Trade and Democracy: A Factor-Based Approach

We study the relationship between trade openness and democracy using a data set with capital-labor ratios, trade flows, and regime type for 142 countries between 1960 and 2007. We are among the first to test a prediction that emerges from the model of Acemoglu and Robinson (2006): Relative factor endowments determine whether trade promotes democracy or not. The statistical results from two-stage least squares estimation indicate that trade is positively associated with democracy among labor-abundant countries but that trade has a negative effect on democracy in capital-abundant countries. The results are not robust, however, and thus we conclude that the evidence in support of their argument is relatively weak.