PDF Ebook An Economic Theory of Political Institutions: Foreign Intervention and Overseas Investments
Scholarly historical research and common-sense discussions of world affairs often emphasize foreign intervention as a major determinant of the dynamics of political institutions. For example, Theodore Roosevelt advanced in May 1904 that the U.S. had a “moral mandate” to enforce proper behavior among the nations of Latin America (this came to be called the Roosevelt Corollary to the Monroe Doctrine). Subsequent attempts to enhance “proper behavior” lead shifting U.S. governments to intervene in favor of dictatorships, to sponsor coup d’états, to support weak democracies and to encourage democratization. Foreign intervention was neither limited to Latin America, nor was it exclusive to the United States. Behind most examples of foreign intervention looms economic goals such as providing a better and more secure investment environment. Yet, the fast growing economics literature on endogenous political institutions has not provided a framework in which the role of economically motivated foreign intervention in the rise, fall and establishment of different forms of democracies and autocracies can be analyzed.
Our theoretical model provides economic foundations for political institutions in situations where international capital flows are important and where investments in other countries are of strategic significance to foreign governments. The main contribution of the paper is to inquire into the incentive of a foreign government to influence regime transitions in another country. We derive conditions under which foreign intervention plays an important role in explaining why certain forms of democracy and autocracy emerge, breakdown or consolidate.
The economic origin of political institutions has received considerable attention by political scientists and economists in recent years (e.g., Boix (2003); Acemoglu and Robinson (2005)). Two different yet complementary streams of literature may be identified. Both focus on an elite’s incentive to share political power with other social groups. In one branch of the literature, democratization is seen as a consequence of an economic or political change that makes democracy more profitable for the elite. This might be the case if property rights are better protected under democracy (Gradstein, 2007), if democracy enhances human capital accumulation (Bourguignon and Verdier, 2000), or if a significant fraction of the elite can benefit from greater provision of public services under democratic governments (Lizzeri and Persico, 2004). The other branch sees democracy as the consequence of a compromise reached by the elite and the population to avoid a costly revolution. According to this view, developed by Acemoglu and Robinson (2000, 2005), democracy emerges because the elite cannot commit to redistributive policies. The only way to make promises of future redistribution credible and to avoid a revolution today is to extend the franchise.1 Transitions from democracy to autocracy can also be studied within this framework. The elite may have an incentive to mount a coup and reinstate autocracy because the majority of voters cannot credibly promise tax cuts for the rich (Acemoglu and Robinson, 2001).
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