Should the experience of China silence those who think that democracy is good for growth?

In 2007, the US subprime mortgage crisis shook the economic world by giving way to the largest global recession the world had seen since the Great Depression. This financial crisis had a harrowing effect by crippling the economies of many democratically run western countries, whilst interestingly; autocratic China remained largely unscathed, only suffering a brief economic slowdown before quickly returning to double-digit real GDP growth. The Organisation for Economic Cooperation and Development (OECD) has recently estimated that China may surpass the United States of America as the world’s largest economy as early as 2016, which therefore begs economists to wonder; what is the driving force behind China’s growth? This essay seeks to examine the extent to which a country’s political system, democratic or authoritarian, has on its economic growth, and if so, why?

We must first assess how China’s authoritarian structure has enabled the country to achieve its high levels of economic growth on a consistent basis. One of the key ingredients of China’s economic growth, asserted by both the Chinese state and foreign observers, is its strong government. The centralisation of economic decision making in China’s 350-member Central Executive Committee has allowed the government to have unilateral control over the country’s factors of production, therefore allowing them to enhance the country’s production capacity, and thus lead to economic growth. A fine example of governmental control over factor inputs is the state- funded construction of the Three Gorges Dam. The Central Executive Committee was quick to realise the economic potential of the construction project, and thus proceeded to acquire 100,000 acres of surrounding farmland for the project, which in turn displaced 1.3 million people [2]. At first when the acquisition was announced by the state, there was a popular feeling of discontent amongst the majority of displaced residents, however since then nearly all residents have been paid compensation and resettled in the nearby urban area of Chongqing, resulting in a steep increase in all of their incomes. The project highlighted how the Chinese government could act above the rule of law, in order to plan for the long run benefits of the country. In contrast, whist infrastructure projects such as these have been unequivocal successes for the Chinese government, in the United Kingdom many infrastructure projects have failed to get past the planning stages. The British government believes that transport spending, on projects such as High Speed 2 (HS2) and the expansion of London Heathrow Airport, is fundamental to helping promote economic growth. This is because they would lead to the creation of jobs within the projects themselves and improve the reliability of the transport network, which would boost the productivity of businesses. However as the UK is a democracy, the views of the people have to be taken into account and many fail to see these projects from an economic perspective, focusing greater concern towards the environmental impacts. Consequently, this outlines how China has the upper hand over many democratic countries, as they are not constrained by public opinion. Worldwide the ‘Made in China’ brand is seemingly synonymous with China’s manufacturing might and one of the main reasons behind China’s rapid economic growth. The reasoning behind China’s manufacturing industry being so powerful is that the country has been able to maintain considerably low production costs, when compared to rivals such as Germany and the USA. One of the key components of a good’s production cost is the cost of labour, and since the Great Leap Forward, the authoritarian regime in China has been able to sustain low wages by banning independent trade unions who lobby for higher wages. This is exemplified by the fact that the average wage for a high-skilled machinist in the USA is $3,000 to $4000 per month, whilst in China a high skilled machinist is paid $150 per month [3]. Cheap labour costs have allowed Chinese-produced goods to be sold at lower prices, which in turn have fuelled greater demand by foreign consumers, resulting in further economic growth. This has led to a common argument being posed against the authoritarian Chinese state; and that is that a 350-member committee cannot take the interests of 1.3 billion people into account, with some believing that the state’s failure to decentralise power will lead to growing public dissent and eventually the collapse of the government. However, the state media responds to this criticism by emphasising how recent reforms in China have proven that the Central Committee takes into account the needs of the people. These reforms include the occurrence of village elections, security of proprietors, long-term land leases, financial reforms in rural china and the promotion of rural entrepreneurship. All of which are possible signs for the future economic liberalisation of the Chinese economy.
