The Political U: New Evidence on Democracy and Income

This paper offers new insights into the causal relationship between income and democracy. Its main argument is that this relation is U-shaped and not linear as often stated. Using data from 162 countries spanning 1960-2018, our results indicate that “intermediate” regimes lead to a 20% decline in economic performance vis-à-vis both democracies and autocracies. Moreover, political instability is identified as the key channel explaining these effects. Other potential mechanisms, such as education, investment, and inequality, lack similar empirical support. These findings are robust to alternative estimators, democracy measures and, chiefly, to the use of night-lights instead of GDP per capita.