(Reprinted from HKCER Letters, Vol. 1, March 1990)
The Relationship between Economic Growth and the Structure of the Political System
Gary S. Becker
High but uneven rates of economic growth
World income has grown more rapidly since 1950 than during any period of comparable length in modern history. The average annual rate of growth of per capita income over 70 countries that have been studied from about 1950 to 1980 has exceeded 2.5 percent. This means that per capita income doubled every 25 to 30 years. Moreover, it is not confined to a single region or a single set of countries, and those that started poor, on the average, did about as well over the subsequent period as those that were rich in 1950.
However, along with this high average rate of growth has been considerable inequality in the rates of growth among different countries. At one end of the spectrum are countries that are famous for their great achievements: Japan, Taiwan, South Korea, Singapore, and of course Hong Kong. They averaged per capita growth rates of more than 6 percent during the past 30 years, a fivefold increase. On the other end of the spectrum were numerous countries that did extremely badly, including most African countries. The obvious and challenging question is: Why did some countries do so remarkably well and others do so badly? Nobody can say they have thoroughly or even mostly answered that question. I certainly do not pretend to you that I do. But I think some aspects of the answer have become clear especially during the past decade or so.
The cultural factor in economic growth
An easy explanation of why growth experiences differ so much is that countries do well when the culture and temperament of the people is conducive to economic progress. Thus, it is said, the Chinese, Koreans, and Japanese are hard-working and thrifty, while Latin and African temperaments are said to be easygoing and leisure-oriented. Undoubtedly temperament and culture play a role, but I am convinced they are grossly overrated as factors of economic growth. Recall that not so long ago, Western writers explained the much slower economic progress in Asia during the past few centuries by the Mandarin influences on Chinese culture with its disdain of business. These Western views, however, have changed because of the dramatic success of the five dragons of Asia. Moreover, the similarity in culture did not prevent North Korea from doing much poorer than South Korea , and East Germany doing much worse than West Germany over this period.
Central planning seemed to promote growth...
A prevailing ideology during the 1950s, especially in the Third World, was greatly influenced by the Soviet Union. It claimed that economic growth was stimulated by government planning, investment in heavy industry, and the protection of domestic industries. China, India, and practically all newly independent countries espoused this ideology, along with many development economists and international organizations like the World Bank. At the same time, a small group of economists with classical liberal views continued to claim that a free enterprise system provided the most powerful engine for growth. They argued that this system gave the right incentives--rewards for success and punishment through failure--to unleash the predacious energies of the able in all populations.
The problem in the 1950s and the 1960s was the growth records of different countries during that period did not provide decisive evidence, one way or another, on whether private or centrally directed economies were the most conducive to growth. For example, the rate of growth in per capita income from about the 1950s to the early 1970s averaged 4 percent in the Soviet Union and the other Eastern European communist countries where we have data, which surpassed the average growth record in the remaining countries with data for this period. It was a very good record as far as one can tell. China grew rapidly from 1951 to 1958 and was claimed even by some outsiders to be accomplishing wonderful miracles with the subsequent Great Leap Forward. The accomplishments of socialism captured the imagination of leaders throughout the world. Practically every single country that became independent or had a revolution between 1950 and 1975 proclaimed itself a socialist republic. There was a strong incentive to do so because if socialism did as least as well as capitalism from an economic point of view, why not have a big government?
...but it failed in bad times
Such evidence shook many advocates of free enterprise and many of them considered that centrally directed economies could more single-mindedly pursue economic growth. They maintained, however, with some legitimacy, that the freedom available under a private enterprise system was well worth the slower growth. Others took the offensive and pointed out that most communist countries were simply recovering from extensive war-time damage. But even these economists did not foresee the disastrous effects on centrally directed economies of the crunch brought about by the quadrupling of oil prices and other changes during the 1970s. Europe and the United States were certainly hit by these, but not as badly as the Communist Bloc. Per capita income in the Soviet Union, although itself a major oil producer and exporter, hardly increased after the mid-1970s, and recent estimates suggested that it fell noticeably. Nigeria, Poland, Romania, Cuba, practically all the African countries, socialist republics, and many other socialist countries have similar dismal records since that time.
Set against these, Taiwan, South Korea, Japan, Hong Kong, and Singapore, free market economies that essentially imported all the energy sources, shrugged off the oil crisis rather quickly, and after hesitant growth for a year or two, resumed their rapid expansions. Great Britain found her new energy under Margaret Thatcher's privatization program and other free market reforms. The United States has boomed under the Reagan administration. No wonder that we are witnessing a worldwide revolution in thinking about economic systems. First China, then the Soviet Union and Eastern European economies, and now even Ghana and Vietnam are trying to liberalize their economies. So one lesson we can learn, which is not yet fully appreciated, is that centrally planned and other economies with heavy government involvement may do terribly well during good times, but they adjust slowly and ineffectively to bad times.
Is democracy compatible with growth?
