A good working economy is a crucial element of a successful state. Therefore, this chapter will be dedicated to how a totalitarian government can influence the economy of its own nation and vice versa.
3.1 THE Economy of an Autocracy
Autocrats care about their ‘public image’, since this partly determines the likelihood for a popular revolt. In autocracies, economic growth is often assigned to the autocrat himself. This means that when the economy grows, the popularity of the autocrat also grows. Therefore, the autocrat will do everything he can to stimulate economic growth, since this gives him a good image both nationally and internationally. (Drezner, 2017)
The National Economy
It is often argued that democracies have better economies than dictatorships, since companies in democratic economies have more freedom of production than in undemocratic economies.
American economist Edward Glaeser; Argentinian Professor in Economics Rafael La Porta and Mexican economist Florencio López de Silanes studied the situation on the Korean Peninsula from 1950 onwards. North Korea and South Korea were both governed by autocratic regimes in 1950. Only from 1980 onwards, South Korea became a democracy. Glaeser, La Porta and Silanes argue that the increase in South Korean democratic institutions are an effect of the economic growth in South Korea from 1950 onwards. In other words, South Korea’s economic progress can be linked to the choices made by its dictators, not to the emergence of democratic institutions, which only happened subsequently. (Glaeser, La Porta, & Lopez-de-Silanes, 2004) So economic growth is a result of the choices made by the dictator himself, rather than an effect of the improvement of national institutions and further
democratization. To find out how modern autocrats set up their state’s economy, the economies of different modern autocracies need to be inspected.
Modern autocracies such as Cuba, Belarus, Zimbabwe and North Korea all have planned economies. (Thompson, 2000) (U.S. Commercial Service) This means that most industries in these countries are owned and run by the government. (Thompson, 2000) Due to the government owning the majority of the industrial corporations in the country, in modern autocracies, there is no such thing as fair competition. This means that, due to the lack of a fair market mechanism, prices can be determined by the government. (Smith, 1776) The fact that the government can directly influence the prices of goods sold on national markets means that the power of the autocratic regime is only extended. To stimulate economic growth (the growth of the GDP of a country), the government will try to stimulate the production in a country. To stimulate production in a country, there have to high consumer demands. To achieve an increase in consumer demands, according to the market mechanism described by Adam Smith, the prices need to be low. (Smith, 1776) To always keep stimulating economic growth, autocratic governments will try to always keep prices of products at a very low level. The effects of this autocratic policy can be seen in table 1 (Expatistan, 2019), which compares the prices of various products in Cuba, Belarus, Greece, The Netherlands and Germany to each other. Visible is the fact that autocracies have much cheaper products than democracies. This can be linked to the planned economy that autocracies have.
Table 1
Product Cuba Belarus Greece The Netherlands Germany
Big Mac Meal €3.81 €3.44 €7.00 €8.00 €8.00
Coca Cola (2L) €2.09 €1.00 €1.92 €2.52 €1.77
Flatscreen TV €828.00 € 383 €349.00 €441 €361.00
Prices compared to each other, all data from Expatistan. (Expatistan, 2019)
The goal of an autocratic regime “is to modify how people go about their investment and production decisions: what goods and services are marketed, how they go about the producing, where they locate their production facilities, and the methods by which they may market their wares to their prospective customers.” (Ebeling, 2018) In an autocracy, people and corporations therefore lose their freedom of choice.
Taxes in Autocracies
In most countries, people are willing to pay taxes since they can notice that the money they pay the government, is spend elsewhere in society. These expenses often contribute to the wealth of that particular country. (Alm, McClelland, & Schulze, 2002)
Since an autocrat has absolute power, he is the one who collects taxes and the one who determines the tax rates. (McGuire & Olson, 1996) The autocrat’s “monopoly over tax collection induces him to limit his tax rate.” (McGuire & Olson, 1996) If he does decide to collect more taxes by using a higher tax rate, his taxation policy reduces the national income which means that his collections automatically begin to decrease leading to less economic growth and thus unpopularity of the autocrat himself. (McGuire & Olson, 1996) The effect of this fact can be seen in table 2. Table 2 compares the tax rates of different countries in Europe to each other. Belarus is the only country in Europe that is an autocracy.
