The International Constraints on Regime Changes: How Globalization Hinders the Prospects for Democratization

Ersin Özsahin The International Constraints on Regime Changes

Ersin Özsahin

The International Constraints on Regime Changes How Globalization Hinders the Prospects for Democratization

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation der Universität Konstanz Referent: Prof. Dr. Gerald Schneider Referent: Prof. Dr. Christoph Knill Tag der mündlichen Prüfung: 20. Mai 2009

1st Edition 2010 All rights reserved © VS Verlag für Sozialwissenschaften | GWV Fachverlage GmbH, Wiesbaden 2010 Editorial Office: Katrin Emmerich / Sabine Schöller VS Verlag für Sozialwissenschaften is part of the specialist publishing group Springer Science+Business Media. www.vs-verlag.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Cover design: KünkelLopka Medienentwicklung, Heidelberg Print and binding: Rosch-Buch, Scheßlitz Printed on acid-free paper Printed in Germany ISBN 978-3-531-16986-6

anneme ve babama, sizin sayenizde

Contents

1

2

3

4

Introduction 1.1 The focus of this book . . . . . . . . . . 1.2 The puzzle of the directions of transitions 1.3 Past research . . . . . . . . . . . . . . . 1.4 The theoretical synthesis . . . . . . . . .

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The economic constraints on regime changes – notes towards a coherent formalization 2.1 The structure of the argument . . . . . . . . . . . . . . . . . . . . 2.2 Preferences over institutions . . . . . . . . . . . . . . . . . . . . 2.3 Economic structure, sources of economic distortions, and integration into world markets . . . . . . . . . . . . . . . . . . . . . . . 2.4 Summarizing the argument . . . . . . . . . . . . . . . . . . . . . Modeling transition 3.1 The focus of this chapter . . . . . . . . . . . . . . . . 3.2 The economy . . . . . . . . . . . . . . . . . . . . . . 3.3 The transition game . . . . . . . . . . . . . . . . . . . 3.3.1 The basic set up . . . . . . . . . . . . . . . . . 3.3.2 The sequential equilibria of the transition game 3.3.3 The comparative static . . . . . . . . . . . . . 3.4 Implications . . . . . . . . . . . . . . . . . . . . . . .

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13 13 20 26 37

41 41 48 51 59 63 63 64 69 69 76 82 86

Research design 93 4.1 The Structure of this chapter . . . . . . . . . . . . . . . . . . . . 93

8

Contents

4.2 4.3 4.4

The operationalization of institutional alterations . . . . . . . . . 93 Independent variables . . . . . . . . . . . . . . . . . . . . . . . . 101 The estimation technique: the ordered logistic regression model . 114

5 Results 5.1 Measuring institutional alterations: dichotomous vs. rank ordered measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Results of the ordered logistic regression model: first insights . . 5.3 The effect of integration on the prospects of democratization . . 5.4 Scrutinizing distinct regime types . . . . . . . . . . . . . . . . 5.5 Summarizing the findings . . . . . . . . . . . . . . . . . . . . .

121 . . . . .

121 126 137 149 154

6 Conclusion

159

Appendix

166

References

190

List of Figures

1.1

1.3

Trends of economic and institutional development – Chile 19502000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Trends of economic and institutional development – Singapore 1950-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Evolution of regime types between 1950 and 2000 . . . . . . . . . 21

3.1 3.2

The transition game . . . . . . . . . . . . . . . . . . . . . . . . . 70 The sequential equilibria of the transition game . . . . . . . . . . 82

4.1

The distribution of levels of trade dependence between democracies and autocracies . . . . . . . . . . . . . . . . . . . . . . . . . 103 The distribution of FDI-to-GCF-ratio between democracies and autocracies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 The distribution of development levels between democracies and autocracies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

1.2

4.2 4.3

5.1 5.2 5.3 5.4 5.5 5.6

The marginal effect of trade dependence on institutional alterations as per capita GDP increases . . . . . . . . . . . . . . . . The marginal effect of trade dependence on institutional alterations as level of autocracy increases . . . . . . . . . . . . . . . The marginal effect of inequality on institutional alterations as ethnic fractionalization increases . . . . . . . . . . . . . . . . . The outcome probabilities as FDI-to-GCF-ratio increases . . . . The outcome probabilities as trade dependence increases . . . . The outcome probabilities as economic development increases .

. 131 . 133 . . . .

134 137 139 140

10

List of Figures

5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17

The effect of high trade dependence on institutional alterations as economic development increases . . . . . . . . . . . . . . . . . The effect of low trade dependence on institutional alterations as economic development increases . . . . . . . . . . . . . . . . . The effect of trade dependence on institutional alterations as level of autocracy increases . . . . . . . . . . . . . . . . . . . . . . . The effect of inequality on institutional alterations as ethnic fractionalization increases . . . . . . . . . . . . . . . . . . . . . . The effect of low inequality on institutional alterations as ethnic fractionalization increases . . . . . . . . . . . . . . . . . . . . The outcome probabilities as membership in int. Organizations varies and the democracy level of trade partners increases . . . . The outcome probabilities as FDI-GCF-ratio increases . . . . . The effect of trade dependence on institutional alterations of authoritarian regimes as level of autocracy increases . . . . . . . . The outcome probabilities as FDI-to-GCF-ratio increases . . . . The effect of high trade dependence as economic development increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The outcome probabilities as the integration indicators increase .

. 141 . 142 . 144 . 145 . 146 . 148 . 151 . 151 . 152 . 152 . 154

List of Tables

1.1

Directions of institutional alterations . . . . . . . . . . . . . . . . 22

4.1 4.2

Summary statistics of the utilized variables (1970-2000) . . . . . 113 Operationalization of the hypotheses . . . . . . . . . . . . . . . . 114

5.1

Institutional alterations vs regime change (1950-2000): overall sample and democracies . . . . . . . . . . . . . . . . . . . . . Institutional alterations vs regime change (1950-2000): partial regimes and autocracies . . . . . . . . . . . . . . . . . . . . . . Institutional alterations vs regime change (1950-2000): partial regimes according Epstein et al. (2006) . . . . . . . . . . . . . The effect of economic integration on institutional alterations – results of the ordered logistic regression model (1970-200) . . . The effect of economic integration on institutional alterations odds ratios and percentage changes . . . . . . . . . . . . . . . . Effect of economic integration on institutional alterations - distinct subsamples (1970-2000) . . . . . . . . . . . . . . . . . . .

5.2 5.3 5.4 5.5 5.6

. 123 . 124 . 125 . 129 . 135 . 150

1 Introduction

1.1 The focus of this book Much has been written about the evolution, development, decline, and the persistence of democratic institutions. The query for the keywords democracy or democratization in the Social Science Citation Index yielded about 3,000 articles and books published in the last 50 years.1 Regarding the fact that the database just covers the leading journals and publishers of the social sciences, one may reasonably argue that the total number of publications dealing with the evolution or the existence of democracy is much higher. Given this, pushing another book into the market needs some plausible reasoning. In 1999, Barbara Geddes asked “What Do we know about democratization. . . ” and came up with the answer that the findings are ambiguous and that the supposed causal mechanisms at work behind the observed relationships are not confirmed. Geddes’ (1999) conclusion relies on her identification of an interesting and yet unsolved puzzle concerning the directions of transitions. She counts 85 breakdowns of authoritarian regimes between 1974 and 1998 and identifies only 30 transitions that resulted in surviving and stable democracies. According to her coding scheme she counts 9 democracies that were only to last a short period of time before experiencing a reverse transition; 8 transitions that led to regime types characterized as partial regimes rather than pure democracies; 4 polities that descended into warlordism; and 34 regime changes that yielded new forms of authoritarianism. In sum, the majority of observed transitions between 1974 and 1998 resulted in the creation or rearrangement of authoritarian rule rather than in the establishment of democracy. Although a vast number of transition studies exist, this puzzle remains unsolved. 1 The

database query was conducted in August 2009

14

1 Introduction

It is argued here that this is primarily for two reasons: first, the large majority of the related literature focuses on transitions to democracy and disregards developments towards authoritarianism. It follows that the theoretical debate is dominated by approaches that aim to explain democratization but pay no attention to contrary developments. Second, the majority of quantitative studies utilize dichotomous measures to operationalize democratization, i.e. democratization is measured in terms of transitions and is defined as some polity’s crossing of threshold levels of a given measure of democracy. This measure thus ignores institutional shifts that do not yield regime changes. As this institutional alterations are included in the measures’ parameter value of stability, such dichotomous measures fail to reflect the full variance of the observed institutional alterations. This raises the question whether the findings of the transition literature are biased due to the use of a somewhat arbitrary distinction between regime change and regime stability. With regard to both shortcomings, it is here proposed to re-examine the modernization related claim that globalization fosters the prospects for democracy in order to shed light on the puzzle of the directions of transitions. This claim relies on the established notion that integration into world markets yields positive economic effects (Sachs & Warner 1995; Frankel & Romer 1999) and connects this finding with Lipset’s(1959) prominent hypotheses that affluent economies are more likely to be democracies. Examining this claim Epstein et al. (2006:563), for instance, report that trade openness “helps stabilize full democracies, but it does not help autocratic or partially democratic regimes move up the ladder”. They also report a negative impact of trade openness on democratization of autocratic and partial regimes in their table on the same page but interpret the negative coefficient as a positive impact on the stability of the regimes. It is argued here that this inference is biased since the authors employ a regime change measure, which disregards alterations within a given regime type and attaches this observations to the stability outcome. Hence, this finding of Epstein et al. (2006) motivates the scrutinization of whether the negative coefficient of trade openness on democratization just accounts for the chance of observing regime changes to democracy or indicates a negative impact on democratic institutional developments in general. The study presented here accounts for both shortcomings of the existing literature. The suggested approach relies on a theoretical synthesis embedding micro-theoretic reasoning in structural contexts which allows us to model democratization as well as developments towards authoritarianism. The approach

