Democracy as a Curve: The Dynamic Effects of Democratization on Economic Growth

Abstract

This paper attempts to model the relationship between economic growth and democratization, with an emphasis on non-linearities. I adopt and explore the concept of “political capital” as a measure of democracy, which is extremely uncommon in the literature and brings considerable advantages in dynamic terms. My results indicate that the impact of democratization on growth is significant and does vary according to the stage of democratic development each country is in, which is likely to be an important factor in explaining the academic dissonance regarding this topic. Broadly, I find that initial democratization enacts a stronger and positive change in economic performance, which then subsides until a level of near zero at the intermediate democracy level. For more evolved democracies, further democratization may impact growth negatively, negligibly or positively (albeit more weakly so than in the initial stages). Additionally, this relationship is found to be significant both when accounting for more and less direct effects of democracy. Results for the more direct avenue are more optimistic, implying that the indirect impacts of democracy on growth, as a whole, might be negative. For most estimations, a (minimum) level of democracy that maximizes growth is found, which I call the “democracy maximum”. My results suggest this occurs for a democracy level of, on a scale of 1 to 10, around or above 6.