How Does Democracy Affect Economic Growth

Empirical Evidence.

Using panel data from 125 countries from 1960-1985 in early research, Helliwell (1994) addressed the topic from a two-way causality point of view. While the effect of various democracy indicators on growth is largely negative and non-significant, the effects of income growth on democracy are positive, statistically significant and robust. Since democracy encourages education and investment, this suggests that the effect of democracy on economic performance is indirect. The author, however, could not find any systematic evidence of the effects of democracy on subsequent economic growth. Under the granger causality approach, Burkhart & Lewis-Beck (1994), found that democracy is caused by economic development and not the

Since democratic institutions attend to the demands of the poor by lowering income inequality and expanding access to education, done at the cost of limiting physical capital accumulation, the overall effect of democracy in growth is relatively negative. In short, there are two sides of the same coin: by providing human capital accumulation and lowering inequality, democracy fosters growth, but it also brings a hindrance to it by raising government expenditure / GDP ratio and lowering the rate of physical capital

But even if there was a positive effect of democracy on growth, it would be spurious to neglect the relevance of other elements that could have been proved to cause growth, including human capital, diffusion of knowledge and institutions (inclusive vs extractive ones). Democracy is, therefore, not the ultimate cause of development but rather a small piece of the big puzzle that has captured the interest of economists for decades: the wealth of