1.1 The focus of this book

15

also accounts for minor institutional changes, which do not yield regime changes, and theorizes how the understanding of such minor shifts contributes to a solution for the puzzle. The structural part of the synthesis focuses on some society’s integration into world economy (which is often vaguely referred to as globalization). In contrast to the modernization related claim, it is essentially argued that integration into global markets constrains domestic policy-making by raising the costs of institutional alterations. One important feature of the argument states that these international constraints influence the choices of the disenfranchised citizens in the same way as the constraints influence the decisions of some authoritarian elite. The game theoretic model and the related underlying economic model employed in this book show that both actors engaged in conflict about political and economic power are in the same way constrained by the economy’s level of integration into world markets and that both prefer to avoid exhaustive and thus, costly alterations of existing political regimes.2 The key theoretical issue behind the argument relies on the basic assumption that institutions provide the essential incentive structure for economic and social behavior (North 1991). With regard to this, any institutional change distorts accustomed political, social and economic behavior and affects domestic and external actors’ resource allocation and appropriation of returns on investment. These distortions denote the origins of the economic consequences of institutional alterations and the consequences increase with the level of integration in international markets. Hence, the decision whether to alter institutions or not, or the decision in which direction and to what extent changes of institutions should be conducted, depends purely on both domestic actors’ assessments of gains and losses related to respective institutional changes. These gains and losses are strongly connected to economic consequences, the extent of which in turn depends on the level of integration into global markets. To cut a long story short, the central argument to shed some light on the puzzle of the 2 The

coherent formalization of this argument in Chapter 3 shows that there exists an economic interdependency between the elite and the disenfranchised citizenry. As long as the economy of some authoritarian regime rests on the division of labor between capital holders – i.e. to some extent the elite – and the holders of labor input – mostly the disfranchised citizenry – both groups depend on each other in order to realize their respective income. In contrast to the model devised in this book, the majority of game theoretic models of transition assume that the elite of authoritarian economies will simply disappear after transition and the formerly disenfranchised part of the population would be able to continue economic production without facing serious economic losses (see for example Sutter 2000). However, assuming a capitalist economic structure, this is not reasonable.

16

1 Introduction

directions of transitions states that integration into world economy constrains the prospects of institutional changes by limiting the options. Two briefly sketched cases of institutional developments shall illustrate the motivation to focus on the nexus between globalization and democratization: the prominent and widely analyzed case of Chile and the less discussed case of Singapore. Figure 1.1 shows the course of the economic and institutional development of Chile between 1950 and 2000. The figure reports the trends of the variables of interest: the development of democratic institutions, economic wealth, trade dependence and the economy’s dependence on foreign direct investment. The variables trade dependence and an economy’s ratio of the net foreign direct investment inflow to gross capital formation serve as approximations for an economy’s integration into global markets. The Polity IV Project’s democracy measure is utilized to reflect the institutional characteristics and economic wealth is captured in terms of per capita GDP in thousands constant and deflated US dollars.3 Although Chile’s history since gaining its independence from Spain in 1818 constitutes distinct and frequently changing political regimes, the most academically debated institutional changes are connected to the rise and decline of the military government led by General Auguste Pinochet. In 1974, Pinochet violently overthrew the government of elected president Salvadore Allende and established a harsh and cruel authoritarian regime. Chile’s transition to democracy began in the 1980s when the regime gradually permitted greater freedom of assembly, speech, and association, to include trade union and limited political activity. In 1988, a plebiscite denied Pinochet a second 8-year term as president and on December 1989 the Chileans elected a new president, Patricio Aylwin, who served from 1990 to 1994, the period that is considered to be the period of consolidation of Chilean democracy (for an overview of the Chilean development see Drake & Jaksic (1991) or Gonzáles 2008). The Chilean case exemplifies what 3 All economic indicators utilized in this study are converted into constant US Dollars (base year 1996)

and deflated. The necessary trade and GDP data to calculate the trade-to-GDP ratio are taken from the Expanded Trade Data Set provided by Gleditsch (2002). Following the common wisdom in the literature, trade dependence or trade openness is measured through the sum of imports and exports divided by the gross domestic product of any given economy (see for instance Rigobon & Rodrik 2005 or Eichengreen & Leblang 2006). FDI inflows and gross capital formation data are taken from World Development Indicators provided by the World Bank. If possible, additional data was added from the Foreign Direct Investment Database provided by the United Nations Conference on Trade and Development. A more elaborate and detailed discussion of the indicators and the data sources is the subject of the operationalization part in Chapter 4.

1.1 The focus of this book

17

Figure 1.1: Trends of economic and institutional development – Chile 1950-2000

2

Polity IV score −10 −5 0 5

per−capita GDP 4 6 8 10

Course of per−capita GDP

10

Course of Polity IV score

1950

1960

1970 1980 year

1990

2000

1950

1970 1980 year

1990

2000

.1

trade dependence .15 .2 .25 .3

Course of trade dependence

FDI−to−GCF−ratio −.2 0 .2 .4 .6

Course of FDI−to−GCF−ratio

1960

1950

1960

1970 1980 year

1990

2000

1950

1960

1970 1980 year

1990

2000

(Note: Data taken from Polity IV Project, WDI, UNCTAD, Gleditsch (2002): Expanded Trade Data Set)

is called a negotiated transition, i.e. a regime change that occurs in steps and as an outcome of negotiation between reformers and hardliners within the elite (Colomer 1991 & 1995; Casper & Taylor 1996). The course of the polity score in the left upper corner of Figure 1.1 sketches these institutional developments: The Coup d’état in 1974, the minor liberalizations of 1982 and the major institutional change in the year 1988 which yielded the first free and fair elections in 1989. If one compares the courses of economic and institutional developments one notices that both major institutional changes occurred in a period that was characterized by a low level of trade dependence (see the right lower corner of Figure 1.1). To a lesser extent the same holds for the course of the FDI dependence. The coup of 1974 and the transition towards democracy (started in 1982) coincided with a period of a decrease of the ratio between foreign and domestic investments as well as with a period of decreasing trade. Both major institutional changes also occurred in a period in which per capita GDP decreased. At first glance, these coincidences of the trajectories are not astonishing: it is a common wisdom that regime changes are more likely to occur during or in the aftermath of economic crises than in periods of economic stability (O’Donnell 1973; Gasiorowski 1995). However, a cursory examination of the case of Singapore reveals a distinct pattern. Singapore became an independent state in 1965. Since then, its political system has been characterized as a partial regime, i.e. a political system that com-

18

1 Introduction

Figure 1.2: Trends of economic and institutional development – Singapore 1950-2000 Course of per−capita GDP

0

−3

Polity IV score

per−capita GDP 10 20 30

−1

Course of Polity IV score

1960

1970

1980 year

1990

2000

1960

1980 year

1990

2000

Course of trade dependence

1

.1

trade dependence 1.5 2 2.5 3

FDI−to−GCF−ratio .2 .3 .4 .5

Course of FDI−to−GCF−ratio

1970

1960

1970

1980 year

1990

2000

1960

1970

1980 year

1990

2000

(Note: Data taken from Polity IV Project, WDI, UNCTAD, Gleditsch (2002): Expanded Trade Data Set)

bines democratic as well as autocratic institutions. Despite the fact that multiparty elections have been a defining feature of Singapore’s political system since 1965, the ruling People’s Action Party (PAP) has successfully established a hegemonic one party system. The party controls the media, intimidates the opposition and influences the electoral institutions to its own advantage such that the PAP received over sixty percent in all elections since 1965 (Case 2002; Mauzy & Milne 2002). But assigning the PAP’s domination solely to its authoritarian policies might be misleading. In the vein of Haggard & Kaufman (1995) Singapore’s outstanding economic record also may account for the PAP’s electoral success. Figure 1.2 illustrates the economic development of Singapore. Singapore’s per capita GDP steadily increased from 3000 US Dollar in 1965, crossed the 10000 US Dollar threshold in 1980 and surpassed the 20000 US Dollar in 1993.4 In contrast to Singapore’s steady income development, the economy’s connectedness to global economy is characterized by vicissitudes – although on a very high level. Similar to the Chilean case one is also able to identify coincidences between the decreases of the trade dependence and the FDI-to-GCF ratio and the slight decreases and 4 The

case of Singapore exemplifies the highly discussed findings of Przeworski & Limongi (1997) and Przeworski et al. (2000) who re-examine Lipset’s (1959) modernization thesis and show that political regimes remain stable above certain levels of development, regardless of whether they are democratic or autocratic.

