Trade Liberalization, Financial Repression and Authoritarian Regimes

• In Event: Protectionism in the 21st Century

Abstract

This paper examines the relationship between trade openness and democratization through the channel of state control of the financial system. I argue that trade openness gives autocrats incentives to increase its control over the domestic economy, especially the financial system, to better deal with the competitive pressure and democratizing force of globalization. I show that conditional on a country being an autocracy, trade openness may increase the level of financial repression. I also show that financial repression has a significant effect for autocracies to remain autocracies. I use an instrumental variable strategy that involves Bartik instruments to deal with the underlying endogeneity problems. Hence, through this channel, trade openness increases the likelihood that a country stays an autocracy. This channel between globalization and democratization has not been examined before in the literature.

Author

• Russell Cui