Skip to main content Accessibility help

The Democratic Advantage: Institutional Foundations of Financial Power in International Competition

  • Kenneth A. Schultz and Barry R. Weingast

Despite their presumed liabilities, institutions associated with democracy serve as a source of power in prolonged international competition by increasing the financial resources that states can bring to bear. The theory of sovereign debt suggests that a state's ability to raise money through public borrowing is enhanced when debtholders have mechanisms for sanctioning state leaders in the event of default. Institutions associated with liberal government provide such mechanisms. All other things being equal, states that possess these institutions enjoy superior access to credit and lower interest rates than do states in which the sovereign has more discretion to default unilaterally. Liberal states can not only raise more money from a given economic base but can also pursue tax-smoothing policies that minimize economic distortions. The ability to finance competition in a manner that is consistent with long-term economic growth generates a significant advantage in prolonged rivalries. These claims are explored by analyzing the Anglo-French rivalry (1688–1815) and the Cold War.

Hide All
Alesina, Alberto. 1988. The End of Large Public Debts. In High Public Debt. The Italian Experience, edited by Giavazzi, Francesco and Spaventa, Luigi, 3479. Cambridge: Cambridge University Press.
Alesina, Alberto, De Broeck, Mark, Prati, Alessandro, and Tabellini, Guido. 1992. Default Risk on Government Debt in OECD Countries. Economic Policy 15:428–63.
Anderson, Olive. 1967. A Liberal State at War. New York: St. Martin's, Press.
Barbour, Violet. 1950. Capitalism in Amsterdam in the 17th Century. Baltimore, Md.: Johns Hopkins University Press.
Barro, Robert J. 1979. On the Determination of the Public Debt. Journal of Political Economy 87 (5):940–71.
Behrens, Catherine Abigail, Betty. 1967. The Ancien Regime. New York: Harcourt, Brace & World.
Bergson, Abram. 1989. Planning and Performance in Socialist Economies The USSR and Eastern Europe Boston: Unwin Hyman.
Bien, David D. 1987. Offices, Corps, and a System of State Credit: The Uses of Privilege Under the Ancien Regime. In The French Revolution and the Creation of Modern Political Culture, Vol 1, edited by Baker, Keith, 89114. Oxford, England: Pergamon Press.
Birman, Igor. 1980. The Financial Crisis in the USSR. Soviet Studies 32 (1):84105.
Birman, Igor. 1981. Secret Incomes of the Soviet State Budget. The Hague, Netherlands: Martinus Nijhoff.
Bordo, Michael D., and White, Eugene N.. 1991. A Tale of Two Currencies: British and French Finance During the Napoleonic Wars. The Journal of Economic History 51 (2):303–16.
Brewer, John. 1988. The Sinews of Power War, Money, and the English State, 16881783. New York: Knopf..
Brooks, Stephen G., and Wohlforth, William C.. 2000./2001. Power, Globalization, and the End of the Cold War: Reevaluating a Landmark Case for Ideas. International Security 25 (3):553.
Bueno de Mesquita, Bruce, Morrow, James D., Siverson, Randolph M., and Smith, Alastair. 1999. An Institutional Explanation of the Democratic Peace. American Political Science Review 93 (4):791807.
Bueno de Mesquita, Bruce, and Siverson, Randolph M.. 1995. War and the Survival of Political Leaders: A Comparative Study of Regime Types and Political Accountability. American Political Science Review 89 (4):841–55.
Bulow, Jeremy, and Rogoff, Kenneth. 1989. A Constant Recontracting Model of Sovereign Debt. Journal of Political Economy 97 (1):155–78.
Carroll, Michael. 1996. Containing Default. Institutional Investor 30 (4):5061.
Chase-Dunn, Christopher. 1981. Interstate System and Capitalist World-Economy: One Logic or Two? International Studies Quarterly 25 (1):119–42.
Conklin, James. 1998. The Theory of Sovereign Debt and Spain Under Philip II. Journal of Political Economy 106 (3):483513.
Cooley, Thomas F., and Ohanian, Lee E.. 1997. Postwar British Economic Growth and the Legacy of Keynes. Journal of Political Economy 105 (3):439–72.
Crafts, N. F. R. 1985. British Economic Growth During the Industrial Revolution. New York: Oxford University Press.
Dahl, Robert A. 1971. Polyarchy Participation and Opposition. New Haven, Conn.: Yale University Press.
de Tocqueville, Alexis. [1831.] 1969. Democracy in America. Translated by Lawrence, George. Garden City, N.Y.: Doubleday.
Dickson, P., and Sperling, J.. 1970. War Finance: 1689–1715. In The New Cambridge Modern History, Vol. 6, edited by Bromley, J. S., 284342. Cambridge: Cambridge University Press.