1.1 The focus of this book

19

periods of stagnancy of income (a period at the end of the 1970s and a period in the mid 1980s). However, unlike the Chilean case and despite the similar vicissitudes of its economic interaction with global markets, Singapore remained stable. In order to account for this observation one might follow the reasoning of Przeworski et al. (2000) and argue that the stability of Singapore’s political system is mainly attributed to its extraordinary wealth – although one has to admit that Chile’s per capita GDP in 1988 was far from defining Chile as a less developed country. However, this cursory comparison of the cases of Singapore and Chile motivates me to question whether a high level of economic affluence, coinciding with high levels of integration into global markets, negatively influences the prospects for institutional development. Following the notion that integration into world markets yields positive economic effects (Sachs & Warner 1995; Frankel & Romer 1999; Dreher 2006), highly integrated authoritarian regimes are expected to have prosperous economies. If so, one may expect (in line with North 1991) that distorting accustomed incentive structures by institutional alterations is likely to yield economic consequences. Given this, one may further deduct that key actors in authoritarian markets anticipate these consequences and evaluate their options with regard to the respective losses and gains alternative institutional designs may produce. So the chance of observing democratization of authoritarian regimes rises with the key actors expectation to gain from institutional changes but is likely to decrease if the actors expect severe losses (Haggard & Kaufman 1995). Following this established notion of the origin of regime changes, it is basically argued in this book that anticipating socio-economic consequences of alterations constrains domestic policy-making by limiting the choices and strategies of the key actors. With regard to the linkage between economic wealth and integration into global markets the argument furthermore states that these constraints increase with the level of integration, i.e. the constraints increase with an economy’s dependence on international economic cooperation. Hence, the proposed model of transition expects key actors of highly integrated authoritarian economies to abstain from endangering their realization of wealth by altering institutions – a prediction which strongly challenges the modernization-related perspective that globalization helps to build democracies. Before this argument is presented in detail, the remaining part of the first chapter expatiates on the puzzle of the directions of transitions and argues how the disregard of small changes is likely to narrow the scope of analysis in democ-

20

1 Introduction

ratization research. This chapter additionally sketches the related literature and reviews past research in order to lay down the foundations for the theoretical development of the proposed theoretical syntheses. The subsequent sections of this book are structured as follows: Chapter 2 unfolds and develops the argument by relying on the respective literature and providing exemplary evidence for the basic assumptions and key elements of the argument. The formalization of the argument and the transition game is the subject of Chapter 3. At first, the basic economic structures are formalized in order to derive the individual utility functions of interest that are utilized in the game theoretic model. The transition game – that is characterized by two-sided incomplete information – is solved by applying the sequential equilibrium solution concept proposed by Kreps & Wilson (1982). The examination of the underlying economy and of the transition game yields the hypotheses that are derived and elaborated in section 3.4. Chapter 4 connects theory to data and develops the design that yields the hypotheses test. It begins with the discussion of how to conceptualize institutional developments and how to operationalize the dependent variable institutional alteration in terms of the transition game. The chapter also introduces the operationalization of the key independent variables of the hypotheses derived in Chapter 3, discusses data sources and data quality, and connects the utilized indicators to recent research. The last part of Chapter 4 introduces the applied estimation technique, an ordered logistic regression model, and formally derives the estimation equations with regard to the dependent variable institutional alteration. Chapter 5 comprises the empirical analysis. Chapter 6 summarizes the results of this study and presents further research objectives. An appendix includes additional information about the scrutinized cases, provides the technical proofs of the transition game, and reports the results of alternative statistical methods and robustness checks. 1.2 The puzzle of the directions of transitions The identification of the so-called ‘third wave’ of democratization (Huntington 1991) and the breakdown of the Soviet Union shaped the perception that democratic rule became the prevalent form of government in the world. Figure 1.3 shows the evolution of regime types between 1950 and 2000. The figure utilizes data provided by the Polity IV Project. It displays that the number of democratic regimes steadily increased from the mid-seventies and finally outnumbered

1.2 The puzzle of the directions of transitions

21

0

20

frequency 40 60

80

100

Figure 1.3: Evolution of regime types between 1950 and 2000

1950

1960

1970

1980

1990

2000

year democracies partial regimes

authoritarian regimes

authoritarian-ruled societies after 1990 – due to the breakdown of the Soviet Union and the vast number of democratic developments in Eastern Europe. The chart also shows that in the same period of time the number of the so-called partial regimes – i.e. political systems which are not clearly definable as either democracies or authoritarian regimes – steadily rose. Summarizing the findings of twenty years of democratization research Barbara Geddes (1999) counts 85 breakdowns of authoritarian regimes since the beginning of the third wave. According to her coding scheme she identifies 30 transitions that resulted in surviving and stable democracies while 9 democracies were only to last a short period of time before experiencing a reverse transition. She also identifies 8 transitions that led to regime types characterized as partial regimes rather than pure democracies, 4 polities that descended into warlordism, and 34 regime changes that yielded new forms of authoritarianism. In sum, the majority of observed transitions between 1974 and 1998 resulted in the creation or re-arrangement of authoritarian rule rather than in the establishment of democracy. Using a different coding scheme Doorenspleet (2000) presents similar results for the third wave, which also questions the conventional wisdom of the triumph of democracy by the end of the twentieth century. Recent findings by Epstein et al. (2006) also show that the majority of observed transitions do not represent moves from one pure regime type to another, but indicate institutional alterations towards partial regimes. These find-

22

1 Introduction

Table 1.1: Directions of institutional alterations direction

frequence

percent

no regime change autocracy to democracy autocracy to partial regime partial regime to democracy partial regime to autocracy democracy to autocracy democracy to partial regime

287 41 54 20 39 26 8

60.42 8.63 11.37 4.21 8.21 5.47 1.68

∑

475

100

ings inspire scrutinization of the directions of regime changes beyond the scope of the third wave. Relying on the Polity IV Projects data and the respective coding scheme5 188 transitions between 1950 and 2000 are observable. As reflected in the descriptive results of Geddes and Doorenspleet the majority of these regime changes yield regime types which are characterized by the dominance of authoritarian institutional arrangements. Between 1950 and 2000, 41 autocracies and 20 partial regimes broke down and their transitions established democratic rule, while 54 transitions from authoritarian rule and 8 breakdowns of democracies resulted in the creation of partial regimes. In the same period 65 regime changes – the breakdown of 39 partial regimes and 26 democracies – ended in the establishment of authoritarianism. This observation reveals an interesting puzzle: although democracy is spreading all around the world and outnumbered authoritarianism by the end of the twentieth century, democratic rule is not the dominant outcome of institutional changes. Instead, one is able to observe a large number of institutional alterations towards authoritarianism which apparently contradicts the common notion of the success of the second and third wave of democratization (Huntington 1991). The most interesting question raised by this puzzle is why some autocracies have made a transition that resulted in the establishment of democratic rule, while some autocracies just modified their autocratic institutional design, and others remained stable. If one agrees that partial regimes 5 The

Polity IV Project identifies regimes as autocracies when regimes possess polity scores between -10 and 0, democracies when regimes expose values between +7 and +10, and partial regimes when regimes are classified within the range +1 and +6.

