Institutions, not tech advances, hold key to economic resilience during democratic backsliding

When democratic safeguards deteriorate, the institutional channels that link governance to prosperity collapse, putting economies at significant risk. Even where innovation ecosystems remain active, they cannot compensate for the loss of institutional integrity. This insight undercuts a common narrative that innovation alone, through technology, start-ups, or research incentives, can sustain growth even in fragile political environments.

New research suggests that the resilience of economies under political strain depends far more on institutions than on innovation. In a study titled "Safeguarding Economic Growth Amid Democratic Backsliding: The Primacy of Institutions over Innovation" and published in Economies (2025), the authors provide empirical evidence that strong institutions are the most important driver of sustained economic performance when democracy declines.

Analyzing data from 123 countries between 2011 and 2022, the researchers used an augmented Solow framework and panel-data mediation analysis to determine how democracy influences growth through two channels: institutional quality and innovation. Their findings send a clear signal to policymakers, when democracy weakens, protecting institutions is the most effective safeguard against economic decline.

How democracy shapes growth through institutions and innovation

Using the Economist Intelligence Unit’s Democracy Index as the primary measure of democracy, the Global Innovation Index to track innovation, and GDP per capita as the growth indicator, the authors quantified the indirect and direct effects of democratic strength.

The results are striking. The analysis shows that institutions account for 83.3 percent of the link between democracy and GDP per capita, while innovation contributes just 16.7 percent. A one-unit increase in the Democracy Index is associated with a $1,466.55 rise in GDP per capita (PPP), of which $1,224.90 comes via institutions and only $244.86 through innovation. This sharp disparity confirms that while innovation has value, it cannot substitute for the foundational role of strong institutions.

The study further reinforces its conclusions by testing robustness against alternative measures of democracy, including Freedom House and V-Dem’s Polyarchy Index. Across all specifications, institutions remain the dominant channel, demonstrating that the results are not a quirk of a single dataset but a consistent global pattern.

Why democratic backsliding threatens institutional channels

The authors argue that weakening democracy undermines precisely the institutional qualities that most strongly support economic performance.

Erosion of judicial independence, reduced checks and balances, growing corruption, and declining rule of law diminish the credibility of contracts, weaken investor confidence, and discourage both domestic and foreign capital. Civil liberties, another core dimension of democracy, are equally critical; restrictions on academic freedom and media independence reduce the vibrancy of markets and suppress the flow of ideas essential for both innovation and institutional accountability.

When democratic safeguards deteriorate, the institutional channels that link governance to prosperity collapse, putting economies at significant risk. Even where innovation ecosystems remain active, they cannot compensate for the loss of institutional integrity. This insight undercuts a common narrative that innovation alone, through technology, start-ups, or research incentives, can sustain growth even in fragile political environments.

Policy priorities for protecting growth amid backsliding

Finally, the study sheds light on what policy actions can mitigate the damage of democratic decline. The authors recommend that governments and international actors prioritize institutional reforms as the first line of defense against economic stagnation.

Key reforms include strengthening judicial independence, enforcing property rights, enhancing fiscal transparency, and increasing government accountability. The authors argue that sequencing reforms according to the five dimensions of the EIU Democracy Index, electoral processes, government functioning, political participation, political culture, and civil liberties, can provide a structured roadmap to protect growth.

At the same time, innovation policy should not be neglected. Tools such as R&D tax credits, investment in digital infrastructure, and support for competitive markets can complement institutional reforms. However, innovation must be treated as a secondary channel that amplifies institutional strength rather than a substitute for it. The research highlights that only by securing institutions first can countries ensure that investments in innovation yield meaningful long-term economic returns.

The study also notes limitations and areas for future work. The reliance on composite indices, while useful for cross-country comparisons, risks masking differences in specific institutional or innovation dimensions. The authors recommend future studies use disaggregated measures of democracy and innovation to refine the analysis. They also call for stronger identification strategies, such as instrumental variables or natural experiments, to address potential endogeneity between democracy, institutions, and growth.