How Democracy Influences Growth

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The relationship between democracy and economic growth has produced ample debate, research, and even puzzlement. This article explores the actual mechanisms by which democracy affects growth, in order to identify important influences as well as countervailing effects. Democracy’s advantages revolve around its ability to improve the certainty and predictability of institutions that establish the framework for the business environment. Because democracies are accountable to the public rather than the elite, they are more likely than autocracies to produce public goods, invest in human capital, maintain rule of law, and protect private property rights. Although democracies typically dampen growth through their tendency toward compulsory redistribution of wealth, in the long term they tend to produce a stable environment and positive incentives for investment, innovation, and growth. These effects become increasingly important as a country reaches higher levels of development.

Article at a glance

Democracy results in higher rates of economic growth over the long term because democracies have more stable and predictable institutions and tend to implement policies that are conducive to private enterprise.

Since they are accountable to the public rather than to elites, democracies produce more public goods, invest more in human capital, maintain the rule of law, and protect private property rights.

Though democracies are more likely to engage in large-scale redistribution than autocracies are, the dampening effect of redistribution is offset by the fact that democracies have lower barriers to entry, promoting competition, and innovation.

Publication Type: 

CIPE

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