1.2 The puzzle of the directions of transitions

23

are autocracies rather than democracies, the post-war record of regime changes indicates that understanding movements away from democracy are as important for solving this puzzle of the directions of transitions as understanding democratization. The puzzle becomes even more interesting if we instead take into account not only clear regime changes but any institutional alterations. The first row of Table 1.1 reports observed institutional alterations which do not yield into regime changes. These alterations are either small or denote some extensive rearrangement of institutional designs within some regime type. All institutional alterations are captured by the Polity data set’s change variable. Change covers the alterations of the polity score from one year to the following year. Since the Polity Project explicitly emphasizes measuring institutional characteristics of a given political system (Jaggers & Gurr 1995), changes of the polity score are regarded as institutional variation within or beyond some regime type.6 Considering all observed alterations reveals an interesting pattern reported in Table 1.1: first, it shows that the findings of Geddes (1999) and Doorenspleet (2000) – that transitions away from democracy outnumber movements towards democracy – are not restricted to the third wave and, second, it shows that the majority of observable institutional alterations do not yield any regime changes. In spite of this observation, the majority of macro-quantitative transition studies and research on regime types employs a dichotomous regime classification such as those used in the research conducted by Linz (1975), Huntington (1991), Przeworski & Limongi (1997) or Geddes (1999). And indeed, defining transition as the “interval between one political regime and another” (O’Donnell & Schmitter 1986: 6) seems to call for such a dichotomous measure which provides thresholds in order to enable researchers to classify authority structures and identify institutional alterations towards democracy or authoritarianism (Collier & Adcock 1999). A closer look at the cases reported in Table 1.1 (see Table A1 in the Appendix) reveals why such an operationalization of transition to or away from democratic rule faces a severe problem. In some cases small alterations may yield regime changes whereas in other cases the same point-change of the polity measure does not yield the crossing of the threshold values.7 In 1955, Panama experienced an 6A

more elaborate discussion of the change variable and its use in this work is subject to the operationalization part in Chapter 4. 7 In order to provide coherent vocabulary the expression institutional alteration is used as a generic term and characterizes all institutional developments regardless of whether the alterations yield regimes changes while institutional change is strictly reserved for institutional developments that

24

1 Introduction

institutional change of 5 points on the polity score that resulted in a transition from autocracy to partial regime, while Brazil’s 5 point alteration in 1974 had no consequences for the regime type. Venezuela experienced a transition from partial regime to democracy through a small 3-point increase in 1968, and even Moldova through a 2-point increase in 1993, while the institutional alterations of Mexico in 1977 (3 points) and Slovakia (2 points) in 1998 did not yield regime changes. Naturally, the question of whether institutional alterations result in shifts of the regime types depends on the initial status quo – such that regimes which are located near to the threshold value need only small changes to cross the distinction line. Nevertheless, if one assumes that the quantification of institutional patterns reflects reliable and valid measures of institutional characteristics, alterations of the same value should be expected to be comparable across polities. If institutional shifts of the same value are comparable, the distinction between alterations that yield regime changes and alterations that do not is somewhat odd. Instead of that, one would assume that positive or negative alterations of institutional setups of a given polity denote some movements towards or away from democracy.8 Restricting the focus on institutional changes limits the sample of cases such that inferences about the origins of transitions to or away from democracy become highly questionable. At the least, this raises the question of whether focusing on institutional alterations instead of on pure regime changes sheds more light on the puzzle of the directions of transitions. If one peels away from the conventional wisdom of the transition literature to focus on regime changes some interesting, new questions arise: why do some polities alter their institutions without changing the nature of the regime type? Do we have to understand these alterations towards democracy as steps within a long-lasting process towards regime changes or are these alterations to be understood in terms of measures implemented by rulers to secure and consolidate their authority? Are such positive alterations likely to stabilize authoritarian rule, and if so, why do disenfranchised citizens content themselves with small alterations towards institutions and do not press for further reforms? In contrast to extensive negative changes which are intuitively understood as the consequence of military coups (Chile 1974) or revolutionary movements (Iran 1979), how do negative alterations contribute to the understandresult in a proper regime change. et al. (2006) argue in a similar vein but finally focus on a trichotomous measure of regimes (democracy, partial regimes, and authoritarian regimes) and respective changes between these types.

8 Epstein

1.2 The puzzle of the directions of transitions

25

ing of the evolution of regime types? Beyond these questions, this study primarily utilizes the measurement of institutional alterations to re-examine the nexus between globalization and democratic development. Concerning this relationship the related literature offers two distinct perceptions: first, that globalization promotes democratization and second, the contrary expectation that integration into world economy hinders the prospects of democratization and is likely to stabilize authoritarian rule. The arguments put forward for the claim that globalization helps to build democracies have relied on various distinct theoretical perspectives. One argument is strongly related to the modernization perspective in the sense of Lipset (1959) (see also Schumpeter (1950) or Lipset (1994)) and claims that integration into world markets fuels economic development and that emerging economic prosperity promotes liberty aspirations which in some way yield the evolution of democratic institutions. Another argument relies on diffusionalist expectations (see for instance Whitehead 1986 & 1996 or Starr 1991) and states that globalization fosters the emergence of democracy through the spread of democratic and liberal ideas, norms and practices. Schmitter (1991) as well as Oneal & Russet (1994 & 1999) argue that integration into the world economy increases the demand of international business for political liberalization, and in a similar vein Keck & Sikking (1998) and Risse & Sikking (1999) reason that globalization strengthens democratic institutions e.g. courts which secure property rights and the rule of law. Ruda (2005) combines theories of embedded liberalism and conflict-based theories of democracy and argues that globalization strengthens political equality in the long run. He argues and provides some empirical evidence that integration into world markets of less developed autocracies creates greater economic risks and social instability connected to diminishing elite legitimacy. In order to prevent the loss of power the elite in such societies is more likely to agree to extend democratic rights. On the other side, there also exists a negative perception of the nexus between globalization and the emergence and persistence of democracy. Wallerstein (1974) and Bollen (1983) argue that integration into world markets widens the gap between the North and the South and prevents economic development. In terms of the related dependency theory the world is composed of a rich core and a poor periphery, where the core dominates the periphery. It is argued that the autocratic elite in the periphery unite with the elite in the core to exploit the masses in the periphery. Thus, globalization is expected to stabilize autocracies in the periphery. Another argument, which claims there is a negative

26

1 Introduction

relationship between economic integration and democratization, states that globalization reduces state policy autonomy and promotes policies that please foreign investors instead of policies that meet domestic demands. As such policies are more likely to implement in less democratic regimes rather than in democracies, it is argued that economic integration is likely to stabilize authoritarian rule (see for instance Lindblom 1977, Diamond 1994 or Cammack 1998). This book provides some evidence in favor of the negative perception of the relationship between integration into the world economy and the course of institutional development. The theoretical explanation of this relationship relies on a synthesis embedding micro-theoretic reasoning in structural contexts as suggested and employed by Karl (1990), Haggard & Kaufman (1995), and Acemoglu & Robinson (2001 & 2006). The developed transition game and its underlying economic model stress economic structures’ impact on actors’ preferences and choices within social disputes over the distribution of political influence and economic wealth. The reasoning emphasizes the combination of three analytical arguments: • first, that institutional alterations depend on actors’ assessments of existing and possible alternative institutional structures with regard to individual gains these respective structures provide; • second, that these assessments are driven by the anticipation of consequences influenced by economic structures; • and third, that the extent of these economic consequences depend on the level of the respective economies’ integration into world markets. Before this reasoning will be unfolded and completely deduced in detail, it is necessary to review past research in order to lay the foundations for the development of the proposed theoretical synthesis. 1.3 Past research For almost forty years the origins of democratic rule have been debated academically and a vast number of models and theories exist which offer various causes and identify diverse ‘main factors’ that yield explanations of the emergence and persistence of democracy. The majority of this literature relies on two distinct approaches: the origins of regime transitions and democratization are either attributed to socio-economic and historical prerequisites or are couched in terms

1.3 Past research

27

of actors and strategies (Potter 1997; Gruggel 2002). In models which emphasize structural causes of democratization, predetermined background conditions are expected to influence the likelihood that authoritarian political systems become democracies – whereas these background conditions are regarded as not changeable in the short run. Some prominent causes cited in this literature are affluence and modernization (Lipset 1959), class structure (Moore 1966), ethnic, religious, or social fragmentation (Almond 1956; Lijphart 1977), and the world system position of the regime in question (Wallerstein 1974). On the other side, models relying on the agency approach argue that creation of democracy is a dynamic process resulting from “a prolonged and inconclusive political struggle” (Rustow 1970: 352). Consequently the literature focuses on interactions, bargains and pacts between authoritarian rulers and the opposition that led to transition, i.e. a stage between authoritarianism and democracy in which the institutions of the new regime are constituted (O’Donnell & Schmitter 1986). Due to this emphasis on the transition period in which the future development of a given regime is laid down by the foundation of the institutional design actor- or agency-based approaches are also known as transition approaches (Potter 1997; Gruggel 2002). The modernization-related claim that integration into global markets fosters democratic development relies on a socio-economic and basically structural argument. The argument connects the common notion that integration into world markets yields positive economic effects (Sachs & Warner 1995; Frankel & Romer 1999) with Lipset’s prominent claim that“the more well-to do a nation, the greater the chances that it will sustain democracy”(Lipset 1959: 71). Although this claim is frequently examined the link between both arguments is theoretically underdeveloped. Whereas the first part of this claim is fairly established (see for instance Baddeley (2006) or Dreher (2006)) the argument itself and the empirical findings related to Lipset’s work are ambiguous and have been discussed extensively. Lipset (1959) argues that initial economic conditions favor a democracy’s emergence and that, once established, democratic institutions are more likely to persist if a respective country further develops these characteristics. He summarizes the initial conditions in his economic development index9 and vaguely argues that the development of these socio-economic factors 9 The index includes items which draw upon modernization theoretical claims and are supposed to pro-

mote the development and establishment of democratic institutions: high levels of economic development, which generates wealth and creates economic security, broad education, open and permeable

