The underrated role of fear in economic development

William Overholt’s book China’s Crisis of Success covers a lot of different topics, but one theme that he keeps coming back to is fear.

A lot of what drove China’s daring early economic reforms was fear of falling back into the chaos of the Cultural Revolution. Fear can motivate political leaders to do things that are out of the ordinary, and motivate the population at large to accept them. It is not a coincidence, in Overholt’s view, that the miracles of economic growth in Asia followed national catastrophes:

The societies that have been able to implement the required policies [for rapid economic growth] are all ones that have experienced excruciating trauma and intense fear: Japan after losing World War II; South Korea after the Korean War; Taiwan after the Chinese Civil War; Singapore after its traumatic separation from Malaya (which meant facing two much larger powers, Indonesia and Malaysia); Vietnam after wars with France, the United States and China; and China after a century of foreign humiliation and tens of millions of deaths from domestic strife. …

The policies required for rapid growth entail enormous social dislocations, and political leaders who consider imposing such dislocations reasonably fear for their jobs. They only try when they are terrified of the alternative, and when a population fearful of collapse accepts otherwise unacceptable stresses. These are the political prerequisites of miracle-level growth.

I think there is something to this, even if it’s not the kind of insight that seems particularly easy to run regressions on (parts of Europe after the second world war probably also belong on the list).

Overholt calls China’s current situation a “crisis of success” because it has in fact succeeded in dispelling fear of national collapse. But without that fear, it is harder for political leaders to make disruptive changes to the system, and it is harder to convince interest groups to accept such changes.

One of China’s current problems is that shared national fear of collapse has given way to complacency and some hubris. …

As fear segues into confidence, the willingness of the population to endure terrible stresses dissipates and so does the motivation of the leaders to take great risks.

For this reason he thinks it is becoming difficult for China to continue liberalization that would reduce the role of government intervention and state-owned enterprises in the economy (the book, which came out at end-2017, is somewhat equivocal about this, but in person Overholt nowadays is more decisively pessimistic).

In recent years, advocacy for continued economic liberalization in China has been organized around the idea of the “middle-income trap”: if China does not do XYZ reforms, the argument goes, it will fall into this trap and not realize its full potential. But the middle-income trap is not a disaster or national catastrophe; it’s just things being not as good as they perhaps could be:

The stakes are different now – not war, not chaos, not financial collapse, just slower growth.

Since China’s growth is going to slow anyway, no one can honestly promise China that, if they do XYZ reforms, growth will not slow down. All they can argue is that growth might not slow down as much as it otherwise would. Which is not that compelling of an argument. So fear of the middle-income trap may not be enough to motivate the Communist Party to make politically difficult changes that reduce its ability to direct economic activity.

Fear does seem to be a stronger motivator in environmental policy: families rightfully fear for the health of their children, and political leaders rightfully fear the anger of families. The “fear model” thus suggests China could continue to make progress in reducing pollution, even if future economic liberalization is limited.

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5 Comments

  1. Doesn’t this thesis overlook the fact that the CCP fought tooth and nail to prevent most of the changes that ultimately became the famous reforms? And most were defacto present on the ground long before they were legalized?

    On Mar 10, 2019, at 9:36 PM, Andrew Batson’s Blog wrote:

    WordPress.com Andrew posted: “William Overholt’s book China’s Crisis of Success covers a lot of different topics, but one theme that he keeps coming back to is fear. A lot of what drove China’s daring early economic reforms was fear of falling back into the chaos of the Cultural Revo”

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    1. That’s a narrative that sort-of works for agricultural decollectivization but doesn’t really hold up for the post-1989 reforms, in my view. A lot of reforms (think financial system and exchange rate) cannot fit into the started-local-then-spread-national framework. Plus economic reforms increased the power and effectiveness of the state and for that reason had substantial support in the party-state.

      Reply

  2. Hard to separate out the element of asset redistribution and wealth destruction that tends to accompany national crises. This seems to play a particularly important part in quite a lot of development stories, not least because it reduces the capacity of vested economic interests in resisting systemic reforms.

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  3. Of course, fear and greed are ALWAYS among humans’ strongest motivations, but are they more responsible than usual for economic reform and growth?

    The notion that fear has been more responsible than other factors for economic reform and growth seems to me just a bit of “post hoc ergo propter hoc” reasoning…

    After all, Japan was reforming and growing extremely rapidly PRIOR to WW II. More recently, countries in Africa have grown VERY rapidly. Is this growth and reform due to fear, or to foreign direct investment in natural resource extraction?

    In 2017, Ireland was the 11th fastest growing country in the world. Was fear the motivation? Turkey was the 9th fastest grower. Was there big fear in Turkey in 2017? Or was there just a lot of real estate development?

    It seems that Mr. Overholt is just taking a common human motivator (fear) and attributing reform and economic growth to it, without clearly distinguishing between fear and other causes of reform and growth.

    A more interesting book would have attributed the reform and growth to greed.

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  4. This is very interesting. Applies to India as well. Whether it is ‘fear’ or ‘crisis’, the biggest pre-requisite for economic development is ‘fear’ or ‘crisis’. They go together. Two leaders stand out for invoking them successfully. One is Andy Grove of Intel. He used to say that the only paranoid survive. Another leader who invoked this and maintained a constant fear of being swallowed up or being overtaken in economic terms using it as a lever to propel his country into materially higher standards of living was Lee Kwan Yew.

    In a way, both India and China are failing to harness the potential of ‘fear’ or ‘crisis’ by overstating their economic growth numbers. If only the economic growth numbers reflect the true growth, without being embellished (intentionally or otherwise) by statistics or artificially spruced up by orchestrated credit growth (as distinct from voluntary commercial decisions of lending institutions), then they would serve as a wake-up call for political and industrial leadership or even labour leaderships in the countries.

    You are right, therefore, about the prospect of China succeeding with its environmental clean-up rather than with continued economic growth beause a sense of crisis (or, fear) is driving changes there.

    India is failing to harness these fears either with respect to economics or with environment. The danger is that easier, off-the-shelf populist answers are being thought of (e.g., interest rate cuts).

    Reply

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