Yasheng Huang: Gross Democratic Product

Yasheng Huang is the professor of political economy and international management and holds the international program professorship in Chinese economy and business at Sloan School of Management, Massachusetts Institute of Technology (MIT). Professor Huang has authored several books on the role played by FDI, investment controls and financial reforms in the Chinese economy. At MIT Sloan School, Professor Huang founded and runs China Lab and India Lab, which aim to help entrepreneurs in China and India improve their management.

China and India are unambiguous success stories of economic reforms and globalisation. This much we know and agree upon. Although scholars debate about the relative importance of different economic policies, to the extent there is any consensus, most would agree that the cumulative effects of the policy package adopted in the two countries have worked in delivering growth.

The discussion that still animates passionate disagreements is about the politics of economic growth in China and in India. The debate boils down to a simple — and simplistic — question, “Did democracy hinder or promote economic growth?” It is easy to see why people still disagree. Sceptics of democracy will cite the past economic failures of India and its current slower pace of growth to make the case that democracy is an economic liability. Proponents of democracy, while conceding the point that China has grown faster, will argue that Chinese growth is substantially more volatile than that of India. After all, China is a country that has produced both the large-scale famine during the Great Leap Forward of the late 1950s as well as accumulated more than $2 trillion worth of foreign exchange reserve today.

Democracy is worth the price of avoiding catastrophes even if giving up some of the upside of growth.
This debate about the economic pros and cons of democracy has many prominent participants of Indian origin. Lord Meghnad Desai is more sympathetic to the Chinese approach; Amartya Sen, even though quite critical of many Indian practices, still sees substantial strength in the Indian system. But the question has more practical significance for China than for India. No matter how many sceptics of democracy there are in India (and there are many), the probability of India reverting to an authoritarian system is precisely zero. Indira Gandhi tried in 1975 and she failed completely. China at least has the theoretical option of becoming a democracy, if not in the next five years but at least in the next 50. Thus, it is more important to have this debate for the Chinese than for the Indians. But here is a catch (and Catch-22): You need to have a democracy to have this debate, but once you can have this debate the policy question would become somewhat moot.

In lieu of a full-blown debate on this issue in China, let me provide some perspectives here. The view that authoritarianism is good for growth predates the rise of China and it is rooted in the “East Asian miracle” of South Korea, Taiwan, Singapore and Hong Kong (the so-called “four little dragons”). The recent Chinese economic performance merely compounds the existing truism rather than creating it anew. The East Asian record is often cited by the sceptics of democracy as evidence of the price India pays for being a democracy.

Suppose I tell you that the odds of winning a multi-million dollar lottery are 100 percent. You may find the statement incredulous. Suppose then I tell you that I reached the above conclusion because I polled everyone who came to claim their lottery prizes. You will probably think I am a lunatic.
Yet the proponents of the “East Asian miracle” view have committed this act of lunacy all the time. They only selected the successful East Asian countries in their formulation of the idea of the East Asian miracle while ignoring the failed East Asian economies.

The reality is that for each East Asian authoritarian success story, there is an East Asian authoritarian failure. Taiwan grew rich but authoritarian Burma did not. South Korea developed rapidly, but North Korea stagnated. Strong one-man rule in Singapore succeeded, but so did laissez-faire Hong Kong. There is no systematic support for the view that authoritarianism was behind the East Asian miracle.

Similarly, the view that India has failed economically because it is a democracy is at best incomplete and at worst misleading. Before the 1990s, India grew at what is known as “Hindu rate of growth” — a per capita GDP growth in the range of 1 to 2 percent a year. This poor performance is often blamed on Indian democracy.

This is unfair, to democracy, that is. Yes, India did have democracy but the democracy it had at best qualified for what Fareed Zakaria terms as “illiberal democracy”. Many people forget but India of the 1970s curtailed media tightly. Indira Gandhi constantly tried to break free of normal constraints imposed by democracy. She cancelled many Congress Party elections, and then she cancelled the national election in 1975. She made frequent attempts to nullify the autonomy of local governments. As Amal Ray and John Kincaid showed in their study, between 1966 and 1976 the Gandhi government invoked Article 356 of the constitution — which empowers the federal government to take over the functions of state governments in emergency situations — 36 times and then another 13 times between 1980 and 1984.

I often marvel at the fact that even Indian scholars failed to notice the congruence of these two developments: At a time when India grew at Hindu rate of growth, its democracy was deeply dysfunctional. There is something else they ignore — during the high-growth era since 1991, Indian democracy has become more transparent and more accountable. Today, media — the fourth pillar of democracy — is far freer. TV stations were privatised. The RTI, passed by the Indian legislature in 2005, followed similar acts passed in various states in the 1990s and the early 2000s. One of the biggest problems in the Indian political system is the capture of the decision making by a few urban elites. In the 1990s, India introduced more grass-roots democracy in rural area by amending its Constitution in 1992 and by introducing village self-government. This is known as the Panchayati Raj movement and in due time this political reform will significantly improve the quality of political governance in India.

Much of the debate on democracy and economic growth takes place at 50,000 feet from the ground. Once you look closely, the more common pattern is that democracy is entirely compatible with economic growth. It does not guarantee growth, for sure, but nor does authoritarianism as I pointed out before. In fact one of the biggest misunderstandings of China — by Westerners, Indians and as well as many Chinese — is that the country only reformed its economy but not its politics. There is far more freedom of press and speech today in China than 30 years ago. There are more limits placed on the power of the government than there were under Mao Zedong. China is not a democracy, by any criteria, but it is more democratic than it was when its economy was struggling in the 1960s and 1970s. Even in China economic growth goes together with political reforms.

Until now, an economic argument for democracy often reads like an apology. Many Indian intellectuals defend democracy on the ground that not everything is about economics. Well, if you live under 1 dollar a day, pretty much everything is about economics. I believe that both statistical and narrative evidence is far stronger than has been assumed for the economic benefits of more democracy. Nothing in this line of reasoning suggests that China should achieve the same level of democracy as India but it should move in that direction through gradual, incremental reforms. That democracy can be made compatible with economic growth is not a new idea, but we need a more rigorous version of that idea to guide Chinese and many others forward in the next 50 years.