Free trade democracy
Over free trade agreements have been formed since the early s, according to the World Trade Organization. During this period the world free trade democracy also witnessed increasing levels of democracy.
Are these two phenomena independent from each other? We argue that they are not. There is evidence free trade democracy participation in free trade agreements FTAs can destroy protectionist rents. If undoing FTAs is not costless, they serve also as commitment devices to destroy future protectionist rents. Since such rents are attractive for autocratic groups, FTAs can lower their incentives to seek power. While this has little value in established democracies, where the rule of law is strong and the risk of authoritarian disruption is negligible, it can be very important for unstable democracies.
Trade gains aside, these threatened states should free trade democracy be particularly keen to seek involvement in FTAs. We provide the theoretical basis for our claims by extending the trade integration model developed by Ornelas to allow for endogenous changes in the political regime.
At any trade regime domestic free trade democracy exchange contributions for protection with the government, which cares about national welfare and the contributions it receives. A similar game takes place at the ex ante stage, when the government defines whether free trade democracy form an FTA. The key to understanding the impact of an FTA is the recognition that the equilibrium of the ex post external tariff game changes with the constraint imposed by the agreement on the internal tariffs.
Taking this into account, one can show that, even though an FTA still permits lobbying for protection against excluded countries, the volume of protectionist rents falls with the formation of the agreement. In a dynamic setting this implies that, all else equal, groups motivated mainly by rents obtained while in office will have lower incentives to seek power if the country is deeply engaged in FTAs.
Authoritarian groups tend to fit this description best. After all, due to their aptitude to resort to violence rather than to rely on accountability to keep power, authoritarian groups have lower incentives to pursue policies that favor the population at free trade democracy than democratic ones. The reason is two-fold.
First, an FTA will weaken the authoritarian threat. Second, even if the dictatorial group takes control despite the FTA, the agreement will constrain its rent-extraction activities. Hence, we find that unstable democracies tend to enter in FTAs more frequently than free trade democracy countries, all else being equal. In free trade democracy, participation in FTAs increases the likelihood of democracy survival in those free trade democracy.
One can, of course, always construct models that deliver strong theoretical results. Along with other covariates, these two components of democratic capital allow us to estimate the likelihood of democratic failure in a country, which is one of our empirical challenges. We find strong empirical support for both of our main theoretical results. Analyzing the formation of FTAs and the strength of democracy in countries overwe find that greater participation in FTAs lowers the likelihood of democratic failure in a country.
We find as well that a high risk of democratic breakdown induces countries to participate more actively in FTAs.
Our empirical results are robust to many different econometric specifications as well as to different measures of democracy. The results are also economically meaningful--although they also make free trade democracy that FTAs are no panacea. Similarly, take the case of Guatemala from towhen its out-of-democracy hazard increased from 0.
According to our estimates, this should lead to an increase of 2. Our analysis also indicates that the rent destruction forces of FTAs are the main drivers of our results.
By contrast, the estimates are generally indistinguishable from zero for partial-scope preferential trade agreements. Since those arrangements, signed under the Enabling Clause of the GATT, allow for many exceptions and are often not fully implemented, they impose very few restrictions on the availability of rents from protection. It is also possible that FTAs help to maintain democracies not because of their rent destruction effects, but because of pressure from more free trade democracy FTA partners.
Our analysis indicates that this may be more than cheap talk, and that the destruction of rents in FTAs can indeed improve the sustainability of democracies. While this is surely not the only reason, this force can nevertheless help to explain the puzzling outbreak of regionalism since the early s, while also helping to rationalize the global democratic wave taking place during the same period. Persson, Torsten and Guido Tabellini The nexus of political and economic change.
Free trade democracy 1 2 Ornelas holds a Ph. He has presented his work in numerous professional conferences and academic institutions and published his research in leading academic journals.
Xuepeng Liu obtained his Ph. His research focuses on international trade and economic development.
For example, it lets us formally test the Null Hypothesis that a decision maker's modal choices match KT-V4, via a single test on all of a person's binary choice data at once, provided that we have multiple observations for each choice pair.
A standard criterion is free trade democracy reject a model or Null Hypothesis when the p-value is smaller than 0. 05, the usual significance level. Hence, small p-values are indications of poor model performance. A p-value of free trade democracy means that a model cannot be rejected on a given set of data, no matter what the significance level of the statistical test.