Handicapping China’s--and India’s--Economic Futures (IV)

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Lant Pritchett and Larry Summers, Asiaphoria Meets Regression to the Mean. National Bureau of Economic Research, October 2014 (NBER Working Paper No 20573)
www.nber.org/papers/w20573

Quote:

"While autocracies can maintain very high growth rates—even over extended periods—they also tend to have much larger ranges of growth outcomes—with booms and busts—than stable democracies."  page 49 (commenting Figure 8)

Regarding Figure 9: "There are extremely few exceptions to the tendency for all countries with high levels of GDP per capita (expressed here as an index from 0 to 100) to also have high levels of (measured) democracy. The only two exceptions for a country with GDPPC more than a third of the leader (33 on the index) not having a democracy capital score above 80 are Oman (an oil producer) and Singapore. For countries in China’s current range of [economic] output[, or GDP per capita] (between 10 and 25 on scale of 0 to 100), the complete range of democracy outcomes exist. However, the average for this group is a democracy capital index of 71 with a standard deviation of 25. Already at a score of 14, China is much less democratic than the typical country with its level of output. For China, continuing to have rapid economic growth while maintaining its current level of democracy (as proxied by its Polity score)—a trajectory moving rapidly due east in Figure 9—would make it more and more anomalous.This is not to say it is not possible.Singapore (granted, a small city-state of only 5 million people) has managed to be nearly the richest country in the world while only having a Polity democracy capital index of 40. But even 40 is more than twice China’s current level of 14."  page 51

"An empirical question is,what effect, if any, might we expect a democratizing period to have on China’s growth? [page 51] * * * The first result evident in Table 11 is that nearly every country that experienced a large democratic transition after a period of above-average growth (more than the cross-country average of 2 percent) experienced a sharp deceleration in growth in the 10 years following the democratizing transition. Among 22 countries in which episodes of large democratic transition coincided with above-average growth, all but one (Korea in 1987 with an acceleration of only 0.22 percent) experienced a growth deceleration. The combination of high initial growth and democratic transition seems to make some deceleration all but inevitable. The magnitude of the decelerations was very large: The median deceleration across the 22 countries was 2.99 percent and the average deceleration was 3.53 percent."  page 53

“At least one mechanism that could cause democratizing transitions to decelerate growth has been explored in the case of Indonesia. As Fisman (2001)has shown,the stock market value of firms connected to President Soeharto was associated with news about his health, implying that a substantial amount of their value was related to his personal control of the levers or power. * * * That said, the fact that China is rated by most indicators as having very low control over corruption and not having improved over the previous decade has obviously not been an obstacle to rapid growth. This is not surprising as Shleifer and Vishny (1993)have long argued that organized corruption need not be inimical to growth. However,it is difficult for corruption to remain organized during a transition in political power [as is now happening in China].”  page 56


Note:
(a) Finally the paper, neutral about effect of democracy on economy, (page 48), pronounces China’s conundrums:
(i) that it is an anomaly already, autocratic but prosperous, and that China will be even more anomalous if it somehow furthers economic growth without democratizing itself; and
(ii) that on the other hand, if China should democratize itself, history (including Taiwan’s) shows democratization almost invariably shows down economy.

(b) Table 11 shows that among other countries that experienced major democratization, Taiwan were democratized in two episodes: 1992 (under President Lee Teng-hui) and 1987 (under President Chiang Ching-kuo), resulting in DROP in GDP growth rates of 2.52% and 0.64%, respectively, in the 10-year period before and after the democratizing transitions.

(c) The paper concludes: "It is impossible to argue that either China or India has the quality institutions that have been associated with the steady dynamic of growth in the currently high productivity countries.The risks of sudden stops are much higher with weak institutions and organizations for policy implementation. [page 58] * * * We suggest several implications of these conclusions. First, there will be a strong tendency to assume that, if growth slows substantially in China or India, it will represent an important policy failure. This is not right. Regression to the mean in a decade or so is the rule,not the exception. What would require much more explanation would be continued rapid growth, which would be very much outside the general run of experience. * * * Contingency planning should also embrace scenarios in which Chinese growth slows dramatically, presumably bringing with it a range of domestic and international political implications. [The end]"  page 59