The global financial crisis and ensuing recession have generated a widespread view that the essence of the so-called Washington Consensus, and with it the model of democratic capitalism, stands discredited before the court of world opinion. At the same time, interest has risen sharply in what may be called the Beijing Consensus: an increasingly robust market economy coupled with authoritarian government.
As is usually the case with sweeping statements about the rise and fall of global forces, this one is a bit too neat. The decline of faith in democratic capitalism is more pronounced among chattering classes in the West than among economic elites in much of the non-West, who are generally pleased with how the macroeconomic orthodoxy of the Washington Consensus has performed for their countries over the past few decades. And the Beijing Consensus is itself not new. A successful government-directed market economy characterized the Turkish Republic for decades before it became an electoral democracy in 1950. Some years later, similar systems not only worked in fledgling Asian tigers like South Korea and Taiwan, but were touted explicitly as models in Singapore and in several Latin American countries.
That said, the current intellectual trend is different from what has gone before. In earlier times, authoritarian capitalism was widely seen as a transitional arrangement leading to democratic capitalism, not as an ideal end in itself. Now, many do see authoritarian capitalism as an ideal end. They do so because of an unexpected juxtaposition: While the United States and other Western countries are noisily debating issues of fairness and social equality in the wake of economic distress, the Chinese model seems able not only to deliver the goods in purely material terms, but to do so in a relatively inclusive way. While an elite has benefited most from China’s rapid economic growth (as elites always do), very large numbers of people have ascended from misery to a decent level of material life, and, while myriad problems remain, optimism sounds the dominant chord. This enables Beijing Consensus boosters to ask: Who needs Western-style democratic capitalism, which fosters deepening inequality and enables plutocracy to mock genuine democratic values, when authoritarian capitalism can ensure both reliable growth and expanding equality?
Such arguments implicitly accept the inevitability of tradeoffs between economic growth and democratic political culture. Growth, they claim, requires social discipline that often only state direction can provide. Human rights advocates have sounded the alarm about human costs of authoritarianism in China and in other authoritarian “development states” like Vietnam, but others assert that these costs are worth bearing for the sake of the material progress they enable. Besides, nascent democracies are often too chaotic, fissiparous and prone to populist or demagogic sabotage to ensure solid economic growth. One must therefore choose, and choosing the Beijing Consensus, many now claim, is the better bet.
It is an attractive argument in some respects, and there have indeed been cases in which democracy attracted more economic trouble than transformation. Democratically elected populist regimes in Venezuela, Argentina and Bolivia, for instance, have not fared well economically, and in ethnically heterogeneous countries like Kenya too much democracy too soon can fuel communal tensions that make nearly everyone poorer. Yet the argument for the Beijing Consensus is ultimately false. First of all, of course, is the fact that Democracy has inherent value beyond its economic implications as the best way to defend human rights and freedom. But more than that, the evidence shows not only that the benefits of inclusive growth can be achieved without sacrificing the benefits of democracy, but also that in most cases inclusive growth and democracy are mutually supportive. Grim tradeoffs between democracy and development are not inevitable. There is a successful democratic path to development, and it is a path along which three quite different large developing countries (India, Brazil and South Africa), as well as many others, are now walking.
The Virtuous Circle
Raising per capita GDP is often taken to be synonymous with development. While legitimate objections to this conflation have been raised, higher income levels do tend to be both a cause and a consequence of increased employment, productivity, education and longevity. But to attain high levels of income, societies have to initiate and sustain the virtuous circles of rapid accumulation of human capital, high levels of investment and innovation. Doing this usually means the society must maintain stability, ensure that individuals, households and businesses have confidence in the future, and have leaders who are respected and legitimate.
In many if not most successful cases, it has taken centuries—and occasionally a bit of good luck—to institutionalize such virtuous circles. The field of development as a profession has spent decades trying to discover ways to compact and speed up this process. Along the way it has learned that virtuous circles are notoriously difficult to kick-start. It is still not clear how best to create them, but these days it is clear what a newly born virtuous circle looks like in the rear-view mirror. It looks like China, which for the past thirty years has grown at an unprecedented average of 9 percent a year. Per capita income has quintupled in less than two conventionally measured generations. Never before in human history has a society as large grown as quickly for as long; none has ever raised as many people out of poverty.
China’s economic success has been startling because it has challenged widely held assumptions about the key institutions necessary for sustained growth. It turns out that growth can happen in a place with no political or press freedom, none of the checks and balances of a democracy, a poor human rights record, and a fragile property rights system. So how has China done it? The answer is both simple and complex.
