Does Political Repression Promote Growth?
Kevin Hassett writes:
The chart shows the economic growth of two different sets of countries. The first set comprises nations that are both politically and economically free; the second, those that are repressed politically (have high numbers on the Freedom House scale) but are economically free. In each case, I looked at the average five-year growth rate of GDP, weighted by the size of each respective economy. The chart tells a striking story: the countries that are economically and politically free are underper¬forming the countries that are economically but not politically free. For example, unfree China had a growth rate of 9.5 percent from 2001 to 2005. But China was not the whole story – Malaysia’s GDP grew 9.5 percent from 1991 to 1995, Singapore’s GDP grew 6.4 percent from 1996 to 2000, and Russia’s grew 6.1 percent from 2001 to 2005. The unfree governments now understand that they have to provide a good economy to keep citizens happy, and they understand that free-market econ¬omies work best. Also, nearly all of the unfree nations are developing countries. History shows they grow faster, at least for a while, than mature nations. But being unfree may be an economic advantage. Dictatorships are not hamstrung by the preferences of voters for, say, a pervasive welfare state.
This strikes me as supply-side silliness gone wild. Beyond the cheap shot at the “welfare state” (who knew that the People’s Republic of China was not a welfare state) – Kevin offers us nothing in the way of economic policies to suggest why China is growing faster than the U.S. And notice that he omits the growth rates of the 1990’s when discussing Russia’s economy. Maybe it is because Russia’s GDP fell during much of the early part of that decade.
This source describes the Russian economy thusly:
Russia ended 2006 with its eighth straight year of growth, averaging 6.7% annually since the financial crisis of 1998. Although high oil prices and a relatively cheap ruble initially drove this growth, since 2003 consumer demand and, more recently, investment have played a significant role. Over the last five years, fixed capital investments have averaged real gains greater than 10% per year and personal incomes have achieved real gains more than 12% per year. During this time, poverty has declined steadily and the middle class has continued to expand. Russia has also improved its international financial position since the 1998 financial crisis. The federal budget has run surpluses since 2001 and ended 2006 with a surplus of 9% of GDP. Over the past several years, Russia has used its stabilization fund based on oil taxes to prepay all Soviet-era sovereign debt to Paris Club creditors and the IMF. Foreign debt has decreased to 39% of GDP, mainly due to decreasing state debt, although commercial debt to foreigners has risen strongly. Oil export earnings have allowed Russia to increase its foreign reserves from $12 billion in 1999 to some $315 billion at yearend 2006, the third largest reserves in the world.
It also notes that Russian’s average real GDP per capita was only $12,100 – as compared to $43,500. China’s real GDP per capita was only $7600. The CIA World Factbook writes:
China’s economy during the last quarter century has changed from a centrally planned system that was largely closed to international trade to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy. Reforms started in the late 1970s with the phasing out of collectivized agriculture, and expanded to include the gradual liberalization of prices, fiscal decentralization, increased autonomy for state enterprises, the foundation of a diversified banking system, the development of stock markets, the rapid growth of the non-state sector, and the opening to foreign trade and investment.
China – like Russia – has a higher national savings rate than does the U.S. Conventional Solow like growth models suggests a convergence hypothesis where nations that begin with a lower capital to labor ratio will grow faster than those with a higher capital to labor ratio even if the two nations have the same savings rates. Add to this the fiscal irresponsibility that the U.S. had to endure during the Reagan and Bush43 Administration, which was accompanied by a reduction in our national savings rate, as compared to the higher national savings rates of China and Russia – is it any surprise that their growth rates have exceeded ours in the last few years?
Kevin ends noting that democracies are still in the same but their victory is not assured. Let me respond by defining the game as a marathon where one runner ran the first 25 miles at a 5 minute pace only to hit the wall having to slow down to a 12 minute mile for the last mile and a quarter. The other runner did the first 25 miles at a 9 minute pace so he could sprint the finish at a pace that was faster than a 5 minute mile. This analogy describes the comparison of a nation with high income per capita growing at a rate less than 3% per year versus one with low income per capita growing at a rate around 7% per year. In my running analogy, the first runner clearly won the race. Likewise – anyone who thinks income per capita in China will be higher than it is in the U.S. any time soon is not thinking clearly.