By Ben Zissimos (University of Exeter Business School)
In a landmark paper, Daron Acemoglu and James Robinson argue that a key purpose of democratization is to resolve a commitment problem faced by a ruling elite under the threat of revolution.[1] Their motivation focuses on 19th and early 20th Century Europe, during which time a number of countries in the region democratized, thus originating a number of today’s mature democracies. The commitment problem that Acemoglu and Robinson characterize arises if the elite cannot make sufficiently large transfers within a single period, to compensate the rest of society for the gains that they would enjoy from a revolution. If transfers must be made over multiple periods, and if the threat of revolution may dissipate prior to the transfers being completed, then the elite will not be able to credibly commit to transfers large enough to defuse the threat of revolution. By extending the franchise, the elite transfer power to set taxes to the rest of society. Thus, democratization enables the elite to make a credible commitment to transfers over multiple periods sufficiently large to defuse the threat of a revolution.
In Acemoglu and Robinson’s model, domestic lump-sum redistributive taxation is the policy instrument used by the elite to make transfers from the elite to the rest of society. This policy instrument simplifies the framework nicely in order to focus on the commitment role of democratization. Yet subsequent research has shown that domestic fiscal capacity did not exist for redistributive taxation prior to extension of the franchise. The power to tax is taken for granted in a great deal of mainstream public finance. But, as Tim Besley and Torsten Persson note, a ruling elite may have an incentive not to install domestic fiscal capacity if they think it will facilitate redistribution from them to the rest of society.[2] Supportive of this view, Toke Aidt and Peter Jensen show for the time period that Acemoglu and Robinson discuss, that countries in Europe and elsewhere typically did not have domestic redistributive taxation prior to extension of the franchise. These observations open the door to a discussion of whether domestic redistributive income taxation could in fact have been used as part of a strategy to resolve the commitment problem through democratization.
In a recent paper, I identify the circumstances under which trade taxes, the capacity for which did exist in 19th-20th century Europe both prior to and after extension of the franchise, can be used to make such redistributions and hence resolve the commitment problem identified by Acemoglu and Robinson.[3] I do this by combining Acemoglu and Robinson’s model with a classic Heckscher-Ohlin model with trade policy due to Wolfgang Meyer.[4] The resulting new model yields insights that would not be available from either of the original models on their own. For example, contrary to the recommendation of classical scholars, I show that when the group in power chooses its optimal trade policy, democratization may in fact go hand in hand with increased protectionism and a decline in economic efficiency. This suggests that although democratization would broadly be regarded as desirable, it may have some adverse consequences. In Acemoglu and Robinson’s original model, because taxation was lump-sum, policy changes associated with democratization could have no adverse efficiency implications.
My paper also identifies a new role for trade policy: that of maintaining political stability for a ruling elite regime. Since the elite would always prefer to retain power (including the power to set trade taxes) rather than extend the franchise, the paper provides a way to think about when the elite can use trade policy to forestall democratization.[5] As an alternative to extending the franchise, the elite may be able to neutralize the threat of revolution and forestall democratization by making temporary concessions to the rest of society over trade policy, thus using trade policy to maintain their grip on power. The framework that I develop makes it possible to delineate precisely where the elite face a commitment problem and hence must extend the franchise, and where they do not face a commitment problem and hence can use trade policy to forestall democratization. I use the framework to motivate British and Prussian trade policy in the 19th Century, arguing that both of their ruling elites used trade policy to forestall democratization.
References
Daron Acemoglu and James A. Robinson (2000); “Why Did the West Extend the Franchise? Democracy, Inequality, and Growth in Historical Perspective.” Quarterly Journal of Economics, 115(4): 1167-1199. [Working paper version]
Daron Acemoglu and James A. Robinson (2006); Economic Origins of Dictatorship and Democracy. Cambridge University Press, Cambridge.
Toke S. Aidt and Peter S. Jensen, (2009); “Tax Structure, Size of Government and the Extension of the Voting Franchise in Western Europe, 1860–1938.” International Tax and Public Finance, 16: 160-175. [Working paper version]
Timothy Besley and Torsten Persson, (2009); “The Origins of State Capacity: Property Rights, Taxation, and Politics.” American Economic Review, 1218–1244. [Working paper version]
Timothy Besley and Torsten Persson, (2014); “Why Do Developing Countries Tax So Little?” Journal of Economic Perspectives 28(4): 99–120. [Working paper version]
Sebastian Galiani and Gustavo Torrens (2014); “Autocracy, Democracy and Trade Policy.” Journal of International Economics, 93(1): 173-193. [Working paper version]
Wolfgang Mayer, (1984); “Endogenous Tariff Formation.” American Economic Review, 74(5): 970-985.
Ben Zissimos (2017); “A Theory of Trade Policy under Dictatorship and Democratization.” Journal of International Economics, 109: 85-101. [Working paper version]
Endnotes
[1] Acemoglu and Robinson (2000). See also Acemoglu and Robinson (2006) for a broader discussion.
[2] Besley and Persson (2009); see also Besley and Persson (2014)
[3] Zissimos (2017)
[4] Mayer (1984)
[5] Galianni and Torrens (2014) also have an element of this, in that an elite can choose between autarky and free trade to help maintain political stability. In my paper, the full spectrum of trade policy between autarky and free trade can also be considered, including the trade policy revenue implications, making it possible to analyze incremental changes to trade policy. This makes it possible to show how trade policy can be used to defuse the threat of revolution in the absence of all domestic fiscal capacity. In turn this opens the door to a consideration of elite trade policy reactions to world price shocks.