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This is a Fixed-effects panel regressions study.

September 5, 2025Open Access

Why the Democracy-Market System Fails: A New Development Economics Perspective

Key Points

Mature democracies with economic egalitarianism underperform, contrasting economic differentiation that boosts growth and equity.
Fixed-effects panel regressions across 66 countries from 2005 to 2013 highlight that egalitarian drift poses risks to democratic performance.
GTED offers a dynamic model that combines neoclassical and endogenous frameworks to analyze institutional incentives in economic growth.
This approach addresses limitations of prior models, emphasizing that economic differentiation supports sustainable development across all regimes.

Abstract

Abstract This study applies the General Theory of Economic Development (GTED) to challenge the assumption that democracy-market systems inherently ensure prosperity. GTED reframes the debate from regime type to institutional functionality, arguing that sustained progress depends on economic differentiation (ED)—performance-driven resource allocation by markets, corporations, and governments—which fosters growth and equity. In contrast, economic egalitarianism (EE)—uniform redistribution—leads to polarized stagnation, particularly in EE-dominated democracies. Grounded in a Trinitarian framework where markets, corporations, and governments synergize under ED to promote complexity and shared prosperity, GTED advances beyond traditional growth models. It extends Solow’s neoclassical framework by endogenizing technology through ED/EE dynamics, incorporating parameters for ED’s Technology stock amplification (σ) and EE’s technology stock drag (η) that enable emergent increasing returns to scale (IRS) under ED and stagnation under EE, refining endogenous growth theory. GTED addresses free-riding in spillovers through ED’s performance incentives, highlighting ED’s necessity for growth loops and EE’s sufficiency for economic drag. This approach—quantifying institutional incentives in a dynamic model bridging neoclassical statics, endogenous mechanics, and complexity’s evolutionary amplification—provides a comprehensive theory absent in prior models, emphasizing ED’s universal applicability across regimes for shared growth. GTED integrates corporations beyond New Institutional Economics’ market-centric lens. Fixed-effects panel regressions (66 countries, 2005–2013) suggest that mature democracies with EE underperform, highlighting risks of egalitarian drift, while ED enhances performance in non-mature regimes. GTED advocates ED-based reforms for sustainable democratic development. JEL Classification: D2, D3, B4, B5, C5, O1, P5 ORCID: 0000-0002-7060-1843

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