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In the wake of recent political shifts, democratic principles are being eroded, giving way to a consolidation of governmental power through autocratic means. A new CEPR eBook sheds light on the trend for regime change towards autocracy, exploring the mechanisms employed by regimes to consolidate power and their consequences.
In the wake of recent political shifts, democratic principles are being eroded, giving way to a consolidation of governmental power through autocratic means. The changes in government witnessed in Hungary, Poland, Israel and Turkey serve as blueprints illustrating how democratic values can be eroded due to electoral manipulative strategies and judicial overhauls. While the manifestations of these patterns differ based on each country's distinct political, social, and historical contexts, they invariably erode the rule of law and democratic institutions. The contributions in a new CEPR eBook (Razin 2024) shed new light on the alarming trend of regime changes from liberal democracy (Mukand and Rodrik 2015) towards illiberal democracy or autocracy.
Acemoglu and Robinson (2017) posit that a nation's institutions, whether inclusive or extractive, serve as fundamental determinants of its economic and political trajectory. Inclusive institutions, they contend, afford a broad spectrum of citizens access to economic and political opportunities with facilitated active involvement in decision-making. In contrast, extractive institutions concentrate power and wealth within a select few, often leading to stagnation and restrained economic prosperity. Acemoglu and Robinson assert that autocracies frequently give rise to extractive institutions that bestow advantages on a small sector while disadvantaging the broader population. This controlling group employs its influence to exploit the country’s resources and sustain its elevated status, inhibiting innovation and constraining overall growth. Inclusive institutions, instead, cultivate innovation and economic expansion by fostering competition, safeguarding property rights, and incentivising investments in productive endeavours.
In his chapter in the book, Barry Eichengreen observes that the relationship between the various measures of democracy and economic growth are ambiguous. In contrast, the relationship between judicial independence and economic growth is clearer. His insightful survey of the literature finds a strong, positive and highly significant effect of de facto judicial independence on economic growth, both when levels of growth and judicial independence are considered, and when the effects of changes in the level of judicial independence are the focus.
Evidently, due to their foreign nature, foreign direct investors are highly sensitive to rule of law, independence of the judicial system and the protection of minority rights in the destination country. In their chapter, Assaf Razin and Efraim Sadka argue that Israel’s prowess in high-tech innovation since 2007 is a result of favourable prerequisites (such as a highly educated workforce and strong rule of law). Figure 1 shows a widening gap between outflows in inflows, indicating or reflecting this set of favourable pre-conditions.
Figure 1 FDI in Israel between 2007-2023: Inflows and outflows (US$ billions)
In his chapter, Noam Yuchtman demonstrates how judicial independence is a complementary institution directly supporting a successful democracy (e.g. interpreting the laws that govern elections). But in fact, it is much more than that – it plays a central role in shaping a wide range of other institutional determinants of the de facto power of civil society. The judiciary plays this role by ruling on contested issued related to all. A simple framework illustrating the direct and indirect role of an independent judiciary is shown in Figure 2.
Figure 2 Framework linking independent judiciary and other complementary institutions to de facto power and liberal democracy
Mobilisation for street protests is costly – in time, effort, and coordination. The ‘free-rider’ problem in protests – the temptation to stay home while others pay the cost of participation – has long been an object of social scientific inquiry (e.g. Olson 1965, Tullock 1971, Palfrey and Rosenthal 1984, Cantoni et al. 2019). Mobilisation for sustained engagement in an opposition movement is repeatedly costly, and yet following the announcement of the judicial overhaul in Israel, protesters turned out week after week for months, blocking the change in the judicial system.
In their chapter, Adam Szeidl and Ferenc Szucs describe the erosion of media freedom in Hungary and its implications for voters’ beliefs, political accountability, and trust in experts. Figure 3 focuses on the two leading online outlets in Hungary: Index and Origo. Index was independent throughout the sample period of 2013-2017. Over the same period, Origo experienced two key events: in August 2014, its editor was replaced, allegedly because of government pressure; and in January 2016, it was sold to the family of the governor of the central bank, an ally of Orban.
