(This essay was published in Hong Kong Economic Journal on 13 May 2015.)

 

My article last week set off a raw nerve among some readers. Radio Hong Kong found it sufficiently controversial to warrant a panel discussion on the topic two days later. I had presented empirical evidence (reproduced as Figure 1) by Harvard economist Robert Barro that showed political freedom and economic growth were positively correlated among countries with low levels of democracy, but negatively correlated for those with high levels of democracy.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The negative reaction to the finding of an inverted U-shaped pattern, when the economic growth rate is plotted against the amount of political freedoms (as a proxy indicator for democracy), was not surprising. This usually happens when one first encounters evidence that contradicts one’s elementary beliefs. Such beliefs are mostly derived from what we have personally learned and experienced in the past.

 

Barro discovered the inverted U-shaped relationship between economic growth and democracy beginning in the late 1990s. His 2003 study included data from 113 countries covering the period 1965-1990. The non-linearity of the relationship did not accord with the elementary beliefs of many individuals. Some naturally regarded the evidence as controversial, but it shouldn’t be simply dismissed or denounced.

 

After the Radio 3 program, I remembered that I had met Barro in Prague in 2012, when he told me he had updated his study. I then looked for it on his website and found a 2014 article, which was a revised version of a presentation at the Nobel Symposium on Growth and Development in Stockholm 2012. The revised study covered the period 1960-2010. He worked on two samples of data, one containing 89 countries and the other 151 countries. Both had the same inverted U-shaped pattern.

 

Barro’s plot in fact correlates economic growth and democracy after holding constant a number of other factors known to be correlated with growth. So the inverted U-shaped pattern is a partial correlation. These other factors include initial GDP per capita, life expectancy, fertility, rule of law, share of investment and government consumption in the economy, education of men and women, openness of the economy, and some others.

 

It is easy to misunderstand Barro’s chart. It does not show authoritarian governments are good or better for economic growth. It merely suggests that democratization can both benefit and harm economic growth depending on how far democracy has matured in a society. The evidence of non-linearity in the relationship implies this.

 

There is considerable evidence to suggest that authoritarian governments can achieve very high growth rates for a period of time. South Korea, Taiwan, Singapore, and China all achieved some of the most spectacular growth rates under authoritarian rule. But the empirical evidence also shows that growth is very low and sometimes even negative in most authoritarian countries. The variation in economic growth rates among authoritarian countries is far greater compared to democratic ones. This accords with common sense.

 

One can be lucky and blessed with a benevolent dictator, a philosopher king, who practices sound policies and promotes economic growth. But far more often one ends up with horror stories. It is this uncertainty of power succession among authoritarian governments that makes democracy defensible as a preferred political arrangement, other than on the pure moral ground of equality and liberty for all.

 

The problem with equal liberty as a moral imperative, an idea that became acceptable two centuries ago, is that individuals are not equal in talent, temperament, or both. Real individuals have never hesitated to lobby governments, whether authoritarian or democratic, for privilege and protection. Democracy has not stopped interest groups lobbying for privilege and protection. Lobbying activities in fact thrive under stable democracies.

 

Frédéric Bastiat mocked the lobbyists of his day by publishing an open letter in 1845 addressed to members of the French Parliament on behalf of candlestick makers to petition for a law that mandated closing all windows so as to end the unfair competition they were getting from the sun.

 

Many democracies over time have developed a preponderance of bad rules and structures that foster a particular kind of political divisiveness, which works against promoting economic progress but defends vested interests, monopolies, and so on, granting privilege and protection to business groups, organized labor, professional bodies, vocal organized advocates, and the like.

 

In the early struggle against authoritarian rule that started in agrarian times, the appearance of democracy served to get rid of bad rules that protected the entrenched interests of the noblesse and latifundia. Good rules promoting free economic markets were created, but over time these became ossified and corrupted, and hindered economic progress. The government succumbed to new emerging vested interests that successfully lobbied for privilege and protection.

 

Democracy proved to be ineffective in preventing or stopping this unending lobbying process, even though in principle it promised equal political influence to every voter.

