Does democracy have an effect on a nation's ability to achieve economic growth? : An empirical analysis of the relationship between deomcracy and growth

Abstract: The rate of economic growth varies extensively between different countries. The underlying reasons to the differences are dissimilarities in productivity and efficiency, which in turn seem to be affected by factors such as the institutional setup, the rate of economic freedom, the level of human and social capital, corruption and interpersonal trust.This thesis investigates the relationship between economic growth and the level of democracy in developing countries, as a well-functioning democracy to a large extent corresponds to an inclusive institutional setup. The empirical investigation is conducted with a regression analysis. Using secondary data from acknowledged organizations and institutes, possible factors that may affect average GDP per capita growth are examined. The estimations included in the regression are democracy, foreign direct investment, education expectancy, initial GDP per capita, population growth rate, life expectancy, corruption, Rule of Law and Internet users. The empirical result shows that democracy has no significant effect on growth, but suggests that the effect might be indirect since factors such as good maintenance of Rule of Law, low level of corruption, high interpersonal trust, a high level of economic freedom and enhanced property rights are empirically proven to correspond to well functioning institutions. This result is in accordance with previous research and seems to support the idea that a good institutional setup is important for economic growth.