Dictators, Ruling Coalitions, and Economic Growth; Authoritarian Politics

Lecture 9

MANCUR OLSON 1993

Main takeaways:

§ Under anarchy, uncoordinated competitive theft by “robbing bandits” destroys the

incentive to invest and produce, leaving little for either the population or the bandits.
Hence, both can be better off if a bandit sets himself as a dictator, a “stationary bandit”,
who monopolizes and rationalizes theft in the form of taxes.
§ A secure autocrat has an interest in domain that leads him to provide a peaceful order and
other public goods that increase productivity

à The First Blessing of the Invisible Hand

§ If large groups are not able to achieve collective goals through voluntarily collective action,
why then, have most populous societies throughout history normally avoided anarchy?
§ Example of warlords in China:
o Why should warlords, who were stationary bandits continuously stealing from a
given group of victims, be preferred by those victims to robbing bandits who soon
departed?
§ The rational stationary bandit will take only a part of income in taxes, because he will be
able to exact a larger total amount of income from his subjects if he leaves them with an
incentive to generate income that he can tax.
o If the stationary bandit monopolizes the theft in his domain, then his victims
do not need to worry about theft by others.
o If he steals only through regular taxation, then his subjects know that they can
keep whatever proportion of their output is left after they have paid their
taxes.
§ With the rational monopolization of theft, victims of the theft can expect to retain whatever
capital they accumulate after tax income and therefore also have an incentive to save and
invest, increasing future income and tax receipts.
§ The stationary bandit will have an incentive to provide other public goods whenever the
provision of these goods increases taxable income sufficiently.
§ Murder is prohibited e
§ Argument: robbing bandits don’t provide an incentive for anyone to produce or accumulate
anything that may be stolen.
o Bandit rationality, on the other hand, induces the bandit leader to seize a given
domain, to make himself the ruler of that domain, and to provide a peaceful order
and other public goods for its inhabitants, thereby obtaining more in tax theft than
he could have obtained from migratory plunder.
o First blessing of the Invisible Hand: the rational, self-interested leader of a band of
robbing bandits is led, as though by an invisible hand, to settle down, wear a crown,
and replace anarchy with government. Governments for larger groups don’t arise
 because of social contracts, but rather because of rational self-interest among
those who can organize the greatest capacity for violence. Origin of autocracy

à Dictator´s Problem: how much tax should the dictator charge and how much public goods to
provide:

§ The autocratic ruler has an incentive to extract the maximum surplus from the whole
society and to use it for his own purposes. He will therefore use his monopoly of coercive
power to obtain the maximum take in taxes.
o The social costs of autocratic leaders arise mostly out of their appetites for military
power, international prestige, and larger domains.

§ Example: if an autocrat received one-third of any increase in the income of his domain in
increased tax collections, he would then get one third of the benefits of the public goods he
provided. Therefore, he would have an incentive to provide public goods up to the point
where the national income rose by the reciprocal of one-third (which is 3), from his last
unit of public good expenditure.
§ If the optimal rate of tax is 50 percent, he will spend on public goods up to the point where
the last dollar spent on these goods adds $2 to the output of the domain, since he will then
receive $1.
§ Tax receipts will increase as tax rates increase, but after the revenue maximizing rate is
reached, higher tax rates will distort incentives and reduce income so much that tax
collections will fall.
§ He will spend money on public goods up to the point where his last dollar of expenditure
on public goods generates a dollar´s increase in his share of the national income. The gain
to society will be the reciprocal of his share.

à Dictatorships and Democracies: assume democratic political leaders are just as self-interested
as the stationary bandit and will use any expedient to obtain majority support.

§ The incumbent party or president will maximize his chances of election simply by making
the electorate as well-off as possible. Since a candidate needs only a majority to win, he
might be able to buy a majority by transferring income from the population to the
prospective majority. à result: impaired incentives and reduced society´s output (just as
stationary bandits)
§ The question that arises is: would this competition to buy votes generate as much distortion
of incentives through taxation as a rational autocracy does? Push taxes to the revenue
maximizing level?
o No, though both the majority and the autocrat have an encompassing interest in the
society because they control tax collections, the majority in addition ears a
significant share of the market income of the society, and this gives it a more
encompassing interest in the productivity of society.
o A majority would maximize its total income with a lower tax rate and a smaller
redistribution to itself that would be chosen by an autocrat.
§ Democratic political competition does not give the leader of the government the incentive
that an autocrat has to extract the maximum attainable social surplus from the society to
achieve his personal objectives.

§ The more encompassing an interest (the larger the share of the national income it receives
taking all sources together), the less the social losses from its redistributions to itself. The
narrower the interest, the less it will take account of the social costs of redistributions to
itself.
o Consider the small parties that often emerge under proportional representation, that
may only encompass a small percentage of a society and therefore may have little
or no incentive to consider the social cost of the steps they take on behalf of their
narrow interests.

