Authoritarian Capitalism

We in the West naturally link political and economic progress into our views of social development. It is entirely understandable for us to do such a thing; the evolution of advanced Western nations through the past three centuries has seen the simultaneous rise of both representative democracies and free market economies. We view this as an almost inevitable, albeit bumpy, progression as our society continued to progress to greater and greater heights of power, growth, and affluence. Indeed, some people like Francis Fukuyama have asserted that liberal democracy is the pinnacle of human institutional development. That is to say, the march of progress which began at tyrannical autarkism and passed through to monarchic mercantilism ended at our current state of affairs…we can go no further!

It is entirely true that a nation’s political and economic structure are endogenous to each other: each system has an effect on the other, meaning that they can not be studied and analyzed in isolation. An appreciation of this fact leads many to conclude that democracy and capitalism are inextricably linked like two peas in a pod. This is not to say that the way liberal democracy manifests itself in different nations is precisely the same: Europe has developed a large social welfare system complete with a myriad of governmental services supported by high tax rates while America has kept to a more laissez-faire existence with less government involvement in the economy, allowing a generally lesser burden of taxation on its populace.

But this is more a debate on the margins of a liberal democratic society (not to say that this isn’t an important debate). Both systems can agree on the fundamental tenets which underlie their organizations and institutions: representative government responsive to its citizenry, significant protections for private property and personal freedoms, and the rule of law subject to all citizens without exception. One can argue all day as to whether American or European society does a better job in implementing these values and goals, but the essential point here is that both societies do value and practice them to a great extent.

Meanwhile, the last remaining bulwarks against the advance of liberal democracy seemed to be falling by the wayside. China had been opening up its economic system since the 1970s thanks to the reforms of Deng Xiaoping and subsequent leaders. With its rapid economic growth through the last two decades of the twentieth century, it was widely assumed that it was only a matter of time before the increasingly wealthy Chinese demanded greater political freedom to complement their newfound prosperity. And with the collapse of the Soviet Union, it seemed as if the battle of ideas had finally ended with the achievements of democratic capitalism delivering a crippling blow to all its competitors.

However, it is beginning to appear as if the game was called a bit too prematurely. Russia sank into despair as the hope of a new era failed to deliver the promised results. Russian capitalism devolved into cronyism with government assets being essentially given away to the well-connected while the vast majority of the populace saw no improvement in their living standards. Disenchanted with the mediocre results produced by democratic capitalism in their society, they turned to Vladimir Putin to bring back the pride and honor of the once great Soviet empire. They had essentially agreed to grant autocratic control of the county to Putin and the United Russia party, hoping that his leadership could counter the downward economic spiral their country was experiencing.

Meanwhile in China, the supposed democratic revolution never came into fruition. The Tiananmen Massacre failed to incite the democratic reforms many had hoped for, demonstrating that the Chinese Communist Party was still firmly in control of the country with no intention of giving up any significant power. Indeed, the communists seems as entrenched in power as ever, recognizing the fact that their power is relatively secure as long as they can continue to reproduce the impressive economic results which have occurred over the past 30 years.

What is most interesting about both of these examples is the degree of success that both of these countries have had in adopting free-market economic reforms while simultaneously eschewing corresponding democratic reforms. Among other things, Putin pushed through significant fiscal reforms such as a flat tax on income, the cause célèbre of many economic conservatives in America. China opened up its country to foreign investment and began to actively engage the international trading system. And these reforms have occurred all the while United Russia has essentially become, and the CCP has steadfastly remained, a one-party state in their respective societies.

The results of these developments have been, on the whole, quite impressive as well. Russia, buoyed by rising gas and oil prices, has been able to reassert itself as a regional power through its control of energy supplies. Economic growth in China has been nothing less than spectacular as decades of continued growth, thanks to its booming export sectors, have driven China to become one of the largest economies in the world today.

