POLITICAL FREEDOM AND ECONOMIC GROWTH Andrei Illarionov, CATO Institute, Institute of Economic Analysis Seminar “Relationship Between Growth and Freedom” Center on Democracy, Development, and the Rule of Law, Stanford University, November 13, 2006 © CATO Institute, Institute of Economic Analysis

© ИЭА2 Prof. F. Fukuyama’s main question: What is Optimal Political System for a developing country seeking rapid economic growth?

© ИЭА3 Prof. F. Fukuyama main conclusions: 1. No such thing exists as an Optimal Political System (an optimal system of formal political institutions). 2. Implicitly, Strong (Decisive) political system is more preferable than Weak (Resolute) one.

© ИЭА4 Prof. F. Fukuyama’s other conclusions: Institutions come in complex, interdependent packages. Institutions come in complex, interdependent packages. Good institutions heavily dependent on local context and traditions. Good institutions heavily dependent on local context and traditions. Need to invest in local knowledge of institutions. Need to invest in local knowledge of institutions. Leadership matters. Leadership matters. Formal institutions matter less the current literature suggests. Formal institutions matter less the current literature suggests. Political culture matters. Political culture matters. Better to work with imperfect existing institutions than to spend political capital on long-term institutional reform. Better to work with imperfect existing institutions than to spend political capital on long-term institutional reform. International donors have only limited influence over translation of demand for good institutions into political power. International donors have only limited influence over translation of demand for good institutions into political power.

© ИЭА5 The main answer seems not quite convincing because of: Number of controversial logical issues: Number of controversial logical issues:  Permanent struggle for particular types and forms of political institutions all over the world for whole human history means that they are perceived to be different and they are different.  Prof. F. Fukuyama’s personal numerous assertions “institutions matter” (p. 2), “undesirable institutions” (p. 27), “good” institutions (p. 28) imply existence of “desirable” as well as “bad” institutions.  Since “institutions themselves remain proximate causes for growth” (p. 3), the author himself agrees that there are different outcomes in growth as a result of different political institutions.

© ИЭА6 Matrix of Political Systems (A. Lijphardt, 1991). Presidential/Parliamentary and Electoral Systems. Annual GDP per capita growth rates in 1950−2001 PluralityPR Presidential Parliamentary Westminster (UK, New Zealand) 1,27 US, Philippines 1,87 Latin America 1,66 Continental Europe 2,96

© ИЭА7 Political Systems’ ranking by aggregate number of veto players (F. Fukuyama, 2006, p. 13): Classic Westminster (New Zealand pre-1994). Classic Westminster (New Zealand pre-1994). Parliamentary/PR with strong parties (Austria, Belgium, Netherlands, Thailand). Parliamentary/PR with strong parties (Austria, Belgium, Netherlands, Thailand). Premier-presidential, no federalism (France 5 th Republic, Finland). Premier-presidential, no federalism (France 5 th Republic, Finland). Presidential with plurality voting, with federalism (USA, Philippines). Presidential with plurality voting, with federalism (USA, Philippines). Parliamentary with fragmented parties (French 4 th Republic, Italy pre-1994). Parliamentary with fragmented parties (French 4 th Republic, Italy pre-1994). Presidential with PR and fragmented parties (Colombia, Brazil). Presidential with PR and fragmented parties (Colombia, Brazil).

© ИЭА8 Criteria“Strong”“Weak” Form of Government PresidentialParliamentary Number of Veto Gates Few: Dictatorship Many: Perfect Consensual Democracy Electoral System Plurality Proportional Representation Party Discipline StrongWeak Bicameralism One chamber Two chambers FederalismCentralizationDecentralization Judiciary Independence Interpretation of legislative intent Initiation policies on its own Components of “Strong” and “Weak” political systems (macro-political institutions):

