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......ffiliated with the authors of this page or responsible for its content. Globalization and Democracy Daron Acemoglu and James A. Robinson Globalization and Democracy Daron Acemoglu and James A. Robinson Introduction What is the relationship between globalization and democracy? Is globalization likely to lead to democratizations? Make existing democ- racies more stable? We need a theory of democracy to answer this question. Here build on ideas developed in Acemoglu and Robinson Economic Origins of Dictatorship and Democracy, Forthcoming Cambridge University Press. Main Idea: Political Institutions As Commitment Role of political institutions: regulate future allocation of de jure political
power. Democracy allocates de jure political power towards the poor. Political institutions are relatively durable: changing political institutions a credible commitment to future policies. Therefore: democracy as credible commitment to pro-citizen policies Our Theory of Democratization Elites control non-democracy, but citizens can sporadically exercise de facto
power and threaten a revolution. Elites can respond with repression; concessions with unchanged political insti-
tutions; or democracy. Democracy arises when repression is too costly and concessions are non-credible. Elites cannot credibly promise to make concessions when they do not give away
their power because the threat of revolution is transitory. Democracy gives a
commitment to future pro-citizen policies. A Dynamic Model of Democratization Total population is normalized to 1, a fraction 1 > 1/2 are poor with income y p , fraction is rich with income y r > y p . Mean income is ¯ y , and we use to parameterize inequality, y p = (1 ) ¯y 1 and y r = ¯ y with < . (1) The political system determines a linear tax rate 0, the proceeds of which are redistributed lump-sum, and there is an aggregate cost of taxation C ( ) ¯ y . The post-tax income level of an agent with income y i is y i = (1 ) y i + ( C ()) ¯y. (2) Fiscal Preferences Tax rate maximizing the utility (income) of a poor agent is p > 0 satisfying µ 1 ¶ = C 0 ( p ). (3) Rich agent prefers r = 0 . Standard result: d p d > 0. Dynamic Preferences Utility is dened over the discounted sum of post-tax incomes with discount
factor (0, 1) U i = X t =0 t y it = X t =0 t h (1 t ) i
t () y i + ( t C ( t )) ¯ y i , i
t () is the cost due to repression for agent i, with = 0 denoting no repres- sion and = 1 denoting repression, with i
t ( = 1) = , i
t ( = 0) = 1. Initially there is a nondemocracy, rich choose tax policy, whether or not to
repress, whether or not to create democracy. If created democracy is fully consolidated (no coups) and that if a revolution
takes places the game ends. In a democracy the median voter (a poor agent)
will determine policy. De Facto Power of Poor Poor agents can mount a revolution in any period t 0, if attempted it always succeeds, but a fraction 1 µ t of income is destroyed forever. If there is a revolution at time t, each poor agent receives a per period return
of µ t ¯ y/ (1 ). Thus no collective action problem. µ changes between two values: µ H and µ L = 0 , with Pr(µ t = µ H ) = q . The fact that µ uctuates will also enable us to model the idea that a promise
to redistribute in the future made today may not materialize due to changes
in circumstances tomorrow. A low value of µ means that a revolution is very
costly, while a low value of q implies that the threat of revolution is rare, perhaps
because the poor are unorganized. Timing of Events in the Stage Game The state µ is revealed. The elite decide whether to repress, {0, 1}. The elite decide whether or not to extend the franchise, {0, 1}. If = = 0 , they set the tax rate. If = 0, the poor decide whether or not to initiate a revolution, {0, 1}. If = 1, the poor cannot undertake a revolution. If = 0 and = 1 , the tax rate is set by the median voter (a poor agent). Dynamic Game This economy can be represented as a dynamic game between two players, the
rich and the poor. Characterize the pure strategy Markov Perfect Equilibria. Key object: revolution constraint V p (R, µ H ) V p (N, µ H ), The value of revolution for the poor has to be less than living in non-democracy. If this is violated, i.e. µ H > 1 , the poor prefer to initiate a revolution when µ = µ H unless there is repression, redistribution or franchise extension, Preventing Revolution Assume that democratization prevents a revolution: V p (D) V p (R, µ H ) : 1 + p ( ) (1 )C( p ) µ H . (4) How to prevent revolution? First, the elite can choose to maintain political power, = 0, but redistribute
at rate giving the poor V p (N, µ H , ) . But this is generally not sucient, because the elite can not commit to future redistribution. Second, the elite can use repression. Eective against the revolution threat,
but costly. Third, if these two options are not attractive or feasible, then democratize.