28

1 Introduction

alters preferences and interests of distinct groups in societies and fosters the evolution of political demands for participation and equality by the disenfranchised citizenry such that the persistence of authoritarian rule is less likely. Studies referring to his argumentation frequently report empirical evidence of a positive relationship between the level of economic development and democracy – proven to be robust by using various statistical methods, or different operationalizations of key variables and indicators (see for instance Cutright 1963; Jackmann 1973; Bollen 1979; Bollen & Jackmann 1985; Burkhardt & Lewis-Beck 1994; Barro 1996 & 1999; Wu & Davies 1999; Bourgignon & Verdier 2000; Easterley 2001; Inglehardt 2001; Boix & Stokes 2003; Glaeser et al. 2004; Epstein et al. 2006). Even though Lipset himself does not claim that economic development causes the emergence of democracy,10 the causality of the nexus between wealth and democratization became a conventional wisdom in the literature. Although there exists a vast amount of literature that perpetually increases the understanding of this complex relationship, the findings in this literature are disputed. The most influential critique accompanied with strong empirical evidence is carried forward by Przeworski & Limongi (1997) and Przeworski et al. (2000): although the authors provide strong evidence for Lipset’s claim that above certain levels of economic development democratic regimes are sustainable, they also show that highly developed authoritarian regimes are less likely to break down. Hence, they conclude that economic performance stabilizes any regime regardless of its institutional design and confirm Rustow’s (1970: 346) critique of Lipset, which argues “factors that keep a democracy stable may not be the ones that brought it into existence”. A recent study by Goldstone (2006) also supports Rustow’s critique and indicates a momentous empirical challenge to the modernization claim. Relying on graphical analyses of institutional trajectories of countries between 1955 and 2000, Goldstone (2006) persuasively shows that the majority of observed transitions towards democracy have occurred in less developed countries – especially in poor autocracies. The latest findings of Acemoglu et al. (2005a & 2007) also challenge the modernization claim. They argue that the positive correlation of high economic performance and democracy relies on omitting crucial class structures, and participation in social and political organizations. Lipset is vague in this context. He elaborates that “it would be difficult to identify any ‘one´ factor crucially associated with, and ‘causing´ any complex social characteristics. Rather, all such characteristics [. . . ] are considered to have multivariate causation, and multivariate consequences”(Lipset 1959: 105).

10 Actually,

1.3 Past research

29

explanatory variables, namely historical aspects that divergently shape political and economic development paths of various societies. Using longitudinal instead of cross-section data,11 and adopting fixed effects and instrumental variable techniques to account for historical country-specific variation and heterogeneity, the authors provide strong evidence that the direct modernization effect reported by other studies is overestimated.Despite this adverse balance of the modernization literature, the claim that globalization fosters democracy as its promotes economic prosperity is frequently carried forward and examined.12 Eichengreen & Leblanc (2006) provide evidence that trade openness (utilized as as an indicator for integration into world markets) promotes democracy. Similarly Lopez-Cordova & Meissner (2005) and Yu (2005) report a positive impact of trade on prospects of democracy. Papaioannou & Siourounis (2008) also argue that trade openness drives transitions to democracy, but are not able to provide systematical evidence. Li & Reuveny (2003) rely on the inflow of foreign direct investment as an approximate measure of globalization and report a positive impact of FDI on democratization in general. Burkhart & de Soysa (2003) specify that when foreign direct investment dominates an economy it tends to have positive effects on the chances for democratic development. Ruda (2005) shows that globalization strengthens political equality, and thus democratization in the long run. He argues and provides some empirical evidence that integration into world markets of less developed autocracies creates greater economic risks and social instability connected to diminishing elite legitimacy. In order to prevent the loss of power the elite in such societies is more likely to agree to extend democratic rights. But these empirical results are not without opposition. Rigobon & Rodrick (2004) as well as Quinn (2000) provide some evidence that trade openness negatively effects democratization and even that financial openness increases the prospects of transitions away from democracy. Alternative structural arguments regarding the impact of international economic effects on the prospects of democratization are offered by models relying on the world system and dependency approach. This approach claims that an account 11 The

majority of the cited modernization studies rely on cross-sectional data. the ambiguous results of the modernization literature, there exists more evidence that questions this link. Although it can be shown that globalization positively influences economic prosperity, some findings suggest that these benefits are not likely to alleviate poverty on a large scale (Dreher 2006).

12 Beside

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1 Introduction

of a country’s role and position in the international division of labor is important for understanding and explaining its social and political development (Wallerstein 1974). The literature working in this vein argues that asymmetrical economic and political exchange relations structure the world system such that the international division of labor creates inequality between countries. It is claimed that due to this international inequality a country’s position in the world system influences its political and social development, such that democracies are expected to emerge in regimes which belong to the highly developed core of the world system while in the less developed and economically dependent periphery democracy should be a rarity (Chirot 1977).13 World system theorists also argue that late and dependent economic development yields different modernization outcomes than developments observed in the core. O’Donnell (1973) identifies that the development of capitalism in developing countries does not lead to the emergence of democracy but to modern autocracies. Chase-Dunn (1975) explains this contradiction to modernization theory with appeal to the different role of the bourgeoisie in such societies: instead of pressing ahead liberalization and democratization the (numerically small) middle class in late and dependent developed countries favors authoritarian rule to democracy in order to realize their economic benefits. Bollen (1983) and Gonick & Rosh (1988) provide strong empirical evidence for the expectation that modernization’s effects on democratization are fundamentally shaped by a regime’s position in the world system. The authors show that economic development has a strong impact on the emergence of democracy in the core of the international system, but that this impact decreases in regimes located in the semi-periphery and diminishes further in countries in the periphery (see also Burkhardt & Lewis-Beck 1994, Li & Reuveny 2003, and Foweraker & Landman 2004). Structural approaches explaining the emergence and persistence of democratic rule face the major critique of being functionalistic, deterministic, ethnocentric, and that they neglect the role of actors in democratization – naturally emphasized by agency theorists. The genesis of the second major approach in de13 World

system theorists, argue that the elite of the core states support the regimes’ elites of the periphery in order to maintain the institutional arrangements that benefit the core states’ economic and political interests. Hence, regime cahnges are less likely to occur (Schmitter 1972; Kaufman, Chernotsky & Geller 1975; Chirot 1977; O’Donnell 1979). 13 The bourgeoisie in late and dependent countries is numerically small since dependent development does not generate wealth for the masses, but to small groups, e.g. raw resource exporting landlords and merchants.

1.3 Past research

31

mocratization research – the transition approach – rests upon Rustow’s (1970) influential critique on Lipset’s (1959) modernization thesis. Rustow (1970) emphasizes that democratization does not only rely on socio-economic conditions but that the creation of democracy is best understood as a dynamic process of political struggle in which actors and their choices determine the extent and the direction of institutional changes. His work set up the intellectual foundation of the seminal comparative project of O’Donnell, Schmitter & Whitehead (1986) Transitions from Authoritarian Rule. O’Donnell & Schmitter (1986) advance Rutow’s initial idea by stressing the interdependency of actors in decision-making and the notion of contingent choices. Transition from Authoritarian Rule became the key references for a vast and still growing literature using elite-induced or negotiated democratization models to explain the emergence of democracy. The literature draws upon examination of interactions, pacts, and bargains within the authoritarian elite, whether in governmental responsibility or opposition, and emphasizes that negotiations between the elite yield settlements which lead to transition (see for instance Linz 1978, Share & Mainwaring 1986, Higley 1987, and DiPalma 1990). Utilizing compelling game theoretic models Przeworski (1991) and Colomer (1991) emphasize the division of the ruling elite in hardliners and liberalizers – in the case of Colomer’s model the respective types are further distinguished between radicals and moderates – as the origin of transitions, and discuss different outcomes of the transitions process along equilibrium paths. Huntington (1991) explains democratization as a possible outcome depending on the respective relative power of opposition and government that influence the prospects of settlements – using a similar notion a formalized transition game is presented by Sutter (2000). Empirically the widely accepted generalization of the transition approach – i.e. there is no transition whose beginning is not the direct or indirect consequence of splits within the authoritarian ruling elite itself – is documented by a large number of case studies and qualitative studies of Latin American and South European transitions (see for instance Colomer 1991, the case study collection edited by Higley & Gunther 1992, or Geddes 1999). This basic perspective of elite induced transitions faces the charge of ignoring the role of the masses in pushing authoritarian leaders to reform (Bratton & van de Walle 1997; Collier & Mahoney 1997). And indeed, only a small number of game theoretic models of transition account for the role and the power of the masses by modeling disputes between the masses (citizens) and elite (Acemoglu & Robinson 2001 &