Table 2
Type of tax Belarus* Netherlands** European Average***
Income tax rate 12% (Flat rate) 36,55 – 52% 32,7%
Profit tax rate 18% 20 – 25 % 21,3%
VAT rate 20% 21% 21%
* (Ministry of Finance of the Republic of Belarus, 2019)
** (Government of the Netherlands, 2019)
*** (European Commission, 2019) (Trading Economics, 2019)
The conclusion that can be drawn from table 2 is that, in Europe, the difference between the tax rates of autocracies and democracies is quite significant and taxes in autocracies are lower than in democracies. To make this conclusion more globally significant, one can look at the tax rate in Cuba, a North-American autocracy. In Cuba the income tax rate is 20%, the profit tax rate is 35% (Frank, 2012) and the VAT rate is 20%. (Trading Economics, 2019) Also in this case, the tax rates are lower than those in democracies. Many people believe that this worldwide tax rate difference between democratic and autocratic countries exists due to autocracies not having a welfare state and therefore requiring less government income to stimulate economic growth. However, as pointed out by political scientist Carl Henrik Knutsen, “several autocracies do have extensive welfare programs covering different types of risks.” (Knutsen & Rasmussen, The Autocratic Welfare State Resource Distribution, Credible Commitments and Political Survival, 2014) Knutsen argues that autocrats often implement such programs for political survival reasons. Targeted welfare programs allow autocrats to make credible commitments on the distribution of resources to their ruling coalition also in the future, thus reducing the probability of revolts or coups. (Knutsen & Rasmussen, The Autocratic Welfare State Resource Distribution, Credible Commitments and Political Survival, 2014) This means that the conclusion that tax rates in autocracies are low due to the lack of a welfare state is invalid.
The real reason is that “the rational autocrat spends some of the resources that he could have devoted to his own consumption on public goods for the whole society ” (McGuire & Olson, 1996) He does this because it, eventually, increases his tax collections. (McGuire & Olson, 1996) An increase in tax collections also means that the autocrat has more income for himself which means his private consumption can increase. The main reason autocrats want this is that they “prefer private consumption over government spending.” (Hollenbach, 2014) This illustrates that autocracies rather stimulate the people’s expenditures and thereby get higher tax incomes through the VAT, than actually collecting more tax income by using higher tax rates.
According to the 2018 World Happiness Report, there appears to be correlation between countries with high tax rates and the happiness of the people. The countries Finland, Norway and Denmark all have high tax rates and are in the top three of the index, while Belarus, with very low tax rates, only reaches position 73. (World Happiness Report, 2018) American political scientist Benjamin Radcliff argues that “higher levels of taxation suggest higher levels of satisfaction with life.” (Radcliff, 2001) American economist Jeffrey Sachs supports Radcliff and argues that higher taxes allow the government to provide more social benefits, universal healthcare and education and better infrastructure, which results in more happiness with the people. (Sachs, 2011) Nevertheless, as mentioned before, people want to pay taxes since they notice that the money they pay the government is spend elsewhere. However, this only works in democracy, since in an autocracy autocrats “prefer private consumption over government spending.” (Hollenbach, 2014)
The World Economy
Building on the point that international trade is efficiency enhancing, Adam Smith, a famous Scottish political economist, argues that democracy helps to support harmonious international economic relations, of which international trade is a central pillar. (Smith, 1776) However, more recent research has argued that “democracy may also empower distributional coalitions with intense interests, making higher levels of protectionism more likely.” (O’Rourke & Taylor, 2007)
Determining a trade policy
The trade policy of an autocratic country can be determined by the autocrat. The decision between an open economy or a policy of prot
ectionism can therefore only be made by the autocrat. Trade policy affects not only the government of a state, but also the people. While the autocrat is in the first place seen as the person who has control over trade policy, the rest of society may be able to overcome the dictator’s policy by having the periodic opportunity of mounting a revolution in which they could weaken the autocrat’s regime. This threat of revolution will force the autocrat to make concessions to the rest of society over trade policy. (Zissimos, 2014) Therefore, the people play an important role in the acceptance of a particular trade policy. An autocracy which is controlled by an autocrat that has the same trade policy preference as the people can easily calm down the supporters of a popular revolt. Autocrats with an opposite trade policy preference than the people risk their regime being weakened by a popular revolt. (Zissimos, 2014) Since many people around the world are dependent on foreign goods, also in an autocracy, the people are likely to be demanding an open trade policy. Modern autocracies will therefore choose an open economy above a policy of protectionism. (Zissimos, 2014)
Import and export
To get a good idea of the economy of an autocracy, one can look if there is a relation between the import and export of modern autocracies. To show this relation, data from the OEC (2018) are presented in table 1. The OEC divides the imported and exported goods into three categories: raw materials, finished goods and services.