Figure 3 Two-way favours between the government and media
Figure 3a plots advertising on Origo relative to the combined advertising on Origo and Index for private and state-owned advertisers, respectively. For comparison, we also plot the share of visitors on Origo of the total visitors to Origo and Index. The key point of the figure is that advertising by state-owned companies, but not by private companies, was meaningfully reallocated to favour Origo after its change of editor, and even more so after its change of owner. Figure 3b investigates return favours for the government, plotting the share of articles covering government corruption scandals on Origo and Index over the same period. Initially, Origo was slightly more critical of the government, but its corruption coverage dropped below that of Index after the change in editor, and the gap grew further after the change in owner. We find similar patterns in several other media outlets.
Following the announcement of the judicial overhaul in Israel, Itai Ater, Itzchak Tzachi Raz, and Yannay Spitzer examine some repercussions for Israel’s financial market. The authors calculate a statistical correlation involving the S&P 500, the shekel/dollar exchange rate, and the interconnections between the Israel and US stock markets which point to significant deviations from the regression after the announcement of the judicial overhaul. Until the end of January 2023, the absolute value of excess depreciation was almost always smaller than 2%. Since then, however, excess depreciation has been rising persistently, reaching 20% by early September 2023; by that time, the predicted USD/NIS exchange hovered around 3.19–3.23, while the actual rate was more than 60 agorot higher (NIS 3.80–3.85).
Figure 4 Excess NIS depreciation
Poor education and education gaps in society are drivers for polarisation, and can facilitate political exploitation in the form of a judicial overhaul. Dan Ben-David and Ayal Kimhi examine the education fault line, highlighting trends in the Israeli education system that widen the gaps in society. They find that approximately half of Israel's children receive a similar level of education to children in low-income countries. Furthermore, this group is the fastest growing population group in Israel. The flaws of the education system include low average levels of knowledge in mathematics, science, and reading among Israeli children compared with high-income countries and high levels of knowledge gaps in these subjects across the country. PISA exams administered every three years in core subjects – maths, science, and reading – illustrate just how low the quality of education provided in Israel is. Figure 5 shows the achievement gaps between pupils in levels 2, 3 and 4 versus those in level 1. In general, the higher the level of parental education, the larger the gap in scores vis-à-vis the level 1 base group. While this is true in the leading countries as well, the gaps there are half, or just over half, of the gaps among Israeli pupils. This failure in reducing the relationship between parental education and children’s academic achievements has far reaching economic implications.
Figure 5 Gaps in scores between children with at least one parent with high school education and up, and children with two parents who did not complete high school
Israel is in the midst of an identity politics crisis, which lies on religion and demography.
Eran Yashiv looks at the cultural and religious segregation that occurs when groups within society socialise primarily with members of their own type. This manifests in educational institutions and social interactions that trigger political polarisation. He focuses on the fault lines created by demographic trends and forces of cultural-religious segregation, taking Israel as a case study. These demographic trends lead to the populist politics that gave rise to the judicial overhaul. The author analyses the economic ramifications of such reforms and the important role that Israel’s resistance movement has played.
The eBook delves with the perils inherent in the interaction of identity-political populism, religion, and regime change. Its global reach is evident in Hungary, Poland, Turkey, India, and Israel. Populist movements and religious orthodoxies harbour shared objectives fundamentally at odds with democracy. The dire economic prospects of such transition are non-negligible.
Acemoglu, D and J Robinson (2017), Why Nations Fail — the Origins of Prosperity, Power and Poverty, Random House.
Cantoni, D, D Y Yang, N Yuchtman and Y J Zhang (2019), “Protests as Strategic Games: Experimental Evidence from Hong Kong’s Anti-Authoritarian Movement,” Quarterly Journal of Economics 134(2): 1021-1077.
Mukand, S and D Rodrik (2015), “The political economy of liberal democracy”, VoxEU.org, 29 September.
Olson, M (1965), The Logic of Collective Action: Public Goods and the Theory of Groups, Schocken Books.
Palfrey, T and H Rosenthal (1984) “Participation and the Provision of Discrete Public Goods: A Strategic Analysis”, Journal of Public Economics 24: 171-193.
Razin, A (ed.) (2024), The Transition to Illiberal Democracy: Economic Drivers and Consequences, CEPR Press.
Tullock, G (1971), “The Paradox of Revolution”, Public Choice 11: 89-99.