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1 Introduction

2006; Kirstein & Voigt 2006). In general the role of popular protest is reduced to a resource of support either for liberalizers or hardliners in the ruling block during the liberalization stage of the democratization process (Przeworski 1986; Casper & Taylor 1996). Within the framework of rational choice external impacts on democratization and regime change are usually examined in terms of external actors influencing local decision-makers. In his contribution to Transitions from Authoritarian Rule Whitehead (1986) expresses the idea of democracy promotion as an instrument of foreign policy frequently used by Western nations after 1945. In his later work, Whitehead (1996) identifies three channels – dimensions – through which international actors influence domestic developments: control, consent and contagion.14 The dimensions of control and consent are related to the so called conditionality approach which has become prominent in the context of the European Union’s and NATO’s role in the democratization processes of Central and Eastern Europe (see for instance Pridham 2002, Schimmelfennig & Sedelmeier 2004, or Dimitrova & Pridham 2004). Conditionality is sketched as “the deliberate use of coercion – by attaching specific conditions to the distribution of benefits to recipient countries” (Schmitter (1996:30) and accounts for strategies embarked on by international organizations or nation states that reward cooperation and sanction defections in order to offer incentives to target countries. Although the strategy of conditionality seems to be very successful in democratization contexts the impact of conditionality beyond the scope of Central and Eastern Europe is regarded as overestimated (Schmitter & Brouwer 1999; Pevehouse 2002; Mansfield & Pevehouse 2006). Discussing three prominent cases in Eastern and Southern Europe, Schimmelfennig, Engert & Knobel (2003) provide some evidence for this shortfall of the conditionality-democratization link. They show that the success of the European Union’s conditionality policies depends heavily on domestic dispositions to democratization and domestic evaluation of 14 The

concept of contagion summarizes external influences as ideologies or experiences that are diffused between nations and regions. Although diffusion processes are hardly understandable as target-oriented strategies of external actors, Schmitter & Brouwer (1999) argue that consent measures like technical assistance, training of officers or transnational education agreements facilitate diffusion processes. In general, the consent dimension summarizes all kinds of mechanisms through which democratic procedures, norms and policies are directly promoted by external actors interacting with domestic actors. Further examples for these measures are electoral assistance or crossborder cooperation of civil society organizations. The control dimension subsumes influence channels whose measures are characterized by the attempt to promote “democracy by one country in another through explicit policies backed by positive or negative sanctions.”(Schmitter 1996:30)

1.3 Past research

33

the benefits of complying with external conditions. Thus, only if societies commit themselves to democracy, external actors are able to influence the process of consolidation. If societies do not commit themselves to democratization, conditionality is less efficient in supporting democratization. Yilmaz (2002) presents a model of external democratization which apparently resolves this shortfall of the conditionality-democratization link. Referring to the world system approach, he reasons that peripheral regimes compete with each other for economic and political gains from cooperation with the core. This competition enables international organizations or key nation states within some core to apply conditionality strategies and influence domestic politics of some integration-seeking regime, since the targets of conditionality are stuck between the economic and political need for integration and the pressure to comply with external conditions. Although Yilmaz open model of democratization is compelling, there exists little empirical evidence supporting the claim that conditionality initiates democratization. Though Yilmaz (2002) himself provides at least some evidence, this evidence consists only of exemplary references to the relationship between Turkey and the European Union between 1983 and 2000. Gillespie & Youngs (2002) and also Cavatorta (2002 & 2005) examine the European Union’s role in the institutional developments in the Mediterranean and find less support for Yilmaz’s claim. These case studies indeed provide some evidence that the conditionality-democratization link of the 1990s is much weaker in the Mediterranean than in Central and Eastern Europe and support the findings of large-N analyses conducted by Pevehouse (2002) and Mansfield & Pevehouse (2006). Hence, the studies strengthen the suggestion of Schimmelfennig, Engert & Knobel (2003) that the success of conditionality depends heavily on the domestic commitment to democratic development. In contrast to these poor and ambiguous findings the literature that emphasizes the notion of Whitehead’s contagion (diffusion) channel provides robust support for temporal clustering of developments towards democracy or authoritarian rule and a strong spatial association of democratization. (Starr 1991; O’Loughlin et al. 1998; Gleditsch 2002). Besides the spatial clustering of institutional similarity, Gleditsch (2000) further identifies a strong tendency for transitions to occur in order to yield institutional compatibility with dominant structures in the regions. Additionally, Brinks & Coppedge (2006) provide some evidence that in addition to regional emulation, global trends and the connectedness to key actors of the international system also influence the course of development of institutional structures. Gleditsch & Ward

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1 Introduction

(2006) couch the diffusion concept in terms of actors and strategies and argue that diffusion-related processes have a strong impact on the power, preferences, and options of relevant societal groups engaged in disputes over certain policies or more essential struggles over political institutions. In sum, it is argued that diffusion processes may shape the incentive structures of domestic actors and are likely to motivate institutional changes to realize gains from international economic or political cooperation (Simmons, Dobbin & Garrett 2006). Since diffusion is a vague concept, emphasizing the unobservable spread of ideas, norms and information across borders, and only a small fraction of literature on democratization apply the concept seriously,15 the underlying mechanisms of diffusion processes remain obfuscated and await closer examination. However, the sparse empirical findings suggest that such external effects not only account for developments towards democratic rule, but also for developments towards authoritarianism. In a similar vein as Gleditsch & Ward (2006), but drawing upon the world system literature, Stallings (1992) connects the diffusion concept with transition arguments. She suggests international markets as one major linkage between external and domestic structures and argues that international markets provide external resources which governments require for both economic and political reasons. Hence, the impact of international markets on domestic policy makers can be positive – e.g. in terms of enabling investments – but also negative in terms of constraining decision makers’ policy options, since decision makers have to consider the needs, requirements, and strategies of international actors. Relying on political economy models recent quantitative studies in conflict research provide strong evidence that such constraining effects of economic integration indeed exist. The literature demonstrates that integrated societies account for the externally induced need for political and economic stability. Integrated societies are more stable with regard to mass protests and political violence (Bussmann, Scheuthle & Schneider 2003) and experience fewer onsets of civil war (de Soysa 2002). Hegre, Gissinger & Gleditsch (2003) report an indirect pacifying impact of trade on domestic conflict through the channels of economic growth and political stability. Conversely, globalization sceptics view economic integration and trade as exerting redistributive conflicts which create social unrest and violent protest and finally destabilize regimes (Stiglitz 2002; Brennan 2003). Bussmann & Schneider (2007) account 15 Besides

the already mentioned authors, Huntington (1991) and Markoff (1996) complete the list of those who consider the diffusion approach in the context of democratization.

1.3 Past research

35

for this view but demonstrate the contrary, i.e. that higher levels of economic openness are associated with lower risks of violent civil conflict and that economic liberalization has only a small negative effect on regime stability. Similar to the study of Hegre, Gissinger & Gleditsch (2003) the study of Bussmann & Schneider (2007) advert to an interesting point in favor of the argument that international markets influence the preferences, strategies and decisions of domestic key actors. They provide some evidence that the inflow of foreign capital pacifies social conflicts and this finding suggests that domestic actors account for external consequences of political instability. The most influential critique on rational choice models of transition is put forward by Karl (1990). She (Karl 1990: 6) criticizes O’Donnell’s & Schmitter’s (1986) emphasis of contingent choice and argues – in a similar vein to Remmer (1991) – that this notion of contigency16 has “the danger of descending into excessive voluntarism if it is not explicitly placed within a framework of [. . . ] constraints.” Even if uncertainty is regarded as tremendously high during transitions and one also accepts that due to this uncertainty constraints are relaxed, the view that actors’ choices do not respond to at least basic structural constraints fails to connect actors’ strategic behavior to underlying structural or situational imperatives; e.g. economic interests of the elite benefiting from the authoritarian rule. Karl (1990) points to Latin American cases concerning the survivability of the negotiated institutional design: democratic institutions have lasted only in countries in which the agrarian economy was not the dominant source of economic wealth. In order to account for this finding she argues that agrarian economies depend more strongly on labor-repressive institutions than other economic activities – an argument that is also carried forward and formalized by Acemoglu & Robinson (2006). Karl concludes that with regard to these observations the stability of negotiated agreements is strongly influenced by economic constraints which shape actors’ preferences and capabilities. Thus, by emphasizing contingency the initial transition approach fails to consider factors that influence the underlying terms of transition and the stability of the outcome. To overcome this shortcoming Karl (1990) emphasizes a theoretical synthesis connecting structural arguments with actor-centred analysis. In a seminal contribution, Haggard & Kaufman (1995) offer such a synthesis by arguing that structural approaches like modernization or 16 This

notion emphasizes that outcomes depend more on subjective rules surrounding strategic decision-making than objective conditions