© ИЭА9 Parameters“Strong”“Weak” Legislative coherence CoherentIncoherent Effectiveness of decisions Lower Cost Higher Cost Speed of decision- making HigherLower ResolutenessHigherLower LegitimacyInternalExternal Character of political activity “To get things done” “To sink in miasma of everyday politics” Political system “Decisive” “Resolute”, but Legitimate Examples New Zealand, UK USA Policy outcomes of “Strong” (“Decisive”) and “Weak” (“Resolute/Legitimate”) political systems:

© ИЭА10 Checking theory against reality

© ИЭА11 GDP per capita in New Zealand as % of USA, 1950−2005

© ИЭА12 Political Systems and Economic Growth, 1950−1994

© ИЭА13 Which political system – either “strong” or “weak” one – is more conducive for economic growth?

© ИЭА14 Forms of Government and Economic Growth, 1951−2004

© ИЭА15 Origin of Legal System and Economic Growth, 1951−2004

© ИЭА16 Political Competition/Political Monopolization and Economic Growth, 1990−2004

© ИЭА17 Federalism/Centralization and Economic Growth

© ИЭА18 Some conclusions: Political institutions matter. Political institutions matter. Optimal political system does exist. Optimal political system does exist. Following political institutions are conducive for faster economic growth : parliamentary form of government rather than presidential one, German/Scandinavian law system rather than French one, political competition rather than political monopolization, federalism rather than centralization of government, political and civil freedoms rather their lack or absence, larger than smaller number of “veto players” in the political system. Following political institutions are conducive for faster economic growth : parliamentary form of government rather than presidential one, German/Scandinavian law system rather than French one, political competition rather than political monopolization, federalism rather than centralization of government, political and civil freedoms rather their lack or absence, larger than smaller number of “veto players” in the political system. In the long-run “Strong”, or “Decisive”, political system seems less effective than “Weak” (“Resolute/Legitimate”) one. The latter leads to much more tangible economic results. In the long-run “Strong”, or “Decisive”, political system seems less effective than “Weak” (“Resolute/Legitimate”) one. The latter leads to much more tangible economic results.

© ИЭА19 Political Freedom in the World, 1972−2005

© ИЭА20 Political Freedom by Country Groups, 1972−2005

© ИЭА21 Political Freedom in Nations in Transition, 1991−2005

© ИЭА22 Political Freedom in Central Europe and Russia, 1991−2005

© ИЭА23 Political Freedom in the Balkans and Russia, 1991−2005

© ИЭА24 Political Freedom in the Baltic Countries and Russia, 1991−2005

© ИЭА25 Political Freedom in the CIS and Russia, 1991−2005

© ИЭА26 Political Freedom in the GUM (Georgia, Ukraine, Moldova) countries and Russia, 1991−2005

© ИЭА27 Political Freedom in the CIS-8 and Russia, 1991−2005

© ИЭА28 Political Freedom in the Former USSR and Russia, 1991−2005

© ИЭА29 The most important factor of the short- and medium- term economic success is economic freedom. But in the long run it is not enough. The necessary condition of the society’s long run success is political freedom.

© ИЭА30 Politically free countries are richer than politically non free ones. GDP per capita by level of political freedom, 2005.

© ИЭА31 Economic growth in politically free countries is faster than in politically non free ones. GDP per capita indices by level of political freedom (1972=100%).

© ИЭА32 Transition from political freedom to political non freedom leads to economic degradation, transition in opposite direction accelerates economic growth. GDP per capita annual average growth rates,

© ИЭА33 Political non freedom creates insurmountable barrier to economic growth. In countries where political freedom was replaced with non freedom GDP per capita does not exceed $ by PPP in 2002 prices.

© ИЭА34 There is no insurmountable barrier to economic growth in the countries that moved from political non freedom to political freedom.

© ИЭА35 A barrier to economic growth does exist even for rich energy-exporters that are politically non free. As a rule, their GDP per capita does not exceed $15000 by PPP in 2002 prices.

© ИЭА36 The barrier to economic growth does exist for energy exporters that are politically partly free. Their GDP per capita does not exceeds $15000, too.

