Discussion Papers, Center for European Governance and Economic Development Research 243
There has been a wide debate on whether democracy actually has an effect on economic outcomes, and especially on international trade. With a new estimation strategy, we analyze this relationship taking a look at the distribution of countries´ trading activity. Using a panel quantile estimation framework from Powell (2014), we find a stronger relationship at the lower quantiles, especially for the import activity. Our results suggest that the impact of democratization on trade is more important when countries trade less: the marginal benefit of democratization decreases as countries trade more. This feature supports a widely neglected issue in the literature: economies very active in the international trading network are not necessarily the most democratic countries. The results are robust to different institutional variables and even to instrumental variables estimation. Our results demonstrate that the effect of democracy on trade is underestimated using Ordinary Least Squares estimation for the group of countries for which the effect is statistically significant for, namely those countries that are active in the lower quantiles of the trading distribution. Moreover, our results complement the findings by Barro (1996) which suggest that the effects of democracy for economic growth are not uniform for all countries.
democracy international trade panel quantile fixed effects