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Threshold Effect of Globalization on Democracy: the Role of Demography

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Abstract

The literature presents conflicting expectations about the effect of globalization on democracy. One view expects globalization to enhance democracy, a second argues that globalization obstructs democracy; a third argues that it does not necessarily affect democracy. In this paper, we consider the threshold effect approach to reconcile these different results. We study the role of demography in the determination of the relationship between globalization and democracy. Based on a panel of 97 countries for the period 1993–2013, we use a threshold panel model (Hansen 1999) as well as a dynamic threshold panel model (Kremer et al. 2013) to estimate the effect of globalization on democracy, taking into account the demographic structure of the country. We find evidence of a threshold effect of demographic characteristics on the relationship between globalization and democracy and prove that the impact of globalization on democracy is regime specific. Our results show a positive impact of globalization associated with “early demographic transition regime” and a negative impact for countries with “late demographic transition regime.” Our results remain robust to alternative measure of democracy.

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Change history

  • 01 December 2020

    The original version of this article unfortunately contained a mistake

Notes

  1. In fact, this literature models the economy along the lines of the Stolper-Samuelson model of international trade. In particular, it argues that international trade benefits the abundant factors and harms the scarce factor.

  2. Population aging means that societies move from having young age structures—with many children—to having old age structures—with few children and more adults.

  3. Following O’Rourke and Taylor (2005), Eichengreen and Leblang (2008) suggest that the impact of democratization on openness should be contingent a country’s factor endowment: -and/labor ratio. O’Rourke and Taylor (2005) argue that democratization increases the likelihood that policy reflects the interests of workers, who now vote, and workers will prefer trade openness in labor-abundant countries. However, in countries where labor is the scarce factor of production, democratic reforms that raise labor’s influence over policy will encourage protectionism rather than opening to the rest of the world.

  4. Ahlquist and Wibbels (2012) rely on Leamer’s (1984) definition of relative factor abundance, which they operationalize as the proportion of country i’s population divided by its proportion of world gross domestic product (GDP).

  5. Doces and Magee (2015) tested the Acemoglu and Robinson (2006) model of democracy.

  6. The dependency ratio is the sum of the young- and old-age dependency ratios. The young-age (old-age) dependency ratio is defined as the ratio of individuals below 15 (above 65) to working age population (15–65).

  7. Developed economies began the demographic transition in the nineteenth century. In most developing countries, the transition lagged by almost a century. However, it progressed much more rapidly.

  8. If associated with a decrease in the labor force as a share of population, aging can lead to an erosion of comparative advantage in labor-intensive manufactured goods, as is foreseen for China (World trade rapport 2013). The effects of aging on comparative advantage may explain why China globalization does not promote democracy.

  9. See Hansen (1999) for more details about the technique.

  10. Note that Model 1 has a single threshold but in some applications there may be multiple thresholds. In the case of a double threshold model, we test for the presence of double thresholds against a single threshold. For a triple threshold model, the hypothesis of existence of triple thresholds against two is tested. For example, the double threshold model takes the form:

    Dit = μi + β'Xit + θ1GitI(dit ≤ γ1) + θ2GitI(γ1 < dit ≤ γ2) + θ3GitI(dit > γ2) + εit

  11. Kremer et al. (2013) consider a hybrid dynamic version by combining the forward orthogonal deviations transformation by Arellano and Bover (1995) and the instrumental variable estimation of the cross section model by Caner and Hansen (2004).

  12. See Kremer et al. (2013) for more details about the transformation method.

  13. In the dynamic panel context, applying GMM estimator provides consistent estimates and is more appropriate. In fact, with serial correlation, lagged democracy would be correlated with the error term and OLS yields biased coefficient estimates.

  14. Note that, in the case of trade and democracy, the predicted openness generated by the gravity model has been largely used as instrument. However, lagged variable procedure has known a growing interest in recent empirical literature.

  15. The benchmark model is a fixed panel model.

  16. See Appendix.

  17. The negative globalization and democracy relationship is also reported in the literature. Li and Reuveny (2003) reported an inverse relationship between trade openness and democracy but do not consider a number of important econometric specification problems. Rigobon and Rodrik (2004) studied the interplay between rule of law, openness, democracy, and growth and found a negative relationship between trade openness and democracy.

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Acknowledgments

We would like to thank the editor and anonymous reviewers for their helpful comments. We are also grateful to the members of the World Trade Organization Chair at Tunis Business School in Tunisia and to the participants at the 20Th Annual Conference of Society for Institutional and Organizational Economics held in Paris (France) and the 3rd MENA Trade Workshop held in Cairo (Egypt).

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Authors and Affiliations

  1. Université de Carthage, FSEGN, Campus universitaire Mrezga, 8000, Nabeul, Tunisia

    Houda Haffoudhi

  2. Univ. Manouba, ESCT, Campus Universitaire Manouba, 2010, Manouba, Tunisia

    Rihab Bellakhal

  3. WTO-Chair, Tunis Business School, PO.Box n°65, Bir El Kassaa, 2059, El Mourouj, Tunisia

    Houda Haffoudhi & Rihab Bellakhal

  4. MASE-ESSAIT, B.P 675, 6 Rue des Métiers, 1080, Tunis, Tunisia

    Houda Haffoudhi & Rihab Bellakhal

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  1. Houda Haffoudhi
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  2. Rihab Bellakhal
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Correspondence to Houda Haffoudhi.

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The original version of this article was revised: Equation 1 has been corrected.

Appendix

Appendix

Table 5 Tests for threshold effects
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Haffoudhi, H., Bellakhal, R. Threshold Effect of Globalization on Democracy: the Role of Demography. J Knowl Econ 11, 1690–1707 (2020). https://doi.org/10.1007/s13132-020-00639-z

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