Table 3
Country Main export Main import Balance of trade
Cuba Raw materials Finished goods $ -5,55 billion
Belarus Raw materials Raw materials $ -3,9 billion
North Korea Raw materials Finished goods $ -0,5 billion
Zimbabwe Raw materials Finished goods $ -2,32 billion
All data from The Observatory of Economic Complexity (OEC, 2018)
As can be seen in table 1, modern autocracies are mainly focused on exporting raw materials, while at the same time, they focus on importing finished goods. From this data can be concluded that autocracies require finished goods. The fact that autocracies need to import finished goods demands them to have a (partly) open trade policy, with low or no import tariffs, since otherwise their opportunities of importing foreign goods are limited. (OEC, 2018) (Wintrobe, Dictatorship, 2004)
Trade barriers
Trade barriers have been a part of international trade for a long time. Trade barriers make imports more expensive and at the same time export prices are also increased. Therefore, trade barriers can be used to improve the trade deficit of countries participating on the global market. (Madsen, 2001)
As can be concluded from table 1, the autocracies Cuba, Belarus and North Korea have a trade deficit. Therefore, these autocracies might be interested in imposing trade barriers. However, as mentioned before, the importance of imports in these countries is high. Due to the risk of becoming too expensive for other countries on the global market, the chances of autocracies imposing trade barriers is small.
The World Trade Organization focuses on maintaining a fair global market and therefore tries to forbid the use of trade barriers against other WTO-members. (WTO, 2019) Of the autocracies mentioned in table 1, Cuba and Zimbabwe are a WTO-member, while North-Korea and Belarus are not. (WTO, 2019) This means that the use of trade barriers by Cuba or Zimbabwe will not be tolerated by the WTO and its members. Still, North Korea and Belarus are not a member of the WTO. Do they use trade barriers? The answer is that they have no reason to use them. Both against Belarus and North-Korea, sanctions are imposed by respectively the EU and the United States. (European Commission, 2018) (U.S. Department of the Treasury, 2019) As explained in Chapter 2, democratic countries do not use violence to attack a state, but rather impose sanctions to make their position clear. (De Deugd, 2018) In the case of Belarus and North Korea, the sanctions were imposed because of the lack of democratic leadership and (in the case of North Korea) the development of nuclear weapons. (European Commission, 2018) (U.S. Department of the Treasury, 2019) Thus, modern autocracies do not use trade barriers against trade partners either due to WTO-membership or due to the fact that there are already sanctions imposed by other states towards the autocracies.
3.2 The Economy of an Oligarchy
Oligarchic states are run by extremely wealthy people who use their wealth for power. This creates the possibility of the controllers to use their power to increase their wealth because this can give them even more power. How this works in reality and what effect this has on the oligarchic states’ economy is what one needs to understand to understand oligarchic states.
The National economy
It is important for oligarchs to have a strong national economy. This is because their companies need income for them to gain wealth. If a country has a bad economy the oligarchs’ companies will do bad as well. This means that oligarchs have to find the right balance between increasing their own wealth and making sure that the people have enough money to consume the products and services that the companies offer. However the possibility of oligarchs using their power to gain more wealth without taking notice of the consequences for the national economy is also a danger.
The tax system in oligarchies can differ enormously. In table 3 (Santander, Country Comparison For Corporate Taxation) the difference between corporate taxes in Saudi Arabia and other countries is shown;
Table 4
Saudi Arabia Middle East & North Africa United States Germany
Number of Payments of Taxes per Year 3.0 17.8 10.6 9.0
Time Taken For Administrative Formalities (Hours) 67.0 208.2 175.0 218.0
Total Share of Taxes
(% of Profit) 15.7 32.3 44.0 48.9
The table shows that the proportion of tax payed in Saudi Arabia is much lower than many
other countries. This can be explained by the fact that the royal family who run the country own the companies that would be taxed. But interestingly the country also has no income tax. This means that their tax income is very low. Saudi Arabia gets most of their money from selling oil. However the problem which arises is the lowering price of oil and the decrease in demand for oil globally. That is why Saudi Arabia has been investing a lot of money into developing new economic centers in the country. (Fanack, 2019) It is clear the oligarchs of Saudi Arabia are interested in keeping a strong economy which is why they are investing so much money in their future economy.
