Friday, September 15, 2006

Economics and Democracy

Democracy (in the European sense of the word at least) is good for an economy, because:

1) It's fucking hard to run a country. Autocracies can do very well in the short and maybe medium term, but they all become unstuck sooner or later. (Even if they are benevolent dictators, they can pursue wrongminded policies). Democracies do better over the longer term, because more people can input and debate problems.

2) People can't revolt against themselves. Zero chance of coup d'etats, coloured revolutions etc. - helps when you're running a business.

3) Politicians are accountable. Press can root about and uncover wrongdoings, which help ensure good governance and less corruption.

However autocracies (genuinely) aren't unpopular in many countries, as long as:

1) Enough people feel wealthy. I.e. the middle classes are too ensconced in the next holiday they're booking, or toyota model they are going to buy, to worry about a discontented minority (who they are not completely ignorant of... but that package holiday to Phuket looks so dreamy!).

But economics is fickle, because:

1) it's /the/ hard science (forget physics etc.) meaning that even the best macroeconomists don't really have much of a clue about what's going to happen next, let alone how best to guide an economy.

When autocracies come up against bear markets, they find it hard to survive - because:

1) There isn't enough money for package holidays (not to mention decent food) and therefore a majority becomes discontented, and blame their leader's mismanagement.


I don't think China is all that far away from doing an Indonesia in the coming decade if it continues its strong growth. There won't be a monetary crisis, but so much capital investment means that a large amount should have been misallocated (either due to shear over-exuberance, diseconomies of scale, or corruption/fraud).

Many of these misallocations will have been dutifully covered up, but they will eventually tell sooner or later, as happened with Indonesia. And when they do, there will be a huge fallout. The standard of living will stay relatively high historically because it's hard to physically destroy capital (human or otherwise). Nevertheless, there will be increased political pressure for reform in China and economic instability.

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