Simply put, China has shown a steadfast commitment to growth over many decades and has made that commitment clear to foreign investors. In part, its steadfastness has come from the ability of an autocratic government to be decisive and plow through dissent in order to stick to a long-term growth path. The more complex part of the story is that China has simultaneously begun to reconfigure many of its social, economic and political institutions. The state has allowed the institutions already in place to anchor the economy while cautiously testing and quietly implementing reforms, often through local experiments.
This idea of achieving growth without dramatically upsetting the institutional status quo underpins the growing allure of the Beijing Consensus. Those admirers in power can infer from China’s example that no economic rationale exists for opening up space for democratic competition and liberty. That many of them are neither committed nor able to implement pro-growth policies is beside the point. For them, China’s example justifies undemocratic government, intolerance of dissent, human rights abuses and, above all, the inviolability of their own grip on power.
Worse, perhaps, those developing countries that instituted liberalization programs during the 1980s and 1990s may be inspired by the Chinese model to roll them back and expand, once again, the role of the state in the economy. This is the dangerous path that some developing countries may now want to follow, one that would likely also undercut still fragile democratic norms and erode hard-won political freedoms. Since self-serving politicians with short time horizons and dubious ethics are among the developing world’s most acute problems, any renewed concentration of resources in state hands would all but guarantee more pillaging of public resources. The absence or weakening of democracy only makes things worse. Democracy is no guarantee of good governance, but it creates the possibility that at least some level of checks and balances will restrain politicians from plundering state resources.
Attractive as autocracy might be to those who wield power in the developing world, it is not autocracy as such that has enabled China to grow. Much more important has been their commitment to policies that drive long-term growth. It is policy consistency and reliability that initially attracted investors, and the virtuous circle of success has now become self-sustaining: China is growing so fast because it attracts investors; it attracts investors because it is growing fast. In effect, China’s now well-established commitment to growth solves the coordinating challenge that sometimes inhibits growth: How to encourage investment in the future so that the future will turn out to have been worth investing in.
Sticking with a long-term growth strategy is not easy, and the political, cultural and historical factors that have allowed China to do so may be unique. To single out autocracy as the key variable is to fail to learn the right lesson from China’s historical achievement. To the extent that governance matters in spurring growth, it is not autocracy but a sustained, credible commitment to long-term policies that causes it to matter. Let us hope, then, that when South Africa’s President Jacob Zuma recently asked during a visit to China whether “political discipline” accounts for China’s economic success, he meant the consistent commitment to market reforms and economic growth rather than the stifling of political competition and the smothering of dissent. 1
Economic growth is the most critical need of developing countries because it underpins broad social development. Hence, development ought to be one of the most important goals of democratic governments. But young democracies in poor and unequal societies are beset by populist pressures in poor and unequal societies that make consistent long-term investment strategies hard to sustain. 2 Democratic polities also tend to make major decisions more slowly than autocracies, and are vulnerable to vested interests (such as labor unions or well-connected companies) who wish to block sound economic policies. Electoral cycles can also shorten leaders’ time horizons. Moreover, developing country democracies may suffer in investors’ eyes from being situated in bad neighborhoods, surrounded by unstable governments in countries with low development and high corruption. Their societies are often less stable, too, sometimes on account of violent, divisive histories that threaten present cohesiveness and generate wild policy swings.
Does it not follow, therefore, that the discipline furnished by autocracy can obviate these disadvantages and spur more consistent growth? No. It turns out that, overall, democracies have more advantages than disadvantages in the pursuit of economic growth. For one thing, press freedoms give political opposition the right to criticize government policies, call attention to corruption and, critically, offer alternatives when government policies are failing. But more important, democracies tend to be more stable than dictatorships. In a major study of the effects of democracies and dictatorships on material well-being, Adam Przeworski and his co-authors found that dictatorships
exhibit high variance of economic performance. Some generate miracles, some disasters, and many generate both. Because their policies and their performances are so unpredictable, they do not allow people to plan their lives over a longer horizon, and thus they induce households to hoard the least risky asset, namely, children. In the end, per capita incomes grow slower and people live shorter lives in dictatorships. 3
The evidence seems to suggest, then, that mature democracies do best of all when it comes to generating growth, young under-institutionalized democracies do worst, and autocracies fall somewhere (nearly everywhere) in between. So the challenge becomes that of bridge-building: How do we bridge a young democracy across the transition period to a point where it can take on the characteristics of a mature democratic polity. How can the benefits of reasonably long histories of democracy and stability be provided in a shorter time? Investors are attracted to countries that they believe will look more or less the same in twenty years as they do now, except for being richer. How can that belief in the future of developing democracies be nurtured?
