Monday, July 4, 2011

China Will Be a Democracy By 2017

I do not think that China will be able to sustain its rapid expansion much longer at all. It is surely brewing up a sharp contraction and a resultant displacement of the current hierarchy.   On the other hand, everyone sees the same thing and they have been skating quite well so far.

The truth is that a restructuring of the economy from the bottom up is long overdue and this is best led by democratically strong local governance.  The central government is now running into outright failure of judgment.

The take home for us here is that once per capita income hits $6,000, the economy stabilizes around a democratic system.  It was sort of implied in the past, but this work establishes it as a bench mark,

Economist predicts that China will be a democracy by 2017

JUNE 23, 2011

A groundbreaking report analyses 150 countries and 60 years of history, and concludes that rising levels of wealth are entrenching democracy in many emerging markets.

According to the report, Russia is highly likely to become a strong democracy within the next few years; China will become a democracy by 2017; and Kenya and Ghana are set to follow Nigeria towards ever-safer democracy levels. It concludes that trade and investment in “non-democracies” should be increased, rather than imposing sanctions on them.

The report asserts that democracies are “immortal” above the per-capita GDP level of $10,000, which probably now includes Mexico, Brazil and Turkey, as well as all EU member states and South Korea. It notes that autocracies have less chance of becoming democracies than vice-versa up to the $3,500 per-capita GDP level; and that rising income levels will lead to democracy unless the country is an energy exporter. “Controversially, it would appear that trade, investment and even tourism to foster growth is a better policy option than sanctions for Western governments hoping to promote democracy in non-energy exporting states,” the report concludes.

The big exception are energy producers, notably in the Middle East, where autocracies have survived with very high income levels, beyond $19,000 annually. Robertson says the answer is straightforward – these states don’t need to tax their citizens.

The $6,000 per capita GDP seems to be a crucial level, marking the point where a country is likely to shift to democracy. Tunisia, which early this year triggered the wave of uprisings against autocracy across the Arab world, recently crossed that threshold.

Conversely, democracy is most fragile at the lowest income levels and when incomes are shrinking.

China: democracy by 2017?

Political forecasting is even more dangerous than economic. Particularly about the future, as the old joke goes. So all credit to Charles Robertson of Renaissance Capital for having a shot at the biggest call of all.

China, he boldly predicts, could be a democracy by 2017 assuming the economy grows and annual incomes rise to $15,550 a head. And that would be good for China and good for the world. Nice if it things turn out that way, of course. But how can be so sure?

Robertson bases his forecasts on well-known studies of the links between economic development, rising incomes and political transformation from autocratic/authoritarian/totalitarian regimes to democracy.

Expanding the existing research to nearly 150 states, he shows in a report that there is no case of a  democracy collapsing into a non-democratic form of government once it has achieved per capita annual incomes of $10,000. The 45 larger democracies to have made the $10,000 grade now include Mexico and Lebanon on 2009 data.  Turkey, Brazil and Serbia probably joined the club in 2010, says Robertson.

Even above $6,000 per capita per year, the chances of a democracy “dying” are only 1 per cent in any given year.   Only five have ever lost their democratic status – Greece in

1967 (with an annual per head income of $9,800), Argentina in  1976 ($8,180) , Thailand in 2006 ($7,440), Venezuela in 2009 ($9,115), and Iran, which  slipped from fragile democracy back to autocracy in 2004 ($8,475).

The big exception are energy producers, notably in the Middle East, where autocracies have survived with very high income levels, beyond $19,000 annually. Robertson says the answer is straightforward – these states don’t need to tax their citizens.
Of the 25 richest autocracies, all but six are significant energy producers. The exceptions are the city state of Singapore, Cuba, Tunisia, Thailand and China, as well as Belarus, which has been given subsidised energy from Russia. Of these, Singapore has just experienced the most challenging election in 2011 since the 1960s, Belarus is facing protests with shrinking incomes since the devaluation, Tunisia has just had a revolution and Thailand has elections scheduled for this year.

This leaves Cuba as a country with apparently high per capita GDP but no energy exports; but we are inclined to doubt that its per capita GDP figure is actually higher than that of Brazil or Romania.
So what about China?  Robertson says China has just entered a most dangerous political period, with per capita GDP at $6,200 in 2009. Even assuming 9 per cent pa growth in per capita GDP, the country will remain in the most dangerous $6,000-10,000 range until 2014.
Given this, it is much easier to understand: 1) why the authorities have been so anxious about a Jasmine revolution at this time, and it helps explain 2) the intention of the authorities to double incomes by 2015, despite the risk of inflation. Unfortunately for China, we see inflation as a potential trigger for demonstrations, given the saving habits of the population, so we think the government is actually stuck between a rock and a hard place.

Theoretically, China may hope that if it can boost per capita GDP above $10,000, then political risk will decrease. Perhaps it may become another Singapore. This is a highly unlikely scenario, in our view. Non-energy exporting countries always become democracies.
Robertson doesn’t pull his punches. Democracy will come – and will be good for the world.
To conclude, the Communist Party of China is right to fear a revolution, and history suggests it will be lucky to avoid democracy by 2017, assuming per capita GDP has reached $15,550 by then.

The positive news for the world economy is that the move to democracy did nothing to impede the growth of Taiwan and South Korea. Per capita GDP continued to rise by roughly $1,000 annually in Taiwan and South Korea after democratisation. Also positive is that once a country becomes a democracy at this wealth level, it becomes an immortal democracy.
Given RenCap’s domicile in Moscow, it’s no surprise to find Robertson is also positive about Russia (income per head $15,000 in 2009).

Assuming it can be classed now as a weak democracy (and not an authoritarian state), its prospects for tranformation into a strong democracy are good because very few weak democracies turn into anything other than strong democracies at these income levels, says Robertson.

However, as Robertson concedes, some observers do class Russia as an authoritarian state and it is clearly an energy exporter. So like the Gulf states, Russia could yet manage to develop into a rich non-democracy.

What to say about Robertson’s startling conclusions?  The main difficulty with the argument is that it lumps together nearly 150 countries, big and small. It could be that China and Russia have too many exceptional characteristics to be covered by rules which govern most other states.
Both are large nuclear powers with big military establishments. Both have global foreign policies. Both have histories in which they dominated their neighbours. Both have been through terrible domestic revolutions and post-revolutionary upheavals in which tens of millions of lives were lost. Both have complex ethnic divisions, which have erupted even in recent years into violence. And, crucially, both have wealthy elites which won’t want to share power and money with the rest of society.

Such states can develop imperialist tendencies – with elites which are prepared to suppress citizens’s rights and justify their actions with claims of acting to defend the nation against internal and/or external enemies.

Russia’s relations with Georgia are a case in point: the 2008 war was combined with the victimisation of ethnic Georgians in Russia. China has – until now – been more cautious about projecting its power abroad. But it is engaged in a rapid expansion of its military strength, not least of its navy, and in asserting its claims to disputed sea areas. And it has been quick to suppress ethnic unrest in Tibet and Xinjang, not least by transferring people from the Han majority into ethnic minority regions.

Nobody knows how any single country will handle these pressures, and others. Robertson builds a predictive model that seems to cover most states. But it could be that two of the biggest and most important nations are also two that break the rules – or at least take much longer in accepting them.

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