Politics Plays Part in Achieving Rich-Nation Status




wall street journals

China is making great progress in lifting its people from the ranks of the world’s poorest. But if the experience of other countries is any indicator, it will need a revolution to achieve rich-nation status.

Govern Well and Prosper

Uprisings throughout the Middle East, and China’s recent moves to suppress its own “Jasmine Revolution”—with steps such as jailing government critics—underscore a question facing the developing world: Can authoritarian or oligarchic states join the ranks of the world’s wealthy, and even gain global economic primacy? Or is political change a prerequisite?

The answer isn’t encouraging for the world’s despots, according to economists who have studied the subject. Evidence suggests countries without good institutions such as universal property rights, impartial courts and equitably enforced laws tend not to rise above a per-capita annual income level of about $15,000. Those institutions coincide with political freedom, which seldom comes about without upheaval.

“Without reform, growth is not sustainable,” says Antonio Fatas, an economist at INSEAD business school in Fontainebleau, France. “This has clear implications for China and other countries.”

Looking at measures of governance from the World Bank for more than 100 countries, Mr. Fatas and fellow INSEAD economist Ilian Mihov estimated the level of economic output per person beyond which countries with poor institutions don’t grow. “The Great Wall,” as they call it, stands at the equivalent of what an annual income between $10,000 and $15,000 would buy in the U.S. in 2009. That’s about one-third the standard of living enjoyed by people in the Group of Seven industrialized nations.

As of 2009, Russia, Argentina, Libya and Turkey all had hit the wall. China was about halfway there. A handful of resource-rich countries with poor governance grades—Kuwait, Saudi Arabia, Bahrain and Equatorial Guinea —had broken through. Mr. Fatas notes, though, that the latter achieved their wealth largely by depleting stocks of nonrenewable resources, a strategy that likely isn’t sustainable in the long run.

Ever since the emergence of modern free-market democracy, leaders and citizens of wealthy Western nations have harbored fears that some other system might produce better economic results. For much of the past century, they focused their concerns on the Soviet Union.

As recently as the 1970s, the centrally controlled Soviet economy was growing at an average annual rate far exceeding that of the U.S., according to the United Nations Statistics Division. But the country’s standard of living, measured in economic output per person, peaked in 1973 at about $12,500 in today’s dollars, or at a bit more than one-third the U.S. level at the time. That was the starting point of a long decline that culminated in the breakup of the Soviet Union in 1991.

Now China’s combination of authoritarian rule, state-directed investment and limited capitalism has become the new alternative model. Over the past decade, Beijing has produced average annual economic growth of 10.5%, far exceeding the 1.6% of the advanced world, according to the International Monetary Fund. China recently surpassed Japan as the world’s second-largest economy.

Growing out of poverty, though, is very different from getting rich. China’s output per person has nearly tripled over the past decade, but at $7,518 per person in 2010, it is still less than one-sixth that of the U.S., according to IMF data adjusted for the purchasing power of national currencies.

Research suggests the next leg of the climb to wealth will be much harder. In a new paper, three economists—Barry Eichengreen of the University of California, Berkeley, Donghyun Park of the Asian Development Bank and Kwanho Shin of Korea University—demonstrate that bouts of rapid economic growth tend to lose steam at an output per person of about $17,000, in 2005 international dollars. That’s pretty close to the level at which Messrs. Fatas and Mihov of INSEAD begin to see a strong correlation between good governance and wealth.

At its current growth rate, China has several years to go before it reaches the barrier. It could even get a bit further, given the government’s firm grip on the media and encouragement of entrepreneurship, says Daron Acemoglu, an economist at the Massachusetts Institute of Technology who studies the link between institutions and economic development. “What China is trying to do is very smart in some ways,” he says. “But within the next 15 years there’s every possibility that if China doesn’t successfully reform political and economic institutions further, growth will peter out. It could be a soft landing or a hard landing.”

At that point, Mr. Acemoglu sees two scenarios. One is a long period of stagnation, which would weigh on the global economy. Alternately, political turmoil could force change as it did in South Korea, which shifted from authoritarianism to a more democratic system through a series of sometimes bloody clashes in the 1980s. The country has since joined the ranks of the world’s richest nations.

In short, wealth won’t come easily for China. But it’s in the world’s best interests that its path be as smooth as possible.

Write to Mark Whitehouse at mark.whitehouse@wsj.com


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