What Comes First, Economic or Political Liberalisation?

Imagine a country that liberalises both its economic and political systems simultaneously, while another one opens up only its economy but decides to maintain a tight lid on political freedoms. Which economy performs better as a result?

Easy, you'd say. Think about Taiwan under Chiang Kai-shek, or about Hong Kong, with meagre colonial freedoms but a very free economy. Or just look at China's and Russia's recent history.

Continental China has not loosened up its political straitjacket one bit, yet its economy is growing at a blistering clip. Russia, in contrast, starting with Mikhail Gorbachev and his perestroika, boasts political freedoms the Chinese can only dream about, but its economy is struggling as badly as under Communism, kept afloat now thanks only to the windfall brought about by high oil prices.

Even Augusto Pinochet, Chile's former dictator (pictured), for all his repressive political ways, ushered in one of the western world's most liberal economies during his stint in power. It was Chile that pioneered some concepts in low tariffs, reducing the size of the state sector, privatising utilities and setting up private pension funds and health care systems that are now being tried in several countries across the globe. The Chilean economy has been a star performer in the developing world for some 25 years, its free-market policies surviving unscathed the return of democracy in that country.

So, if you start out as an economically-closed and politically-repressed country, is a bit of authoritarianism just the right thing to speed you along the path to a free-market economy and economic development? According to a recent paper by Guido Tabellini and Francesco Giavazzi, professors of economics at Bocconi University, Milan, that's what empirical evidence suggests.

Their study measured economic liberalisation by a widely used indicator capturing the extent of free trade. Political liberalisation, in turn, was measured in terms of events leading to a full-fledged democracy. As expected, they did find positive feedback effects between economic and political liberalisation. While the timing of events indicates that causality is more likely to run from political to economic liberalisation, rather than the other way around, feedback effects in both directions cannot be ruled out. More crucially, they found that the sequence of reforms matters. Countries that first liberalise their economy and then become democracies perform much better economically than countries that pursue the opposite sequence, in almost all dimensions.

In another paper, Tabellini scrutinises the economic literature dealing with the role of the state in economic development. He finds that government incentives to enact sound policies are key to economic success. No surprise there. But then he examines what happens after episodes of economic and political liberalisation, asking whether political liberalisation strengthens government incentives to enact sound economic policies. The answer, he found, is mixed. Most episodes of economic liberalisation are indeed preceded by political liberalisation. But he came to the same conclusion as in the paper discussed above: the countries that have done better are those that have opened up their economy first, and only later liberalised their political system.

It is only to be hoped, then, that the positive feedback the authors report will one day lead China's burgeoning economy to further loosen up the country's political system. Not only China, but the entire world would stand to gain.

• Other CESifo Working Papers dealing with democracy and economy
• Other CESifo Working Papers by Guido Tabellini
• Other CESifo Working Papers by Francesco Giavazzi

Note: This text is the responsibility of the writer and does not necessarily reflect the opinion of either the CESifo Working Paper author(s) cited or the CESifo Group Munich.