Two superstars, MIT's Daron Acemoglu and Harvard's Ed Glaeser, discuss the relationship on a Wall Street Journal feature. Ed says,
While I yield to no one in my passion for liberty, the view that democracy is a critical ingredient for economic growth is untenable.
...I think the relationship between democracy and wealth reflects the power of human capital -- education -- to make countries both rich and democratic. If you put enough smart people together, they'll figure out how to govern themselves and gravitate towards democracy.
Many societies counted as "democratic" using standard measures are really "dysfunctional democracies" where traditional elites dominate politics through control of the party system, political influence, vote buying, intimidation and even assassination. Colombia, which has had regular democratic elections for the past 50 years, is a typical example. In others, democratic institutions survive, but there is significant in-fighting between ethnic groups, religious groups or social classes. The situation in Iraq would be the most extreme -- but not a unique -- example. Finally, many democracies suffer economically from populist and irresponsible macroeconomic policies...
it's true that autocratic regimes can generate growth for certain periods of time by providing secure property rights and good business conditions to firms aligned with political powers. But modern capitalist growth requires not only secure property rights, but also creative destruction, that is, the entry of new firms with new ideas and technologies that replace the successful firms of the past. Creative destruction requires a level playing field, which democracies are better at providing
We found 95% of the democracies that ranked as "well-educated" in 1960 stayed democracies for the next 40 years. By contrast, 50% of 1960's "less well-educated" became dictatorships within a decade.
But democracy is about collective choices in conflict-ridden situations, and education is not a panacea for solving these problems. Weimar Germany is an interesting example. In the interwar years, Germany was one of the most culturally advanced, educated and sophisticated societies in the world. Was the education of the German people sufficient to prevent the Nazi nightmare? No.
Ed cites this paper to argue that schooling predicts which dictatorships will transition to democracy. Daron comes back with this paper showing that "there is no correlation between changes in education and changes in democracy."
Daron gets the last word.
The main barrier to democracy is not low education but deep social and economic divides that create intense conflict. Democracy has failed in highly educated countries -- such as Germany before World War II or post-war Argentina. It has also been extremely successful in very low-education countries. Botswana provides a perfect example. It is the most successful democracy and the fastest growing economy in sub-Saharan Africa. When the British granted independence to this colony in 1965, there were only 22 Botswanans who had graduated from university and 100 from secondary school.
...I would also like to emphasize -- and conclude with -- this point: Sustained economic growth requires secure property rights and a level playing field for generating new technologies and entry by new firms. Democracy is the best guarantor for such sustained economic growth. Economic growth generates various vested interests, ranging from landed elites to businessmen in declining industries to privileged workers. These vested interests will try to block the introduction of new technologies and stop the entry of new firms. Democracy is not perfect, but with its more egalitarian distribution of political power, it will have greater resistance against vested interests than autocracy.
My father, who was in political science, was fond of saying that the first iron law of social science is "Sometimes it's this way and sometimes it's that way." In this context, that means you would never expect to find a perfect causal relationship between variables like education, democracy, and economic growth. There are always exceptions.
My own guess is that mental and moral development are part of the process of economic growth and democracy. However, you can have a well-schooled population that allows itself to be ruled in an unwise or immoral fashion, and you can have a poorly-schooled population that is fortunate enough to have a benevolent dictator. The mistake is to assume that schooling will be perfectly correlated with how well a country is governed.