Democracy and economic growth

Just covering Developing Economies with my A2 class and I came across this in a publication from HSBC entitled “The World in 2050”. They look at what variables generate economic growth and they discuss democracy.

The success of democratic systems is most likely explained by the freedom of speech and creativity that leads to successful entrepreneurs. In addition, they provide checks and balances to ensure governments do not become excessively powerful, absorbing any improvement in the country’s prosperity for their own benefit. Democracy, therefore, is highly correlated with the measure of rule of law – see below.

Democracy rule of law

But there are authoritarian regimes, such as China and Saudi Arabia, that have delivered a good ‘rule of law’. In parts of Latin America, democracy has done little to improve rule of law. Even in highly democratic systems you can still see corruption. Research showed that too much democracy was not necessarily a good thing for economic growth (of course, it may be the best model for social development). At very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavour. And democracy places a disproportionate weight on winning current votes, potentially at the expense of future votes and therefore can hinder the investment required for long-term development.

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