1. Authoritarian Regimes and Economic Growth Lessons for Developing Democracies Curtis J. Milhaupt Columbia Law School Based on Working Paper with Ronald J. Gilson

2. The Development Conundrum Succession of theories on how to promote economic development have failed. –Easterly (2006) contains depressing catalogue. –Even undeveloped economies have lock-in problem by vested groups There are many ways to fail No clear way to succeed?

3. Motivating Observation Only a handful of countries in post-war period have successfully developed. Common characteristic of many (most?) is an authoritarian political regime in power during transformative period of growth.

4. Political Regimes and Economic Growth: Empirics On average, no clear winner between autocracy and democracy. –Barro (1996): finds nonlinear relationship between democracy and growth –Brunetti (1997) (reviewing 17 empirical studies): “no clear relationship between democracy, at least as measured in these studies, and economic growth.” –Przeworski (2004): “political regimes have no impact on the rate of growth.”

5. Political Regimes and Economic Growth: Theory Theory supports this empirical ambiguity Recall that the empirical studies are averages Authoritarian rulers: reduced political transaction costs v. kleptocracy Democracies: better institutions v. rent seeking and instability

6. Theoretical Perspective Economic development as incomplete contract Importance of simultaneity/increasing returns to industrialization (Rosenstein-Rodan [1943]; Murphy et al. [1989]) Importance of credible commitment (carrots and sticks) Authoritarian ruler’s comparative advantage in making credible commitment “Visible hand” scaling up from trust to market (but not through central planning)

7. Preferences of Development Strategy Credible Commitment Decision Makers Hypothesis

8. Exploring the Hypothesis

9. Growth Strategies Chile: Washington Consensus menu (15 years ahead of its time) South Korea: export-driven, with national champions and protection of domestic market China: SOEs pervasive, export-oriented, but fairly open market

10. Chile Rent seeking democracy, then socialist experiment under Allende replaced by military dictatorship in 1973 Pinochet desires transformation of country Eventual embrace of free market policies/Chicago Boys Growth of new business groups (esp. financial) in open market system Strategic retreat from reforms in recession of 1982, followed by further reforms Link between regime and business groups broken Constitution of 1980 secures economic freedoms Return to democracy in 1989 Major increases in investment and economic growth in 1990s

11. South Korea Rent seeking/corruption in post-Korean war period Park seizes power in 1961 seeking “economic revolution”; influenced by Meiji Model in Japan Begins to prosecute business leaders, then decides to work with them Chaebol as “brainchild of government” Continued influence of chaebol in political economy after democratization

12. China Deng’s opening in 1978, reinforced in early 1990s 1980s: focus on local cooperatives 1990s-present: reform of state owned enterprises Private Equity Analogy (high powered incentives) –High level connections between party and SOEs (“elite privatization”) –Economic federalism (within limits); regional competition and compensation based on growth –Experimentation and scaling

13. Cross-Country Analysis Dramatically different growth strategies; dramatically different institutional designs Importance of leader preferences –Pecuniary/Non-pecuniary PBOC at political level –Importance of historical circumstance to leadership –Role of culture? But leader’s commitment to growth is not sufficient condition (contrast Shleifer et al (2004)) –Preferences of leaders are idiosyncratic; credible commitment is not Importance of business groups (contrast “law and finance” literature) –Reduces coordination, communication and enforcement costs –Creates bilateral monopoly between state and business (mutual benefits and legitimization through growth) –Scaling up trust model from family to market through privileged access to credit and inside information on economic policy

14. Institutions: Form v. Function High growth rulers have used both formal and informal mechanisms as commitment devices. It is not the character of the devices that is important; it is their function. World Bank and others made mistake of over- emphasizing need for formal institutions to support growth. Allen & Qian (2009) err in opposite direction by emphasizing informality as key to China’s growth. (And by overlooking role of government in making “informality” work.)

15. Institutional Substitutes Regional commercial court Government sponsored investor protection organizations (e.g. SFI in Taiwan; PSPD in Korea) Constitutional commitment to economic freedoms with high barriers to amendment

16. Economic Growth & Democratization Popular account (e.g. Zakaria (2003)): economic growth leads to political liberalization—key role of intermediate organizations in society –Chile and Korea often cited as examples, but… –Misreads Chile’s history; overlooks South Korea’s “chaebol problem” Different hypothesis: Growth and globalization increase power of business groups vis-à-vis state. May be anti- democratic even if rule of law/political process improves –Consistent with “trapped transition” (Pei 2006)

17. Wrap Up For democracies seeking growth, the choice of development strategy and the form of its institutions are far less important than the creation of devices to secure commitment to growth. Creativity in commitment devices may be richly rewarded (see China). Historical record does not clearly support link between economic growth and democratization. Business groups: engines of growth but brakes on democracy?