Trade costs and democracy
AbstractDuring 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 InfoPaper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/6251.
Date of creation: 2004
Date of revision:
Publication status: Published in Cahiers de recherche d'EURISCO, 2004
Econometric estimations; democracy; trade liberalization;
Find related papers by JEL classification:
- C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
- F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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