CDDRL Working Papers, Vol. 148
The paper summarizes and evaluates our current understanding of relations between democracy and economic growth and analyzes the mechanisms of the causality from democracy to growth. Specific features of democracy - civil liberties; elections; protection of minorities; peaceful transition of power; and accountability of the government - have set the framework for explaining the mechanism of influence. These mechanisms include: political stability and predictability; distortion of economic institutions; public sector size; investments in human capital; rule of law; economic inequalities and compulsory redistribution; and investments in physical capital. Although some countervailing effects of democracy to growth have been identified in almost every mechanism specified it is evident that on the margin democracy is more likely to be beneficial to economic growth compared with autocracies. The strongest mechanism of positive effect is rule of law. Reverse causality from growth to democracy was recorded with a policy implication that fast-growing autocracies are not politically sustainable in the long run. Democratization does not produce linear effects to economic growth. Nonetheless, the type of the relation is still unclear. The paper ends with the conjecture that democracy is more important to economic growth at higher levels of economic development.