The Relationship between Democracy and Economic Growth: An Empirical Analysis

Abstract

The effect of democracy on economic growth receives excellent attention in theoretical and empirical studies. However, much-existing literature provides conflicting views of democracy on economic growth. For this reason, this paper aims to empirically investigate the relationship between democracy and economic growth in thirty-three countries from 2010 to 2020. This paper examines this relationship in the context of the panel data framework. The study investigates the relationship by employing Panel unit root, cointegration tests, and panel vector error correction model (VECM) methodology associated with Wald test approaches. The preliminary empirical results show that democracy has a positive effect on growth. Furthermore, a long-run causality runs from democracy to real GDP, and both variables are cointegrated. The results conclude that a well-functioning political system by upgrading democratic accountability can positively contribute to a higher economic growth rate.