36

1 Introduction

world system theory allow for the identification of factors that shape the environment in which individuals strategies and choices are embedded. Their approach to democratization draws upon strategies and choices of key actors in the transition phase but the authors stress the impacts of economic performance and economic conditions on actors’ preferences and their strategies. In contrast to ‘traditional’, elite-centred transition games they emphasize bargains and alliances forged between authoritarian rulers and key socio-economic groups within the society in question. Briefly summarized, their key argument is that poor economic performance and especially economic crises undermine existing settlements and expose authoritarian rulers to the danger of losing elementary support and the loyalty of key socio-economic actors. If isolated, such rulers lose the capacity to negotiate favorable terms of regime changes and transitions occur under derogatory terms for outgoing leaders. On the other hand, if rulers ’avoid’ economic crises and their rule is accompanied by economic prosperity authoritarian regimes enjoy wider support and less opposition. Even if transitions from authoritarian rule occur under such circumstances, authoritarian rulers are able to impose institutional frameworks which maintain their own and their political allies’ prerogatives, due to that backing from key actors in society. Hence, negotiated transitions under a prosperous economy are likely to produce settlements beneficial for the outgoing elite. Haggard & Kaufman (1995) provide strong evidence for their argument by scrutinizing Latin American transitions. In a similar vein the game theoretical transition model of Acemoglu & Robinson (2006) relies heavily on the theoretical work of Moore (1966) and parts of the historical sociology17 by embedding 17 In general historical structuralists emphasize that altering relationships between the state and classes

shape a political system (see for instance Skocpol 1985). Historical sociology’s understanding of democratization is best exemplified by Barrington Moore’s (1966) important study of the genesis of democratic, fascist and communist regimes. He examines the development of eight important countries, Britain, China, France, Germany, India, Japan, Russia and the United States, through the 19th into the 20th century and identifies different historical paths of modernization which yield different institutional designs. Moore argues that the different outcomes ranging from liberal democracy to totalitarianism result from different interaction patterns between three important classes in the respective history of nations: the peasantry, the landed nobility, and the bourgeoisie. Rueschemeyer, Stephens & Stephens (1992) modify Moore’s baseline explanation and provide the most extensive comparative case study analysis of advanced capitalist societies and countries in Latin America, Central America and the Caribbean. Relying on a Marxian view of class struggles and class conflict which influences the capitalist elites’ decision-making, Rueschemeyer, Stephens & Stephens’ modification of Moore’s concept emphasizes the importance of the rising urban working class for democratization. The authors argue and show that the elites’ choices and strategies can only be ex-

1.4 The theoretical synthesis

37

micro-theoretic reasoning in structural contexts. The importance of these contributions to democratization theory is due to at least two aspects: first, they combine structural claims with micro-theoretic arguments in a way acceptable for both approaches and, second, they establish the notion that transitions from authoritarian rule rely heavily on societies’ assessment of existing institutional arrangements with regard to individual socio-economic gains these arrangements provide.

1.4 The theoretical synthesis So far it was shown that the literature on regime changes purely focuses on a dichotomous measurement of transitions by utilizing somewhat arbitrarily defined thresholds of distinct democracy measures. By disregarding institutional alterations which do not yield regime changes this conceptual focus ignores the observable variance of institutional alterations (see Table 1.1). This shortcoming becomes severe as the literature stresses democratization and fails to theorize, and thus omits scrutinization of, institutional developments towards authoritarianism. It is argued here that both shortcomings prevent shedding light on the puzzle of the directions of transitions. These deficiencies are also exhibited by the literature that claims integration into world markets positively influences the prospects of democratization as its promotes economic prosperity. In addition, this literature lacks a coherent theoretical foundation of this argument. This study suggests an approach that accounts for these shortcomings. The study focuses on the broad range of institutional alterations including developments towards authoritarianism and provides an micro-theoretic foundation for the globalizationdemocratization link. The approach relies on the rational choice paradigm but follows the suggestion of Karl (1990) to connect strategic behavior to underlying structural imperatives. Similar to Haggard & Kaufman (1995) the theoretical frame stresses the constraining impact of economic structures. Focusing on the distribution of socio-economic interests within societies the proposed theoretical frame provides a micro-theoretic foundation of how international markets shape domestic decision-making. The approach relies on the nexus of two plained by referring to the structural constraints and opportunities of the society in question. Hence, and in contrast to the modernization approach democratization is understood as the result of reforms of capitalist societies and not an automatic outcome of capitalist development (see also Therborn 1977, or Collier 1999).

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1 Introduction

well-established aspects derived from the existing literature: the distribution of preferences about distinct institutions and international markets’ impacts on these preferences and choices of domestic actors. Both provide the basic frame for the offered contribution to the explanation of the puzzle of the directions of transitions. The explanation is strategic in terms of game theory and economic in terms of connecting individual utility to economic performance and affluence. In the vein of Haggard & Kaufman (1995) transitions are attributed to the disenfranchised citizens’ assessment of existing institutional arrangements with regard to individual gains these arrangements provide. If citizens value alternative institutional arrangements’ individual output as more beneficial than the existing output they will demand and eventually press violently for institutional changes. The strategic situation in which preferences for institutional alterations are articulated in putting forward demands denotes a conflict over the distribution of wealth and political power between the elite of some authoritarian regime and the disenfranchised masses of citizens. Actors’ assessments are driven by their anticipation of consequences that are influenced by existing economic structures. A coherent formalization of economic structures reveals that structures are expected to constrain the actors’ choices for namely two reasons: First, in societies that rely on complex production structures, division of labor between economic elite and disenfranchised citizenry implicates the dependency of both groups in realizing their respective incomes. It follows that both groups have to consider welfare losses if they press for their respective interests without accounting for the other’s preferences and options. Second, constraints on choices become even more severe if the economy’s international ties are taken into account. The claim that international markets affect actors’ strategies and choices by influencing the economic consequences of institutional alterations relies on the theoretical perspective that institutional arrangements provide the basic incentive structure for economic and social behavior (North 1991). The key theoretical issue of the approach claims that any institutional alteration distorts accustomed economic behavior and affects the productivity of the economy in question. These distortions are analytically captured by redistributive taxation and the concept of the deadweight losses of taxation (Browning 1978 & 1987). Understanding redistribution as a metaphor for institutional alterations towards democratic rule allows the deadweight losses of taxation to symbolize the consequences of institutional movements towards

1.4 The theoretical synthesis

39

democratic rule.18 Putting everything together, the model claims that – conditional on the economy’s integration into world markets – the magnitude and the direction of institutional alterations affect individual benefits and losses connected to the respective changes. With regard to that, transitions to democracy occur if the citizens’ pay offs from initiating a regime change exceed the gains provided by the existing institutional arrangements. Institutional alterations towards democratic rule, which do not yield regime changes, occur if individuals benefit from minor alterations rather than exhaustive changes or remaining at the status quo. The expected economic consequences associated with both democratization and remaining in authoritarianism denote the crucial point in this view of transitions: these consequences increase with integration. The model unfolded and formalized in the following chapters argues that economic distortions induced by institutional alterations are likely to harm economic performance and that these economic losses increase to the extent of the respective increase of integration into international markets.19 The model predicts the institutional sustainability of highly integrated authoritarian regimes whereas radical institutional alterations in terms of regime changes are expected to be restricted to less integrated authoritarian18 Given

a normative perspective the notion of costs of democratization may be confusing. But relying on an economic perspective shifts the focus to the trade-off between democratic rule and economic efficiency. A conventional wisdom in the related literature claims that democratic policies – such as redistributive measures, higher shares of government expenditure, and the liability to lobbying – harm economic efficiency (for an overview of this literature see Drazen 2000 and Chapter 3, where some empirical findings of this claim are reviewed). Besides this, consider also that the citizenry of an authoritarian regime is not a homogeneous group. Although the citizens are disenfranchised, one part of the citizenry may belong to a privileged group and others may not (see for instance the ethnic and religious cleavages in Iraq under the rule of Saddam Hussein or the situation in today’s Nigeria). Democratization may threaten these privileges and the question of whether to support democratization or not depends on the privileged citizens’ assessment of whether they may sustain their position after regime change. A similar costly situation may arise if ethnic or religious minorities press for independence or at least for substantive autonomy after regime change. In sum, costs of democratization are not necessarily restricted to the elite of an authoritarian regime. The changes connected to institutional alterations also affect accustomed structures of a society and may induce group-specific losses. 19 One of these consequences of major institutional changes for authoritarian regimes is the possible reduction of foreign direct investments. Li & Resnick (2003), for instance, provide strong evidence that among the group of developing countries multinational corporations prefer to invest in autocracies as long as they secure property rights since welfare consequences of democratic rule (as social security systems or workers’ participation) are likely to pose unfavorable conditions for these companies.

