A very interesting question has been floating around for a while. It can be summarized in the following question asked of me:
Why limit the question of democracy to Islam? Can anybody name a country that has, say, a Christian theocratic government that is also a democracy? Maybe the point is that ANY kind of government based/controlled by clerics CANNOT be democratic at the same time.
Some of us amateur philosophers, and a few professionals, have had this debate in multiple ways on my favorite group blog, redstate. There are those conservatives who believe that Islam exists in exclusion to any other religion on its base principles. Others, like me, believe that they have not experienced reforms culturally, and are in the process of becoming modern. But, the question of democracy is not so much of a 'system' that works, but of the population that practices it. If, for instance, many people of religious faith agree on democratic government, to be more successful and secure, they must limit the influence of one particular sect gaining control of that government. Hence, the government does not support one specific belief system (this doesn't mean that the government is overly secular). This form of democracy seems to work pretty well. But if you have a monoculture, the form of the democracy will reflect the beliefs of the majority much more, no matter how the system is arranged.
What is interesting, for Islam, is that there seem to be two very opposing interpretations. One is to the exclusion of all others, and the other is inclusive. I like to call this a very dogmatic type of principle. In a real Christian walk with God, inevitably there are questions that have no immediate answer. You can provide a answer dogmatically, or according to some interpretation of the 'law' or moral code, conversely, you can seek what is fruitful. In other words, you can be right, or you can seek life. I think this goes to the heart of all fanaticism, as they have traveled deep into the path of 'rightness', and are left with a culture of death. There is no life in it. The same thing happened to the Catholic Church in the dark ages. When I say this, I mean the culture as a whole, or a societal effect. Of course any one group can do the same thing, or an individual, but what we see today in Islamo Fascism is more broadly indicative of a societal effect.
How this 'dogmatic' approach, or you might call it a pure legalistic philosophy, can coexist with western democracy is not clear. I think that within the Muslim community there will have to be a separation of the two, much like the reformation. Yet they are already divided along ethnic, geographic, and Sunni/Shiite lines, so it isn't clear cut. Certainly the more capitalistic and secular a country is in its economy, the less problem this will be, but as we both can see, the Arab states, and North Africa, are the some of the worst economies in the world. Going to take a long time.... That is why I view Iraq much more favorably that Afghanistan. Iraq can easily support a economy with diverse elements, just needs time. Afghanistan will be a collection of mini fiefdoms for the near future, much less stable, and no bright horizon.
As for the greater question of a Christian theocratic government, I see no contradiction with the many predominantly Christian countries that have a democratic government. Christians are a majority, the politicians are mainly Christian, the laws are based on Christian ethics, the only thing those governments do not have is clergy control. Which is fine, not necessary. However, this may contradict with the form of democracy we would find acceptable in a non-Christian country. No matter how you frame the argument, it does reduce to a cultural conflict on many levels. We may think that some other 'democracy' is controlled by clerics simply because those clerics are the politicians of that culture and time. A significant majority of the founding fathers had religious schooling, and were comparable in church leadership. What separates the two in direct comparison however, is the broad base of Western thought, and the very narrow base of modern Islamic education on a societal scale. In other words, they have yet to experience a Enlightenment, or even a reformation of sorts. So the question of a theocratic democracy is loaded, and in application to modern events, there does not seem to be any clear parallel in history, just significant similarities.