 

The role of lobbyists featured in two seminal studies published in 1965 and 1982 by economist Mancur Olson, who was also influential in the study of the relationship between political democracy and economic growth.

 

Olson first focused attention on how interest groups became successful in the political game of competitive lobbying. He then showed how the proliferation of organized narrow vested interests would lead over time to social rigidities, economic stagnation, and the decline of nations.

 

A corollary of Olson’s thesis is that the destruction of vested interests led to the rise of nations, as the noblesse and latifundia were driven from power when capitalism and democracy first appeared.

 

Olson’s thesis argues that interest groups can only become successful and win at the lobbying game if they overcome the free rider problem. This happens when groups succeed in providing benefits only to active participants to the exclusion of others. Successfully organized interest groups therefore tend to be those that serve narrow interests because it is less costly to organize a smaller group and overcome free rider problems.

 

Olson next draws numerous historical examples to demonstrate why the accumulation of organized narrow interest groups harms economic growth. He shows that younger states in the US grew faster than older states; after the American civil war the defeated southern states grew faster than the victorious northern ones; Japan and Germany grew faster than the allies after World War II; for two centuries, France grew as fast as Britain even though the latter was more stable politically; and so on.

 

Olson’s thesis provides an explanation for an entire host of phenomena. It explains why for more than two hundred years after the publication of Adam Smith’s magnum opus setting forth the case for free markets, trade everywhere remains fettered. Why rich industrialized countries protect agriculture when farmers are a small fraction of the population, but poor agricultural countries adopt policies to tax and harm agricultural interests when their numbers are enormous. These are all the result of large interest groups failing to become organized politically.

 

So vested interests are more likely to become politically influential when their numbers are small. Organized political success belongs to small minorities with narrow interests. Lenin’s conception of the Bolshevik party in revolution was similar.

 

Olson’s idea on the political effectiveness of small organized groups was actually anticipated by economist Vilfredo Pareto observing contemporary Italian election politics and writing in the late 19th century.

 

The non-linearity or inverted U-shaped in the Barro diagram suggests that mature democracies may experience something akin to diminishing returns. Olson’s thesis provides a mechanism for interpreting why this might happen – the accumulation of narrow special interest groups.

 

Hong Kong’s political system is suffering from a combination of forces that gives inordinate political power to narrow vested interest groups. Some of these forces were inherited from the British colonial days and have been institutionalized in functional constituencies. These include not only business and indigenous inhabitants from the New Territories, but numerous professional and organized labor interests. Some are identified with the establishment and others with the pan-democrats; such labels are merely an insurance cover for entrenched interests to whom they owe their primary loyalty.

 

Our election rules in the geographical constituencies based on proportional representation fosters fragmentation, as commonly found in continental Europe. Hong Kong’s pan-democrat parties have fallen victim to these divisive forces and are drifting towards radical opportunism and political posturing without leadership. The Chief Executive is a lone force, short on legitimacy, and caught in a hopeless trap of divided loyalty between Beijing and the people of Hong Kong.

 

In little over a month, Hong Kong’s legislature will most likely make a choice to continue the status quo for another seven years. The Chief Executive will most likely simply wait to turn off the lights. Although escaping the tyranny of the status quo is in the interest of the vast majority of the people of Hong Kong, it is unfortunately not in the interest of the many narrow organized interests in Hong Kong. I fear if this were to pass, it would be delusional to believe that it is a step towards some better democracy. Economically it is a step towards decline. Politically it is an invitation to tyranny. Is this what Beijing truly wishes to see happen in Hong Kong? I find it difficult to believe that this is what the people of Hong Kong want.

 

References

 

Robert J. Barro and Xavier Sala-i-Martin, Economic Growth, 2nd edition, MIT Press, 2004

 

Robert J. Barro, “Convergence and Modernization,” Manuscript, August 2014

 

Mancur Olson, The Logic of Collective Action, Harvard University Press, 1965

 

Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, Yale University Press, 1982

 

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