The Impact of International Trade on Democracy: A Long-Run Perspective
Published online by Cambridge University Press: 13 June 2011
The likely endogeneity between democracy and trade is addressed with an instrumental variables strategy in this article about whether international trade fosters democracy. The authors use a measure of natural openness to obtain estimates of the causal impact of openness on democratization in three separate samples spanning the last 130 years. A positive impact of openness on democracy is apparent in the data over the long run. The post–World War II results suggest that with a rise in trade with other countries equal to a one standard deviation increase, countries such as Indonesia, Russia, and Venezuela could eventually become as democratic as the U.S., Great Britain, or France. There is some variation in the impact of openness by region that may be because trade seems to have a positive impact only when the capital-to-labor ratio is sufficiently high. This is consistent with the idea that openness promotes democracy when it strengthens the economic fortunes of the middle class.
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43 One might wonder why the coefficient on distance increases over time when conventional wisdom would have it that transportation costs fall over time. If short-distance transportation costs and other trade costs have fallen more quickly over time, as Hummels argues, then trade may have become more 'regionalized' over time. This would yield a rise on the distance coefficient in a series of gravity regressions. See David Hummels, “Have International Transport Costs Declined?” (Manuscript, Graduate School of Business, University of Chicago, 1999).
44 In the working paper version, we also explain how we tested the exclusion restriction that the geographic information incorporated in the gravity equation was uncorrelated with the error term with Hansen's J-statistic (a test for overidentifying restrictions that is robust to heteroskedasticity). The findings were overall encouraging. We found that when we include population, land area, number of borders, and the landlocked indicator directly, and use the average distance to countries and the island indicator as excluded instruments, we can never reject the null hypothesis of exogeneity.
45 We do not present year-by-year ordered probit results although the results are available in the longer version of this paper. We are comfortable using continuous dependent variable techniques be-cause as the number of categories becomes large, ordered probit and linear models produce very similar results and because the predictions we get from our model are very nearly within the bounds of the actual outcomes. In any case the qualitative results are identical to the results of the linear model.
46 It would appear that the general positive correlation is not too sensitive to the way in which we code the democracy variable. As previously mentioned, we used the binary data from Alvarez et al. in an instrumental variables probit model including openness and size. See Alvarez et al. (fn. 39). Their data is available from 1960 to 1990. The results show a highly significant and positive relationship between democracy and openness.
47 Our regressions use generated instruments as instruments rather than the geographic information itself. Nevertheless, we simulate the change in the standard error of the openness coefficient for small changes we impose in the underlying geographic data. This allows us to gauge how much sampling error could be affecting the standard errors. To save on computation time, we chose to carry out such a simulation for 1960 and 1995. Doing so barely altered the standard errors on the coefficient on openness. For example, our simulations yielded an increase of 0.001 in the standard error of the openness coefficient in both years.
48 Our data for the interwar period on trade were kindly made available by Albrecht Ritschl. We selected the years that comprise the interwar period based on the years for which data were available in this dataset.
49 The countries in our 1910 sample are Argentina, Austria, Australia, Belgium, Brazil, Canada, Chile, Denmark, France, Germany, Great Britain, Greece, Italy, Japan, Mexico, New Zealand, Norway, Portugal, Russia, Spain, Sweden, Switzerland, and the U.S.
50 We tried other specifications of these regressions. Unreported ordered probit results, including controls for population and size, find slightly more years with positive and statistically significant coefficients on openness. Nevertheless, in many years these are only statistically significant at about the 85 or 90 percent confidence level. One might attribute these imprecise results to the fact that the number of degrees of freedom is so small or to outliers.
51 The countries in the Eastern European region for which we have data prior to 1990 are Hungary, Poland, Romania, and Turkey.
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53 This evidence also suggests that high capital/labor ratios alone only promote democracy when a country” is sufficiently open to international trade. This may or may not be consistent with the argument presented in Acemoglu and Robinson that capital abundance deters coups and makes repressions costly. Acemoglu and Robinson (fn. 19).
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