How does democracy contribute to economic growth?

Democracy leads to economic growth through cumulation of social and economic capabilities. Acemoglu et al. (2019) argued that democracy leads to economic reforms, higher investment, improved provision of schooling and healthcare, and lower social unrest, all of which support economic growth.

How does the government support economic growth?

A government can try to influence the rate of economic growth through demand-side and supply-side policies, Expansionary fiscal policy – cutting taxes to increase disposable income and encourage spending. However, lower taxes will increase the budget deficit and will lead to higher borrowing.

What is the relationship between democracy and successful national economic performance?

Our results show a robust and sizeable effect of democracy on economic growth. Our central estimates suggest that a country that switches from nondemocracy to democracy achieves about 20\% higher GDP per capita in the long run (over roughly the next 30 years).

Is democracy the key to economic growth?

The first lesson is that democracy is not the key to economic growth” (Barro 1997, pp. 1 and 11). Meanwhile, reacting to the rise of China, New York Times columnist Tom Friedman argues:

Does Democracy change with time and country fixed effects?

Finally, even with year and country fixed effects, changes in democracy may be correlated with other changes or respond to current or future economic conditions, raising obvious omitted variable bias concerns (Acemoglu et al. 2005, Brückner and Ciccone 2011). We deal with all of these in our paper.

Why do existing democracy indices fail to measure democracy?

Existing democracy indices are typically subject to considerable measurement error, leading to spurious changes in the democracy score of a country even if its democratic institutions do not truly change. As shown in Figure 1, democratizations are preceded by a temporary fall in GDP.