RenCap Sees 14% Chance of Regime Change in Developing Countries

  • Thailand, Egypt among most likely to undergo regime changes
  • Likelihood of shift to democratic rule increases with GDP

The biggest political risks to the global economy may be stemming from developed markets, but Renaissance Capital sees no reason to anticipate dramatic changes. Advanced economies are simply too wealthy, it says.

The risk of regime change lies with autocratic governments in developing nations, not rich democracies. They have a 14 percent chance in any given year of regime change, or shifting to more democratic forms of rule, London-based economists Charles Robertson and Vikram Lopez wrote in a report released Tuesday. With the exception of Singapore and oil exporters, all autocratic nations become more democratic as they get richer because they would otherwise stagnate politically and economically, they wrote, citing their study of national-accounts data, per-capita gross domestic product, and two centuries’ worth of political scores measuring government authority.

The likelihood of a change in governing systems remains higher in countries where per-capita GDP is $8,000-$15,000 in purchasing power parity terms, according to the report. It lessens to 1.7 percent for nations with per-capita GDP in the $15,000-$25,000 range, RenCap said. For wealthy nations above $25,000, the probability falls to near zero.

Robertson and Lopez subscribe to Francis Fukuyama’s thesis laid out in the 1992 book “The End of History,” that all societies will end up as capitalist democracies. Once basic food and shelter needs are met, taxpayers eventually demand a say in how their taxes are spent. The principle doesn’t apply to oil-exporting countries, which don’t tend to tax their citizens. The 2011 Arab Spring uprising has shown that neither Islamic theocracy nor one-party communism has proven to become an alternative. That principle, however, doesn’t apply to Singapore, and net oil exporters such as Gulf nations which don’t tend to tax their citizens.

Russia, Turkey

Thailand and Egypt are among the most likely to undergo regime change, according to the study of 7,776 data points. They both have a 10 percent chance of downgrading to an open anocracy, a Russia- or Turkey-like system that combines democratic and autocratic elements with more semblance to a democracy through the use of elections.

Malaysia, Russia and Turkey each have a 10 percent chance annually of becoming democracies, but Moscow-based RenCap cites low confidence in the probability for this grouping. There are no open anocracies above $25,000 of per capita GDP so the political status quo in Turkey and Russia is incompatible with higher wealth levels. Neither Presidents Vladimir Putin nor Recep Tayyip Erdogan have shown signs of soon retiring, nor making way for an independent judiciary, political openness, and freedom, according to the report.

“While Putin is there, Russia probably won’t change significantly, while Erdogan is president of Turkey, there will be continued pressure on institutions like the central bank,” Robertson said in an e-mailed response to questions.

China Outlook

In contrast, peaceful democratization is inevitable in China, Robertson said, adding that it will not be the highly disruptive event many investors seem to think it would be. China has a 4.5 percent chance of undergoing some form of democratization in any given year, according to the report, which anticipated that China will transition by 2020 to a closed anocracy, or one that is closer to an autocracy. By then, China’s per-capita GDP in PPP dollars will be in the $15,000-$25,000 range.

Regime changes can lead to market corrections such as a reset in asset prices and usher in new policies that could influence inflows and investors’ risk appetites, creating new potential opportunities. While no strong correlation supports the view that autocracies are better for growth at low-income levels, RenCap found evidence that autocracies may produce a better business, corruption and legal environment than some anocracies. Predicting the likelihood of a shift in political regimes helps better measure and manage risk, according to the report.