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Trade uncertainty, income, and democracy

Jilin Tian, Nicholas Sim (), Wenshou Yan () and Yanyun Li

Economic Modelling, 2020, vol. 90, issue C, 21-31

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.

Keywords: Trade uncertainty; Economic shock; Democratization; Polity score; Instrumental variable (search for similar items in EconPapers)
JEL-codes: D72 E21 O10 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2020.04.022

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