Dictatorship, Democracy and Institutions: Macropolicy in China and India

Abstract

We explore the hypothesis that macroeconomic polices are influenced by political structure, through a systematic comparison of reform period macroeconomic policy choices and outcomes, in China and India. One decade lagged Indian reform in the context of similar economic and very different political structures offers a powerful natural experiment. Chinese low but positive real interest rates, facilitated by greater exchange rate volatility, and high infrastructure investment allowed it to outperform India in its first post reform decade. We find political structure did lead to specific inefficiencies in macroeconomic outcomes but macro-institutional changes exist that can improve policy. More openness under similar labor endowments give both countries the opportunity to commit to more effective, stable yet stimulatory, macroeconomic institutions and policies.

Keywords: Macropolicy, endowments, democracy, dictatorship, institutions, seignorage, policy rules

JEL Classification: P51, O11, E65