The Impact of International Trade on Democracy: A Long-Run Perspective

We study whether international trade fosters democracy. The likely endogeneity between democracy and trade is addressed with an instrumental variables strategy. Our instrument is a measure of natural openness obtained via the gravity model of trade à la Frankel and Romer (1999). We use this powerful instrument to obtain estimates of the causal impact of openness on democratization in three separate samples that span almost 130 years of global history. A positive long-run impact of openness on democracy is apparent in the data, although no relationship exists in the short-run. Our post-World War II results suggest that a one standard deviation increase in trade with other countries could eventually bring countries like Indonesia, Russia or Venezuela to be as democratic as the US, Great Britain or France. We also see some variation in the impact of openness by region. Notably countries in Africa and the Middle East are not more democratic at higher levels of openness. This does not appear to be because many of them are commodity exporters. Finally openness does not seem to have a larger impact where labor is a relatively abundant factor of production.