Factor Endowments, Democracy and Trade Policy Divergence

37 Pages Posted: 7 Jan 2010 Last revised: 26 Sep 2011

See all articles by Sebastian Galiani

Sebastian Galiani

University of Maryland - Department of Economics

Norman Schofield

Washington University in St. Louis - Center in Political Economy

Gustavo Torrens

Indiana University

Date Written: September 2011

Abstract

We develop a stochastic model of electoral competition in order to study the economic and political determinants of trade policy. We model a small open economy with two tradable goods, each of which is produced using a sector specific factor (e.g., land and capital) and another factor that is mobile between these tradable sectors (e.g., labor); one nontradable good, which is also produced using a specific factor (e.g., skilled labor), and an elected government with the mandate to fix an ad valorem import tax rate. The tax revenue is used to provide local public goods that increase the economic agents' utility. We use this general equilibrium model to explicitly derive the preferences of the different socioeconomic groups in society (e.g., landlords, industrialists, labor and skilled workers). We then use those derived preferences for policies to model the individual probabilistic voting behavior of the members of each of these socioeconomic groups. We use this model to shed light on how differences in the comparative advantages of countries explain trade policy divergence between countries as well as trade policy instability within countries. We regard trade policy instability to mean that, in equilibrium, political parties diverge in terms of the political platforms they adopt. We show that in natural resource (e.g., land) abundant economies with very little capital, or in economies that specializes in the production of manufactures, parties tend to converge to the same policy platform, and trade policy is likely to be stable and relatively close to free trade. In contrast, in a natural resource abundant economy with an important domestic industry that competes with the imports, parties tend to diverge, and trade policy is likely to be more protectionist and unstable.

Keywords: Trade Policy, Factor Endowments, Probabilistic Voting Models, Policy Instability

JEL Classification: F13, D72

Suggested Citation

Galiani, Sebastian and Schofield, Norman and Torrens, Gustavo, Factor Endowments, Democracy and Trade Policy Divergence (September 2011). Available at SSRN: https://ssrn.com/abstract=1531953 or http://dx.doi.org/10.2139/ssrn.1531953

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Norman Schofield

Washington University in St. Louis - Center in Political Economy ( email )

1 Brookings Drive
St. Louis, MO 63130-4899
United States

Gustavo Torrens

Indiana University ( email )

Wylie Hall, 100 S Woodland Ave
Bloomington, IN 47405-7104
United States
8128568131 (Phone)

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