Democratization and trade policy: An empirical analysis of developing countries

Abstract

I show that the process of democratization in developing countries constitutes an important factor in the formation of preferential trade agreements. Specifically, democratizing developing countries are more likely to form a preferential trade agreement with richer countries, whereas there is little evidence that democratic transition affects the probability of a developing country joining a preferential trade agreement with other developing countries. This result follows naturally from median voter preferences and the Heckscher–Ohlin and Stolper–Samuelson theorems. Put simply, the median voter gains from trading with the richer states and loses from trading with the other poor states. Since preferential trade agreements allow countries to waive the most-favored nation principle, the need for both trade openness and protectionism against competitors might explain why preferential trade agreements constitute one of the main features of the current wave of globalization. I quantitatively test this hypothesis using a newly compiled dataset that covers 135 developing countries from 1990 to 2007. An important implication of this article is that it could be more challenging than expected to combine domestic political equality with international economic equality.