Reforms by diktat won’t get desired results
As India’s experience is showing, the middle path is still the best approach to bringing about change for all
o country has more potential for the improvement of the human condition than India. Home to more than 1.3 billion people and soon to overtake China as the world’s most populous country, India is also still desperately poor — its gross domestic product per capita is less than $6,000 in purchasing power parity terms, less than half that of China and barely a tenth of the US.
So it’s disappointing to see its prime minister, Narendra Modi, failing to live up to his promise as an economic moderniser. Employment growth has slowed to a crawl. Many fewer Indians are employed in the formal sector than in the early 2000s.
Meanwhile, India’s economic growth has stumbled in recent months. And Modi’s attempt at reducing the use of cash in the economy appears to have backfired. Some economists suspect the integrity of India’s economic statistics to be slipping. And though the prime minister has made some improvements to infrastructure, it remains to be seen how consequential those will be.
But to be fair, few leaders are visionary reformers. The real question is, why did analysts and the economics press have such high expectations for Modi in the first place? Part of it might be a sense of momentum — a feeling that India’s recent success in enacting economic reform and boosting growth rates would continue.
But I suspect that part of it was due to Modi’s somewhat authoritarian approach to governance. Modi is no dictator, but he seems to be taking a more heavy-handed approach to policymaking. That kind of flexing of executive power is probably taken as a positive sign by many economists who, despite evidence to the contrary, remain enamoured of the idea of an enlightened despot forcibly modernising a poor country’s economy.
The idea of a beneficent autocrat isn’t new — it dates back at least to Plato’s idea of “philosopher kings”. Nowadays, the idea is often implicit in economists’ models. With some noted exceptions, most theories focus on efficiency rather than social welfare. There is often little discussion of what types of political mechanisms might lead to those efficient policies — it’s sort of assumed that good policies just happen by fiat.
Those economists who do think about how to make policy work in practice often run into the problem that there’s no perfect system for giving people what they want. The great economist Kenneth Arrow concluded that under certain reasonable conditions, it’s impossible to create a democratic system that reliably maximises human welfare in every situation.
That result seems to leave open the tantalising possibility that a benevolent dictator could solve the problem. Economists themselves have often been optimistic about dictators who seemed to want to push their countries toward better economic policies. The Nobel Prize-winning economists Milton Friedman and Friedrich Hayek expressed optimism about the economic policies of Chilean dictator Augusto Pinochet.
During Pinochet’s 16 plus years as president, real per capita income grew at a rate of a little more than 2 per cent a year — about the same as an advanced economy like the US, which in theory should grow more slowly. But in the 16-year period after Pinochet’s exit and the restoration of democracy, growth doubled to about 4 per cent a year. That’s hardly a stellar result for enlightened despotism.
Evidence of history
The evidence of history confirms the disappointing performance of dictators. A recent paper by top economists Daron Acemoglu, Suresh Naidu, James Robinson and Pascual Restrepo estimates that switching from authoritarian government to democracy tends to increase a country’s economic growth rate by around 20 per cent.
The biggest exception to this rule, of course, is Chinese leader Deng Xiaoping. Deng, who crushed the pro-democracy protests in Tiananmen Square in 1989, was unquestionably a heavy-handed despot. But under his iron fist, China made freemarket reforms and opened its economy to the world, paving the way for one of history’s greatest bursts of economic development.
But even in the case of Deng, it’s crucial to note that his rule followed that of an even more powerful despot, Mao Zedong, whose catastrophic policies shattered the Chinese economy and starved millions to death. That illustrates one of the key truths about tyranny — there’s no way to ensure that you get the enlightened kind.
Because authoritarian rulers have little check on their power, the country is subject to their whims. Sometimes those whims produce spectacular results, but as Acemoglu et al’s research shows, on average they do more harm than good.
So poor countries like India should resist the authoritarian temptation. Instead of investing their hopes in strongmen, developing nations should stick to pushing smart reforms through the democratic process. Actually, that’s good advice for developed countries as well.