§ Do democracies tax more?

 o Neither Olson (encompassing interest and grasping hand) nor the median voter
theorem are consistent with empirical evidence.
§ The median voter theorem predicts higher tax rate for democracies
§ Olson predicts that a regime with more freedom to coerce should therefore
be in a better position to extract taxes from its citizens.
§ Democracies perform in a more uniform fashion maybe because of their
capacity to produce quasi voluntary tax compliance.

POLITICAL SYSTEM AND ECONOMIC GROWTH

§ There is a broad consensus that authoritarian governments enforce property rights more
weakly and provide fewer public goods than democracies. One would therefore expect
countries ruled by authoritarians to grow more slowly than democracies.
§ All dictators share the same primary goal: hold onto office for dear life because failing to
do so would result in jail, exile, etcetera. The net effect is a paradox: dictators are inherently
insecure.
§ Horizon problems:
o The historical prevalence of dynastic succession, despite 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 absolutism. Any ruler with absolute
power can´t also have an independent source of power within society that will
select the next rule and impose its choice in society.
§ Given autocracy, dynastic succession can be socially desirable.
§ Would a low-income majority in democracy gain from confiscating all the property of
those with wealth and redistributing to themselves?
o No, even voters with less than median incomes have an encompassing interest.

DEMOCRACY AND PRIVATE PROPERTY RIGHTS

§ The only societies where individual rights are confidently expected to last across
generations 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 orderly legal
succession means that there is always substantial uncertainty about what will happen when
the current autocrat is gone.
§ It is true that the 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. However, with predictable succession under democracies, the enforcement of
individual rights is not similarly reduced. Citizens in democracies expect their legal rights
to be secure for the indefinite future.
§ Experience shows that relatively poor countries can grow extraordinarily rapidly when they
have a strong dictator with usually good economic policies, such growth only lasts only for
the ruling span of one or two dictators.
THE IMPROBABLE TRANSITION

§ The logic of collective action that ensures the absence of social contracts in the historical
record also implies that the masses will not overthrow an autocrat simply because they
would be better off if they did so.
§ Why a leader who organized the overthrow of an autocrat would not make himself the next
dictator or why any group of conspirators who overthrew an autocrat would not form a
governing junta?
o Autocracy is the most profitable occupation and the authors of most coups have
appointed themselves dictators.
o The theory predicts that democracy would be most likely to emerge spontaneously
when the individual who orchestrated the autocrat’s overthrow could not establish
another autocracy, much as they would gain from doing so.
§ If constituencies rules out division of a domain into mini autocracies, then the best
attainable option for the leader of each group when there is a balance of power is power
sharing. If no leader can subdue the others or segregate his followers into a separate
domain, then the alternative is either to engage in fruitless fighting or to work out a
truce with mutual toleration.
§ Note: the logic is the following, if none of the victorious leaders after overthrowing an
autocracy is strong enough to impose it will upon all others to create a new autocracy,
then power sharing is beneficial.
§ Elections and consensual agreements among the leaders of the different groups can be
consistent with the interests of the leaders and members of each group.

DICTATORS AND THE RULING COALITION

§ Who can threaten a dictator with removal from power, and the mechanisms that the use to
do so?
o A political entrepreneur must have a leadership role in an organized group that can
accomplish two things: serve as a forum to coordinate with other political
entrepreneurs and mobilize a rank and file against the dictatorship.
§ Dictators are insecure because they face political entrepreneurs who lead organized groups.
Dictators can´t rule alone, they need the organized group to take the power and run the
country. The group is composed of self-interested individuals that are integrated into the
state.
§ Since the organized group was able to solve the collective action problem inherent in
putting the dictator into office, then they can solve it to remove it from office.
o Example: military coups are attempted against dictatorships twice as frequently as
they are attempted against democracies.
§ Key implication: the dictator´s political survival requires that he either find a way to
commit credibly to do the bidding of the launching organization´s leadership or he finds a
way to curb their power. It is a power struggle between the dictator and the leadership of
the organized group that launched him.
§ There are three broad classes of outcomes:
o Terrorize the leadership of the launching organization
o Co-opt the leadership
 o Create a set of rival or complementary organizations with the purpose of raising the
cost of collective action for the leadership group (organizational proliferation).
§ Each of these solutions generates a property rights system and some of the resulting ones
severely limit the number of people that can enforce their property and contract rights.
Given the central role played by property rights in the process of economic growth, the
result is a high degree of variance in economic performance across dictatorships.
§ Why are there so few stationary bandits? Olson assumed that dictators face no threat to
their survival and that therefore have long time horizons. This is not true, no one lives
forever
o Co-optation ensures economic growth but not in the long term. In fact, rent sharing
systems, necessary to co-opt the group weigh on economic growth. Resources are
misallocated, industries exist in which the country has no comparative advantage,
monopolies occur where perfect competition should exist.
o Organizational proliferation confers property rights to most of the society, which
in turns, creates incentives for the members to invest in enterprises, which results
in impressive rates of economic growth. Growth is hampered because still not all
individuals are ensured their property rights are protected, but this system
approximates to that of democracies.
o Terror: property rights are vested in the dictator.