Institutional change and political conflict in a structuralist model[Paths to inclusive institutions]

External conditions have historically influenced economic outcomes and have also impacted political institutions in developing countries. Focusing on these changes, this article develops a theoretical model of political conflict and democratic stability in a small open developing economy, using as the basis a structuralist macroeconomic model. In this model, political institutions are given in the medium run but vary in the long run as a result of political conflict between capitalists, formal workers, and informal workers excluded from the benefits of social protection. The model suggests that a democratic breakdown is more likely the larger the informal sector, the lower the structural competitiveness of the economy, and the weaker the country’s democratic tradition. The model also links the possibility of coups and democratization process with external shocks. Based mainly on the Latin American experience in democratic and dictatorial regimes, the article claims that combining industrial and technological policies—which ease the Balance-of-Payments constraint—with the building of a comprehensive system of social protection is key for the consolidation and stability of democracy.