Investment and Expropriation under Oligarchy and Democracy in a Heckscher-Ohlin World

Abstract

We study the incentives to expropriate foreign capital under democracy and oligarchy. We model a two-sector small open economy where foreign investment triggers Stolper-Samuelson effects through reducing exporting costs. We show how incentives to expropriate depend on the distributional effects of the investment and on how these affect the interests of the group in power. How investment affects the incomes of the different groups in society depends on the sectors where these investments are undertaken and on structural features of the economy such as factor intensities. We characterize expropriation equilibria and show that if investment is undertaken in the sector that uses labor less intensively; democracies are generally more prone to expropriate. This result provides one possible rationalization for the wave of expropriations in Latin America under governments with a broad popular base during the 20th Century. Abstract

Political regimes and foreign intervention

“…As a consequence, the elite would like to discourage foreign investment while workers would like to encourage it. Albornoz, Heymann, and Galiani (2009) show how the incentives for a democracy or an oligarchy to expropriate/tax FDI depend on their distributional effects and, therefore, on the production structure of the host economy. While we acknowledge that this is a possibility, we believe that, in most cases involving foreign intervention, it is more natural to assume that FDI complements domestic factors of production.…”

Autocracies and Development in a Global Economy: A Tale of Two Elites

“…The autocrat caters to the needs of the elites and may thus be either landed or capitalist in nature. 6 The autocrat governs the institutional quality and makes decisions on whether or not to allow for international trade in goods and foreign capital in ‡ows.…”

“…For now, however, we treat A Kt as a parameter, derive equilibrium expressions that hold for K F t 0; and return to this issue in Section 4. 6 The possibility that autocrats may be heterogeneous and have di¤erent objectives is also present in Shen (2007), Paltseva (2008) and Larsson Seim and Parente (2012). However, these papers do not take into account that the endowments of the political elites may be country-speci…c.…”

Financial integration in autocracies: Greasing the wheel or more to steal?

“…In section 3, we introduce dynamics with a myopic elite and in section 4 with a forward-5 Albornoz et al (2008) analyze the incentives to expropriate foreign investors in a Heckscher-Ohlin-framework, in which foreign capital facilitates international trade. In their model, the expropriation risk depends amongst others on sectoral factor intensities.…”