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A Dynamic Theory of Economic Openness and Political Stability in Autocracies

The timing and magnitude of economic openness exhibit considerable variation across authoritarian regimes and lead to vastly different political outcomes. Some autocracies liberalized their economy in early post-war period while others started to open their doors just in the last decade. Some were eventually transformed into democracy following economic liberalization while others remain autocratic until now. To explain the variation, this paper develops a set of infinite time horizon stochastic models to study the dynamic interaction between economic liberalization, transaction cost, political instability and social unrest. It shows formally that political instability does not necessarily impede economic liberalization and growth. The timing and magnitude of liberalization are determined by the stage of economic development and the timing of political instability. High frequency of intermediately high political instability may force the autocratic elite to liberalize the economy in order to maintain his rule. Paradoxically, the elite in an autocracy with low frequency of high political instability may fail to liberalize the economy and eventually be overthrown by the citizens. Meanwhile, although economic liberalization may be initialized by economic development, it is accelerated by the political instability under certain conditions. The logic of the causal mechanism developed in the formal model is tested on a number of case histories, including the Soviet Union and Eastern Europe, China, Singapore and Taiwan.