DP20146 Democracy in Decline: The Economic Implications of Democratic Collapse
Previous research has established a link between democratic governance and sustainable economic growth. Yet, over the past decade, we have witnessed a global decline of democratic institutions across a wide range of political contexts. How has this erosion of democracy affected countries’ economic trajectories over the 1999-2023 period? This paper investigates the economic consequences of democratic breakdowns, focusing on whether — and how — losing democracy comes with an economic cost. Using a heterogeneous difference-in-differences estimator and drawing on the hierarchical structure of the Varieties of Democracy dataset, we examine both high-level democracy definitions and their institutional building blocks. Our analysis proceeds in three steps. First, we estimate the average treatment effect of regime collapse and find robust evidence of an autocratic loss: on average, countries that transition from democracy to autocracy experience a decline in income per capita of around 1.5%, with losses reaching 4-6% two decades after collapse. This effect is driven more strongly by the breakdown of electoral democracy than liberal democracy. Second, we disaggregate democracy into its low-level institutional components to identify the source of this loss. We find that the negative economic effects are primarily driven by the erosion of free and fair elections — while other components, such as freedom of expression or judicial constraints on the executive, play a much smaller role. Third, we explore transmission channels that explain how democratic collapse translates into economic decline. We find suggestive evidence that cuts to investment in social support and public goods — such as education — are among the key mechanisms through which autocratic loss materializes, with some effects emerging more immediately and others likely to deepen over time. Our findings underscore the long-term risks posed by democratic erosion and highlight the central role of electoral integrity in safeguarding economic development.
