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Free Trade and Democracy

Free Trade and Democracy published on

Xuepeng Lui and Emanual Ornelas have a rather interesting paper in the current issue of American Economic Journal: Macroeconomics (Vol 6, No 2) examining the relation between participation in free trade agreements (FTAs) and the sustainability of democracy. Using hazard and duration models, and accounting for endogeneity of the dynamics, they find that participation in FTAs is positively related to democratic stability. The authors’ findings suggest the bi-lateral nature of FTAs, rather than just a unilateral free-trade regime, make credible the rent-dissipating effects of free trade and reduce incentives to subvert the democratic regime. The authors further show that the adoption of FTAs does not appear to be influenced by how democratic trading partners are, but FTAs do appear to be used as defensive measures by less stable democracies. It’s a thoughtfully done piece that illustrates the interactions of socio-political and economic institutions. The abstract follows:

We study the relationship between participation in free trade agreements (FTAs) and the sustainability of democracy. Our model shows that FTAs can critically reduce the incentive of authoritarian groups to seek power by destroying protectionist rents, thus making democracies last longer. This gives governments in unstable democracies an extra motive to form FTAs. Hence, greater democratic instability induces governments to boost their FTA commitments. In a dataset with 116 countries over 1960-2007, we find robust support for these predictions. They help to rationalize the rapid simultaneous growth of regionalism and of worldwide democratization since the late 1980s.

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