There are at least two types of links between democracy and GDP. Is it true that the wealthier a country, the more likely it will be – or turn out to be – a democracy? Cross-country analysis often only shows a weak correlation between democracy and economic growth:
The correlation is weak because there are numerous authoritarian countries that have strong growth figures. Most notably China of course. However, those countries shouldn’t be viewed as typical: there are just as many authoritarian countries with very weak growth figures:
(source, the growth rate here is the geometric average of per capita growth per year for the years between 1960 and 2008; the source for the democracy data is Polity IV)
Furthermore, it’s also relatively easy to produce good growth figures when the baseline is very low, as was China’s some decades ago. In such cases, neither the presence or absence of democracy does much to promote or stifle growth.
The correlation between democracy and GDP is stronger when we look at the level rather than the growth of GDP. Here’s the correlation for a sample of countries composed of Austria, Belgium, Chile, Denmark, France, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Turkey, the UK, and the US:
Richer countries (with the exception of most wealthy Muslim countries) tend to be or become democracies:
Because the graph above plots income in 1971 against democracy scores in the following decades, you can see that the causation goes from income to democracy. A high level of GDP predicts a flourishing (or at least continuation) of democracy. However, the opposite also seems to be true. Here’s a graph plotting current income against older democracy scores, suggesting that democracy also promotes growth:
Here are some more correlations:
(source, scatter plot covers all countries with population larger than 1 million and with fuel exports less than 50% of export revenues)
The causation seems to go both ways: democracies promotes income growth and growth promotes democracy. One can indeed assume that transparency, rule of law, accountability and other characteristics of democracy are good for growth. Likewise, a more wealthier population will most likely demand democratic reforms.
More interesting perhaps is an in-country analysis. This paper examines the effect of democratic transitions on economic growth. Since democracy and the absence of poverty are both human rights issues, and since poverty usually correlates with insufficient economic growth (see above), it is encouraging to see that countries which have experienced a transition to democracy experience higher average growth after the transition.
The graph below, from the paper, plots the evolution of real per capita GDP growth in the years surrounding a successful democratization (the year of the democratization being T), compared to the global growth rates in each year. The average growth is the purple dashed line. The graph also shows that the transition itself may imply economic costs, but in the longer term democracy pays off.
Why does this happen? Why is democracy good for economic growth? For many reasons, some of which are the rule of law and respect for human rights (property rights, freedom of information etc.). More here.
A second link between democracy and GDP has to do with election outcomes. Once a country is a democracy, the election outcomes in that country depend heavily on economic growth: