The relationship between democracy and economic growth in high and upper middle income countries

The relationship between democracy and economic growth first came to the agenda with an article in 1959 by Lipset. In the literature, studies on the subject are divided into three. The relationship between democracy and economic growth is grouped as the compatibility Perspective the conflict perspective, the skeptical perspective. The present study is intended to analyze the impact that the relation between democracy and economic growth poses onto different income groups. High income countries representing developed countries and high middle income countries are used to represent developing countries. The present study includes two income groups i.e. high-income and upper-middle-income groups for the period between 2003-2018. The group of high-income countries consists of 14 countries and the group of upper-middle-income countries consists of 19 countries. Countries are preferred to be at least one country from each continent according to their geographical location. The data used in analysis is collected from the World Bank Economic Development Indicators database and the Freedom House Index and analyzed employing the unbalanced panel data analysis model. The Stata/IC 14.2, Eviews 9 and Gauss v10 software programs were used to analyze the collected data. The econometric model created incorporates independent variables of openness, inflation, civil liberties and political rights, as well as the GDP-dependent variable. According to the results of Hausman and BP Lm test, it was determined that a fixed effect estimator should be preferred for both income groups. The present study concluded that the civil liberties and political rights variable and GDP are positively correlated at a significant level in the high-income group. The study results also indicated that civil and political liberties are significantly correlated with GDP in the upper-middle-group. In the upper-middle-income political rights and GDP are negatively correlated while civil liberties and GDP are positively correlated. While the compatibility perspective is supported for high-income; the skeptical perspective is supported for upper-middle-income countries. These results suggest that, for an upper-middle-income country to move up to the group of high-income countries, economic growth should be its primary objective while integrating the rule of law principle into its system should be the next one, which might all contribute to its development. Key Words: Economic Growth, Democracy, Freedom House Index, Panel Data Analysis.