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Factor Endowments, Democracy and Trade Policy Divergence

  • Sebastian Galiani
  • Norman Schofield

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (labor); one nontradable good, which is also produced using a specific factor (skilled labor), and an elected government with the mandate to tax trade flows. The tax revenue is used to provide local public goods that increase the economic agents' utility. We use this general equilibrium model to explicitly derive the preferences of the different socioeconomic groups in society (landlords, industrialists, labor and skilled workers). We then use those derived preferences for policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (land) abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.

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Paper provided by DEGIT, Dynamics, Economic Growth, and International Trade in its series DEGIT Conference Papers with number c015_027.

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Date of creation: Sep 2010
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Handle: RePEc:deg:conpap:c015_027
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  1. Anna Maria Mayda & Dani Rodrik, 2001. "Why Are Some People (and Countries) More Protectionist Than Others?," NBER Working Papers 8461, National Bureau of Economic Research, Inc.
  2. Duggan, John & Fey, Mark, 2005. "Electoral competition with policy-motivated candidates," Games and Economic Behavior, Elsevier, vol. 51(2), pages 490-522, May.
  3. repec:att:wimass:9428 is not listed on IDEAS
  4. Kevin H. O'Rourke & Alan M. Taylor, 2006. "Democracy and Protectionism," NBER Working Papers 12250, National Bureau of Economic Research, Inc.
  5. Torsten Persson & Guido Tabellini, 2006. "Democracy and Development: The Devil in the Details," CESifo Working Paper Series 1672, CESifo Group Munich.
  6. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
  7. Grossman, Gene M & Helpman, Elhanan, 1994. "Protection for Sale," American Economic Review, American Economic Association, vol. 84(4), pages 833-50, September.
  8. Galiani, Sebastian & Heymann, Daniel & Dabús, Carlos & Tohmé, Fernando, 2008. "On the emergence of public education in land-rich economies," Journal of Development Economics, Elsevier, vol. 86(2), pages 434-446, June.
  9. Hinich, Melvin J., 1977. "Equilibrium in spatial voting: The median voter result is an artifact," Journal of Economic Theory, Elsevier, vol. 16(2), pages 208-219, December.
  10. Facundo Albornoz & Sebastian Galiani & Daniel Heymann, 2008. "Investment and Expropriation under Oligarchy and Democracy in a Heckscher-Ohlin World," Discussion Papers 08-02, Department of Economics, University of Birmingham.
  11. Syrquin, Moshe, 1988. "Patterns of structural change," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 7, pages 203-273 Elsevier.
  12. Norman Schofield & Maria Gallego & Ugur Ozdemir & Alexei Zakharov, 2011. "Competition for popular support: a valence model of elections in Turkey," Social Choice and Welfare, Springer, vol. 36(3), pages 451-482, April.
  13. Grossman, Gene M & Helpman, Elhanan, 1996. "Electoral Competition and Special Interest Politics," Review of Economic Studies, Wiley Blackwell, vol. 63(2), pages 265-86, April.
  14. repec:idb:brikps:33798 is not listed on IDEAS
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