Democracy and Trade

Yesterday in Sean's class we discussed democracy and the liberalization of trade based on the empirical paper of Milner and Kubota, who aimed to prove that the increased move to democracy is related to decreased trade barriers and the liberalization of trade. Unsurprisingly their time series cross-section analysis leads to the conclusion that democracies trade more. 

This point raises some questions, not from any simple need to criticize and be pessimistic about how little we know, but from the genuine willingness to understand what is this result good for and think about it from another perspective.

The main argument evolves around a kind of a minimum winning coalition theory, where democratization leads to the broadening of the electorate and consequently to limiting the outreach of specific groups with particular trade interests. Conveniently leaning on the Stolper-Samuelson theorem, it is argued that since the wealthy capital-owners in developing countries are in possession of the scarce factor, they are the group which would defend protectionism. Workers in less-developed countries are the owners of the abundant factor and would accordingly support free trade because it raises their income in the simple Heckscher-Ohlin framework.

What I think is lacking and still unconvincing is a more thorough explanation of the mechanism through which democracies tend to trade more... I  don't find the broadened electorate is credibly the decisive reason. The people of newly democratized countries are not suddenly beginning to exert pressure on their governments to reduce trade barriers. Newly democratized states gain access to new markets and often strive to become part of international regimes, international institutions and free trading zones. A very good case can be observed in the former Eastern block and the EU-enlargement in 2004 and 2007: a number of reforms had to be implemented by the candidate states and criteria to be met in order for the Eastern European states to join the EU. "The main trading partner of the new member states is the EU15". This phenomenon can be seen more as a "compliance" case, which coincides with the democratization of Eastern Europe, yet does not result from particular pressure from the broader electorate to have freer trade. 

The argument that the people of new democracies support free trade even if there is a trade off of short-term losses versus long-term benefits is rather naive, because it assumes that citizens are perfectly informed about the functioning of the trade system and have particular time preferences. There are two important remarks: 1) US-soft power has driven globalization and westernization of the new democracies in Eastern Europe; 2) political and economic instability of new democracies has sometimes resulted in the socialist parties being elected again (Zhan Videnov in 1995)

Well, the OFFICE variable, which is coded as the number of years the government has been in power does not capture the new ideas of political leaders. No wonder that the regression results show that it is rather political leaders, who have been in power for a few years who decide to implement trade liberalization reforms. Democratization is not a clear-cut process and the mechanism thought which it influences trade must be examined in a more precise manner.

Note: There is another definition/bias issue that Milner and Kubota fail to address. The Sachs and Warner openness index automatically codes socialist regimes as closed regimes...