Financial Globalization as a Barrier to Democratic Consolidation: a North-South Model with Public Goods

Gabriel Porcile

doi:10.1515/jgd-2019-0009

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Financial Globalization as a Barrier to Democratic Consolidation: a North-South Model with Public Goods

Gabriel Porcile

Veröffentlicht/Copyright: 7. Juli 2020

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Aus der Zeitschrift Journal of Globalization and Development Band 11 Heft 2

Abstract

This paper modifies the Acemoglu–Robinson model of the economic basis of democracy to discuss the impact of the international regime regulating capital flows on the consolidation and quality of democracy. Two regimes of capital mobility are considered, Bretton Woods and Rodrik’s hyperglobalization, in an international economy formed by an advanced North and a developing South. The model shows that hyperglobalization compromises the stability of democracy in the South by limiting the ability of the citizens to tax the elite and provide public goods which are critical for technical change and income distribution. At variance with the mainstream results, it is argued that financial globalization is a barrier to democratic consolidation. The model is consistent with key findings of the empirical literature on globalization and democracy, as well as with evidence from the economic history of Latin America.

Keywords: financial globalization; North-South model; democracy

Corresponding author: Gabriel Porcile, DPPM – Economic Commission for Latin America and the Caribbean, UN-ECLAC, Dag Hammarskjold 3477, Vitacura, RM, Santiago de Chile, 7630412, Chile and Department of Economics, Federal University of Parana (UFPR), Brazil, E-mail: jose.porcile@un.org

Article note: I am grateful to Benjamin Telias Simunovic for comments and competent research assistance. The paper greatly benefited from comments and/or discussions with Mario Cimoli, Felipe Correa, Marco Dini, Alvaro Forteza, Olaf De Groot, Martin Guzmán, Jakob Kapeller, Jose Antonio Ocampo, Wilson Peres, Nunzia Saporito and Sinduja Srinivasan. Francisica Lira helped me with the design of the figures. Part of the research was conducted while I was at the University of Columbia on a sabbatical leave from ECLAC. I am grateful to both institutions. Neither the institutions nor the people mentioned are responsible for the contents of the paper, which are of my sole responsibility.

Acknowledgments

The author is very grateful to the most useful comments and suggestions provided by an anonymous referee.

Appendix The game in extensive form

The figure below presents the game in extensive form always under the assumption that the costs of a coup d’état is higher than the cost of taxation in democracy. This excludes the scenario in which the elite stage a coup. Nature decides first whether the international system is that of hyperglobalization or Bretton Woods. Citizens decide after Nature whether they will provide public goods or resort to pure redistribution. With hyperglobalization we have f<fD, K˜> 1 and hence the equilibrium is the one in blue in the Northeast, r(DR), w(DR). Inversely, under the Bretton Woods system we have f>fD, K˜< 1 and hence the outcome is one in blue in the Southeast, r(DG), w(DG). The main equations explaining the outcomes of the game are presented below the decision tree.

Main equations and outcomes of the pay-off matrix:

(A.1)w(DR)= Ka(1−d)1−a[1−a1−d+12(a−d1−d)2]

(A.2)w(DG)=(1−b1−d)bAK

(A.3)w(NR)=w(NG)= (K)a(1−d)1−a(1−a1−d)(1−φ)

(A.4)r(DR)=(K)a(1−d)1−a[ad+(a−d)1−d) (1−ad)−12(a−d)1−d)2 ]

(A.5)r(DG)=b2dAK

(A.6)r(NR)=r(NG)=(K)a(1−d)1−a(ad)(1−φ).

(A.7)fD=1−(1−d)(1−b)dbSrSw, Sr≡[ad+a−d1−d(1−ad)−(a−d1−d)22], Sw≡[1−a1−d+12(a−d1−d)2]

(A.8)K˜≡KWKD=(1−ddb1−bSwSr)11−a

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Received: 2019-02-03

Accepted: 2020-04-14

Published Online: 2020-07-07

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Research Foundations
Financial Globalization as a Barrier to Democratic Consolidation: a North-South Model with Public Goods
The Real Exchange Rate and Economic Growth: A Survey

https://doi.org/10.1515/jgd-2019-0009

Schlagwörter für diesen Artikel

financial globalization; North-South model; democracy

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