IMO, if you're not USA, UK, USSR, or Germany, the major incentive for democracy is being with the allies by mid-game. Once the US steam-roller gets rolling, if you've lived this long your investment is about to pay off. I'm quite happy with it as a challenge and RP element: can I sustain a democratic country X until the tides of war turn? But there's also a rational element there: we all know those tides will turn and then I get my (considerable) pay-off.
That said, I really do like the suggestion, early on in the thread, of elections helping democracies. Authoritarian regimes end up stuck with idiots who are friends with the boss in position of power (looking your way, Goering). In theory, at least, democracies, and more transparent regimes where legitimacy is not based on brute force, have a much easier time removing the well-connected but incompetent. In practice, this manifested very handily in WWII in the anglophone armies with promotions/demotions based on merit. In the allied forces, over time, important decisions ended up being made by the most qualified. Contrast this to the Axis--I know very little about Japan, but in Germany it seems more and more was micro-managed by the Fuehrer to disastrous effect while in Italy... the corrupt incompetent mess that was Italy happened. So, perhaps democratic elections can have some kind of impact on the quality of leaders over time (obviously not the generals, the ones bought with political points), or elections can add political points, or something, so that they enable you to build up more and more competent leaders over time . But then.... perhaps they already do? I don't think we know how it works, right?
To contrast democracies with communist nations, I think there's an upfront cost to being communist. In the USSR, Stalin's paranoia, disregard for human life, and distaste for dissent eliminated any kind of army leadership just in time for the build-up to the war and this is already modelled in-game. If you're not the USSR, turning communist (because very few nations start out that way--is it just Mongolia and Tanu Tuva?) must come at some cost. It'll be interesting to see this play out in the France co-op game in WWW. But there's a potential for a civil war (huge cost!) or at the very least time & resources devoted to the transition. If the costs turn out to be very low, I'd suggest some kind of "purges" modifier that makes any new Communist nation start out at a leadership disadvantage, making the choice more difficult to the player. After all, without going into specifics, joining up with Stalin did seem to lead to purges in a number of satellite states and the leaders that came out of the processes were not always the most qualified to lead their country... to put it mildly. In short, I think the solution there is to impose an entry cost; but we don't know yet whether there is a real problem here.