Capitalism Without Democracy — China Has It, Trump May Try It Too

-Analysis-

BERLIN — Populists are generally bad news for the economy. That’s not just an assumption; it’s backed by hard evidence. Brexit ended in economic turmoil, Italy’s growth stalled once Silvio Berlusconi came to power, and Hugo Chávez completely shattered Venezuela’s economy.

The Kiel Institute for the World Economy evaluated economic performance under populist governments over the last 120 years. The findings? Negative economic impacts start appearing within a few years after populists take office. Fifteen years in, a country led by populists sees its GDP drop about 10% below that of similar nations.

One key explanation for this is that populists often seal off their own economy through tariffs or restrictions on cross-border capital flows or labor mobility. This harms productivity because the advantages of international division of labor can no longer be exploited and suddenly fewer immigrants are available for the labor market.

Tariff troubles

But attacks on the independence of the judiciary or citizens’ civil liberties also harm growth in the long term: the erosion of the rule of law encourages mismanagement and corruption.

The economy will serve as a corrective force

This connection between the quality of a country’s institutions and its economic prosperity has been proven by numerous studies; in 2024, economists Daron Acemoğlu, Simon Johnson and James A. Robinson were awarded the Nobel Prize for their work on this topic.

Tariffs, border controls, attacks on the rule of law? Trump’s playbook certainly ticks all those boxes. That’s why politicians and business leaders across Europe are betting on Trump faltering on the economic front. They’re hoping the American economy will stumble, that he’ll face backlash in the midterms, and ultimately that he’ll become a lame-duck president — or even get pushed out of office. In their minds, the economy will serve as a corrective force that even Trump can’t ignore.

Too big to fail?

When former British Prime Minister Liz Truss rolled out tax cuts without a financing plan in 2022, investors pulled out, and Truss was shown the door after just 45 days.

But Trump has one big advantage Truss didn’t: the dollar. As the world’s leading currency, and the critical role of America’s capital markets, investors tend to stay loyal — even, and especially, in times of crisis.

This gives Trump more room to play with, and most global corporations can’t afford to withdraw from the U.S. market, tariffs or not. It’s no accident that industry leaders from around the world have congratulated Trump on his election victory, sometimes with almost embarrassing enthusiasm. The subjugation has already begun.

In tennis, beginners are given a racket with a large head because it helps them hit the ball over the net even if their aim is not that good. They are called ‘forgiving rackets.’ The American economy is a forgiving economy because of its sheer size. You have to be very stupid to tank it.

Maybe Trump will actually be that stupid. Maybe he will deport millions of immigrants immediately after his inauguration, maybe he will massively increase tariffs and limit the independence of the central bank, as he suggested during the election campaign. Then inflation would rise due to the increased costs of labor and imported products, and the subsequent spike in interest rates would plunge the economy into a recession.

Separation of powers, at risk

There are, however, indications that Trump will be acting a little more wisely. Both frontrunners for Treasury Secretary – Scott Bessent and John Paulson – are successful investors who know the ropes of the markets.

In addition, Joe Biden’s aggressive industrial policy has led to an expansion of manufacturing capacity in the United States, an expansion which will paradoxically benefit Trump in the coming years, as the Centre for European Reform argues in a recent study.

Joe Biden’s industrial policy will paradoxically benefit Trump

Trump could choose to concentrate his destructive energies on undermining the separation of powers and filling administrative posts with loyalists — in other words, targeting democratic institutions but leaves the economy alone. In such a scenario, this second Trump term might even be an economic success.

The financial consequences of the erosion of constitutional principles would not be immediately visible, they are more long-term in nature. In the short and medium term, capitalism works quite well without democracy — China is the living proof of this. Thus those troubled by Trump’s win shouldn’t count on the economy to rein him in.