The “Lee thesis,” named after Singapore’s Lee Kuan Yew, is a school of thought that democracy is not conducive to growth. According to its proponents, in the Third World, political systems that suppress democracy and civil liberties are likely to grow faster. Democracy and political rights, according to the Lee thesis, are luxuries that must await affluence. Superficially, the performance of South Korea, Taiwan and Singapore would seem to suggest that this is true.
Over 1965-93, the high performing countries of East Asia – Hong Kong, Singapore; Taiwan and South Korea – experienced phenomenal growth. These nations used a range of policies, from hands-off to highly interventionist, so no single “East Asian model” exists, but the common factors included economic openness, macroeconomic stability and flexible labour markets.
Openness to trade was necessary. Exports helped them escape the size limitations of domestic markets and provided more extensive economic opportunities to exploit in international markets. Imports created competitive pressures for the domestic economy, keeping local firms efficient. FDI allowed access to new technology through imports of new machinery and equipment.
Sound macroeconomic conditions – stable interest, inflation and exchange rates – lay the foundation for investment. In East Asia, this was unusually good. Fiscal prudence is the key to this. Balanced budgets lead to low inflation and low-interest rates, and in turn, stable exchange rates. Some countries did run small deficits; between 1961-96, South Korean deficits averaged 0.86% of GDP, Thailand 0.79%, Indonesia 1.09% and Malaysia 4.04%. In contrast, Sri Lanka’s deficits during the same period averaged 8.2%.
Countries that did run budget deficits financed them prudently, avoiding money printing. Sri Lanka, on the other hand, regularly prints money to cover large fiscal deficits, causing currency crises and necessitating frequent IMF bailouts.
The alternative to money printing is taxation – it is painful but does not cause economic destabilisation. Debt is not a solution to deficits – it is essentially taxation postponed, so it must be managed carefully. Hong Kong, Singapore and Taiwan avoided foreign debt, although both Korea and Indonesia relied on substantial external borrowings during the 1980s and 1990s. Therefore, it was the right policies that set the framework for growth. Many of these countries did have authoritarian regimes, but is the dictator strictly necessary? In other words, can the right policies be fostered better by dictators?
[pullquote]It may be argued that political contestation creates social instability or political gridlock[/pullquote]
It may be argued that political contestation creates social instability or political gridlock. Therefore, democratic governments will find it harder to implement reforms and conduct effective policy.
A paper by Knutsen (2017) examined data from 21 Asian countries to see if dictatorship resulted in better policy. The study focused on Asia because dictatorship seemed to perform better here. Globally, dictatorship is associated with lower growth. The countries modelled were Afghanistan, Bangladesh, Burma/Myanmar, Cambodia, China, India, Indonesia, Japan, Laos, Malaysia, Mongolia, Nepal, North Korea, Pakistan, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. The study found no significant effect from dictatorship on economic growth, independent of the time investigated.
People may be sceptical seeing the countries studied; certainly, South Korea, Taiwan, Singapore and the more recent experience of Vietnam and China seem to provide convincing anecdotal evidence of the Lee thesis. However, as the paper points out, in order “to assess the impacts of political regimes, we must examine their full record, not just the best performers”.
Good policy, however, is clearly associated with growth, regardless of the type of regime.
Democratic Japan experienced astonishing economic development after WWII. In more recent years, India experienced high growth post-liberalisation. South Korea and Taiwan continued to grow relatively fast also after they became democracies.
Therefore, if we are to get a dictator, then we must get the “right” type of dictator, an “enlightened ruler” supported by a well-educated and impartial technocratic-bureaucratic elite, who can better understand the policies needed.
What is the nature of economic growth and what policies do we need?
Growth is simply an increase in economic production or output. An increase of the economic output arises from either an increase in productive inputs, physical capital, human capital and labour hours or through increased efficiency. An increase in productivity means that an economy produces more output for a given amount of productive inputs. Increased efficiency results from, for example, increased division of labour, efficient markets and other allocation mechanisms, as well as technological change.
