Does Trade Openness Influence Democracy? Evidence from Ex-communist Countries

Abstract

Abstract This paper analyses the influence of trade on democracy, aiming to understand whether becoming more open to trade also makes a country more democratic. So far, the scientific literature that investigate this topic is scarce, and has not reached any solid consensus: while some papers find a positive effect of trade openness on democracy levels, others find a negative effect, or no effect at all. Moreover, the empirical literature on this topic is also very prone to technical problems of the research design, such as endogeneity, which increases the risk of obtaining biased estimates. This paper uses an instrumental variable approach, this way avoiding any omitted variable bias and reverse causality problems. More precisely, we instrument trade openness with its natural, geography-determined rate, based on the gravity equation of trade; we then use the predicted rate of trade openness to capture its effect on democracy, employing an OLS regression on a panel sample of 27 post-communist countries across a period of 24 years. Democracy is measured using the polity index (from Polity V dataset), and also five other variables that capture different facets of democracy – electoral, liberal, participatory, deliberative and egalitarian dimension (from V-Dem dataset). Empirical results suggest that trade openness has a significant, positive effect on democracy. The effect is only marginally higher for the liberal dimension of democracy, and rather similar in magnitude for the rest of four dimensions.