Now what can one say about which political system is most conducive to growth? Aside from the communist centrally directed system which everyone now more or less rejects, there are still a great difference of opinions about the best political system. One question sometimes asked is whether democracy is compatible with economic growth. Now, how one defines democracy is not at all obvious. I would define democracy, not in terms of the voting structure, but basically as a political system where there is fairly equal competition among various political interest groups. Obviously this is somewhat related to how votes are distributed, but not necessarily in any simple way like one person one vote.
It is a great fear that democracy so defined is incompatible with, or at least retards, growth. It is no doubt true that Western democracies have led to large amounts of government intervention as a result of the activities of the pressure or interest groups as they try to get various benefits for themselves, and that they have had relatively slow growth particularly in recent years. Set against it, we have Hong Kong, Korea, Taiwan, and Singapore, none of them democracies either in my definition or in any other definition, and they have done extremely well. So, it is said -- this is the observation -- that Western democracy is not doing so great and these dragons are doing very well. At the theoretical level, it is also said, the voters want increases in government expenditures and regulations. They want to get benefits and they do not worry about the costs. That is how a democracy works, and that rivals the growth process.
Democracy is not an obvious handicap
What I want to stress to you are the important qualifications to be made about those propositions. Consider the evidence. The dragons have not been democratic and done extremely well. You can add some other nations like Pinochet's Chile, a country that has been doing quite well in recent years. But what about the Philippines under Marcos, Indonesia, Franco's Spain, many African republics including Egypt and Ghana, and much of South America? It is very clear that you have many examples that go the other way, not democratic governments, and have very bad growth experiences. Now, on the other side, you have many countries which would be called democracies that have done reasonably well. Japan has been a well-functioning democracy with a lot of special interest groups that can organize a lot of voting and so on. While Japan's growth rate is slowing down, most parts of the world would be happy to accept Japan's economic experiences over the last 30 years. Some people try to run systemic studies by measuring the degree of democracy in a country, usually not by my criteria, but by votes or liberties and so on, against economic growth and show, if anything, a positive relationship between the degree of democracy and the growth experience. Although it is not an overwhelmingly powerful relation--there are many exceptions--but, if anything, it is positive, and that, plus the examples I gave, suggest to me that it is by no means obvious that democracy is a handicap to economic growth.
Competition in politics limits bad policies
What about the theory, the claim, about the harmful effects of democracy? The theory is also questionable. It is true that special interest groups are powerful under democracies. But at least by my definition of democracy, there is competition among these special interest groups, and to some extent they offset each other. Let me give examples. We have the tendency towards big spending but we have also developed in the United States a tax movement that slowed down greatly the growth of spending. Also, while it is true that producers domestically put a lot of pressure to restrict imports, we also have pretty strong lobbies of importers who are offsetting, to some extent, the power of the domestic producers. That does not mean that you do not have many inefficient and bad policies. I can name thousands of them in the United States alone. It is clearly true that well-entrenched small groups can still have large effects. The automobile industry, which is now very small in the United States, teachers, professors, doctors, lawyers, are all small groups and have significant political power. They are doing it not because they command many votes or because there is a widespread distribution of votes or anything of that kind, but because they happen to be in a special position whereby they can impose their costs in a small way on a large number of other people. So I am not claiming that with offsetting interest groups you are not going to get a lot of bad policies. You will, but you will limit them, and that is the important point.
Non-democracies are slow in reversing bad policies
Now look at non-democracies. Their main property is that they restrict access to political power of certain potential special interest groups. Of course special interests still operate under these systems, but they operate with less competition, with more inequality of power, and that is what I would think is the main difficulty in these systems. There you can go to either extreme. You can get great achievements if you happen to have the groups in power who are trying to promote economic growth. But it has a down side that I find more dangerous. Because you have unequal competition, because you have a limited number of groups in power, you can get disastrous policies that will be changed eventually, but much more slowly. The reason it is slower to reverse is because you do not have ready groups available to combat the groups in power who have made these serious mistakes. I think because of the greater competition in democracy, it is better designed and better situated in making that reversal. When the social cost imposed by various policies on society gets too large, opposing interest groups get stronger and stronger, and they can moderate and even overthrow those bad policies. On the whole, and it is only on whole, I think democratic societies do better in promoting growth, although the best promotions may occur in some non-democratic societies.
No better feasible alternatives
Let me just conclude. Capitalism has been successful for a very simple reason. Competition and private enterprise permit the talented and energetic men and women from all levels of society, rich families and poor families, to rise to the top. How? If they can cater successfully to the wishes of consumers. In planned and centrally directed economies too, talented people rise to the top. That is not the difference. The question is how they rise. In these economies they rise by responding to the top of politically powerful groups. And that, I think, is the big difference between these economies. I would now conclude with a paraphrase of Winston Churchill: Capitalism and democracy are not very good economic and political systems, they just happen to be much better than any feasible alternatives.
Professor Gary S. Becker is currently a Professor of Economics and Sociology at the University of Chicago. He was President of the American Economic Association and is a regular columnist in Business Week. The above is an edited version of a lecture he delivered when he visited the Centre.