Young democracies need to persuade rather than proclaim. They need to promulgate and stick to good laws. They must spend public resources modestly and defer gratification. They must lead by example. They must refrain from overly ambitious promises and undertakings, which inevitably disappoint, ultimately reduce investor confidence. Failed promises lead the public to look for immediate solutions to problems in the belief that no long-term plans can be brought to fruition.
This is not a pipe dream. It can be done and is being done. A country that establishes and defends the correct institutions, laws and freedoms—such as secure property rights, transparent procurement practices, media freedom and sensible economic policies—can go a long way in attracting investors. There are promising examples of developing-country democracies that have managed to overcome their particular challenges and, using exactly this mix of institutions, laws, freedoms and sensible economic policies, achieve moderate to high levels of economic growth while remaining free and democratic. Steven Radelet has recently documented success in 17 African countries. 4 But the best evidence comes from three cases, only one of them in Africa: India, Brazil and South Africa.
The Big Three
India, Brazil and South Africa, while nowhere near being out of the woods yet, have been on a promising path for the past twenty years. As the Cold War ended (if not history itself), these three states initiated important pro-market reforms. Their experiences should buoy those who favor the democratic path to development. Though each began from different historical circumstances—India’s quite dirigiste, the others less so—they all illustrate the complementarity of democracy consolidation and market-based economic growth. Each matched its own set of developmental reforms beginning in the early 1990s with policies to open up political space for change.
India in the 1980s had been through a significant challenge to democracy during the incumbency of Indira Gandhi. She had declared a state of emergency to deal with her Congress Party’s political opponents. Widespread communal violence erupted as confidence in Indian democracy plummeted. By the fourth decade of Indian independence the country’s liberal, secular constitution was thwarted by the rise of an elite disproportionately composed of higher caste Hindus from certain regions, which ruled and ruined the country. Divisions based on caste, geography and religion locked some groups into cycles of poverty while others reaped the benefits of India’s tepid economic growth. By 1990, India’s state-led planning model for economic development had all but collapsed in corruption and a severe balance of payments crisis. A change in the ruling party opened up the political space for reform.
Brazil’s principal challenge was to stimulate economic growth while also dealing with high levels of poverty and inequality. Brazil had achieved high growth before, but this had been under the aegis of military dictatorship, which had few qualms about appropriating property and keeping opportunities and wealth in the hands of a small elite. Between 1960 and 1990 inequality increased sharply: The share of total income accruing to the poorest half of the population declined by 6 percentage points, while the share going to the richest 20 percent increased by 11 points. By 1990, whatever foundations for growth that had previously existed were gone, and Brazil’s economy was in shambles. Wild swings in economic performance—a 4 percent contraction in 1990 coming after 3 percent growth in 1989—illustrated the acute lack of macro-economic stability amid swings in the global economy. Inflation was consistently high, the economy was heavily concentrated, property rights were shaky, and up to 36 percent of households lived below the poverty line.
By 1990 South Africa was, by many accounts, on the verge of a full-blown civil war. For the previous half-century blacks had been denied economic, political and human rights while the white minority reaped the benefits of state spending. South Africa was two countries, one a member of the First World, the other of the Third World. The ruling National Party government was losing political control, and the economic situation was dire. Since the mid 1970s, the economy had stagnated. GDP per capita fell 17 percent between 1981 and 1993, and by 1994 the public sector deficit was 9 percent of GDP. Under these circumstances only major political and economic reforms could avert disaster. Increased political freedom led to the first democratic elections in 1994, which the African National Congress (ANC) won with a large majority. Once in power, the ANC faced many challenges. It was obvious that South Africa’s economy needed to grow and that to do this the government needed to formulate and then stick to sensible economic policies that would attract investors. Another priority was to address racialized inequality in income distribution, as well as in the composition of the public service.
How did these three countries fare after reforms?
