Umair Haque / Bubblegeneration
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Wednesday, August 11, 2010

The Institutional Revolution

"Which is better for economic growth – a strong guiding hand that is free from the pressure of political competition, or a plurality of competing interests that fosters openness to new ideas and new political players?

East Asian examples (South Korea, Taiwan, China) seem to suggest the former. But how, then, can one explain the fact that almost all wealthy countries – except those that owe their riches to natural resources alone – are democratic? Should political openness precede, rather than follow, economic growth?

When we look at systematic historical evidence, instead of individual cases, we find that authoritarianism buys little in terms of economic growth. For every authoritarian country that has managed to grow rapidly, there are several that have floundered. For every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.

Democracies not only out-perform dictatorships when it comes to long-term economic growth, but also outdo them in several other important respects. They provide much greater economic stability, measured by the ups and downs of the business cycle. They are better at adjusting to external economic shocks (such as terms-of-trade declines or sudden stops in capital inflows). They generate more investment in human capital – health and education. And they produce more equitable societies."

From an incisive article by Dani Rodrik.

Of course, this bodes ill not for East Asia - which is marchings towards deeper democracy - but for America, which is floundering as an authentic democracy. Hence, the instabilities Rodrik cites sending tectonic shocks rippling across the economic landscape.

If one wanted to connect some dots, you might link this to Frank's recent post about spending is concentrated in a smaller and smaller number of ultra-rich hands, and how that creates vulnerability, disinvestment, and other assorted nasty effects.

It's not a recession, but an institutional decline; the real rot's in the fabric of our most basic political, social, and economic institutions, the bulk of which are as obsolete as the toxic junk lining the bleak exurban shelves.

-- umair // 12:09 AM // 0 comments


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