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Trade costs and democracy

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  • Siroën, Jean-Marc
  • Granger, Clotilde
  • Duc, Cindy

Abstract

During the three past decades, most developing countries have opted for both a higher degree of political democracy as well as increased trade openness. This trend raises the question of the effect of democracy on trade liberalization. To address the question, this paper proposes a theoretical analysis based on a variant of an HOS model, but assuming allocative effects between the export sector and the non-tradable sector. This analytical framework preserves the Stolper-Samuelson effects, even with complete specialization of countries. Furthermore, it is assumed that in democratic regimes, the policies enforced are those preferred by the median-voter. If, in a country, the tradable sector is labour-intensive , workers gain from free trade and a democratic government should adopt trade liberalization policies. We expose a political economic theoretical model in which democracies apply a tariff to imports all the lower as the other trade costs are low. The theoretical model has led to a gravity equation so that the expected positive relation between democracy and trade can be tested econometrically. We are interested in the influence of democracy on trade costs and test the idea that institutional trade costs are lower when trade occurs between democracies. Econometric estimations confirm that bilateral trade is positively and significantly affected when the two partners are democratic.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/6251.

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Date of creation: 2004
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Publication status: Published in Cahiers de recherche d'EURISCO, 2004
Handle: RePEc:dau:papers:123456789/6251

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Keywords: Econometric estimations; democracy; trade liberalization;

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References

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  1. Baldwin, Robert E, 1989. "The Political Economy of Trade Policy," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 119-35, Fall.
  2. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
  3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  4. Hamilton, Carl B, 2002. "Globalization and Democracy," CEPR Discussion Papers 3653, C.E.P.R. Discussion Papers.
  5. Granger, Clotilde & Siroën, Jean-Marc, 2001. "Les démocraties sont-elles plus ouvertes à l'échange ?," Economics Papers from University Paris Dauphine 123456789/6061, Paris Dauphine University.
  6. Mansfield, Edward D. & Milner, Helen V. & Rosendorff, B. Peter, 2002. "Why Democracies Cooperate More: Electoral Control and International Trade Agreements," International Organization, Cambridge University Press, vol. 56(03), pages 477-513, June.
  7. Yang, C C, 1995. "Endogenous Tariff Formation under Representative Democracy: A Probabilistic Voting Model," American Economic Review, American Economic Association, vol. 85(4), pages 956-63, September.
  8. Milner, Helen V. & Kubota, Keiko, 2005. "Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries," International Organization, Cambridge University Press, vol. 59(01), pages 107-143, January.
  9. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
  10. Shang-Jin Wei, 2000. "Natural Openness and Good Government," NBER Working Papers 7765, National Bureau of Economic Research, Inc.
  11. Shang-Jin Wei & Arvind Subramanian, 2003. "The WTO Promotes Trade, Strongly But Unevenly," IMF Working Papers 03/185, International Monetary Fund.
  12. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  13. Edwards, Sebastian, 1992. "Trade orientation, distortions and growth in developing countries," Journal of Development Economics, Elsevier, vol. 39(1), pages 31-57, July.
  14. de Haan, Jakob & Sturm, Jan-Egbert, 2003. "Does more democracy lead to greater economic freedom? New evidence for developing countries," European Journal of Political Economy, Elsevier, vol. 19(3), pages 547-563, September.
  15. Clague, Christopher, et al, 1996. " Property and Contract Rights in Autocracies and Democracies," Journal of Economic Growth, Springer, vol. 1(2), pages 243-76, June.
  16. Clague, Christopher & Keefer, Philip & Knack, Stephen & Olson, Mancur, 1996. "Property and Contract Rights in Autocracies and Democracies," MPRA Paper 25720, University Library of Munich, Germany.
  17. Dawson, John W, 1998. "Institutions, Investment, and Growth: New Cross-Country and Panel Data Evidence," Economic Inquiry, Western Economic Association International, vol. 36(4), pages 603-19, October.
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Cited by:
  1. Siroën, Jean-Marc & Duc, Cindy & Granger, Clotilde, 2005. "Do Democratic Agreements Foster Bilateral Trade Flows ?," Economics Papers from University Paris Dauphine 123456789/4103, Paris Dauphine University.

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