After China, India is now the world’s fastest growing economy. Growth took off after liberalization, reaching an impressive 10 percent in 2006, 9 percent in 2007 and 6 percent again in 2008 despite the global economic crisis. The country has achieved massive growth and innovation in the services sector and become globally competitive in information technology, R&D; and business-process outsourcing. Where 54 percent of the population lived on less than $1.25 a day in 1988, 42 percent did in 2005. Real GDP per capita almost tripled from $374 in 1990 to $1,017 in 2008. A quota system for reserving jobs in the public sector and places in school for the “scheduled” castes, although it has created other difficulties, went some way toward dealing with inequality of opportunity between people of different castes. Opening up the market to new clothing and fabrics also did a great deal to change relations between castes, as people were not restricted to wearing the fabrics and styles that were often used to identify one’s status. 5 India scored 0.612 on the UN Development Programme’s 2007 Human Development Report compared with just 0.489 in 1990.
After its reforms, Brazil managed to get inflation under control, reform its tax laws and make private property more secure. Competition increased, too, to the point that Brazil is now widely considered a good place to do business. It is attracting significant foreign direct investment. Largely as a result, since 1991 real GDP has grown steadily, reaching 7 percent annual growth in 2007, dropping to a still healthy 4 percent in the downswing of the 2008 economic crisis. Growth has been more inclusive, too, with the share of national income accruing to the poorest half of the population rising from 11.5 percent in 1990 to 14 percent in 2005. The proportion of households living in poverty dropped from 36 percent to 23 percent, and the Gini coefficient, which measures income inequality, fell from 0.61 to 0.57 in the same period. Life expectancy increased from 65.6 years in 1990 to 72.2 years in 2008, and infant mortality decreased from 46 per 1,000 births in 1990 to 18 in 2008. The adult literacy rate has gone from 81 percent to 90 percent. Its Human Development rating, 0.813 in 2007, is up from 0.710 in 1990, placing the population in the category of high human development.
South Africa’s levels of economic growth have also improved since the early 1990s. The country reached 5 percent annual growth from 2004 to 2007, which decreased to 3 percent in the 2008 economic downswing before turning negative in 2009. GDP per capita has risen from $3,182 in 1990 to $5,678 in 2008. The black share of the upper middle class increased from 12.3 percent in 1994 to 36.4 percent in 2008. The black share of the working and lower middle classes increased from 21.1 percent in 1994 to 44 percent in 2008. 6 A comprehensive and greatly expanded grant system helped to reduce the number of people living below the national poverty line from 38 percent in 2000 to 22 percent in 2008.
South Africa has not fared well in terms of its human development indicators, however. Its score on the Human Development Index fell from 0.698 in 1990 to 0.683 in 2007. The quality of public education, public healthcare and many aspects of infrastructure maintenance have declined to the point of crisis. Corruption remains a critical challenge. That said, the achievements of the past twenty years should be seen in the context of what had come before. Apartheid tore apart the social fabric, and in its wake South Africa was a highly unequal, deeply divided and violent society marked by high levels of unemployment and poverty. 1994 black South Africans gained the right to vote, to move around the country freely, to own businesses and to gain full status as South African citizens entitled to rights set out in a constitution and enforced by an independent judiciary that was one of the most liberal in the world. The importance of these gains that cannot be overstated.
In sum, India, Brazil and South Africa have seen respectable rates of growth over the past twenty years, although by some accounts these have not been as high as they could have been. This is in the main because developing-country democracies are forced to compromise between short-term redistributive measures and long-term growth policies. It is also because it takes time for a democracy to establish a track record for securing property rights and enacting sensible policy. Until these are established in the eyes of both domestic and foreign investors, achieving high rates of growth is extremely difficult.
Nevertheless, we contend that the success of all three countries owes much to democracy: in the Indian case to democracy revitalized, in the Brazilian case to democracy restored, and in the South African case to democracy created for the first time for the population as a whole.
Of course, we do not argue that democracy is a good thing only if it produces more inclusive growth. Democracy cannot be judged simply on its economic consequences; it is of value in itself, because of its association with the flourishing of liberty and human rights. Rather, we argue, pace the Beijing Consensus, that these two good things—democracy and inclusive growth—can exist together and that at least under certain circumstances, they reinforce each other.
Indeed, we suspect that democracy ultimately may be essential for more inclusive growth in countries—like India, Brazil and South Africa—that are marked by divisions based on race, religion, class or caste. Democracy can ensure that political and economic power is dispersed across different interest groups instead of being held by an elite. Inclusive growth can only occur when political and economic power—in the form of public sector jobs, targeted state spending, and pressure to reform credit systems and, frequently, business ownership—rests safely out of the hands of a single dominant group. India, Brazil and South Africa have provided prime examples of a path that leads to this destination.
