When does more aid imply less democracy? An empirical examination

Foreign aid flows have increased considerably during the last decades, targeting, apart from development objectives, goals related to democracy. In this paper we investigate whether aid has affected the political regime of recipient countries. To this end, we use annual data on Net Official Development Assistance covering 64 aid-recipients. Because of data limitations, we cover the 1967-2002 period. We find that aid flows decreased the likelihood of observing a democratic regime in a recipient country. This effect is sensitive to economic and social conditions. The negative relation between aid and democracy is moderated when aid flows are preceded by economic liberalization. Aid from the U.S. has a non-significant effect on the political regime of recipients.     

Do dictatorships redistribute more?

This paper examines the effect of political institutions on fiscal redistribution for a country-level panel from 1960–2010. Using data on Gini coefficients before and after government intervention, we apply a measure of effective fiscal redistribution that reflects the effect of taxes and transfers on income inequality. Our findings clearly indicate that non-democratic regimes demonstrate significantly greater direct fiscal redistribution. Subsequently, we employ fiscal data in an attempt to enlighten this puzzling empirical finding. We find that dictatorial regimes rely more heavily on cash transfers that exhibit a direct impact on net inequality and consequently on the difference between market and net inequality (i.e., effective fiscal redistribution), whereas democratic regimes devote a larger amount of resources to public inputs (health and education) that may influence market inequality but not the difference between market and net inequality per se. We argue that the driving force behind the observed differences within the pattern on government spending and effective fiscal redistribution is that democratic institutions lead survival-oriented leaders to care more for the private market, and thus to follow policies that enhance the productivity of the whole economy.     

THE NON‐TRADED SECTOR,LOBBYING, AND THE CHOICE BETWEEN THE CUSTOMS UNION AND THE COMMON MARKET

This paper models immigration policy as the outcome of political competition between interest groups representing individuals employed in different sectors. In standard positive theory, restrictive immigration policy results from a low‐skilled median voter voting against predominantly low‐skilled immigration. In the present paper, in contrast, once trade policies are liberalized, restrictive immigration policy results from anti‐immigration lobbying by interest groups representing the non‐traded sectors. It is shown that this is in line with empirical regularities from recent episodes of restrictive immigration legislation in the European Union. It is further shown that if governments negotiate bilaterally over trade and migration policy regimes, the equilibrium regime depends (i) on the sequencing of the international negotiation process and (ii) on the set of available trade and migration policy regimes. In particular, the most comprehensive and most welfare‐beneficial type of liberalization may be rejected only because a less comprehensive type of liberalization is available.     

Immigration,Conflict, and Redistribution

In this paper, we analyze how the possibility of conflict between natives and immigrants shapes income redistribution in developed democracies. This possibility can generate income redistribution towards immigrants even if they have no voting rights. We show that the threat of conflict between natives and immigrants lowers vertical income redistribution (from the rich to the poor) as the level of immigration increases. The opposite holds for horizontal income redistribution (from natives to immigrants), which increases with the level of immigration. Income inequality weakens the negative effect of immigration on vertical redistribution, but it also reduces horizontal redistribution. These theoretical predictions are consistent with the results of our empirical analysis on data from 29 European countries: larger immigrant populations are associated with more redistribution towards immigrants and lower vertical redistribution.     

Developing Countries’ Net-migration: The Impact of Economic Opportunities,Disasters, Conflicts,and Political Instability

We provide regressions for the net immigration flows of developing countries. We show that (i) savings finance emigration and worker remittances serve to make staying rather than migrating possible; (ii) lagged dependent migration flows have a negative sign in the presence of migration stock variables; (iii) stocks of migrants in six OECD countries and in the developing countries have non-linear effects. Some of the non-linear effects of the economic variables vanish if indicators for disasters, conflicts and political instability are taken into account but new ones come in for these latter variables.     

Democratic transitions can attract foreign direct investment: Effect,trajectories, and the role of political risk

Using a difference-in-differences method on a panel of 115 developing countries from 1970 to 2014, we find that democratic transitions do not affect foreign direct investment (FDI) inflows, on average. However, consolidated democratic transitions, i.e. transitions that do not go into reverse for at least five years, increase FDI inflows, with the bulk of the improvement appearing 10 years after the transition. Furthermore, when controlling for political risk, the effect of consolidated democratic transitions appears immediately after they have occurred, suggesting that higher political risk in the early years of the new regime offsets their positive intrinsic effect on FDI.     

Political democratization, economic liberalization, and growth volatility

This study empirically investigates the effects of political and economic liberalization on growth volatility using a difference-in-difference method for a sample of 158 countries over the 1970-2005 period. The results show that, when examined separately, economic liberalization leads to a significant reduction in volatility while democratization is not followed by a decrease in growth volatility. For countries that undertake only one liberalization, opening up the economy to international trade reduces volatility in growth; becoming a democracy, on the other hand, seems to increase macroeconomic instability. For countries that implement both political and economic liberalizations, no statistically significant effect on volatility is detected. These results serve to provide additional support for the policy recommendation that developing countries should liberalize their economy first and then consider political liberalization.     