Table 4
Russia Eastern Europe & Central Asia United States Germany
Number of Payments of Taxes per Year 7.0 17.6 10.6 9.0
Time Taken For Administrative Formalities (Hours) 168.0 238.0 175.0 218.0
Total Share of Taxes
(% of Profit) 47.4 33.8 44.0 48.9
Russian corporate taxes compared to other tax systems.
The situation in Saudi Arabia may seem like a good example of the standard economy of an oligarchy but when looking at other oligarchies one notices that the difference in taxes is enormous. In table 4 (Santander, Country comparison for corporate taxation) we can see that in a country with a less clear oligarchic ruling and a different type of economy the tax system is very different.
Like Saudi Arabia Russia’s economy is built on their oil and gas industry but along with the dropping oil and gas prices, Russia also has to deal with Economic sanctions by the EU and the US. (Rapoza, 2018) This means it has to get more incomes out of its tax which explains the higher taxes.
When looking at both oligarchies we see that the way their economies work is highly dependent on several factors. Firstly the power of oligarchs is important. In Saudi Arabia for example the country is completely run by the family of oligarchs which makes it easier for them to control the economy and work together. In Russia this situation is very different because of the fact that the oligarchs can only use their power to influence the government and aren’t officially part of the government. On top of that the oligarchs all have different interests and relations with Russian president Vladimir Putin. (Rutland, 2009) Another factor is the wish of the oligarchs that control the country. How they control things like unemployment, the market type and how they react in a recession all has to do with how much wealth they want to acquire for themselves or for the country. This means that oligarchies will not have one specific way of running their economy, something which is more likely to happen in an autocracy.
Of course oligarchic states are also dependent on trade with other countries. This affects the decisions oligarchs can make over their states economy. On top of that other countries can impose sanctions on countries when they undertake certain actions that go against the values of the countries that they want to trade with. This can have a large effect on the economy. This happened in Russia after NATO countries imposed economic sanctions on Russia after the annexation of Crimea in 2014. This caused the growth of the GDP to decline and lead up to a growth of 0% in 2016. (Hunter, 2015) On top of that the sanctions led to trade diversion happening which means that even when sanctions are lifted there is no need for NATO countries to return to trade with Russia giving Russia a weak negotiation position. At the same time Europe is dependent on Russia due to its large supply of gas. With 37% of European gas coming from Russia, (Kottasová, 2018) Russia has a powerful position over Europe. There is a similar situation in Saudi Arabia where sanctions have been imposed after the assassination of journalist Jamal Khashoggi. However like Russia the world is still dependent on Saudi oil. This shows how the international economy of an oligarchic state is dependent on the actions of their leaders but also how dependent oligarchies are on their resources. This means that if an oligarchic state would not have resources which other countries are dependent on they could be completely shut off by sanctions. This is important to note when discussing whether an autocratic or oligarchic state would be better.
3.3 Characteristics of the European economy
After the Second World War, the European countries wanted to make sure that a new war would never happen again. The Netherlands, Belgium, France, Italy, Luxemburg and West Germany viewed that an important step for preventing a new war in Europe was economic cooperation. Therefore these six countries formed the European Coal and Steel Community in 1951. (Fligstein, 1999) Due to the success of the European Coal and Steel Community, these six countries wanted to increase economic cooperation and integration by forming a new economic union: the European Economic Community. “The EEC formed to expand the activities of the alliance to cooperation in agricultural policies and various industrial policies. The Treaty of Rome which produced the EEC, had the goal of reducing tariffs and other trade barriers, thereby promoting free trade and economic growth.” (Fligstein, 1999) The EEC became popular and countries as the United Kingdom and Greece decided to join the economic union. The EEC promoted a free internal market and therefore stimulated economic growth in Europe. This means that the EEC promoted a free market economy and tried to limit the use of tariffs and trade barriers. The members of the EEC all agreed that economic cooperation brought them closer together both economically and politically. This resulted in the formation of the European Union in 1993.
From this story one can conclude that since the end of the Second World War, European countries have been focused on maintaining a free European market and on stimulating economic cooperation. As pointed out by dr. Nienke de Deugd, actions of European countries that threaten the free European market will be rejected by the EU. The EU will never use violence to achieve their goals, but will focus on imposing sanctions against the state that obstructs one of their key values, both economically and politically. (De Deugd, 2018)