Democracy and Economic Growth: A Survey of Arguments and Results

This paper surveys the literature on how democracy affects economic growth. The paper first presents descriptive statistics and brief case-descriptions to illustrate how democracy and dictatorship may affect growth. Thereafter, the paper evaluates five central arguments on democracy and growth, before it surveys empirical studies on the relationship. Furthermore, the paper highlights critical methodological challenges, and draws implications for constructing valid models for empirical research on the topic. The review shows there is still disagreement over whether democracy enhances growth or not. Nevertheless, in the light of more recent studies, using more proper methodological approaches and more data than previous studies, two trends are recognizable: First, the hypothesis that democracy reduces economic growth is refuted by recent studies. Second, the hypothesis that democracy has no effect on growth, although still widespread in the academic community, seems less plausible today than it did ten or twenty years ago. Several recent studies show that democracy has positive effects on growth, although these effects are ‘indirect’ in the sense that democracy affects growth through, for example, enhancing human capital or strengthening the protection of property rights.