Dickson, Peter. 1967. The Financial Revolution in England: A Study in the Development of Public Credit, 1688–1756. New York: St. Martin's Press.
Doyle, Michael W. 1983. Kant, Liberal Legacies, and Foreign Affairs: Part 1. Philosophy and Public Affairs 12 (3):205–35.
Eaton, Jonathan, Gersovitch, Mark, and Stiglitz, Joseph. 1986. The Pure Theory of Country Risk. European Economic Review 30 (3):481513.
Economic Report of the President, 2000. Washington, D.C.: U.S. Government Printing Office.
Ellman, Michael. 1992. Money in the 1980s: From Disequilibrium to Collapse. In The Disintegration of the Soviet Economic System, edited by Ellman, Michael and Kontorovich, Vladimir, 106–33. London: Routledge.
Evangelista, Matthew. 1993. Internal and External Constraints on Grand Strategy: The Soviet Case. In The Domestic Bases of Grand Strategy, edited by Rosecrance, Richard and Stein, Arthur A., 154–78. Ithaca, N.Y.: Cornell University Press.
Fearon, James D. 1994. Domestic Political Audiences and the Escalation of International Disputes. American Political Science Review 88 (3):577–92.
Ferguson, Niall. 1999. The Pity of War. New York: Basic Books.
Finel, Bernard I., and Lord, Kristin. 1999. The Surprising Logic of Transparency. International Studies Quarterly 43 (2):315–39.
Friedrich, Carl Joachim. 1938. Foreign Policy in the Making The Search for a New Balance of Power. New York: Norton.
Fujihira, Shinju. 2000. Conscripting Money: Total War and Fiscal Revolution in the Twentieth Century. Ph.D. diss., Princeton University, Princeton, N.J..
Gaddis, John Lewis. 1992. International Relations Theory and the End of the Cold War. International Security 17 (3):558.
Gilpin, Robert. 1981. War and Change in World Politics. New York: Cambridge University Press.
Goertz, Gary, and Diehl, Paul F.. 1993. Enduring Rivalries: Theoretical Constructs and Empirical Patterns. International Studies Quarterly 37 (2):147–71.
Greif, Avner, Milgrom, Paul, and Weingast, Barry R.. 1994. Coordination, Commitment and Enforcement. The Case of the Merchant Guild. Journal of Political Economy 102 (4):745–76.
Groth, Alexander J. 1999. Democracies Against Hitler Myth, Reality, and Prologue Brookfield, Vt.: Ashgate.
Gunther, Gerald. 1980. Cases and Materials on Constitutional Law. 10th ed. Mineola, N.Y.: Foundation Press.
Gurr, Ted Robert. 1990. Polity II: Political Structures and Regime Change, 1800–1986. Ann Arbor, Mich: Inter-University Consortium for Political and Social Research.
Harrison, Mark. 1986. The USSR State Budget Under Late Stalinism (1945–55): Capital Formation, Government Borrowing and Monetary Growth. Economics of Planning 20 (3):179205.
Hoffman, Philip. 1994. Early Modern France, 1450–1700. In Fiscal Crises, Liberty, and Representative Government, edited by Hoffman, Philip and Norberg, Kathryn, 226–52. Stanford, Calif.: Stanford University Press.
Hoffman, Philip T., and Rosenthal, Jean-Laurent. 1997. The Political Economy of Warfare and Taxation in Early Modern Europe: Historical Lessons for Economic Development. In The Frontiers of the New Institutional Economics, edited by Drobak, John N. and Nye, John V. C., 3156. San Diego, Calif.: Academic Press.
Hoffman, Philip T., Postel-Vinay, Gilles, and Rosenthal, Jean-Laurent. 1998. Priceless Markets: Credit in Paris, 1660–1869. Unpublished manuscript, California Institute of Technology, Pasadena.
Holzman, Franklyn D. 1957. The Soviet Bond Hoax. Problems of Communism 6 (5):4749.
Homer, Sidney, and Sylla, Richard. 1991. A History of Interest Rates. 3d ed. New Brunswick, N.J.: Rutgers University Press.
Jones, James R. 1972. The Revolution of 1688 in England. London: Weidenfeld and Nicolson.
Kant, Immanuel [1795.] 1983. To Perpetual Peace: A Philosophical Sketch. In Perpetual Peace and Other Essays on Politics, History, and Morals, translated by Humphrey, Ted, 107–43. Indianapolis, Ind.: Hacket.
Kegley, Charles W. Jr., 1994. How Did the Cold War Die? Principles for an Autopsy. Mershon International Studies Review 38 (1):1141.
Kennan, George F. 1977. The Cloud of Danger Current Realities of American Foreign Policy. Boston: Little, Brown.
