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The Incentive Compatibility of Dictatorship

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"The Incentive Compatibility of Dictatorship"

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Dani Rodrick has a widely praised piece about the superior economic performance of liberal democracies relative to authoritarian countries:

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.

Authoritarian regimes, by contrast, ultimately produce economies that are as fragile as their political systems. Their economic potency, when it exists, rests on the strength of individual leaders, or on favorable but temporary circumstances. They cannot aspire to continued economic innovation or to global economic leadership.

Rodrick observes that the apparent exception of China is really quite untested. China is much less poor than it was 15 years ago, but it’s still poorer than El Salvador so it’s not clear what kind of model this is.

Both the strength and the weakness of this argument, I think, is captured in the observation “[f]or every Lee Kuan Yew of Singapore, there are many like Mobutu Sese Seko of the Congo.” The strength—historically that’s been the case. The weakness is that if you’re a modern-day dictator, the lesson of history is clear that the less-corrupt, less-exploitive Singapore model was not only better for the Singaporeans it was better for the dictator. For all the same reasons that over the long term the revenue-maximizing tax rate equals the growth-maximizing tax rate, over the long-term dictatorship is more incentive-compatible than Mobutu seems to have realized.

Historically, few authoritarian regimes have seen that their own self-interest is best maximized via enlightened policies. But at least one interpretation of what’s happening in China is that the most important authoritarians around have figured this out (Abu Dhabi also seems to have) and this is driving major improvements in human well-being. It seems to me that the clearest thing you can say about growth and democracy is that when growing democracies hit economic downturns, what tends to happen is you vote the incumbents out of office. But when growing dictatorships hit economic downturns, what tends to happen is you throw the dictators out of office. I’m not sure whether China’s leaders can keep delivering growth, but if they can’t it’ll be hard for them to stay in charge.

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