Disentangling the migration-trade nexus: the pro-trade effects of immigrants and emigrants in the presence of vertical and horizontal product differentiation

This paper presents an exploration of the migration-trade nexus taking the case of Italy by crossing the two dimensions of migration (immigration and emigration) and the two dimensions of intra-industry trade (vertical and horizontal). This empirical strategy proves useful in refining interpretation of econometric results. In general, we find that both immigration and emigration are positively and significantly related to intra-industry trade. However, the magnitude and the statistical significance of the impact of migration on trade vary, depending on the type of trade flows considered (vertical or horizontal), the direction of migration (immigration or emigration) and the partner countries considered (OECD or non-OECD). In particular, we find that immigrants from non-OECD countries have a positive and significant impact on both ‘variety trade’ and ‘quality trade’, while immigrants from OECD countries significantly affect ‘variety trade’ only. Emigrants to non-OECD countries have positive effect only on ‘variety trade’. These findings are largely consistent with predictions deriving from theoretical models of intra-industry trade and from the literature on migration-trade nexus.     

The political economy of exchange rate regimes in developed and developing countries

This paper examines the influence of government ideology, political institutions and globalization on the choice of exchange rate regime via panel multinomial logit approach using annual data over the period of 1974-2004 in a panel of 180 countries: 26 developed and 154 developing.We provide evidence that government ideology, political institutions and globalization are important determinants of the choice of exchange rate regime. In particular, we find that left-wing governments, democratic institutions, central bank independence and financial development increase the likelihood of choosing a flexible regime, whereas more globalized countries have a higher probability of implementing a fixed regime. More importantly, we find that political economy factors have different effects on the choice of exchange rate regime in developed and developing countries. All our results are robust to panel ordered probit model.     

Do Potential Skilled Emigrants Care about Political Stability at Home?

In this paper, we consider the role of political stability in the source country as a potential reason for skilled emigration. We control for all prospective source country characteristics, and yet skilled emigration is seen to be driven by a relatively better situation of political stability in the home country. Our research clearly shows that government stability, socioeconomic conditions, investment profiles, democratic accountability, internal conflict, and ethnic tensions in source nations have significant impacts on the rate of skilled emigration for a sample of developed and developing countries. The results retain robustness even for a subset of only developing nations.     

Preferential versus multilateral trade liberalization and the role of political economy

In this paper we analyze the effect of the freedom to pursue preferential trade liberalization, permitted by Article XXIV of the GATT, on country׳s incentives to participate in multilateral negotiations and on feasibility of global free trade. We present a model, in which countries choose whether to participate in preferential or multilateral trade agreements under political pressures from domestic special interest groups. We show that heterogeneity in political preferences across countries plays an important role in determining the relative merits of preferential and multilateral approaches to trade liberalization. On one hand, the opportunity to liberalize preferentially may be necessary to induce countries with strong political motivations to participate in multilateral free trade negotiations. On the other hand, when countries share similar political preferences, multilateral free trade that would have been politically supported otherwise becomes unattainable if countries can pursue preferential liberalization.     

DEMOCRATIC AID AND THE DEMOCRATIZATION OF RECIPIENTS

We investigate whether democratic aid flows, which are directed toward the democratization of recipients by covering democracy‐related programs and government and civil society activities, affect the future political regime of recipient countries. We introduce a multinomial multivariate logit model and we use 5‐yr averaged data covering the period 1972–2004 for 59 democracy aid‐recipient countries categorized into three broad classes according to the prevalent political regime. We find strong evidence that democratic aid flows are positively associated with the likelihood of observing a partly democratic or a fully democratic political regime in democratic aid‐recipient countries and that this result is robust to the potential endogeneity of democratic assistance.(JEL D70, F35, C25)     

Financial liberalization and the selection of emigrants: a cross-national analysis

This paper explores the impact of financial liberalization on the migration of high skilled labor from 46 countries to the Organization for Economic Cooperation and Development, taken at 5-year intervals over the period 1985–2000. Using an exploratory factor analysis, we are able to distinguish between two dimensions of financial liberalization, namely the robustness of the markets and their freedom from direct government control. We find that a standard deviation improvement in the robustness of the source country financial sector magnifies the extent of skilled emigration by a factor of about 3.9–5.1 % points on the average. However, a corresponding increase in the freedom of the source country financial sector from government control has a statistically insignificant impact. Further, the impact of improved financial sector robustness on selection is more pronounced for countries with a better quality of institutions in terms of the perceived credibility of the regime in terms of its ability to protect property rights.     

