Saturday, January 14, 2012

Does democracy help or hinder the economic growth?

 In his talk Yasheng Huang (2011) is speaking about the economic growth in China and India. I was interested in this topic because he raised a question which is very interesting for economists, as for me. The key question of the talk is “whether democracy has helped or has hindered the economic growth?”
  First of all as this question was very interesting for me, especially I wanted to understand why and how China grows so fast, I have decided to search also about Yasheng Huang for understanding whether it is a trustworthy source or not, and I have found out some details about the author. 
 Yasheng Huang is a professor of political economy and international management at MIT Sloan School of Management. His previous appointments include faculty positions at the University of Michigan and at Harvard Business School. He was also a consultant to the World Bank.

The key question in this topic, which also includes the main idea, is “why has China grown so much faster than India?” For answering to this question Huang uses many statistical data and historic evidences of China and India by making several comparisons mainly in terms of GDP growth rates. According to those statistical data China has grown twice the rate of India during the last 3 decades. For explaining such kind of result Huang uses “The Shanghai model of economic growth”, which consists of several characteristics that foster the economic growth:

  •   Infrastructures
  •         Strong government 
  •         State capitalism and government ownership
 The main point of this model is that the democracy is the hindrance for economic growth rather than a facilitator of economic growth. Another important question comes up here:how important are infrastructures for economic growth? By using two examples (the first example is that Soviet Union had more telephones than China, and the second is that India had longer system of railways than China till 1990s) Huang came to conclusion that infrastructure doesn’t explain why China has grown faster than India. Even if Soviet Union had more telephones, the country collapsed, that means that infrastructure doesn’t help to economic growth. India being a smaller country than China had longer railways, but again China today has great economic advantage over India. If we look at the evidence worldwide, we can say that infrastructures are the result of economic growth rather than the cause for economic growth.

 The important question is also: “Is democracy bad for growth?” The author compared the GDP rates per capita for India and Pakistan. India is democratic country, Pakistan is a non-democratic country. The comparison of these 2 countries is more convenient and acceptable than India and China, because India and Pakistan are similar from the geographic point of view; also they have somehow common history and culture. The only common thing among India and China is the highest population. Again when we look at the statistical evidence worldwide, there is no support for the idea that authoritarian governments hold a systematic advantage over democracies in terms of economic growth.
So, for answering to the main question let’s compare China during Cultural Revolution with India during the times of Indira Gandhi. During Cultural Revolution China’s GDP rate was by average about 2.2% larger than India’s GDP rate. This means that China had one important and advantageous resource which helped the country to overcome the worst effects of Cultural Revolution and that resource was human capital. At the same time the adult literacy rate in China is 77%, the same rate in India is 48%. Here the key issue is to understand how the literacy rate is defined in both countries. In China literacy is defined as the ability to read and write 1500 characters. In India literacy is defined the ability to read your own name in the language you happen to speak. The reason of this advantage is discrimination.

 The important issue is also the political system of China. Let’s consider statics of the political system and the dynamics of the political system of China. Statically China is a one party system, authoritarian. Dynamically, it has changed over time to become less authoritarian and more democratic. In terms of the political changes they have introduced village elections, they have increased the security of proprietors and the security with the long-term land leases, and there are also financial reforms and rural entrepreneurial revolution in China. In the case of India the country has undertaken not only economic reforms, but also political reform by introducing village self-rule, privatization of media, and introducing freedom of information acts.

  By summarizing the main perspectives of this topic, let’s compare dragon and elephant: Which country has the growth momentum?” China has some of the excellent raw fundamentals (mostly the social capital, the public health), that we cannot find in India. But from the other side India has the momentum; it has solid institutional conditions for growth. India has the right institutional conditions for economic growth whereas china is still struggling with political reforms. The main idea that Huang states here is that for keeping the economic growth, political reforms should happen in China.

 Overall the topic is very interesting. The author clearly defines the issue and uses many statistical data and examples for his explanations. He uses question-answer type of presentation by which he presents several questions in the same talk. At the end of his talk Huang states his assumption and point of view. Logical explanations are provided in this talk. The author talks clearly, and precisely presents the evidence and perspectives. 
Source: Huang, Y. (2011). Does democracy stifle economic growth? TEDTalks (video podcast). Retrieved from: 

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