Kennedy, Paul. 1987. The Rise and Fall of the Great Powers Economic Change and Military Conflict from 1500 to 2000. New York: Random House.
Keohane, Robert O. 1986. Theory of World Politics: Structural Realism and Beyond. In Neo-Realism and Its Critics, edited by Keohane, Robert O., 158203. New York: Columbia University Press.
King, Gary, Keohane, Robert O., and Verba, Sidney. 1994. Designing Social Inquiry Scientific Inference in Qualitative Research. Princeton, N.J.: Princeton University Press.
Kugler, Jacek, and Domke, William. 1986. Comparing the Strength of Nations. Comparative Political Studies 19 (1):3969.
Lake, David 1992. Powerful Pacifists: Democratic States and War. American Political Science Review 86(1):2437.
Lippmann, Walter. 1955. Essays in the Public Philosophy. Boston: Little, Brown.
Lipset, Seymour Martin. 1960. Political Man The Social Bases of Politics. Garden City, N.Y.: Doubleday.
Lowi, Theodore. 1967. Making Democracy Safe for the World: National Politics and Foreign Policy. In Domestic Sources of Foreign Policy, edited by Rosenau, James N., 295331. New York: Free Press.
Lucas, Robert E., and Stokey, Nancy L.. 1983. Optimal Fiscal and Monetary Policy in an Economy Without Capital. Journal of Monetary Economics. 12 (1):5593.
McKinnon, Ronald I. 1993. The Order of Economic Liberalization Financial Control in the Transition to a Market Economy. 2d ed. Baltimore, Md.: Johns Hopkins University Press.
Millar, James R. 1990. The Soviet Economic Experiment. Edited by Linz, Susan J.. Urbana University of Illinois Press.
Mitchell, B. R. 1988. British Historical Statistics. Cambridge: Cambridge University Press.
Modelski, George. 1978. The Long Cycle of Global Politics and the Nation-State. Comparative Studies in Society and History 20 (2):214–35.
Modelski, George. 1983. Long Cycles of World Leadership. In Contending Approaches to World Systems Analysis, edited by Thompson, William R., 115–39. Beverly Hills, Calif.: Sage Publications.
Modelski, George, and Thompson, William R.. 1988. Seapower in Global Politics, 1494–1993. Seattle: University of Washington Press.
Moore, Barrington Jr., 1966. Social Origins of Dictatorship and Democracy Lord and Peasant in the Making of the Modern World. Boston: Beacon Press.
Morgenthau, Hans J. 1973. Politics Among Nations The Struggle for Power and Peace. 5th ed. New York: Knopf..
Moskoff, William. 1993. Hard Times Impoverishment and Protest in the Perestroika Years The Soviet Union 1985–1991. Armonk, N.Y.: M. E. Sharpe.
Nincic, Miroslav. 1992. Democracy and Foreign Policy The Fall of Political Realism. New York: Columbia University Press.
North, Douglass C. 1981. Structure and Change in Economic History. New York: Norton.
North, Douglass C. Institutions, Institutional Change, and Economic Performance. Cambridge: Cambridge University Press.
North, Douglass C., and Weingast, Barry R.. 1989. Constitutions and Commitment. The Evolution of Institutions Governing Public Choice in Seventeenth-Century England. Journal of Economic History 49 (4):803–32.
Ofer, Gur. 1989. Budget Deficit, Market Disequilibrium and Soviet Economic Reforms. Soviet Economy 5 (2):107–61.
Organski, A. F. K., and Kugler, Jacek. 1980. The War Ledger Chicago: University of Chicago Press.
Parker, Geoffrey. 1988. The Military Revolution Military Innovation and The Rise of the West, 1500–1800. Cambridge: Cambridge University Press.
Partell, Peter J., and Palmer, Glenn. 1999. Audience Costs and Interstate Crises: An Empirical Assessment of Fearon's Model of Dispute Outcomes. International Studies Quarterly 43 (2):389405.
Rasler, Karen A., and Thompson, William R.. 1983. Global Wars, Public Debts, and the Long Cycle. World Politics 35 (4):489516.
Rasmusen, Eric. B. 1992. The Strategy of Sovereign-Debt Renegotiation. In Country-Risk Analysis A Handbook, edited by Solberg, Ronald L., 161–85. London: Routledge.
Reed, William, and Clark, David H.. 2000. War Initiators and War Winners. The Consequences of Linking Theories of Democratic War Success. Journal of Conflict Resolution 44 (3):378–95.
Reiter, Dani, and Stam, Allan C.. 2002. Democracies at War Princeton, N.J.: Princeton University Press.
Riley, James C. 1980. International Government Finance and the Amsterdam Capital Market, 1740–1815. Cambridge: Cambridge University Press.
