Authoritarian Growth Regimes, If Any will only be Short-lived

The Economist magazine hosted a debate between two prominent individuals: William Easterly, Professor of Economics at NYU and Dambisa Moyo, contributing editor to CNBC. They debated on the economic prospects of emerging economies for 2013 and the significance of political institutions in the process. If you just look at their profiles, you would assume that W. Easterly will always be right and Dambisa Moyo would usually be wrong when each is in opposite sides. My observation is you are probably right, at least in this specific case. Let me present why I presume so.



Traditional neoclassical models of growth and development of the 1950’s and 1960's explain the differences in per capita income between countries using differences in capital accumulation and factor productivity. They don’t presume that differences in income are explained by institutions but by savings, capital accumulation and investments. Dambisa’s central argument rests on these traditional theories that, “serious macroeconomics” of these emerging economies: debt-to-GDP ratio, the quantity and quality of labor and capital, total factor productivity, efficiency of capital and labor use, etc explain the differences. However, economic theory and empirics have come a long way from this traditional understanding of the economic dynamics of countries especially emerging economies. It suffices to recall the failures of the structural adjustment program and other similar programs that undermined the significance of existing political and socio-economic frameworks which are detrimental in a nation’s economic growth to understand the limitations of such approaches. Yes, capital is critical. Yes, labor is very important. True, an acceptable level of debt and deficit is important. Yet, it’s a far cry to rely on these factors to engineer development especially in the developing world. Empirical research has shown that economic institutions that largely rely on political institutions such as property rights, elite capture in the allocation of resources and economic opportunities are central.

The structure of political institutions and the state machinery determines the structure of these economic institutions. If the state machinery is set up in order to maintain the power and prestige of a selected few elites, it would be a fantasy to expect economic progress of any kind except for those in power. If there is any progress, it’s only in the interest of the reigning political elites and would be short-lived. Because, when a disproportionate balance is observed against the interest of those in power, it can always be reversed if deemed a threat. Experience has shown that bad states have failed their nation a repeated number of times. And, that is the greatest demonstration of why political institutions are the most critical elements in growth and development. The urge to maintain political power by the ruling elite has dominated the urge to foster economic growth. It is no mere coincidence that in 2011, the Democratic Republic of the Congo, Liberia, Zimbabwe, Burundi, Eritrea, Central African Republic, Niger, Sierra Leone, Malawi, Togo, Madagascar, Afghanistan, Guinea, Mozambique, Ethiopia, Mali, Guinea-Bissau and Uganda are the poorest nations on earth. The case of North Korea and South Korea is the closest thing to a natural experiment sufficient in its own right to understand the significance of political institutions in economic growth.

The poorest economies mentioned above have one thing in common. They have or had the most autocratic dictators in recent history. These governments tried to establish political and economic infrastructures that would benefit their kin and partners. In these economies, banks offer loans to party affiliates and wealthy associates. Competition, innovation and creativity are severely stalled and discouraged since jobs, land and access to other relevant infrastructure will be controlled by supporters and associates of the ruling party. Critical economic opportunities including jobs, better education and access to credit will be confined to party affiliates. A country might still grow when these elites invest, but it is only going to be short-lived and inadequate. This process eventually builds a scheme of intricate institutions that would preserve the power structure. The challenges are further exacerbated and sustained when the political parties are based on ethnic categories. Hence, the urge to protect and intensify economic and political power by the ruling elites would dampen any sensible effort for long term economic growth.

Similar debates in Development Economics are often elusive and fail to appreciate the precise linkages between economic growth and political institutions. The debate in “Democracy Vs. Development”, “Politics Vs. Development” and “Governance Vs. Development” which is usually mixed up and intricate needs to be clear and devoid of any mystifying jargons. It has become frequent observation, that most of the debates are nebulous and highly jargonized and devoid of empirical evidence. This has been aggravated by a continued reliance on ad-hoc cross country regressions. Such regressions, in addition to the econometric challenges, have proven to convey no substantive information in terms of explaining the causal linkages. A more effective approach is to examine the local or micro level linkages between political/governance institutions and economic outcomes.

I want to conclude by asserting that authoritarian growth regimes if any would only be short lived.