The recent success of Russia and China would certainly warrant greater scrutiny with respect to the relationship between democracy and capitalism as a necessary precursor to sustained economic progress. Indeed, the rise of authoritarian capitalism in these states have come to be seen as the answer to democratic capitalism as an alternative form of institutional development. Azar Gat, in the most recent edition of Foreign Affairs magazine, describes authoritarian capitalism as possibly the most significant threat to liberal democratic societies, greater than even the rise of Islamic fundamentalism in the Middle East. The growth of non-democratic capitalist nations could halt further progress in political liberalization throughout the world, progress which the West would value regardless of its effects on economic progress, and more generally shift the balance of power away from the liberal democratic West and the fundamental values they hold dear.

But before anyone can proclaim authoritarian capitalism as a true alternative to societal wealth and prosperity, a few caveats are certainly in order. The most significant of these is the obvious fact that, despite the considerable progress made by Russia and especially China, these countries are still very poor relative to the developed countries in the West. GDP per capita in approximately $7,600 and $12,100 in China and Russia respectively, figures which pale in comparison to the $28,000 average for the European Union (a figure which itself is weighed down by its central and eastern European members) and $43,000 for the United States. China will require decades of continued, fast-paced growth in order to catch up to the West in terms of living standards, something which is not guaranteed by any means. The fact that China has become the third largest economy in the world is due to its sheer size, not the affluence of its citizens.

Furthermore, we can question the very premise as to whether Russia and China can indeed be considered capitalist economies. The debate between capitalism and communism is not a dichotomy between two polar opposites which a country must take as a whole; instead, there is a continuum of choices which a country can make which allows them to balance these two competing world views. Indeed, China has come a long way in the past 30 years from its heyday as a staunchly communist state under Mao Zedong. And yet, there still remains many aspects of the Chinese economy which keep it at a far distance from a pure free market. Their financial and banking systems, for instance, are still heavily regulated by the federal government. Banks, especially in the past, were often under political pressure to provide loans to state enterprises in order to keep the afloat. This has led to a mountain of underperforming loans which these banks have failed to account for. As for Russia, many of their most important industries, such as the energy sector, is still run by state-owned enterprises such as Gazprom which have been operated as much by political considerations (notice Russia’s recent dealings with eastern European counties such as the Ukraine and Belarus) as by economic ones.

Of course, the same type of concerns can be expressed with respect to many liberal democratic nations, particularly those nations in western Europe such as France and Italy. But there is still an important fundamental distinction in my mind about how the economy operates within these two divergent spheres. At its essence, western Europe can be seen to be operating under socialist-style capitalism while Russia and China operate under capitalist-style socialism. And though this may sound like a mere issue of semantics, there is indeed an important difference between the two.

But despite these above concerns, there does seem to have been a tendency in recent history for non-democratic, autocratic nations to adopt capitalist reforms while stringently maintaining political power. The question becomes whether such a social system has some inherent advantages over a capitalist economic system within a democratic nation.

We can certainly think of some theoretical considerations which would lend credence to such advantages. For one, autocratic regimes will be better able to implement reforms which are unpopular with the population as a whole, even if such reforms may be to the greater benefit of the country in aggregate. Thomas Friedman, in his book “The World is Flat,” mentions such an example when he quotes an interviewee who stated that China would never have entered the World Trade Organization if it had been put up to a democratic vote. The Chinese government, however, realized the benefits that would accrue to the country by greatly expanding it trade throughout the world. Indeed, the convergence of international trading standards and the improved terms of trade aided in China’s rise as a significant factor in export markets and to its growing economy more generally.

Alternatively, democratic societies are more vulnerable to cyclical changes in policy as majority governments come and go due to the desires of the polity. Governments are more responsive to the concerns of its constituents, a characteristic which could lead to negative consequences if their desires are fundamentally opposed to sound economic or political principles (whatever that may be!). Bryan Caplan, an economics professor at George Mason University, has recently done considerable research and wrote a book about the irrationality of voters beliefs, providng some plausibility to the claim that authoritarian regimes are better able to ignore short-term political pressures and implement sound long-term policies.

