Abstract:
The relationship between democracy and globalisation has been the focus of substantial
policy and academic debate. Some argue that democracy and globalisation go hand in hand
suggesting that unrestricted international transactions leads to increased political
accountability and transparency. And, politically free societies are likely to have minimal
restrictions on the mobility of goods and services across national borders. Others argue that
the causal relationship should be reversed: democracies are more likely to have closed
markets and vice versa. We examine these relationships between political democracy and
trade and financial globalisation over the period 1870-2000 and treat both democracy and
globalisation as both cause and effect. Our empirical strategy uses instrumental variables
and estimates relationships using the Generalised Method of Moments framework. Our
general findings support the hypothesis of a positive two-way relationship between
democracy and globalisation.
(This paper includes comments by Harold James and Marc Flandreau.)