Dictatorship,Democracy,and Development September 1993 The historical prevalence of dynastic succession,in reap all potential gains from investment and from spite of the near-zero probability that the son of a long-term transactions only if it has a government king is the most talented person for the job,probably that is believed to be both strong enough to last and also owes something to another neglected feature of inhibited from violating individual rights to property absolutisms.Any ruler with absolute power cannot, and rights to contract enforcement.What does a by definition,also have an independent source of society need in order to have a government that power within the society that will select the next ruler satisfies both of these conditions? and impose its choice upon the society.An indepen- Interestingly,the conditions that are needed to dent capacity to install a new ruler would imply that have the individual rights needed for maximum eco- this capacity can be used to remove or constrain the nomic development are exactly the same conditions present autocrat.Thus,as is evident from modern that are needed to have a lasting democracy.Obvi- dictatorships in Africa and Latin America,most dic- ously,a democracy is not viable if individuals,includ- tatorships are by their nature especially susceptible to ing the leading rivals of the administration in power, succession crises and uncertainty about the future. lack the rights to free speech and to security for their These uncertainties add to the problem of short time property and contracts or if the rule of law is not horizons that has just been described.In these cir- followed even when it calls for the current adminis- cumstances,it may be advantageous to a society if a tration to leave office.Thus the same court system, consensus emerges about who the next ruler will independent judiciary,and respect for law and indi- probably be,since this reduces the social losses vidual rights that are needed for a lasting democracy arising from the absence in an autocracy of any are also required for security of property and contract independent power that could ensure a smooth suc- rights. cession.Given autocracy,then,dynastic succession As the foregoing reasoning suggests,the only can be socially desirable,both because it may reduce societies where individual rights to property and the likelihood of succession crises and because it may contract are confidently expected to last across gen- give monarchs more concern for the long run and the erations are the securely democratic societies.In an productivity of their societies. autocracy,the autocrat will often have a short time horizon,and the absence of any independent power to assure an orderly legal succession means that there is always substantial uncertainty about what will DEMOCRACY,INDIVIDUAL RIGHTS, happen when the current autocrat is gone.History AND ECONOMIC DEVELOPMENT provides not even a single example of a long and uninterrupted sequence of absolute rulers who con- We have seen that whenever a dictator has a suffi- tinuously respected the property and contract-en- ciently short time horizon,it is in his interest to forcement rights of their subjects.Admittedly,the confiscate the property of his subjects,to abrogate terms,tenures,and time horizons of democratic any contracts he has signed in borrowing money political leaders are perhaps even shorter than those from them,and generally to ignore the long-run of the typical autocrat,and democracies lose a good economic consequences of his choices.Even the deal of efficiency because of this.But in the secure ever-present possibility that an autocracy will come to democracy with predictable succession of power un- be led by someone with a short time horizon always der the rule of law,the adjudication and enforcement reduces confidence in investments and in the en- of individual rights is not similarly short-sighted. forcement of long-run contracts.What do the individ- Many individuals in the secure democracies confi- uals in an economy need if they are to have the dently make even very-long-term contracts,establish maximum confidence that any property they accumu- trusts for great-grandchildren,and create founda- late will be respected and that any contracts they sign tions that they expect will last indefinitely and will be impartially enforced? thereby reveal that they expect their legal rights to be They need a secure government that respects indi- secure for the indefinite future. vidual rights.But individual rights are normally an Not surprisingly,then,capital often flees from artifact of a special set of governmental institutions. countries with continuing or episodic dictatorships There is no private property without government!In (even when these countries have relatively little cap- a world of roving bandits some individuals may have ital)to the stable democracies,even though the latter possessions,but no one has a claim to private prop- are already relatively well supplied with capital and erty that is enforced by the society.There is typically thus offer only modest rates of return.Similarly,the no reliable contract enforcement unless there is an gains from contract-intensive activities such as bank- impartial court system that can call upon the coercive ing,insurance,and capital markets are also mainly power of the state to require individuals to honor the reaped by stable democracies like the United States contracts they have made. the United Kingdom,and Switzerland.Though ex- But individuals need their property and their con- perience shows that relatively poor countries can tract rights protected from violation not only by other grow extraordinarily rapidly when they have a strong individuals in the private sector but also by the entity dictator who happens to have unusually good eco- that has the greatest power in the society,namely, nomic policies,such growth lasts only for the ruling the government itself.An economy will be able to span of one or two dictators.It is no accident that the 572 This content downloaded from 202.120.14.67 on Sun,19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/termsDictatorship, Democracy, and Development