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Political Regimes and Economic Development

 

Header part V

I. Political Regimes and Economic Development

At a time when Argentina, whose most recent default on its debt was in 2001, is about to issue a 100-year bond, China’s economic rise continue to defy the leadership position of the United States and the oil-exporters Gulf states continue to be among the richest countries in the world, the question of how political regime fosters economic development remains key for emerging market investors. How does political regime relate to economic growth? Can we expect some impact from regime change? Are there some indicators that investors shall focus onto? We try to address these questions below.

1. Typology of Political regimes

Here are the main political regimes and their key features.

Part V- Graphe 1

As for the classification of countries, we use the polity IV dataset which covers a majority of states in the world over the period 1800-2015.  The polity scores are based on the ability of political regimes to govern institutions. Measures include quality of institutions, quality of executives recruitment, constraints on executive authority and political competition.

How political regime can affect economic growth?

There are no statistical evidence that either democracies or autocracies are somewhat more favourable for economic growth. It is generally accepted that economic growth rests on the upholding of property rights. Yet, there is no consensus as to which regime democracy or autocracy can best guarantee these rights.

 

Part V - Graphe 2

Autocracies may show an ability to focus on infrastructure  and economic development that may foster growth rates especially when the country is still relatively poor.

The main argument against autocracies rests in that the person governing the country has often no interest to maximize the total output unless he has a long time-horizon, operates for the society as a whole, and there is credibility for the regime to last.

This relates to the concept of benevolent dictators, such as Lee Kuan Yew in Singapore.

 

Democracies ability to foster economic growth relies notably on a succession in government, wealth redistribution to the citizens, and freedom not being questioned. The main critic of democracy is that its governments tend to favour immediate consumption, which reduce investment, hindering economic growth as a result (Galeson, 1959). Another argument against democracy is that an authoritarian regime insulates the state from pressure coming from the large firms or unions. This has been pointed out as a key difference in explaining the solid economic performance of the Asian countries vs Latin America or Eastern Europe countries under authoritarian regimes until the 1980s. This view implies an autonomous state, fully focused on running and developing the economy, and a resistance to external private pressures for redistribution, two features possible only under authoritarianism (Becker, 1983).

Which countries to look at for change? Anocracies are unstable and deserve close monitoring

All states generally start as an autocracy. As argued by Francis Fukuyama from 1989, as countries get richer, they will tend to evolve into democracies although the road is often not a straight one. The exceptions among the rich countries are the large oil-exporters and Singapore. History has shown that democracies only rarely leave that regime afterward. The only countries to lose a democratic regime above GDP per capita $8,000 were Greece in 1967, Thailand in 2006 and again in 2014, Iran in 2004 and Venezuela in 2009. Meanwhile, anocracies are inherently more unstable than both other regimes hence their economic trajectory can be volatile. Anocracies tend to evolve as income level rise and eventually become a democracy or fail to grow. A large fall in oil price can also be a trigger for regime change (democratization or not) in oil-exporting countries as lower fiscal revenues and potentially higher taxes could lead the citizens to ask for more political rights.

2. Beyond political regime, which indicators do investors need to focus on?

As we have seen, the nature of the political regime does not tell the whole story and one needs to analyse beyond this regime divide. What are then the indicators that could help investors in emerging markets? Overall, investors tend to prefer a reasonable legal system, less corruption and business-friendly environment, all of which happen to be found in both democracies or autocracies. The hybrid regime of anocracy tends to be the one where these indicators do not score well probably because the uncertainty is relatively higher. This warrants close monitoring, from a risk control perspective, of the countries under such political regime.

 

 

High scores of ease of doing business are found in both autocracies and democracies

 

Part V -  Graphe 3
Investment as %GDP and ease of doing business

 

Part V - Graphe 4

 

 

 

 

 

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GIELEN Pierre , Investment Specialist
PHILLIPS Valérie , Investment Specialist
ROUX Barthelemy , Investment Specialist
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Political Regimes and Economic Development
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