GEP 2025/02: A democratic dividend in trade? Evidence from a flexible empirical implementation

Abstract

We study the causal effect of country-specific democratic regime change on bilateral trade flows, extending standard structural gravity empirics to ‘heterogeneous gravity’ estimated at the country-pair level. Our original difference-in-differences implementation accounts for selection into regime change, multilateral resistance, globalisation effects, and spatial dependence. We initially find average effects of 46% higher exports for countries after thirty years in democracy, but demonstrate that these effects are driven by the democratic dividend for income: the causal chain runs from democracy to economic prosperity to trade, and democracy appears to have a limited ‘direct’ effect on trade flows.

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Authors

Rodolphe Desbordes, Markus Eberhardt and Mario Larch

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