Eective commitment to future redistribution by shifting political power to the
citizens. Proposition: There exists a unique Markov Perfect Equilibrium such that: When 1 µ H , there is never any threat of revolution, the rich never redistribute and the society remains nondemocratic. When 1 < µ H , then we have: 1. If µ H > µ H and < ¯ , then the revolution threat in the state µ = µ H will be met by franchise extension. 2. If µ H µ H and < , then the revolution threat in the state µ = µ H will be met by temporary redistribution. 3. If µ H > µ H and ¯, or if µ H µ H and , then the revolution threat will be met by repression in the state µ = µ H . Key Comparative Statics A non-monotonic (inverted U-shaped) relationship between inequality and the
likelihood of transition to democracy. Democracy unlikely in very egalitarian
(Singapore) or very inegalitarian (South Africa) societies. The structure of assets matter for democracy; e.g., land versus capital. Civil society - poor need to be suciently organized for revolution to be a threat
(Tilly). Shocks and crises. Costs of repression: related to "coercive institutions"; how costly this to use coercion. Potentially related to underlying structure of power, organization of the state, military etc.. Potentially also related to asset composition (to be discussed later). Our Theory of Democratic Consolidation/Coups Poor control power in democracy. Adopt relatively pro-poor/anti-rich policies. Rich can occasionally exercise de facto political power and threaten a coup. Poor wish to sustain democracy and promise concessions. Coups happen because de facto power transitory and promises by democrats to
make policy less pro-poor are not necessarily credible. Democracy fully consolidated when coups never a threat. Semi-consolidated when coups are a threat but can be stopped with concessions
(tax cuts). Comparative Statics of Consolidation Greater inequality makes democracy more redistributive and coups more likely. Shocks and crises. Costs of coups. May depend on nature of assets in the economy and "coercive
institutions." Middle classstrong middle class reduces attractiveness of coups. Political institutions - giving the rich power, but not too much power can help
to consolidate democracy. Globalization and Democracy Is democracy more likely in a more globally integrated world? More specically: What is the eect of greater international trade on democracy? What is the eect of greater integration of nancial markets on democracy? Trade integration: Non-democratic countries typically poor and capital-scarce.
Greater international trade reduces returns to capital and increases returns to
labor in capital-scarce countries. This reduces inequality and makes democ-
racy less redistributive. In consequence repression and coups less attractive.
Democracy more likely to be created, once created more likely to consolidate. Financial Integration Capital-in. If non-democracies are capital poor we can get capital inow. Pushes down the return to capital, reduces inequality with standard eects on
democratization and consolidation. Reduces the potential taxes on capital and
reduces opposition to democracy. Capital-out. If taxes in democracy are high, the rich will ee the country.
Natural limit on taxes from nancial integration (exit and capital ight). This
reduces the rich agents aversion to democracy, repression and coups less ben-
ecial. Model Suppose that the aggregate production function of the economy is Cobb-
Douglas: Y = (Y K + Y L ) Y 1 N (5) where Y K is a capital-intensive good, Y L is a land-intensive good, and Y N is a labor-intensive good with 0 < < 1, and > 0. Labor is only supplied by the poor workers, and all capital and land is owned
by that rich elite. Y K = K (6) Y L = L Y N = 1 exploiting the fact that there are 1 workers. Closed Economy Equilibrium Factor prices are w = p N , r = p K and v = p L with p K = µ K + L 1 ¶ 1 (7) p L = µ K + L 1 ¶ 1 p N = (1 ) µ K + L 1 ¶ Closed Economy Equilibrium (continued) Equilibrium incomes: y p = 1 1 ¯y and y r = ¯ y Income distribution is identical to our reduced-form model above. The rich elite control the fraction of aggregate income. (Naturally > ). We again assume there is a single tax rate on income, irrespective of its source.
This tax rate again creates the standard distortions captured by the function
C ( )¯ y . Then, the most preferred tax rate by a citizen, p , is given by an equation identical to before. Open Economy Equilibrium No trading costs. Standard arguments give p K = p L = 1 and p N = (1 ) . (8) where = P j K j + P j L j P j N j is a world factor ratio. Open Economy Equilibrium (continued) It is natural to think that the country in question is relatively scarce in capital,
so > K + L 1 . (9) Implication: after trade opening, the price of the labor-intensive interme- diate good will increase. In particular: w = (1 ) (10) r = 1 v = 1 Open Economy Equilibrium (continued) Implication: under (9), income inequality is reduced by trade. Therefore, lower preferred tax rate for the poor: p < p , Less conict, democracy more likely to be created and more likely to be con-
solidated. Another Eect from Trade Another interesting eect of trade from the model. This is to change the net cost of repression or coups. In closed economy, repression makes land or capital less productive, but the
costs are shared between elites and citizens because of the general equilibrium
wage eects. In open economy, this general equilibrium eect is shut down, so repression and
coups are more costly for the elites. Caveats Lower inequality may enable and non-democratic regime to protect itself with-
out democratization. Recall the non-monotonic relationship between inequality and democracy. Assumption (9) is not totally innocuous. Poorer, non-democratic countries can be suciently land abundant so that
the opposite of this assumption may hold. Examples: Latin America at the
beginning of the century. In this case, trade increases inequality and the opposite eects apply. General lesson: the eect of trade on equilibrium political institutions will depend on how they aect factor prices. Financial Integration Useful to distinguish between two types of nancial integration: Capital-in: investment by capital-abundant countries in poorer capital- scarce non-democratic countries, very similar eects to trade integration. Capital-out: the threat of domestic capital to be invested abroad reduces taxation, makes democracy more likely to be created and consolidated.