Give me liberty and give me cash!

June 22, 2011

Come back Mr Fukuyama, all is forgiven.

In his 1992 book “The End of History and the Last Man”, American political scientist Francis Fukuyama famously argued that all states were moving inexorably towards liberal democracy. His thesis that democracy is the pinnacle of political evolution has since been challenged by the violent eruption of radical Islam as well as the economic success of authoritarian countries such as China and Russia.

Now a study by Russian investment bank Renaissance Capital into the link between economic wealth and democracy seems to back Fukuyama.

Looking at 150 countries and over 60 years of history, RenCap found that countries are likely to become more democratic as they enjoyed rising levels of income with democracy virtually ‘immortal’ in countries with a GDP per capita above $10,000.

” Only five democracies above the $6,000 income level have died. Even democracies above the $6,000 level have a 99 percent chance of sustaining their political system each year. The only exceptions were the military coups in Greece in 1967 ($9,800), Argentina in 1976 ($8,180) and Thailand in 2006 ($7,440), and the events in Venezuela in 2009 ($9,115), as well as Iran in 2004 ($8,475),” RenCap global chief economist Charles Robertson writes.

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. The world’s populous democracy, India, is a notable exception as its per capita income was under $800 from 1950-1967, and only exceeded $2,000 in 2003.

By this criteria, Nigeria’s democracy is safer than it has ever been. However, RenCap also notes that wealthy energy exporters tend to resist the democratization trend since their low levels of taxation give their people less incentive to demand political accountability.

These findings suggest that the best way to overthrow an autocratic regime is to trade and invest heavily in the country.

“Tourists intent on fermenting revolution should smoke cigars in Cuba, party in Belarus, dress like Indiana Jones at Petra, in Jordan, visit ‘Tatooine’ in Tunisia, and buy t-shirts in Swaziland,” Robertson writes.

And while democracy has become entrenched in major emerging economies such Brazil, Mexico and South Korea, the world’s biggest emerging economy remains far from politically free.

According to Robertson, China has just entered a most dangerous political period, with per
capita GDP at $6,200 in 2009. Even assuming 9 percent annual growth in per capita GDP, the
country will remain in the most dangerous $6,000-10,000 range until 2014.

“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,” he adds.

If that happens, investors shouldn’t fret too much; at least judging by the experience of China’s neighbours.

Economic growth in Taiwan and South Korea have hardly been impeded by their transition to democracy with per capita GDP rising by roughly $1,000 annually in Taiwan and
South Korea after democratisation.

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