Tuesday, September 13, 2011

Recession without democracy: what would China do?


I wrote before about Ireland's former taoiseach (prime minister) Bertie Ahern, who had controversially claimed to be a socialist. I showed that Ahern did drastically increase spending on social welfare, but did so by taking advantage of rising tax revenue, not by increasing tax rates. Ahern wanted it all: lower taxes and higher spending.

One result of this avoidance of difficult trade-offs was the remarkable popularity of Ahern, leading his party to three consecutive electoral victories, in 1997, 2002 and 2007. Time Magazine has this bizarre observation of his popularity in 2007, just before the elections:
The people of Navan, northwest of Dublin, respond to their Taoiseach — the official title of Ireland's Prime Minister — not with fatigue or ill temper, but with an awe and affection usually reserved for rock stars.

As Bertie Ahern kicks off his campaign for elections expected within weeks, he remains startlingly popular for a man seeking a third consecutive term.
This is hilarious because within a year or two Ahern's stack of cards had collapsed, the country was in dire economic distress and Ahern had retired, leaving his party to be decimated in the next elections, losing nearly 72% of its seats.

In the boom times Ahern and his government could fling money at problems, funding large expansions in spending without worrying about undesirable tax increases. Once the tax revenue dipped during the recession, the government had to start desperately cutting costs, destroying their popularity.

I thought about all this again when I read this article by John Quiggin in The National Interest, pondering the sustainability of China's government:
The spectacular economic growth of the past two decades has made the resolution of policy disagreements relatively easy. Simply put, there has been enough surplus to satisfy all important interests and still allow rapidly rising incomes for the mass of the population, or at least those in urban areas who might pose a threat to political stability.

Again, the example of the Arab Spring suggests that a slowdown in economic growth can bring about a sudden break in what seemed like an established political order. In democracies, economic shocks typically result in electoral defeat for the incumbent government, which at least provides the public with someone to blame, and a test of the hypothesis that the crisis was the result of mismanagement.

In a closed oligarchy like that of China, there is no such mechanism. The system could break down from within, as factional disagreements within the central committee spill out into the broader party and the public at large. Alternatively, large-scale public protests, combined with disagreements over the extent to which repression is desirable and feasible, could bring about a rapid breakdown.
In Ireland Ahern's own party were annihilated in the last election and although the coalition that has replaced them has continued with their difficult cost-cutting programme its senior partner Fine Gael remains popular. Perhaps Irish voters simply needed to feel that they were punishing the guilty party which had caused the economic mess in the first place. Their sense of justice sated, they settled down to the painful budget cuts and tax hikes necessary to return to economic health.

As Quiggin points out, China lacks the electoral system that can give a satisfying punishment to unpopular leaders. If China's economy hits trouble and the government have to slash spending and increase taxes, how will angry citizens respond?

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