The Democratic Advantage: Institutional Foundations of Financial Power in International Competition

Abstract

Despite their presumed liabilities, institutions associated with democracy serve as a source of power in prolonged international competition by increasing the financial resources that states can bring to bear. The theory of sovereign debt suggests that a state's ability to raise money through public borrowing is enhanced when debtholders have mechanisms for sanctioning state leaders in the event of default. Institutions associated with liberal government provide such mechanisms. All other things being equal, states that possess these institutions enjoy superior access to credit and lower interest rates than do states in which the sovereign has more discretion to default unilaterally. Liberal states can not only raise more money from a given economic base but can also pursue tax-smoothing policies that minimize economic distortions. The ability to finance competition in a manner that is consistent with long-term economic growth generates a significant advantage in prolonged rivalries. These claims are explored by analyzing the Anglo-French rivalry (1688–1815) and the Cold War.