Does China need democracy to achieve sustainable economic growth?

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Many economists have questioned whether China needs democracy in order to sustain its rapid economic growth. Some of them, including the famous Acemoglu and Robinson in their book titled “Why Nations Fail” (2012), seem to support the idea that democracy is needed by stating that “China’s rapid economic growth, which has been happening since the late 1970s, will decline in the future if it does not steer clear of its authoritarian regime.” Some others, however, also believe that China does not need democracy to sustain its growth. In this short story, by rethinking some of Acemoglu and Robinson’s ideas, I believe the key driver for China’s sustainable economic growth is not democracy but the presence of stable political institutions that are inclusive enough to support innovation. However, I acknowledge three possible drawbacks that should be considered if China would like to keep its authoritarian regime.

Acemoglu & Robinson: Why Nations Fail (2012)

The discussion on how China’s economy has rapidly grown since the late 20th century has become one of the most interesting topics discussed in the world of economics. Among many growth determinants discussed in growth theories, such as capital, technology, and human capital factors, as well as geography and colonial history, political belief that shapes economic institutions is unquestionably an important factor that should not be overlooked. China has been ruled by the Chinese Communist Party (CCP) for more than 50 years since 1949, which intrigues many economists, who question whether China’s rapid growth in the past 40 years would be sustainable or not in the future without democracy. Some economists, including Acemoglu and Robinson in their book titled “Why Nations Fail” (2012), seem to support the idea that democracy is needed by arguing that “under the authoritarian regime, China’s growth would not likely to be sustainable in the future” (p.445). In contrast, some others also believe that growth’s sustainability of China does not depend on democracy. For three reasons, I believe that democracy is not necessary for China to sustain its economic growth. However, I also believe there are at least three possible drawbacks that should be considered if China would like to keep its authoritarian regime.

The first reason why democracy is not the most important factor for China to achieve sustainable economic growth is that the stability of a political regime that promotes economic stability could be more important than the form of the political regime itself (democracy or not). In the past 40 years, China has seemed able to maintain its high growth rate, which suggests an authoritarian regime could maintain its economic stability through strict and absolute rule. This idea is also emphasized by Mitter and Johnson (2021) which say “in contrast with the western perspectives which suggest that democracy is inevitable for country in order to grow, the growth in China is in fact the matter of stable communist rule”. Similarly, Angang (2014) also argue that “the social stability which provides a growth-enabling macroeconomic environment is the single crucial factor behind China’s growth”. Furthermore, Younis et al. (2008) in their research study found that “China’s rapid economic growth and boom are largely due to political stability, which is centered on the country’s one-party political structure”. Perhaps, the China’s strict and aggressive mitigation of COVID-19 that rebounds it economy faster than many democracies could also become an evidence that stricter and absolute rule could be more effective for growth.

The second reason why China does not have to adopt democracy is that autocratic rule combined with inclusive economic institutions (see Figure 1) could be the most appropriate way for China’s prosperity as it is now. Acemoglu and Robinson make an intriguing argument on the necessity of inclusive institutions in their book, which is difficult to dismiss. The question is “Is it possible to have inclusive economic institutions in a non-democratic setup?”. Although, Acemoglu and Robinson does not clearly state the answer, it seems possible if we refer to the case of Singapore, which has grown continually despite not truly adopting democracy. “Good governance indices such as rule of law and effective and clean government could indicate that political institutions of Singapore have become inclusive enough in some ways to support inclusive economic institutions” (Howes et al. 2022a, p.18). In the case of China, the existence of Chinese giant companies such as Huawei, Alibaba, Tencent, etc. and the rise of entrepreneurship in China certainly could prove that the presence of inclusive economic institutions in China is possible. This again proves Acemoglu and Robinson’s point, which states that there is no way for an authoritarian regime to sustain growth if it resists creativity (being extractive). We could believe that China benefited from technological transfer, foreign investment, and international trade benefits during its early development. However, China would not be able to sustain its economic growth and compete with other countries that value innovation like the way it is now unless it opened itself to more innovation. In some ways, I believe China’s regime has done a good job of allowing innovation to flourish while also becoming more inclusive, despite not being democratic.

Figure 1: Inclusive versus extractive. Source: Acemoglu & Robinson (2012) Ch.15

The third reason why democracy is not necessary to support China’s sustainable growth in future is that the impact of democracy on growth itself is still unclear. While the presence of many rich countries, such as the United States, the United Kingdom, and a group of democratic countries that have dominated the world economy since the late 19th century, definitely provides support to the argument that democracy is important for growth, the presence of democratic countries that are stagnant, such as Malaysia, Indonesia, and some Latin American countries, definitely raises the question. Similarly, the results of few notable research studies in this area are also conflicting. One of the notable works related to democracy and growth is written by Acemoglu et al. (2014), which suggests that Democracy causes growth. However, according to Pozuelo et al. (2016), there is an endogeneity problem with the methodology used in the study (using IV in cross-country regression) which makes the finding seems questionable. Furthermore, using meta analysis of cross-country regression, Doucouliagos and Ulubasoglu (2008) also concluded that “democracy seems to not have a direct impact on economic growth”.