In order to maintain a balanced viewpoint we must also consider whether authoritarian governments can be an impediment to economic growth. Firstly, we should address whether authoritarianism is sustainable in China, and whether economic growth in the autocratically led Chinese economy will last. For authoritarianism to last in China the government must ensure that public opinion is in their favour, so that demonstrations against the government such as the Tiananmen Square protests of 1989 are not an often occurrence. Currently in China, one of the most contentious issues is the wages of workers. This is because poor working conditions, longer hours and increased productivity in Chinese factories have led to growing demands from workers for higher wages. However, unfortunately for the workers, their demands appear to have fallen on deaf ears, this is because the Central Committee’s main macroeconomic objective is to achieve high and sustainable economic growth, which in their view can only be attained by keeping the production costs of goods as low as possible, therefore giving China a competitive edge in the manufacturing industry. As for now the temptation of cheaper labour, and therefore greater profits, have ensured that foreign firms continue to invest in opening up new production facilities in China. However, in the future, growing discontent from Chinese workers over wages and working conditions may lead to more firms being discouraged from producing goods in China, and opting to produce goods in other emerging economies as cheaper alternatives. This therefore questions the sustainability of China’s manufacturing industry whilst the country remains under authoritarian rule. It should also be said that rapid economic growth in China may have an inadvertent effect of weakening the authoritarian government. This is because history has taught us that as a country’s living standards and middle-class grows, more and more people will take interest in the country’s politics and demand greater political participation. This could prove to be worrisome for the government as greater political awareness amongst the people may force the Central Committee to take into account public opinion. This would therefore take away the committee’s previous strength of not being constrained by public opinion, when creating economic policy or developing infrastructure projects. In addition to public dissent, a problem authoritarianism faces, with regards to economic growth, is that authoritarian governments are far more varied than democratic governments when it comes to the successfulness of their economies. For example, the ‘China model’ is the epitome of an authoritarian success story, whilst the failed state of Zimbabwe is a clear example of how authoritarianism can lead to an economic meltdown. This is opposed to democratic governments, whose economies tend to be less volatile. This could be due to the fact that authoritarian leaders are not elected by the people; therefore, their motives for ruling the country are questionable. An example of this is Zimbabwe, a country with vast mineral wealth and agricultural potential, which has been under the rule of its corrupt president, Robert Mugabe, for 26 years. The Zimbabwean economy is in a dire state; 94% of the population is unemployed, hyperinflation was prevalent from 2003 to 2009, and Mugabe’s disastrous land reforms have resulted in many people relying upon subsistence farming for food. Alternatively, if Zimbabwe was a democracy the people would have been able to remove Mugabe from power as soon as it became apparent that he was bankrupting the country. This is one of the clear flaws of authoritarianism; people do not have the power to remove a government if they fail to deliver prosperity through economic growth. The inability to do so could have disastrous consequences, such as an increase in poverty amongst the people or the country turning into a failed state. In regards to China, despite authoritarianism significantly contributing to its economic growth there are many other factors apart from authoritarianism, which should be explored. The most important factor that should be taken into account is that China, inherently, is destined to be an economic superpower due to the size of its population and vast land area. China’s position as the world’s most populous nation has resulted in a large human capital, which allows the country to have a high production output of goods. Furthermore, China is the third largest nation in relation to its land area; this allows the country to accommodate for industrialisation and the creation of manufacturing facilities, both of which further extend the country’s productive output. A characteristic of China that is normally disregarded when assessing the country’s economic resources is the country’s large seaboard, which allows the country to export the vast amount of goods that it produces. Moreover, culturally, China has always been able to achieve economic prosperity as its society places a high value on education and likes to maintain a hard work ethic, also in a historical context, China has always strived to outdo the West as a means of making up for the ‘century of humiliation’, whereby China was dominated by Western colonial powers. Many pro-authoritarians have pointed out that out of the world’s twenty richest countries; three are governed by non-democratic systems, China, Russia and Saudi Arabia. However, both Russia and Saudi Arabia’s wealth is mainly derived from resource extraction, which its countries’ authoritarian governments cannot claim credit for. Furthermore, regional competitiveness and resource wealth have been the causes behind the authoritarian countries, Qatar and the United Arab Emirates, achieving rapid economic growth. This highlights how the authoritarian nature of a country’s political system may bear no effect on its economic growth.