September 1993 The historical prevalence of dynastic succession, in spite of the near-zero probability that the son of a king is the most talented person for the job, probably also owes something to another neglected feature of absolutisms. Any ruler with absolute power cannot, by definition, also have an independent source of power within the society that will select the next ruler and impose its choice upon the society. An indepen- dent capacity to install a new ruler would imply that this capacity can be used to remove or constrain the present autocrat. Thus, as is evident from modem dictatorships in Africa and Latin America, most dic- tatorships are by their nature especially susceptible to succession crises and uncertainty about the future. These uncertainties add to the problem of short time horizons that has just been described. In these cir- cumstances, it may be advantageous to a society if a consensus emerges about who the next ruler will probably be, since this reduces the social losses arising from the absence in an autocracy of any independent power that could ensure a smooth suc- cession. Given autocracy, then, dynastic succession can be socially desirable, both because it may reduce the likelihood of succession crises and because it may give monarchs more concern for the long run and the productivity of their societies. DEMOCRACY, INDIVIDUAL RIGHTS, AND ECONOMIC DEVELOPMENT We have seen that whenever a dictator has a suffi- ciently short time horizon, it is in his interest to confiscate the property of his subjects, to abrogate any contracts he has signed in borrowing money from them, and generally to ignore the long-run economic consequences of his choices. Even the ever-present possibility that an autocracy will come to be led by someone with a short time horizon always reduces confidence in investments and in the en- forcement of long-run contracts. What do the individ- uals in an economy need if they are to have the maximum confidence that any property they accumu- late will be respected and that any contracts they sign will be impartially enforced? They need a secure government that respects indi- vidual rights. But individual rights are normally an artifact of a special set of governmental institutions. There is no private property without government! In a world of roving bandits some individuals may have possessions, but no one has a claim to private prop- erty that is enforced by the society. There is typically no reliable contract enforcement unless there is an impartial court system that can call upon the coercive power of the state to require individuals to honor the contracts they have made. But individuals need their property and their con- tract rights protected from violation not only by other individuals in the private sector but also by the entity that has the greatest power in the society, namely, the government itself. An economy will be able to reap all potential gains from investment and from long-term transactions only if it has a government that is believed to be both strong enough to last and inhibited from violating individual rights to property and rights to contract enforcement. What does a society need in order to have a government that satisfies both of these conditions? Interestingly, the conditions that are needed to have the individual rights needed for maximum eco- nomic development are exactly the same conditions that are needed to have a lasting democracy. Obvi- ously, a democracy is not viable if individuals, includ- ing the leading rivals of the administration in power, lack the rights to free speech and to security for their property and contracts or if the rule of law is not followed even when it calls for the current adminis- tration to leave office. Thus the same court system, independent judiciary, and respect for law and indi- vidual rights that are needed for a lasting democracy are also required for security of property and contract rights. As the foregoing reasoning suggests, the only societies where individual rights to property and contract are confidently expected to last across gen- erations are the securely democratic societies. In an autocracy, the autocrat will often have a short time horizon, and the absence of any independent power to assure an orderly legal succession means that there is always substantial uncertainty about what will happen when the current autocrat is gone. History provides not even a single example of a long and uninterrupted sequence of absolute rulers who con- tinuously respected the property and contract-en- forcement rights of their subjects. Admittedly, the terms, tenures, and time horizons of democratic political leaders are perhaps even shorter than those of the typical autocrat, and democracies lose a good deal of efficiency because of this. But in the secure democracy with predictable succession of power un- der the rule of law, the adjudication and enforcement of individual rights is not similarly short-sighted. Many individuals in the secure democracies confi- dently make even very-long-term contracts, establish trusts for great-grandchildren, and create founda- tions that they expect will last indefinitely and thereby reveal that they expect their legal rights to be secure for the indefinite future. Not surprisingly, then, capital often flees from countries with continuing or episodic dictatorships (even when these countries have relatively little cap- ital) to the stable democracies, even though the latter are already relatively well supplied with capital and thus offer only modest rates of return. Similarly, the gains from contract-intensive activities such as bank- ing, insurance, and capital markets are also mainly reaped by stable democracies like the United States, the United Kingdom, and Switzerland. Though ex- perience shows that relatively poor countries can grow extraordinarily rapidly when they have a strong dictator who happens to have unusually good eco- nomic policies, such growth lasts only for the ruling span of one or two dictators. It is no accident that the 572 This content downloaded from 202.120.14.67 on Sun, 19 Feb 2017 15:11:57 UTC All use subject to http://about.jstor.org/terms