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.

41cnty87rel

3 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”

    Reply

    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.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.