Sri Lanka is now reaching the limits of growth through increases in inputs. Not much labour is available. Land in private hands is limited (80% of the land is state-owned), so unless more becomes available for productive use, this resource is limited. The existing economic incentives are skewed to the domestic market, not exports. Local investors are only too happy to concentrate on a captive domestic market rather than exports. Th ere is much talk, but little real interest in attracting FDI. The public sector employs 1.3 million people, and the deficits and debt keep growing. Politicians need to give jobs to be popular, who is willing to stop this? Trade reform involves hard decisions, the relative trade-off s need to be weighed and balanced, but it is crucial if the efficiency of the economy is to be improved.
Free market reform is difficult and almost always leads to an economic dip before improved performance sets in as the government reduces itself and old activities fade well before new business can take up the slack. Th is is the path prosperous post-communist nations followed, a downturn that may last years before the upturn. Sri Lanka is in a similar quagmire, a remittance-dependent, debt-financed economy approaching a middle-income trap. Getting out of it is not easy and involves a lot of painful reforms.
Politicians are always driven by personal motives, and are subject to the influence of lobbyists and interest groups. Sri Lankan politics is a web of vested interests to which even a dictator can easily succumb, postponing the difficult decisions for later.
There are no magical solutions, an given the knotty problems faced and based on historical record, the odds of drawing a “good” dictator seem a lot smaller than a “bad” dictator.
Democracy at least offers the option of removing bad leaders; in a dictatorship, we are stuck. We may dream of becoming a Singapore or a Taiwan, but with our luck, we may well end up a Pakistan or Afghanistan, models that are culturally and geographically a lot closer.
What I wish for in a president
Sri Lanka’s voters are disgusted by politicians. In frustration, some have called for a dictator, a topic covered more seriously in an article here. This is a somewhat more light-hearted approach to the problem.
People dissatisfied with the choice of candidates may sometimes engage in wishful thinking, speculating on an ideal leader. What if we went out and hired someone instead? Someone of proven capability, very much like a company hiring a new chief executive. That would be a good idea, but who would be best? Nelson Mandela, for example, or Lee Kuan Yew, a name that crops up frequently in Asia, or perhaps even Mahathir Mohamed. Some may suggest Deng Xiaoping, the leader who reformed China and a worthy candidate.
I am much more modest in my expectations. Sri Lanka is a small country; the talents of Mandela, Lee or Deng are suited for a much broader canvas. Why be so ambitious? Why not choose a lesser leader, one who while better than what we have, is not such a world figure and is, therefore, more likely to take up the position?
I would settle for Omar Bongo.Not many may have heard of him, but for 42 long years, he ruled Gabon. Western concepts of governance, he could not understand. He saw no distinction between himself and the state.
The suggestion of fiddling public finances flummoxed and infuriated him. Corruption, he once explained to a reporter, was not an African word. No more was nepotism: he simply looked after his family, supplying them with villas in Nice, as well as the ministries of defence and foreign affairs. When French judges in 2009 froze nine of his 70 bank accounts, he was outraged. An attack on him was obviously an attempt to destabilise his country. (from the Economist obituary)
Gabon’s mineral wealth helped to ease his rule. A timber concession here, a stretch of paved road or a Bongo stadium there disarmed anyone who objected to his way of doing things. Even Pierre Mamboundou, his most diligent opponent, was soothed after many years with $21.5 million spent on his constituency. Business visitors to the capital found it chic, feudal and hospitable, like an Arab emirate; in Mr Bongo’s time, Gabon’s consumption of champagne was said to be the highest in the world. Everyone could be suborned or sweetened, except his first wife, Joséphine, who became a pop singer after the divorce and sang cutting songs about her young replacement (the Economist).
Whatever his faults, Mr Bongo did allow a modicum of prosperity to trickle down to his people, who enjoyed a slow but steady increase in living standards. He also brought relative tranquillity and order, rare commodities in Africa. There was apparently genuine mourning by the population at his passing.
Sri Lanka is not a rich land, so if Mr Bongo were to rule, he would have little wealth to ease his passage. However, having made so much in Gabon, he could surely be persuaded to serve here for more modest pickings. After all, some minister here made the very same argument – that it is better to have the old hands who have already made money than to get someone new who would need to start all over again.
There is the minor inconvenience that all the candidates named here are no longer in the land of the living, so we may end up having to settle for our local politicos after all.