Are democracy and globalisation mutually supportive? A new BIS working paper by Barry Eichengreen and David Leblang, Democracy and globalisation, finds a positive two-way relationship. Here is the 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 is one of several presented at a BIS conference last June on Financial Globalisation. The papers have recently been posted online, including comments on the Eichengree and Leblang paper by Harold James and Marc Flandreau. Worth a look.