The underlying question that must be answered is whether democracy helps or hinders economic growth. In the current economic climate, it is easy for one to say that the Eurozone sovereign debt crisis has proven that democracy is ineffective in sustaining economic growth, or in that case preventing recession. However, with calls for an EU referendum growing louder in the UK, it begs us to ask the question whether the European Union is essentially democratic. This question is put forward because countries such as the UK, which is in a period of austerity, is obliged to provide billions in bailout funds to countries whose economies are failing (e.g. Portugal and Greece). Furthermore, as seen in Greece, bailout conditions given by the EU to the recipient country can sometimes go against the wishes of the people, leading to widespread demonstrations. The sovereign debt crisis arose from deficit spending by European governments, resulting in government debts that some countries were unable to repay without the assistance of a third party. This therefore highlights how the Eurozone sovereign debt crisis was brought about by the failure of government, not democracy. It is also believed that democracy is inevitable for any country that manages to sustain economic growth, such as China, because of the ‘modernisation theory’. This theory focuses on the rise of China’s middle class and emphasises on their pivotal role in the democratisation process. This is exemplified in countries such as Malaysia and South Korea, where the growth in the size and wealth of the middle class has resulted in power shifting away from the traditional political elite, therefore highlighting how sustainable economic growth in an autocratic state will inevitably result in a process of democratisation. On the other hand, democracy can also be seen to hinder economic growth. It seems somewhat poignant to refer to the birthplace of democracy, Greece, a country that is currently marred with political instability, the rise of the right wing, discontent amongst the people over growing austerity and mass privatisation. A consistent problem Greece has suffered from in recent decades is tax evasion, which has resulted in the Greek government having considerably low tax revenue. In 2010, it was estimated tax evasion cost the Greek government well over $20 billion per year, which when put into context of Greece’s current financial climate, is a staggering amount. The failure of the Greek economy can be attributed to a prolonged political ideology whereby populism has prevailed over economic liberalism. This is has been proven by the fact that successive governments have customarily run large deficits by choosing to ignore tax avoidance and financing public sector jobs, pensions, and other social benefits. All in order to satisfy their own electoral constituencies and reap further electoral gains, at the expense of economic growth. This indicates how by listening to public opinion economic growth can stagnate. This can be further proven by how in the UK, public sector workers, through the medium of trade unions, are able to manipulate the government by threatening closure/disruption to vital state provisions (education healthcare and transport). For example, train drivers have an unequivocal amount of power as they could bring the whole of London, and possibly the finance industry, to a standstill by going on strike.

In conclusion, both authoritarianism and democracy have created economic successes and economic failures across the world. However, the experience of China should not undermine the belief that democracy is good for economic growth. This is because whilst China’s government is adamantly communist and authoritarian, its economic system has been capitalist since free market reforms were introduced by Deng Xiaoping in 1978. And in order to understand why the experience of China has not proven that authoritarian governments are better for economic growth, one must understand the strong relationship between democracy and capitalism, and how nearly all democratic countries around the world operate capitalist economic systems. China’s free market reforms and export-led growth have highlighted that it is not authoritarianism, which is responsible for China’s growth, but its capitalist economic system. Moreover, increased domestic demand in China, caused by its burgeoning middle-class, has led many to believe that the country is developing into a consumerist society. However whilst domestic demand for Chinese goods continues to rise, foreign sales of Chinese goods have seemed to decline as a result of a decrease in expenditure by cash-strapped European consumers. This decrease in demand in the European market has been countered through China’s ‘soft power’ foreign policy, which has ensured that cordial relations with developing countries in Africa, Asia and South America will allow Chinese firms to access new emerging markets, and thus make up for the decrease in consumption from Europe. The growth of consumerism and foreign trade in China, have led many to believe that China is following in the economic footpath of the United States of America. This illustrates that whilst China is an autocracy, a peaceful democratic transition in the country would not alter its economic growth, as the economic boom the country has experienced could equally be achieved by a democratic government in Beijing. Therefore, the economic experience of China is not a result of the prevalence of authoritarianism but the prevalence of capitalism.

Contributed by Krishan Sivaneson

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[3] Friedman, M. 2007. The World is Flat. Macmillan Publishers, p. 147.

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