Political regimes and foreign intervention

We present a theory of endogenous political regimes that emphasizes foreign direct investment as a motive for foreign governments to either induce regime transitions or promote regime consolidations. We characterize different forms of foreign intervention and identify the conditions under which they occur. We highlight new channels through which economic factors affect political regime choices. Foreign intervention is most likely to originate from countries where the government has a substantial pro-investor bias and to be directed at destinations where FDI is highly profitable and where income inequality is high. Foreign-sponsored coups d'état are more likely to be directed at democratic governments of poor countries. In destinations where FDI is highly profitable but the domestic elite is weak, foreign intervention tends to be aimed at stabilizing dictatorships. We relate the analysis to evidence on foreign intervention from around the world.     

Is democracy good for growth? — Development at political transition time matters

Is democracy a better political regime for economic prosperity than autocracy? This paper shows that the answer depends on the initial economic development level during the democratic transition when the foundation of institutions was laid. Democracy facilitates growth only in countries that already have adequate development at transition time. These countries are more likely to create and sustain growth-enhancing institutions than others. Without appropriate development, democracy does not improve growth; this applies to about 40% of the third-wave democratized countries. These results are based on a sample of 153 countries in 1960–2010 and robust to various specifications and endogeneity issues.     

Democracy in the neighborhood and foreign direct investment

The determinants of foreign direct investment (FDI) have been extensively studied. Even though there is extensive research in the area, most of it is based on analyzing the effects of host country characteristics on FDI flows, and yet there is little research on how neighboring country characteristics play a role in facilitating FDI flows to host countries. This paper analyzes the association between the democracy level in neighboring countries and FDI flows to host countries. Using bilateral FDI flows from the OECD countries, with a large host country sample, we find that countries surrounded by democratic countries attract higher FDI flows. Furthermore, we find evidence that countries that are surrounded by neighboring countries with good institutions tend themselves to have better institutions, experience lower civil conflict, and have higher political stability and hence indirectly attract higher FDI flows. Our findings suggest that if neighboring countries act in such way as to become more democratic, FDI flows to these countries would be higher since not only does improving the quality of democracy attract more FDI inflows, but also being surrounded by neighboring advanced democratic countries will also lead to higher FDI flows to them.     

Protecting Property: The Politics of Redistribution,Expropriation, and Market Openness

This paper develops a formal model to disentangle the competing political incentives for redistribution, expropriation, and market openness. Although redistribution and expropriation are both types of government extraction, redistribution re‐allocates wealth within the citizenry, while expropriation re‐allocates wealth from citizens to the government. Representative political institutions increase redistribution and reduce expropriation. Market openness changes these incentives, as foreign investors prefer reductions in both redistribution and expropriation. When political institutions are representative, the government will rely more on reducing expropriation, rather than limiting redistribution, to attract foreign investment. Under representative institutions then, openness partially reinforces the preferences of voters rather than undermining them. In addition, market liberalization occurs only when the policy changes needed to attract foreign investment are relatively small. If existing policies are satisfactory to foreign investors, moves toward openness may be accompanied by greater redistribution and expropriation, as governments are tempted by a larger base for extraction. Thus, openness has ambiguous effects on economic policy, at times encouraging and at times constraining extraction.     

Does Capital Account Liberalization Discipline Budget Deficit?

The paper investigates whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market. The author tests the hypothesis using three‐stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization. Even the conservative measure shows that, if capital account liberalization were exogenously imposed, ceteris paribus, government budget deficit would be reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect is stronger for countries under a fixed exchange rate regime or for countries with weak central bank independence. The disciplinary effect is also found to be stronger in more recent periods—the 1990s—during which capital market integration has been most prevalent.     

On the timing of political regime changes in resource-dependent economies

We consider a resource-dependent economy initially ruled by the elite. The transition from the autocratic to a more democratic regime takes place only if the citizens decide to revolt against the elite. The occurrence of a revolution primarily depends on the autocratic regime vulnerability and the level of inequalities, both being driven by the elite׳s redistribution and repression policies. First, we show that when a political transition is inevitable, the elite choose the maximum rate of redistribution to lengthen their period in office. Second, we find that the duration of the autocratic regime is linked to resource abundance, and how it relates to the elite׳s policies. More resources lead to a shorter reign of a redistributive regime, which may not be the case of a repressive regime. Finally, we interpret the Arab spring sequence in light of our findings.     

Public education and redistribution when talents are mismatched

In democratic countries, elected policymakers determine public spending. The level of public spending depends on taxes that are decided by a voting mechanism. Policymakers also decide how to allocate funds among different policies, such as public education and pure redistributive transfers. How are the levels of funding for public education and redistribution determined in the political process? What impacts do votes on these two policies have on inequality, growth and social mobility? We develop a politico-economic model that highlights a novel mechanism: public education provides opportunities for the children of the poor to be recognized for their talent. This reduces the probability of a mismatch, which takes place when individuals with low talent who come from rich families find jobs that should go to people with high talent (and vice versa). Hence, the poor may prefer public spending on education to direct redistribution, while the rich prefer redistribution, as education implies more competition for good jobs from the poor.