What does democratic backsliding mean for the U.S. economy when looking through the scope of other nondemocratic/backsliding countries?
With abject poverty on the decline, and industrialization of previously agrarian countries on the rise, one has no reason to doubt that the world is becoming much more livable (economically speaking). However, in the age of Democratic erosion, one also be weary of their lack of doubt. Why is it that some of the authoritarian countries economies grown so rapidly over the past 30-40 years, while others have not grown, and in some cases decreased? With a comparison between China, Hungary, Turkey and the United States, what can an already developed economy expect if their democracy happens to turn sour?
For starters, The four previously mentioned countries are categorized as upper-middle to high income countries. Some of them having been riding on the coattails of their neighbors and others going through the organic process of transitioning from an agricultural economy to a manufacturing economy. But with the transition from one form of output to the other comes the ability to get a lot of free aid in the form of foreign investors. However, as it may seem obvious, with democratic backsliding on the rise comes a decrease confidence from foreign investors. This can turn out to be a large blow to any economy. Studies have shown that with an increase in authoritarian attitudes in the government, the less an investor would be willing to offer money into that country. Of course, for any person investing money, the goal is to turn a profit. This is the case in both Turkey and Hungary. In an article by The Conversation titled Is Authoritarianism Bad for the Economy, foreign investors confidence have been falling since 2013 by large figures especially in Hungary. This is partly due to the fear that a regime with total control of the economy will be more willing to start meddling with the physical/monetary capital and in some cases even human capital within the firm which can put people’s lives and livelihood in danger.
Taking into account the fallibility of leaders is an important figure as well. Fiscal policy is often time made in cooperation between two or more government institutions. However, as mentioned in the Conversation article, when fiscal policy becomes subject to a branch that dominates all others, the undermining of valuable institutions makes it much more likely for a decision to be made that can tank the entire economy. For this reason, the Washington Consensus, which most authoritarian regimes like to avoid, is crucial. Specifically the aspects of fiscal discipline, trade liberalization, liberized direct foreign investment, property rights, privatization, and deregulation. While China is keen on only some parts of the Washington Consensus, the growth that it offered as it transitioned from an agrarian economy to a manufacturing economy is waning because of the lack of liberalization in all types of sectors. Mentioned in the article Are Authoritarian States Better at Delivering Economic Growth? The only time an authoritarian government can achieve unmatched, double digit growth is in the early stages of growth (evident in China, Zimbabwe and Cuba). However, as the countries of Hungary, and China approach the high income range by global standards, they will need continual growth of GDP. However, growth rates in both of those countries have fallen and are expected to continue to fall. As for Turkey, it is a borderline high income authoritarian country, and with economic turmoil, it is expected to fall out of the high income category and enter the high-middle income range.
Given these facts, what can the United States expect as fears of further democratic backsliding continue to grow as we get further into the Trump era? Well first off, here are some statistics from the Bureau of Economic Analysis. The United States GDP growth target is 2% annually. The BEA has released a report that stated in the fourth quarter of 2018, the growth rate was at 2.6% which is less than the third quarters 3.4%. They attribute the loss to the lengthy government shutdown. And real GDP growth, which is growth in GDP that does not take into account of the increase in cost of goods (so it is strictly measuring output of goods and services), has grown at 2.9%. However, in line with the article by the Conversation, direct foreign investment is down 32% since 2016 (i.e. Trump’s election).What does all of this mean to us? Well, we have strong institutions that are not bending to some of the demands from Trump, like the additional $8.6 billion he has requested again from Congress to fund us wall. We also have good separation of the decision making abilities between the institutions like the Federal Reserve, Congress and the Executive. This separation is designed to drive us to the virtue that authoritarian regimes tend to lack which is cooperation between government institutions. However, in the United States, we have two central government institutions trying to sideline the other because of the lack of cooperation. This may be something that caused the direct foreign investment to decline so sharply. It is feasible to consider that the lack of cooperation, has caused a fall in confidence in the United States ability to make fiscal/economic decisions the same way confidence has fallen in other backsliding countries. If the institutions in place continue to go through such turbulent times, it will only be matter of time before investors totally lose confidence in us the same way they have lost confidence in Turkey, Hungary, Venezuela, Poland, Cuba, Zimbabwe and many others. As norms continue to be broken and relationships between opposing forces also continue to be untied, the harsh reality that we could be in the same economic boat as Hungary, Venezuela or Turkey starts to seem just a little bit more plausible. Obviously, being in a post industrialization economy does not protect us because of what has seemed to have happened Venezuela, Turkey and now beginning in China.