Growth and Democracy:a U-shaped Relationship

Abstract

This paper contributes to the study of the income-democracy relationship in three ways: it argues that the causal relation is U-shaped, not linear as often stated; it uses night-lights (in addition to official GDP statistics) to address measurement concerns; and it strengthens causal identification by implementing novel advances on differences-in-differences with heterogeneous treatment effects. The results show that “intermediate” regimes lead to a 20% decline in economic performance vis-à-vis both democracies and autocracies; and identify political instability as the key channel. Other potential mechanisms (such as education, investment, and inequality) lack empirical support. These findings are robust to a wide range of alternative estimators, specifications, and measures.