What consequences will economies face from the lurch toward populism and authoritarianism? Mainstream parties, and indeed economists, should be humble about how much they know about good policy. Failure to manage the forces that globalization unleashed created the conditions for the rise of populism in the first place.
Even so, as traditional economic logic plays a diminished role in big policy decisions, it seems reasonable to ask if a slide toward populism and authoritarianism will erect barriers to growth. The shift is, after all, producing plenty of violations of the good-policy playbook.
Leaving aside self-interested mismanagement of the economic cycle—goosing growth for short-term political gain, for example, a practice common to both mainstream and populist governments—we’d break the missteps into two categories: First are policies that damage growth potential. Brexit, taking the U.K. out of the world’s biggest free-trade bloc and shrinking markets for the country’s goods and services, is one example.
Second are policies that undermine institutions. That includes everything from the head-spinning reversals of U.S. policy under President Trump, such as his refusal to sign the G-7 communiqué in June (adding to uncertainty), to Turkish President Recep Tayyip Erdogan’s appointment of his son-in-law to a key economic post in July (reducing accountability).
Is it time to get out the placards saying, “The end is nigh”? Not yet. To be sure, Turkey and Italy are flirting with crisis, and the U.K. is underperforming. But looking at the G-20 as a whole, GDP growth rose to 3.8 percent in 2017, the fastest pace since 2011. In part, that’s because populists got lucky. They fed on economic discontent but ultimately inherited an upswing. Pro-cyclical policies, notably the U.S. tax cuts, are giving growth an additional boost. A pro-business stance, with a bonfire of regulations in the U.S., China, and India, is also helping.
Those factors are important. But the persistence of growth reflects something more than just luck and stimulus. Some aspects of governance, it seems, are more important for growth than others.
The World Bank’s Worldwide Governance Indicators project has gathered data in more than 200 countries on six dimensions of governance: voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption. An analysis using that data shows that high-quality regulation and government effectiveness correlate more closely with growth than democratic values such as voice and accountability, which track views about citizens’ ability to participate in their government. In those terms, the trajectory on governance in the G-20 looks less alarming. Democratic standards may be deteriorating, but quality of regulation and government effectiveness remain comparatively stable, even edging up in recent years.
Will the new rulers of the world’s major economies really be able to decouple long-term growth from the institutions that underpin good governance? Count us skeptical. Cycles turn. Confidence fades. Government effectiveness and high-quality regulation are tough to maintain in the absence of policy debate and accountability for leaders. The return of history has not, so far, meant the end of growth. But we’re keeping our placards on hand … just in case.
Orlik is chief economist at Bloomberg Economics in Washington. Jimenez is an associate economist in Hong Kong.
This article was provided by Bloomberg News.