Trade uncertainty,income, and democracy |
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Institution: | 1. School of Business Administration, Zhongnan University of Economics and Law, 182 Nanhu Road, Wuchang, Wuhan, Hubei Province, 430073, PR China;2. School of Business, Singapore University of Social Sciences, 463 Clementi Road, 599494, Singapore;3. School of International Trade and Economics, Central University of Finance and Economics, 39 South Road, Haidian District, Beijing, 100081, PR China;1. Banque de France, Direction de la Stabilité Financière, Paris, France;2. EconomiX-CNRS, University of Paris Nanterre, France;3. CEPII, Paris, France;1. Department of Finance and Economics, Qatar University, Qatar;2. Department of Economics, University of Miami, USA;3. Department of Economics, Virginia Polytechnic Institute and State University, USA;1. Ifo Institute, University of Munich and CESifo, Poschingerstr. 5, D-81679, Munich, Germany;2. Univ. Ramon Llull, ESADE Business School and CESifo, Av. del la Torre Blanca 59, E-08172, Sant Cugat, Spain |
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Abstract: | Existing studies establish a strong correlation between income and democracy. Little, however, is known about whether income shocks driven by non-economic fundamentals matter for political transitions. This study employs trade uncertainty as a non-economic fundamental and examines the effect that trade uncertainty driven income variations have on democratic transitions over the period 1960–2013. We find that higher income fosters democratic transitions, but this effect works mainly for developing than developed countries. Specifically, using trade uncertainty as an instrument, we find that the Polity2 score, a measure of democracy, increases by at least 2.3 points following a 1 percentage point increase in GDP growth. This positive association is robust to exploiting conditional heteroskedasticity for identification, using different time periods, including lagged Polity2 as a regressor, and using alternative measures of GDP and democracy. |
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Keywords: | Trade uncertainty Economic shock Democratization Polity score Instrumental variable D72 E21 O10 |
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