In a similar vein, authoritarian regimes may be better able to ensure stability within the society that they govern. Democratic governments are characterized by, among other things, constant change through the transitions of power which take place at election time. This change can often be destabilizing to societal order; indeed, the peaceful transitions of power which are a crucial element to modern democratic states are a rarity by historical standards. The election of 1800 has often been held up as a monumental point in the evolution of American democracy precisely since it was one of the first times that political power was peacefully transferred between two people of differing political parties (those people being, of course, John Adams of the Federalist party and Thomas Jefferson of the Democratic party).

Authoritarian regimes simply avoid this problem to a great extent by simply keeping power into the hands of a single party. Of course, even non-democratic governments are not entirely immune to the pressures of political opinion. Any government which is fundamentally at odds with the values of the governed risk rebellion or a coup d’état. However, they do have more leeway to pursue policies which are unpopular with the populace, though the degree to which they can do this is a rather delicate balancing act. But if a government is responsive “enough” to the population as a whole, those citizens will no longer turn to politics to pursue change and will instead view government policy as largely exogenous. For a country which is already pursuing free-market economic reforms, an institution notorious for constant change and “creative destruction,” political freedom may be perceived to be much too destabilizing to develop simultaneously.

China may very well be a perfect example of the above ideas in action. The Chinese Communist Party has been preoccupied with stability, almost to the point of obsession, ever since the large scale demonstrations that took place in Tiananmen Square in 1989. Even today, tens of thousands of political demonstration take place every year in China, mainly in rural areas where people have been essentially untouched by the economic growth that has taken place it its cities. Meanwhile, wealthy city dwellers have been anxious to obtain greater political freedoms to complement their growing economic prosperity. Given the rapid changes that China’s economic growth have precipitated, the government has little desire to introduce any further areas of potential instability into its social system, instability which could threaten their very existence as the country’s governing power.

But despite these possible advantages with authoritarian governments, we do not tend to see such results pan out empirically. As mentioned earlier, peaceful transitions of power within democratic societies has become institutionalized. Western societies have become rather adept at coping with change effectively in order to maintain a stable social order. And though authoritarian regimes may be better able to implement unpopular market-based economic policies, western democracies are far more advanced to the degree in which their market economies have grown and developed. That is to say, democratic governments have not seen any significant regression in the implementation of capitalist economic policies, even if some of these policies are unpopular with the population as a whole. For instance, there has been a lot of consternation recently with free trade agreements and its effects on labor market mobility, yet there hasn’t been any serious threats as of yet to the continued existence to any major free trade deals such as NAFTA.

In the end, there seems to be nothing to fear in the rise of authoritarian capitalist regimes as an alternative to their democratic counterparts. Indeed, we should be welcoming China’s slow transition in their economic system. Despite their lack of political progress, they are still moving closer towards, not further away from, the social systems that characterize western countries. Russia has been a bit more schizophrenic in its social development. Russia eliminated their formerly dictatorial, communist regime at the end of the Cold War but have recently been transitioning back into their old ways, at least in the political realm. Regardless of any counties’ political order, however, the widespread adoption of capitalism throughout the globe will make the world increasingly interconnected as institutions and organizations become more standardized. In the future, our prosperity will depend greatly on the prosperity of our neighbors, making the likelihood for conflict less likely.

But it is hard to imagine whether these countries can continue to grow in the future without any political reform. Every developed economy in the world today has a representative political system as well, though the academic literature concerning the relationship between democracy and economic growth has generally been inconclusive. But as the citizens of these nations become more prosperous, the demands for greater political freedom, including the desires to elect their own representatives, will become more vociferous. It is quite possible that capitalism may be the opening salvo in the eventual adoption of democratic freedoms in the rest of the world.