DP14336 Economic Integration and Democracy: An Empirical Investigation

Author(s): Giacomo Magistretti, Marco Tabellini
Publication Date: January 2020
Keyword(s): democracy, economic integration, Institutional development, international trade
JEL(s): F14, F15, P16
Programme Areas: Public Economics, International Trade and Regional Economics, Development Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14336

We study whether economic integration fosters the process of democratization and the channels through which this might happen. Our analysis is based on a large panel dataset of countries between 1950 and 2014. We instrument actual trade with predicted trade constructed by estimating a time-varying gravity equation similar to Feyrer (2009). We find that economic integration has a positive effect on democracy, driven by trade with democratic partners and stronger for countries with lower initial levels of economic and institutional development. These results are consistent with a learning/cultural exchange process whereby economic integration promotes the spread of democracy from more to less democratic countries. We corroborate this interpretation by providing evidence against alternative mechanisms, such as income effects, human capital accumulation, and trade-induced changes in inequality.