Democracy = Prosperity?

I would genuinely like to believe the findings reported on in this article at MIT News:

As long as democracy has existed, there have been democracy skeptics — from Plato warning of mass rule to contemporary critics claiming authoritarian regimes can fast-track economic programs.

But a new study co-authored by an MIT economist shows that when it comes to growth, democracy significantly increases development. Indeed, countries switching to democratic rule experience a 20 percent increase in GDP over a 25-year period, compared to what would have happened had they remained authoritarian states, the researchers report.

“I don’t find it surprising that it should be a big effect, because this is a big event, and nondemocracies, dictatorships, are messed up in many dimensions,” says Daron Acemoglu, an MIT economist and co-author of the new paper about the study.

but it filled me with so many questions that I turned to the paper itself for answers. Among the questions I had were

• Are their findings circular? In other words do the metrics being used to determine whether a country is democratic precondition the results? After reading the paper and doing a little research I was satisfied that its findings were not circular.
• What specific mechanisms produce the difference? Those are summarized in this passage from the paper’s conclusion:
  

  The channels via which democracy raises growth include greater economic reforms, greater investment in primary schooling and better health, and may also include greater investment, greater taxation and public good provision, and lower social unrest. In contrast to the equally popular claims that democracy is bad for growth at early stages of economic development, we find no heterogeneity by level of income. There is some heterogeneity depending on the level of human capital, but these effects are not large enough to lead to negative effects of democracy for low human capital countries.

• What is the direction of causality? On his subject I remain unsure.
• Are the findings robust? By this I mean do small improvements in democratization result in economic improvements and are there decreasing returns to scale. The paper does not really address this question.
• Does Freedom House’s index of freedom serve as a reasonable first order approximation of per capita income? The answer to that is clearly “yes”.

One of the things I would point out is this graph:

Note the timeframe of the graph. If we truly desire a return to robust economic growth we might consider the sources of that decline.

Another observation I would make is that all of the countries that are most democratic are also quite small and the very most democratic also have very high levels of social cohesion, levels we cannot hope to match here.