It is safe to argue that much of the incremental economic growth over the next decade will come from societies that can be characterised as quasi-market economies. A peculiar cocktail of market economics and state capitalism is practised by these nations, which will produce the bulk of economic growth in the first half of the 21st century. These nations also have political systems that are either managed democracies or semi-authoritarian in character. Whether you look at China, Russia, South Korea and Indonesia or some of the managed democracies of Latin America and Africa, it is clear that global growth of the future will be powered by hybrid political and economic systems that do not fall into neat categories of pure democracies and market economies as defined by western discourse.
The West had traditionally been a bit puritanical in the way it viewed economic and political institutions; there was a wide consensus among scholars in the US and Europe that capitalism could only thrive under strict conditions characterised by democracy and the existence of healthy market institutions. However, the experience of the past decade, which coincides with the relative decline of the western economies, has caused many scholars and business practitioners to review their position on whether a democratic system with robust market institutions provides sufficient conditions to drive economic growth and productivity.
In this context, a very interesting study has been done by Ruchir Sharma, head of Emerging Market Funds at Morgan Stanley Investment Management. The study is contained in a just-released book titled, Breakout Nations?In Pursuit of the Next Economic Miracles.
Ruchir argues, ?The success of the command and control capitalism in China has set off a vigorous debate over which political system is most likely to produce growth. But it is not the type of system that matters, it is the stability of the system, and even more important, whether the leaders running it understand the basics of economic reforms? in a rapidly globalising world economy. Through a pure statistical analysis of economies with varying political and market systems, Ruchir concludes that ?the chance that any particular system?democratic, authoritarian or any other?will have a positive impact on a country?s breakout potential is about 50/50?. For instance, in the decade of 1980s, 32 nations were growing at a rate faster than 5%, and 59% of them were democracies. This changed in the first decade of the 21st century, when only 43% of the high-growth economies were democracies. This period was also characterised by a relative decline of the western economies and a general shift in the axis of economic power to the developing world not very familiar with western-style democracy.
However, it is also true that at least some 15 new, managed democracies have emerged in Africa over the past decade of high economic growth in that continent.
The imperatives of globalisation and the rising prosperity and awareness of the middle classes are making some autocracies in Asia and the Middle East shift towards a more democratic alternative. For instance, Myanmar, an autocracy that also experienced high economic growth over the past decade, held elections recently and the military regime there has possibly read the writing on the wall. Similarly Russia, another high-growth, resource-based economy, runs a managed democracy that is undergoing some churn too. The recent Russian elections were a sort of warning to Putin that the component of autocracy needed to be reduced in Russia?s managed democracy.
So it comes back to the larger question of how the leadership, whether of an autocracy or of a partial democracy, responds to the imperatives of globalisation, which is having a profound impact on the lives of the people. For instance, China brilliantly used its entry into the WTO some 13 years ago to implement economic reforms and open up its trade with the rest of the world. This was the leadership?s response to a rapidly globalising world economy. China has not looked back since.
In this context, India?s leadership is currently suffering from a syndrome that can be best described as democratic anarchism, in which coalition partners of the ruling formation have de facto joined hands with the opposition to stall all reforms needed to enhance the supply of key resources such as land, minerals and skilled human resources to drive the next phase of growth in the economy.
Between 2003 and 2008 India produced a miraculous rate of growth (average close to 9%) and surprised the world, which had assumed that a chaotic democracy like India could not go beyond a GDP growth of about 7.5%. The discourse prior to 2003 was that India could never reach 9%-plus GDP growth like China because of its disruptive democracy. However, India produced a contrarian outcome that surprised the world. The Chinese particularly began to respect India a little more after that.
Now, our fractious polity seems to be vindicating the original (pre-2003) perception that the world had about us, i.e. there are limits to growth in a disruptive democracy. But then it?s the same multi-party coalition that produced growth earlier. Therein lies the conundrum. So is a leadership change the answer then? Maybe there is some truth to what Chief Economic Advisor Kaushik Basu inadvertently said in Washington: That India?s chaotic coalition will start producing reforms and growth after the 2014 general elections!
mk.venu@expressindia.com