A re-examination of the relation between democracy and international trade

Abstract

Scholars and policy makers believe that democracy will bring prosperity through integration into the global economy via increased international trade. Existing research is plagued by methodological problems that obscure the empirics and avoid the theoretical problem of why democracies may or may not trade more. In this paper, I seek to correct these shortcomings. I test two theories as to why democracies might trade more. First, political freedom may be correlated with economic freedom, thus prompting higher levels of economic activity, thereby driving states to trade more. Second, democracy implies higher quality governance either through institutions or policy making procedures. To test the impact of democracy on trade and the potential transmission mechanisms, I utilize a bilateral gravity trade model covering approximately 150 countries from 1950 to 1999, with fixed effects for time, importers, and exporters. I find the theory that democracy, and many of its components, promotes international trade unconvincing. The coefficients are the theoretically correct sign; however, many are statistically or economically insignificant and fragile to changes in modeling or data. Economic freedom does not have the expected impact on international trade levels, but quality of governance variables have broad economic and statistical significance.

Democracy and International Trade: Differential Effects from a Panel Quantile Regression Framework

“…This indicates a positive link for some countries in the right tail of the trading distribution, as well. 14 For the exporting activity no clear evidence can be found which corresponds to the weak effects for exports already found by ordinary least squares regressions and to results from the past research literature (Balding (2011) e.g. ).…”

“…Nevertheless, in the past literature contrary evidence featuring the non-significance of the link between democracy and trade has also been established (Nicolini and Paccagnini (2011) and Balding (2011)). 3 The literature that is in favor of a significant positive link explains that a country that has a democratic regime is generally hosting better political and economic institutions (Olson (1993), Giuliano et al (2012)) and guaranteeing better market conditions like stronger property rights, consumer rights and rule of law (Yu 2010) or supports a legislature that ratifies trade agreements more efficiently, such that there is less space for discretion of the executive (Mansfield et al 2000).…”

“…Balding (2011)). We further added the landlabor ratio, the capital-labor ratio and their interactions with democracy, respectively.…”

Are trade and transport logistics activities mutually reinforcing? Some empirical evidences from ASEAN countries

“…In addition, as Aidt and Gassebner (2010) shows, CL is a main driver for international trade growth. As political freedom can be positively associated with economic freedom, and it promotes economic prosperity and trade between countries as democracy implies better public governance (Balding 2011). The economic stance of a country can be shaped by its government's commitment to develop and implement trade policy, which in turn affects the export and import trade volume.…”

Trade Openness and Democracy: The Case of Gabon

“…Under the structural adjustment programs of the International Monetary Fund, there is renewed interest in the analysis of the relation between trade openness and democracy in developing countries, where there may be conflicts between them two objectives [1].…”