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Democracy causes growth

Liberal democratic systems lead to a permanent increase in economic growth. This effect is due to the functioning of certain democratic institutions and their building blocks, as WZB researchers Vanessa Boese-Schlosser and Markus Eberhardt (University of Nottingham) show in a recent WZB discussion paper. In their study, they prove for the first time the long-term positive effect between a democratic system and economic growth. In terms of institutional building blocks, freedom of expression, clean democratic elections and legislative executive constraints are the strongest drivers of the growth effect of democratisation. An erosion of these institutions, as currently observed in many countries, could jeopardise growth, the authors warn.

Using data from the Varieties of Democracies-Project, the researchers modelled the effect of individual institutions of liberal democracies on economic growth. They examined data from 157 countries from 1949 to 2018. The data show that the initially strong positive effects of freedom of assembly, the rule of law and the restriction of executive power by the judiciary diminish after one to two decades and become statistically and economically insignificant. In contrast, fair elections, freedom of expression and legislative executive constraints promote economic prosperity in the long run. The researchers show that regime change towards liberal democracy generates a permanent increase in economic growth of 0.8 per cent per year compared to countries that remain autocratic. This result goes beyond previous work, which assumed a one-off growth effect over a period of 20 to 30 years.

The authors see a warning signal in the global erosion of democratic institutions in their most recent study period from 2009 to 2018. In light of their findings, they warn policymakers not to continue dismantling democracy (as in Hungary or Poland, for example), as this could have a significant negative impact on the economy.

07.09.2023 / MP