The next piece of the puzzle is “are there any drawbacks for China if it does not adopt democracy?”. The answer is yes and it depends on to what extent Acegmoglu and Robinson are correct about China’s authoritarian regime. Firstly, it is necessary to acknowledge that maintaining an authoritarian regime is indeed a risky strategy. Unless the regime could maintain its citizens’ prosperity, public trust, and “positive feedback loop” (p.308), as it could happen when the institutions are progressing toward inclusive, there is a serious danger that could destroy the regime’s stability and hamper the growth. In this case, the regime must carefully address not only maintaining economic growth, but also inequality, law, human rights, unemployment, education, and other issues. Nevertheless, from its citizens’ perspective, China seems to have done well in this case. According to the survey by the Ash Center of Harvard Kennedy School (see Figure 2), “the satisfaction level of China citizens towards the central government has increased from 86.1% in 2003 with 8,9% disagreement to 93.1% in 2016 with 4,3% disagreement” (Cunningham et al. 2020). Furthermore, when it comes to the direction that the country is heading in, Willige (2016) also pointed out the result of a study conducted by a global market research firm which showed that 90% of Chinese citizens believe that the government is heading in the right direction as of 2016. Interestingly, this percentage is the highest in the world and is relatively much higher compared to some democracies that we know.

Figure 2: Satisfaction level of China citizens towards the central government (reconstructed chart). Source: Cunningham et al. (2020)

Secondly, the regime should always be dynamic in accommodating the demand for inclusive economic institutions that support innovation. The proposition of Acemoglu and Robinson which implies that “non-democractic setup hampers the freedom of innovation” (Howes et al. 2022a, p.15), could be true for China if the regime fails to determine how much freedom for innovation is allowed and how much control is needed in order to maintain power. Although the regime has appeared to be able to maintain power by recruiting successful new innovative businesses to the party and/or closely monitoring them up until now, this could become a major challenge for the party in the future as creativity and technological innovation become more important in order for the country to sustain and compete with other countries. In other words, more freedom is definitely needed in the future to sustain growth.

Lastly, the decisions taken by powerful groups in the communist party should be more based on rules. In other words, it should be more “rule-based bargains” instead of “deal-based bargains” if we refer to the concept of elite bargains introduced in the 2017 World Development Report (pp.200–201). Although there is no clear link between the elite bargains concept and the inclusive-extractive institutions concept (let alone democracy), “the two concepts seem to fit naturally, where rule-based tends to be the inclusive one” (Howes et al. 2022a, p.17). Given its non-democratic setup, it appears reasonable to justify China’s authoritarian regime as more deal-based because major decisions are made by powerful groups (central government officials, governors, businessmen, and so on) bonded into the communist party. In contrast with rule-based bargains, which may “stabilize the transition from one ruler to the next, strengthen the party’s legitimacy, and support development” (Howes et al. 2022b, pp.4–5), more deal-based bargains in the future are unlikely to be the answer to more sustainable growth. Therefore, clear rules that could serve as a check and balance instrument among the party members and limit their power to some extent in order to maintain the stability of the party should be established within the party.

In conclusion, the key ingredient for China’s sustainable economic growth is not democracy but the presence of stable political institutions that could maintain stability in the market and are inclusive enough to support innovation (despite being non-democratic). As long as the political regime can maintain its citizens’ prosperity, public trust, and positive feedback loop, as well as sustain innovation, political reformation heading toward democracy is unlikely to be necessary in the near future. Finally, it is also important for China to be more rule-based in terms of its elites’ bargains, in order to sustain growth.

References

Acemoglu, D & Robinson, JA 2012, Why nations fail: the origins of power, prosperity and poverty, Crown Publishers.

Acemoglu, D, Naidu, S, Restrepo, P & Robinson, JA 2014, ‘Democracy does cause growth’, NBER Working Paper Series №20004, National Bureau of Economic Research, viewed 20 March 2022,<https://www.nber.org/papers/w20004>.

Angang, H 2014, ‘Is china more democratic than the us’, New Perspectives Quarterly, vol. 31, no. 3, pp. 12–17.

Cunningham, E, Saich, T & Turiel, J 2020, ‘Understanding ccp resilience: surveying chinese public opinion through time’, ASH Center for Democratic Governance Innovation, Harvard Kennedy School, viewed 20 March 2022,<https://ash.harvard.edu/publications/understanding-ccp-resilience-surveying-chinese-public-opinion-through-time>.

Doucouliagos, H & Ulubasoglu, MA 2008, ‘Democracy and economic growth: a meta-analysis’, American Journal of Political Science, vol. 52, no. 1, pp. 61–83.<https://publications.iadb.org/publications/english/document/Democracy-Does-Not-Cause-Growth-The-Importance-of-Endogeneity-Arguments.pdf>.

Howes, S, Agarwal, V & Woolf, M 2022a, ‘Democracy and prosperity’, Ch. 6, CRWF8000 Lecture Notes, Crawford School of Public Policy, The Australian National University.

Howes, S, Agarwal, V & Woolf, M 2022b, ‘The political underpinnings of economic growth’, Ch. 5, CRWF8000 Lecture Notes, Crawford School of Public Policy, The Australian National University.

Mitter, R & Johnson, E 2021, ‘What the west gets wrong about china’, Harvard Business Review, Harvard Business Publishing, viewed 20 March 2022,<https://hbr.org/2021/05/what-the-west-gets-wrong-about-china>.

Pozuelo, JR, Slipowitz, A & Vuletin, G 2016, ‘Democracy does not cause growth: the importance of endogeneity arguments’, IDB Working Paper Series No. IDB-WP-694, Department of Research and Chief Economist, Inter-American Development Bank, viewed 20 March 2022,

Williege, A 2017, ‘Which countries are on the right track, according to their citizens?’, World Economic Forum, 12 January.

World Bank 2017, World Development Report 2017: Governance and the law, The World Bank.

Younis, M, Xu, X, Yahya, S & Santhirasegaram, S 2008, ‘Stability and economic growth in asia’, American Journal of Applied Sciences, vol. 5, no. 3, pp. 203–208.