Economic Integration and Democracy: An Empirical Investigation

Between 1960 and 2010, both democratization and globalization increased dramatically. Since the late 2000s, however, the world has witnessed rising opposition towards globalization and, at the same time, a “democratic retreat”. Are these phenomena causally related? In this paper, we study the effects of economic integration on democracy, using a country-year panel dataset that covers the period from 1960 to 2015. We predict bilateral trade flows by estimating a time-varying gravity equation that exploits changes in the relative importance of air vs sea transportation. We find that economic integration promotes democracy, but only when it happens with democratic partners. These effects grow over time, becoming larger in the long-run. We conjecture that economic integration with democracies fosters the transmission of “democratic capital” from more to less democratic countries. Consistent with this mechanism, we first verify that our findings cannot be explained by direct income effects or by human capital accumulation. Next, we show that results are driven by countries that are non-democratic at baseline, for which the transmission channel is more likely to operate. Using survey data and exploiting within country, between cohort variation, we also document that individuals who were exposed to trade with democracies during their impressionable years are, today, more supportive of democracy and have stronger confidence in the judiciary, free elections, and the media. We provide further evidence of a transmission channel using the institutional content of trade.