, democracies commenced growing faster only during the second half of the 20th century after they became better recovered after the crises (Knutsen, 2012). Thus, it is valid to say that the economic performance of countries depends on historical contexts. However, when explaining the differences in the findings of the studies published before and after 1988, Przeworski and Limongi (1993) suggested that the representation of economic data may be linked to states’ ideologies and activities aimed to protect certain political values and points of view. It seems that autocracies could alter statistics before publishing them in order to form a better picture of their economic situations. The assumptions about the falsification of economic indicators by authoritarian states were made by other researchers as well. However, before exploring this issue in greater detail, it is appropriate to discuss findings in favor of autocracies’ positive economic impacts.

Statistics discussed on page 6 indicated that democracies perform better than autocracies, but the experiences of some autocratic states and dictatorships contradict those data. Singapore under the rule of Prime Minister Lee Kuan Yew, who stayed in power for decades is a good example of a high-performing autocratic economy (Knutsen, 2012). As reported by Knutsen (2012), “Singapore experienced an average GDP per capita growth rate of 6.4 percentage points between 1970 and 2000” (p. 400). It can be argued that the significant growth in Singapore during that period was closely linked to the political framework factors.

Lee Kuan Yew encouraged industrialization through the development and implementation of policies that favored the development of potentially profitable sectors (Knutsen, 2012). A few of the examples of initiatives aimed to stimulate economic development are the protection of property rights for both domestic and foreign investors and the creation of multiple opportunities for investment and saving (Knutsen, 2012). In addition, the regime invested in highly successful infrastructure development projects, including the building of the subway network, as well as the improvement of social and public services, including health and education (Knutsen, 2012). It is worth noting that by implementing effective economic policies targeted at enhanced investment and saving, Lee Kuan Yew managed not only to stimulate growth but also gain substantial support from citizens (Knutsen, 2012).

In this way, the longevity of the authoritarian regime and the long-term political stability in Singapore were closely linked to the government’s commitment to economic development and the effectiveness of enacted policies. The promotion of economic and social welfare was positively perceived by the public and, in its turn, a positive perception of the government contributed to greater political stability and lack of internal discontent. As Croissant et al. (2015) state, autocracies indeed may utilize various policies and economic betterment strategies linked to human capital development, promotion of national openness to trade and foreign investment, in order to increase their legitimacy, improve public perceptions, and gain citizens’ support of the regime and ideology. Overall, in the lack of historical and cultural justification for the authoritarian framework, a state’s orientation towards national prosperity serves as an essential means for preserving political power.

However, it is clear that in order to achieve political stability in the country, autocracies must deliver on their promise of economic growth. The case of Mexico during the late 1980s and the beginning of the 1990s illustrates this statement. While the country’s authoritarian government implemented some economic reforms and aimed to promote international trade and foreign investment, the benefits of those policies were mainly distributed among the ruling and elite groups (Faust, 2007). At the same time, workers and members of rural communities in Mexico were put in an economically disadvantaged position due to a narrowing of the ruling coalition (Faust, 2007). As a result of the reform that favored the financial interests of politicians and major national businesses, many social and political disturbances took place (Faust, 2007). The regime associated with an increased incidence of corruption failed to deal with them efficiently due to the lack of proper succession and conflict management plans (Faust, 2007). The outcomes of the regime’s inability to implement efficient economic incentives included not only the consequent democratization of the country but also an increase in economic instability.

The reviewed cases of Mexico and Singapore show that autocracies can significantly differ in their characteristics and, thus, can be associated with disparate economic outcomes. While considering the differences in autocracies’ features, it is important to take into account the fact that some authoritarian states reportedly may exaggerate their economic growth data. Magee and Doces (2014) and Wallace (2014), addressed this issue in their studies directly. When analyzing nighttime light consumption as a predictor of economic growth, Magee and Doces (2014) concluded that GDP rates reported by autocracies were approximately 1.5% higher than the rate predicted by nighttime lights.

By applying the same method to the case of China, Wallace (2014) also revealed that the country’s government regularly published elevated GDP growth statistics. It means that democracies are usually more truthful in their representations of economic data since they are usually associated with greater levels of transparency and utilize functional accountability measures (Wallace, 2014). In contrast, the mechanisms and factors inherent with autocracies, such as the lack of accountability practices and reduced transparency, allow their governments to manipulate statistics. Thus, due to the risk of informational bias, the findings regarding autocracies’ better economic performance that are based on the evaluation of publicly accessible growth statistics may lack validity.

Discussion of Implications

The findings of the literature review show that the overall rate of economic growth is determined by multiple factors. The political regime and its quality can substantially influence economic outcomes as well. Overall, the discussed evidence is controversial, but it is valid to say that democracy can stimulate a better economic performance of a country by altering various determinants of growth, including human capital and openness to foreign investment and knowledge. The reviewed evidence also implies that economic development may be slower in autocracies since they are less successful in enhancing workers’ skillfulness, providing individuals with enough job opportunities, and ensuring their overall safety. Dilatory economic progress may also be linked to greater corruption incidence in autocratic regimes due to the lack of transparency (Alon et al., 2016).

However, it is essential to make it clear that democracies and autocracies differ in types and traits. For instance, Singapore’s experience indicates that some autocratic regimes ensure more just distribution of goods, economic costs, and benefits among the population and manage to keep corruption levels relatively low (Knutsen, 2012). It is possible to say that by doing so, they mimic democracies and, thus, tend to perform better in terms of both political and economic stability. At the same time, developing democracies are characterized by insignificant economic growth mainly because their very political and regulatory system does not function well and they still possess some marked authoritarian features even after democratization. It means that to foster economic development, countries must not only employ effective policies but also embrace more democratic mechanisms that aim to develop human capital, promote the state’s openness to various external resources, and increase transparency and accountability (Nosier & El-Karamani, 2018; Rachdi & Saidi, 2015).

Conclusion

The conducted literature review emphasized that it is important to distinguish different types of democracies and autocracies when analyzing their economic performance. As a result of evidence evaluation and comparison, a clear answer to the question of whether democracy or autocracy is more conducive to economic growth was not formulated. However, the findings indicate that, due to its characteristics, democracy has a greater potential to impact economic performance positively. At the same time, the success of autocracies substantially depends on their capacities to promote social welfare, protect property rights, attract investors, and implement the right economic strategies. Overall, the government’s commitment to a good growth program seems to play a vital role in countries’ progress. Still, the presence of a well-functioning democratic system may be of significant support in the attainment of national growth rates.

References

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Croissant, A., Kailitz, S., Koellner, P., & Wurster, S. (2015). Introduction: The Performance and persistence of autocracies. In A. Croissant, S. Kailitz, P. Koellner, & S. Wurster (Eds.), Comparing autocracies in the early twenty-first century: Vol 2: The performance and persistence of autocracies (pp. 1-18). New York, NY: Routledge.

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Rachdi, H., & Saidi, H. (2015). Democracy and economic growth: Evidence in MENA countries. Procedia – Social and Behavioral Sciences, 191, 616-621.

Rahman, M. (2015). Comparative study between democracy and autocracy based on social indicators. British Journal of Economics, Management & Trade, 8(4), 305-312.

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