We can attribute some of the gains in inclusivity and poverty reduction in each of the three countries to a combination of improved growth rates as well as targeted state spending, in the forms of affirmative action or quota systems, direct transfers, education spending and free or low-cost healthcare. But the pace at which poverty is reduced in this way tends to decline quickly. After achieving initial gains, governments can seldom continue to improve the welfare of the poor through redistribution. Once redistribution loses steam, it is crucial that governments move toward policies that send firm signals to entrepreneurs and investors so that higher levels of investment can drive job-creation and productivity growth.
It is particularly important, therefore, that governments resist populist pressure for excessive short-term redistribution, which damages their prospects for higher longer-term growth rates. This is where business-friendly and pro-market think tanks and advocacy groups play a vital role. These groups understand the need to attract investors to enable business and enterprise to grow further. The best way to bring about employment is putting the country on a sustained growth path. 7 They must continually remind the public, the government and the private sector of the benefits of growth and the need to delay gratification in order to invest in the future. These groups, as well as the media, are well placed to tilt the balance of public opinion against misguided policies—such as the appropriation of land or businesses by the state, or the curtailing of media freedoms—that lead investors, local businesses and citizens alike to doubt the likelihood of a prosperous future.
India, Brazil and South Africa are all classed as middle-income developing democracies. Each has the potential to succeed. Each has a strong and growing middle class whose interests increasingly lie not in state-directed redistribution policies but in protecting property rights and encouraging policies for vibrant market-driven growth. Where the middle-classes are not helping as well as they could is in the area of savings. The middle classes in these three countries are slightly unusual in that they consume more and save less than middle classes in developed countries. This is partly because this group is made up of many new entrants. However, poor saving is an impediment to growth in all three countries, and this problem needs to be tackled and the cultural causes behind it properly understood.
The fight against populism and the lingering appeal of autocracy in these countries is also an important issue. It is vital for civil society organizations, both foreign and domestic, to use the space provided by democracy to hold governments to account and encourage them to persist in pursuing the pro-growth agendas that local and international private investors can believe in. In this way India, Brazil and South Africa, along with other emerging democracies, can offer a path forward that avoids the autocratic dangers of the Beijing Consensus.
As already mentioned, one of the challenges developing democracies face is that they are often surrounded by unhelpful neighbors who impoverish and destabilize the region. India, Brazil and South Africa are exceptions. As relatively large countries, they have begun to function as engines pulling their neighbors up with them. They provide political models as well as economic examples. Compared to the United States, South Africa is a new and pretty shaky democracy; compared to Zimbabwe, however, it is highly functional and prosperous. When people in Malawi and Zambia and Lesotho look around the region, they can certainly tell the difference.
The Chinese government has recently taken up the venerable Confucian ideal of the “harmonious society.” The ideal implies stability, order and material well-being. We have no quarrel with these goals. But the ideal did not originally imply freedom, and it certainly does not imply it in the manner in which the current Chinese regime uses the phrase. We believe one can have a “harmonious society” with freedom, and that freedom will enhance stability, order and material well-being. We believe that ultimately a “Freedom Consensus” will triumph over the Beijing Consensus. Maybe someday it will even do so in Beijing.
1 Lecture by the President of South Africa, to Renmin University in Beijing, August 25, 2010.
2 This is one of the main findings in the unpublished papers commissioned by Instituto Ferdinando Henrique Cardoso and Centre for Development and Enterprise: Armando C. Pinheiro, Regis Bonelli, Samuel de Abreu Pessoa, “Pro- and Anti-Market reforms in Democratic Brazil”, and S. Johnston, “Political, Social and Economic Challenges in South Africa, 1990–2010: A market liberalizing perspective.”
3 Przeworski, Michael E. Alvarez, José A. Cheibub and Fernando Limongi, Democracy and Development: Political Institutions and Well-Being in the World, 1950–1990 (Cambridge University Press, 2000), p. 271.
4 Radelet, Emerging Africa: How 17 Countries Are Leading the Way (Center for Global Development, 2010).
5 See Nadan Nilekani, Imagining India (Penguin, 2008), p.155–6.
6 Centre for Development and Enterprise, Poverty and Inequality: Facts, Trends and Hard Choices, August 2010, p.11.
7 Ann Bernstein, The Case for Business in Developing Economies (Penguin, 2010).