Riley, James C. 1986. The Seven Year's War and the Old Regime in France The Economic and Financial Toll Princeton, N.J.. Princeton University Press.
Riley, James C. 1987. French Finances, 1727–1768. Journal of Modern History 59 (2):209–43.
Root, Hilton L. 1989. Tying the King's Hands. Credible Commitments and Royal Fiscal Policy During the Old Regime. Rationality and Society 1 (2) 240–58.
Root, Hilton L. 1994. The Fountain of Privilege: Political Foundations of Markets in Old Regime France and England. Berkeley: University of California Press.
Sargent, Thomas, and Velde, Francois R.. 1995. Macroeconomic Features of the French Revolution. Journal of Political Economy 103 (3):474518.
Schultz, Kenneth A. 2001. Democracy and Coercive Diplomacy. Cambridge: Cambridge University Press.
Schultz, Kenneth A., and Weingast, Barry R.. 1998. Limited Governments, Powerful States. In Strategic Politicians, Institutions, and Foreign Policy, edited by Siverson, Randolph M., 1549. Ann Arbor: University of Michigan Press.
Shelton, Judy. 1989. The Coming Soviet Crash Gorbachev's Desperate Pursuit of Credit in Western Financial Markets. New York: Free Press.
Siverson, Randolph M. 1995. Democracies and War Participation: In Defense of the Institutional Constraints Argument. European Journal of International Relations 1 (4):481–89.
Snyder, Jack. 1991. Myths of Empire. Ithaca, N.Y.: Cornell University Press.
Stam, Allan C. 1996. Win, Lose, or Draw Domestic Politics and the Crucible of War. Ann Arbor: University of Michigan Press.
Taylor, A. J. P. 1962. The Origins of the Second World War. New York: Atheneum.
Thompson, William R. 1983a. Uneven Economic Growth, Systemic Challenges, and Global Wars. International Studies Quarterly 27 (3):341–55.
Thompson, William R. 1983b. The World-Economy, the Long Cycle, and the Question of World System Time. In Foreign Policy and the Modern World-System, edited by McGowan, Pat and Kegley, Charles W. Jr., 3562. Beverly Hills, Calif.: Sage Publications.
Thucydides, 1950. The History of the Peloponnesian War. Translated by Crawley, Richard. New York: Dutton.
Tracy, James D. 1985. A Financial Revolution in Habsburg Netherlands. Berkeley: University of California Press.
U.S. Arms Control and Disarmament Agency (ACDA). 1994. World Military Expenditures and Arms Transfers. Washington, D.C.: U.S. Government Printing Office.
U.S. Central Intelligence Agency (CIA). 1992. Handbook of International Economic Statistics, 1991. Washington, D.C.: U.S. Government Printing Office.
U.S. Central Intelligence Agency/Defense Intelligence Agency (CIA/DIA). 1990. The Soviet Economy Stumbles Badly in 1989. Washington, D.C.: Central Intelligence Agency.
U.S. Congress. Joint Economic Committee. 1990. Measures of Soviet Gross National Product in 1982 Prices. 101st Cong., 2d sess. November.
U.S. Office of Management and Budget (OMB). 2002. Budget for the Fiscal Year 2003, Historical Tables Washington, D.C.: U.S. Government Printing Office.
Veitch, John M. 1986. Repudiations and Confiscations by the Medieval State. The Journal of Economic History 46 (1):3136.
Velde, Francois R., and Weir, David R.. 1992. The Financial Market and Government Debt Policy in France, 1746–1793. The Journal of Economic History 52 (1):1819.
Wallerstein, Immanuel. 1979. The Capitalist World–Economy Cambridge: Cambridge University Press.
Wallerstein, Immanuel. 1980. Mercantilism and the Consolidation of the European World Economy, 1600–1750. New York: Academic Press.
Waltz, Kenneth N. 1979. Theory of International Politics. New York: Random House.
Weingast, Barry R. 1997a. The Political Foundations of Limited Government: Parliament and Sovereign Debt in 17th and 18th Century England. In The Frontiers of the New Institutional Economics, edited by Drobak, John and Nye, John, 213–46. San Diego, Calif.: Academic Press.
Weingast, Barry R. 1997b. The Political Foundations of Democracy and the Rule of Law. American Political Science Review 91 (2):245–63.
Weir, David R. 1989. Tontines, Public Finance, and Revolution in France and England, 1688–1789. The Journal of Economic History 49 (1):98101.
Wohlforth, William C. 1995. Realism and the End of the Cold War. International Security 19 (3):91129.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

International Organization
  • ISSN: 0020-8183
  • EISSN: 1531-5088
  • URL: /core/journals/international-organization
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed