[sorry for the long post, you triggered a lot of ideas I had concerning the design direction of HoI4]

I agree with your points regarding the historical balance of power between democracies and other forms of government, but I don't think it should necessarily preclude examining the game mechanics. HoI4 occupies an interesting space where it strives to be both historical and an entertaining game to play, but this creates contradictions in the design of the game, because parts of history are inherently not fun or balanced. I believe that hewing to absolute historical accuracy would be undesirable - it would eliminate entertaining (if improbable) game possibilities like Luxembourg world conquest that make the game unpredictable and fun.

In the best case scenario, HoI would have enough basis in historical fact to be flavorful and accurate, but have mechanics that are flexible and balanced enough to provide a variety of possibilities/campaign outcomes in single player, and relatively balanced multiplayer where it should be possible to win as any of the three major factions.

In the current state of the game, I think Paradox has done a pretty solid job with the flexibility of the system - it's great that any nation is viable in single player, and I like that a variety of strategies are viable. I feel that compared to earlier HoI games, they have sacrificed some of the simulationist elements that make the game feel more historically authentic, and I hope that in future updates they continue to add elements that add historical context to the game.

I think a large part of the complaints about democracies in the game is that they restrict the player's decision making and appear to provide no significant advantages in exchange, and are thus "less viable" when the player has equal opportunities to change to any form of government at will. This is a problem that HoI4 introduced by making it easy to switch government types. Obviously you could simply make it more difficult to change government forms, or penalize the player for switching ideologies, but this has the downside of reducing the sandbox element/flexibility that makes the game fun for some players. Another alternative could be to model some of the historical problems that fascist governments faced, like internal political infighting or popular resistance to oppressive rule, so fascism has some disadvantages and isn't a "strictly better" choice in all scenarios. However, it's difficult to represent these complex historical problems in a way that creates entertaining game decisions for the player, so I can see why Paradox either abstracted or ignored a lot of these elements. In any case, there should be some kind of compelling advantage/reason to be democratic in the game, and currently there isn't one.

Multiplayer is somewhat unbalanced because it needs to adhere to the historical scenario, which isn't surprising, because the game was probably not designed with multiplayer as the first priority. If Paradox were so inclined, I think HoI4 does have the capability to support exciting, competitive matches within the current game system, but it would be best executed within a standalone scenario. Defining an official set of rules for multiplayer matches and making balance tweaks to the factions would go a long way, and they could fictionalize to an extent to create scenarios that offer more immediate action. By using a standalone multiplayer map, Paradox can escape the constraints of absolute historical accuracy and have greater liberty to create balanced, competitive multiplayer without disrupting the historical authenticity that makes single player compelling.

HoI4 is a great game because it strikes a good balance of playability and history, and maintaining that balance requires some difficult design decisions and compromises. I think Paradox is generally on the right track, but they have an extremely difficult position in that the fanbase is split between players that want a stricter historical scenario, and players that are less concerned with history and simply want to enjoy a challenging strategy game with diverse possibilities. Maybe Paradox's best option is to create different campaigns. One would embrace the imbalance in a "realistic" historical scenario with more complex simulation elements, more historical events, and more accurate representation of power between countries, while the second would explore the current iteration of the game even more, aiming to create an excellent, balanced strategic combat game using WW2 as a backdrop. These are both valid game ideas and HoI4 is kind of stuck halfway between the two. Together with the above comments on multiplayer, this would be a lot of work and a lot of different scenarios for different design reasons, but it might be worthwhile in the end. The divergent interests of the fanbase could be reconciled without trying to make a monolithic map/system that tries to please everyone at once without truly excelling in any one role.