Abstract
In this paper, we study the effect of democracy on economic growth. We provide an overview of theoretical models analyzing the relationship between political regime and economic growth, and characterize the existing empirical results. Theoretical considerations suggest that it is accumulated and not instantaneous level of democracy that affects economic development. In order to capture this idea, we introduce the notion of democratic capital. We estimate the impact of democratic capital on GDP per worker growth rates in a dynamic panel data model from 1990 to 2019 in a sample of 70 countries that have recently transitioned to democracy. Our GMM estimates show that for countries of the third wave of democratization it's capital of democracy has a robustly positive impact on economic growth. The effect of democratic capital is most pronounced in Europe and Latin America, which can be explained by the prevalence of democracy in neighboring countries. Furthermore, the effect of democratic capital is most pronounced in partial democracies than in full or failed democracies, which can be explained by the trade-off between the governmental rent-seeking and public desire for redistribution.
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