September 2016

What Happens to Economic Growth When High-Growth Autocracies Become Democracies?

Tim Kelsall

International policy makers and domestic activists would often like to promote democracy in authoritarian regimes, but can be deterred by the fact that the instability and uncertainty caused by the transition process itself often harms economic growth. The picture is not uniform, however, and the reasons why in some countries growth falls or collapses under democratic transition, while in others it is sustained, are not well-understood. This paper examines the impact of democratic transition on growth to help policy makers and activists weigh the costs of transition, and if possible act in ways to reduce them.

The study uses post-1960 growth data cross-tabulated with data on political regime change to identify thirteen high-growth autocracies that underwent democratic transition either during or just after a period of high growth. Using the average growth rate eight years following the transition, it divides the countries into ‘sustained growers’ (South Korea, Chile, Taiwan, Lesotho), ‘reduced growers’ (Pakistan, Indonesia, Dominican Republic, Spain, Greece, Portgual), and ‘collapsed growers’ (Bulgaria, Ecuador, Liberia).

It then uses qualitative comparative case study analysis to tease out the causes of these different growth experiences. Three variables seem to be key:

  • whether the transition took place while the economy was strong, or during an economic dip;
  • whether the transition had strong support from business (which was usually linked to whether the victorious party was pro-business or not);
  • whether the transition received strong international support. If the economy was strong at the time of transition and supported by a strong pro-business coalition and international actors, sustained growth was the result (South Korea, Chile, Taiwan, Lesotho).

If the economy was strong but business and international actors were lukewarm about the transition, reduced growth was the outcome (Pakistan). If the economy was weak, meanwhile, but the transition still had either strong business or international support, or both, the result was also reduced growth (Indonesia, Dominican Republic, Spain, Greece, Portgual).

If, finally, the economy was weak and business and international actors unsupportive, the economy collapsed (Bulgaria, Ecuador, Liberia).

Taking these lessons on board, policymakers and domestic activists wishing to smooth the process of transition in high-growth autocracies might then try the following:

  • nurture business and political support for transition (the paper provides some examples of how);
  • broker coalitions between business and political parties; and
  • act while growth is still strong.

Some important caveats apply. First, these findings apply only to high-growth autocracies. Second, these techniques are only likely to work in countries that have some or all of the underlying conditions for democracy – income per capita above US$2,700, a moderate degree of economic inequality, and comparatively weak ethnic or religious divisions. In other cases, such as Liberia and Lesotho in this study, more drastic forms of international intervention would be required.

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What Happens to Economic Growth When High-Growth Autocracies Become Democracies?

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