© ИЭА37 There is no insurmountable barrier to economic growth for energy exporters that are free politically.

© ИЭА38 Economic barrier of political non freedom. Political Freedom Index and Level of economic development (countries with population more than 3 mln.), 2005.

© ИЭА39 Different political institutions defend political freedom in different ways and have different impact on economic growth.

© ИЭА40 CriteriaStrongWeak Forms of government PresidentialParliamentary Legal system French law Germanic-Scandinavic law Electoral system Majoritarian Proportional representation Power resource of the largest party Political monopolization Political competition FederalismCentralizationDecentralization Independence of justice system WeakStrong Basic characteristics of «strong» and «weak» political systems.

© ИЭА41 Freedom vs. Non Freedom: historical cases.

© ИЭА42 GDP per capita in South Korea and North Korea as % of the world average, 1950–2005

© ИЭА43 GDP per capita in Austria and Czech Republic as % to the world average, 1950–2005

© ИЭА44 GDP per capita in Puerto Rico and Cuba as % of the world average, 1950–2005

© ИЭА45 GDP per capita in Greece and Georgia as % of the world average, 1950–2005

© ИЭА46 Main World Trends

© ИЭА47 World Political Rights and Civil Liberties Indices, 1972−2005

© ИЭА48 Politically Free, Partly Free and Non Free countries as % of all countries of the world, 1975−2005

© ИЭА49 World GDP per capita, 1870−2005

© ИЭА50 The most important law of the modern social development: an increase in economic and political freedoms leads to growth of prosperity and well-being. Humanity becomes freer. World becomes richer and safer.

© ИЭА51 Formula of prosperity is not puzzle anymore. Formula of prosperity is defense, support, sustaining and expanding of economic and political freedoms.

© ИЭА52 Political Freedom in the World, OPEC and Russia, 1991−2005

© ИЭА53 By change in PF Index in 1991−2005 in 193 countries Russia occupies 190 th place

© ИЭА54 The G8, world leaders by speed of political freedom destruction, 1991−2005 : RankCountry Change in PF Index 1Nepal-4,29 2Belarus-4,00 3Tajikistan-3,86 4Russia-3,64 5Gambia-3,57 6Venezuela-2,86 7Zimbabwe-2,86 8 Solomon Islands -2,86

© ИЭА55 «Zimbabwean disease». Political Freedom in Zimbabwe and Russia, 1991−2005

© ИЭА56 Some conclusions: Institutions matter. Institutions matter. For faster economic growth are conducive following political institutions: parliamentary rather than presidential form of government, German/Scandinavian law system rather than French one, political competition rather than political monopolization, federalism rather than centralization of government, political and civil freedoms, larger number of “veto players” in the political system. For faster economic growth are conducive following political institutions: parliamentary rather than presidential form of government, German/Scandinavian law system rather than French one, political competition rather than political monopolization, federalism rather than centralization of government, political and civil freedoms, larger number of “veto players” in the political system. In the long-run “Strong”, or “Decisive” political system is less effective than “Weak”, or “Resolute/Legitimate” one. In the long-run “Strong”, or “Decisive” political system is less effective than “Weak”, or “Resolute/Legitimate” one. There is such thing as an Optimal Political System. There is such thing as an Optimal Political System. Political institutions are subject to evolution. Political institutions are subject to evolution. Optimal political system can be achieved through natural evolution and efforts from within society as well as from outside. Optimal political system can be achieved through natural evolution and efforts from within society as well as from outside. Through their financial assistance international donors can substantially hinder positive evolution of political institutions and economic growth of a recipient country. Through their financial assistance international donors can substantially hinder positive evolution of political institutions and economic growth of a recipient country. Effective destruction of political institutions and economic growth goes through non-market inflow and non-market (government) distribution of economic resources. Effective destruction of political institutions and economic growth goes through non-market inflow and non-market (government) distribution of economic resources.

© ИЭА57 And finally: “Democracy is the worst form of government except all those others that have been tried from time to time”. W. Churchill.