TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Megan McArdle on why Iraq’s business environment isn’t getting better:

But for Iraq to generate a healthy economy–rather than just another semi-failed oil state, with most of its population limping along on the income from dwindling oil reserves–it needs much more than the absence of Saddam.  When I started writing this piece, most of the war supporters I spoke to assumed that the major obstacle to economic growth in Iraq was Saddam’s legacy–insufficient education, crumbling infrastructure.  Most of the war opponents assumed it was the violence.

But neither is the major problem now.  We’re fixing the infrastructure, and the violence is declining.  Instead, the major problem is creating political and social institutions that support a vibrant, entrepreneurial business culture.  And that’s not just absent now; it actively seems to be going in the wrong direction.  And the reason Iraq is going in the wrong direction is not that our violence begot violence, but that the freedom and democracy, which work so well in America, may actually be promoting more corruption and rent-seeking than a horrible dictatorship.  

That’s why I think, long-term, China is in a much better position to transition to a free society than any other country. For now, they suffer under a repressive government that denies them freedom, but the CCP’s slow embrace of free markets, and reticence to liberalize their political system, is effectively allowing Chinese society to adapt to more liberal norms without (all) of the harms that other nations, like Russia, faced when they liberalized their economy and political system simultaneously.

Of course, it might not work out that way. There’s an argument to be made that the CCP is pioneering a new system, authoritarian capitalism, only adopting the elements of liberal countries they need to uphold the only mandate they have to their people, economic growth, and that this model will spread across the world, just like people assumed Soviet-style socialism would. Or, slightly less dramatically, the CCP could just prove adept at providing economic growth and go on in their current position.

I don’t think that’s how it will play out, though. the PRC’s stability is directly dependent on continued high levels of growth, which provide jobs and rising standards of living for the people, keeping a lid on frustration. This strategy has worked thus far; the CCP’s success thus far with generating economic growth has provided them legitimacy and respect among the greater population.

It is incredibly unlikely, however, that they will be able to continue with 7+ percent growth year after year. China’s growth to date is due almost entirely to infrastructure and export developments, and they are approaching the limits of this approach. Soon, they will have to move toward a more balanced economy, with a larger consumer market. This won’t be an easy transition. There will be a year, likely in the next decade, when China’s growth falters. And if China faces persistent economic trouble, there will be dramatic frustration, and all of it will be directed toward the CCP.

That’s the problem for dictatorships: when something terrible happens, and people are angry, there isn’t a way of dissipating that anger. It is bottled up until it finally explodes, and the regime in power receives the full brunt of it.

Democracy, though, provides a blow-off valve for this kind of anger. People can protest in the streets, write angry opinions, speak to others, and ultimately, vote out whoever is in office, whether they are responsible or not. The CCP may need to adopt democratic reform to survive. If it is in absolute control when the economy falters, the party, and the government, may not survive; but if there are other parties the people can elect in anger, the government will survive, and the CCP will be able to come back in future elections. It may turn out that the CCP’s own desire to survive will push them toward democratic reform.