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ruled economies. A second implication of the transition game states that highly integrated authoritarian economies show the tendency to be more repressive than less integrated economies. Both predictions challenge the conditionality literature and emphasize that external influences also account for stabilizing and tightening authoritarian regimes.20 The approach accounts for Whitehead’s (1986) notion that institutional development towards democracy does not take place in an international vacuum – but not in the sense Whitehead and others expect, i.e. that integration fosters democratization. It is expected contrarily that international ties negatively influence the prospects of democratization. This expectation is derived from the important conceptual decision to consider any institutional alteration of a given political system rather than only those alterations which resulted in regime changes. In contrast to Whitehead and the dominant part of the transition literature, which emphasizes explaining democratization, the approach developed here focuses on a broader range of alteration outcomes and questions why democracy should be automatically regarded as the most beneficial institutional outcome in all circumstances. This model and its basic predictions may also provide a microtheoretic foundation for Przeworski’s et al. (2000) result that highly developed authoritarian regimes are less likely to break down. Following the notion that integration into world markets yields positive economic effects (Sachs & Warner 1995; Frankel & Romer 1999), highly integrated authoritarian regimes are expected to have prosperous economies. If this holds, one should expect the consequence of regime changes to be severe, such that the key actors in the transition game abstain from endangering their realization of income by altering institutions – a prediction which strongly challenges the modernization-related perspective that globalization helps to build democracies.

20 External

influences, which stabilize and even tighten authoritarian regimes, are completely disregarded in the literature on external impact on democratization. But a great deal of evidence indeed exists that shows that during the Cold War, for instance, democratic rule was not a criterion for the selection of allies which receive economic and political support in return for their loyalty or distinct services. It is sometimes argued that this kind of conditionality stabilized authoritarian regimes (Meernik, Krueger & Poe 1998).

2 The economic constraints on regime changes – notes towards a coherent formalization

2.1 The structure of the argument

In contrast to the modernization-related claim that globalization helps to build democracy it is argued in this book that integration into world economy constrains domestic policy-making and narrows the scope of institutional changes. The proposed approach to scrutinize the directions of transition relies on a theoretical synthesis embedding micro-theoretic reasoning in structural contexts as suggested and employed by Karl (1990), Haggard & Kaufman (1995), and Acemoglu & Robinson (2001 & 2006). The approach emphasizes the impact of economic structures on actors’ preferences and choices within social disputes over the distribution of political influence and economic wealth by combining three arguments: • that institutional alterations depend on actors’ assessments of existing and possible alternative institutional arrangements with regard to the individual gains these respective arrangements provide; • that these assessment are driven by anticipating consequences that are influenced by existing economic structures and economic performance; and • that the extent of these economic consequences depend on the level of the respective economy’s integration into world markets. In order to provide a coherent argumentation the theoretical synthesis is translated into a formal model which consists of two distinct analytical parts: first, the economic structure is modeled by relying on a Cobb-Douglas production function that accounts for an economy’s integration into global markets. Formalizing the

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underlying economy has primarily two functions: first, it allows us to coherently deduce the individual utilities of the actors in the game theoretic model and by doing this, embeds choices and strategies in a structural context. The game theoretic model – the transition game – represents the dispute over wealth and political power between the elite and the disenfranchised citizens in a society in terms of a dispute over distinct redistribution policies. Strategic choice models focusing on transitions to democracy commonly state that transitions from authoritarian rule rely heavily on the disenfranchised citizens’ assessment of existing institutional arrangements with regard to the individual gains that these institutional structures provide (Haggard & Kaufman 1995; Acemoglu & Robinson 2006). This analytical perspective yields the expectation that transitions are more likely to occur if the citizens are not satisfied with the gains provided by some authoritarian regime and if the citizenry possesses the power to challenge and overthrow the regime’s elites and implement institutions that they regard as more beneficial. In this vein, transitions are basically the result of economic conflicts between the ruling elite and disenfranchised citizens about the distribution of wealth, which according to Dahl (1971), reflects the distribution of political power. Although this assumption is commonly accepted and used, the literature disregards an important implication: assuming strategically acting individuals implies that individuals’ decisions rely on their assessment of expectations of the consequences of all alternative options – including minor reforms or even alternative authoritarian arrangements. That means if citizens value the existing gains associated with institutional set ups, they should consequently be supposed to assess all alternative institutional arrangements. Accordingly, it follows that citizens’ decisions to overthrow authoritarian rulers depends both on the existent performance of the respective regime and on the citizens’ expectations about their future gains provided by alternative institutions. With regard to this assumption about the nature of transitional dynamics one should observe transitions only if the disenfranchised citizens of a regime are both dissatisfied with the performance of the existing institutional setting and if they expect higher individual benefits from other institutional arrangements. The second condition of this hypothesis denotes the key to understanding the puzzling observation concerning the directions of transitions. Regarding the individuals’ expectation of the performance of alternative institutions allows for an analysis of regime alterations beyond the focus on democratization. This perspective facilitate scrutinizing contexts in which creating democratic rule may be harmful

2.1 The structure of the argument

43

to individual gains while it may be beneficial to preserve modified, but basically authoritarian institutions.21 Modeling the economic structure accounts for this analytical starting point and provides a frame which allows the modeler to derive the actors’ assessments of distinct institutional set-ups from a coherent structural environment. Understanding transitions as the strategic choice between different institutional arrangements shifts the focus of transitional dynamics from distributional conflicts between elite and citizens as the initial forefront of transition to expected consequences of institutional alteration. According to the new institutional economics approach, institutions provide the fundamental incentive structure of any society (see for instance North 1990 & 1991), such that any institutional alteration distorts accustomed individual behavior. Since regime transitions denote the most substantial and exhaustive conceivable institutional alterations the consequences of changes are supposed to be severe. Evaluating possible consequences and the magnitude of consequences of institutional change involves considering two major aspects: the economic structure which impacts the performance of any given authoritarian regime and the international context in which this structure is embedded and the performance is connected to. The coherent analytical formalization of this environment reveals an important shortcoming of the existing transition literature: rationalist explanations of regime alteration mostly disregard the interdependence of the economic elite and the citizenry in economic processes.22 But this interdependence in generating income and individual wellbeing has an important implication for the distributional conflict. If both groups depend on each other in order to realize their respective incomes – at least in capitalist economies23 – one should expect that the distinct groups consider this interdependency in their assessments of alternative institutional designs. It is thus misleading to expect, as per conventional wisdom, that the citizenry will continue with economic production without facing substantial economic losses after tran21 This

deduction draws on the reasoning of Buchanan & Tullock (1962). contrast to structural explanations as provided by Moore (1966) or Collier (1999). 23 Wintrobe (1998) classifies autocratic economic systems and identifies capitalist authoritarianism which accounts for economies in which production relies on division of labor and markets. Such regimes combine autocratic institutional arrangements with private enterprise. Prominent examples for capitalist-authoritarian economies are Pinochet’s Chile, Argentina between 1976 and 1983, South Korea until 1987, Taiwan until 1993, and recent Southeast Asian regimes like Singapore and Malaysia. 22 In

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2 The economic constraints on regime changes

sition has taken place and the ruling elite has been impeached. The argument that the political elite disappears after transition may account for the elite of communist regimes or some highly personalized dictatorships where – due to clientelist mechanisms – the future of the political elite is closely connected to the fate of the rulers. However, given a capitalist economic structure and that the political elite of such economies also constitutes the economic elite, as argued by Dahl (1991), it is not reasonable to assume that the elite of such economies will simply disappear after transition and the former disenfranchised part of the population would be able to continue economic production without facing serious economic losses. As long as the economy of some authoritarian regime rests on the division of labor between capital holders – i.e. to some extent the elite – and the holders of labor input – mostly the disenfranchised citizenry of the regime – the economic interdependence of both groups exists and influences the assessments of alternative institutions and the consequent choices. Following the notion that changing institutions disturbs accustomed economic and social behavior requires us to think about the consequences emerging from these distortions. If one agrees that transitions result from distributional conflicts in unequal societies the outcome of this conflict may be couched in terms of distinct redistributive measures. In this vein the proposed game theoretic model of institutional alterations utilizes distinct redistributive measures to denote distinct institutional set-ups. A regime’s elite who faces demands for participation by the disenfranchised citizenry may meet these demands by redistributing a small amount of political power which satisfies the citizens and prevents them from pressing further for more substantial institutional change. In terms of the model developed in this book, such minor redistribution denotes minor institutional alterations towards political equality. A second redistribution outcome may occur if the citizens press for regime change and implement majority-oriented institutions in order to distribute wealth and political power more equally. The distributional conflict may also result in political instability. Within the transition game instability arises whenever the citizens challenge the ruling elite and instability may become an actual state of the regime if the elite decides to repress the citizens’ demands. This suppression outcome also reflects a kind of negative redistribution since the costs of repressive measures have to be financed in the same way as redistributive measures: by taxation. As the proposed model of institutional alterations utilizes redistributive policies as a metaphor for democratization, varying tax rates become an allegory for different

2.1 The structure of the argument

45

institutional settings (for a similar use of taxation policies see Alesina & Rodrik 1994). Understanding varying tax policies as a metaphor for institutional alterations facilitates modeling the economic consequences of regime alterations in terms of the deadweight losses of taxation. The concept of the deadweight losses of taxation (Browning 1978 & 1987) states that proportional income taxes affect economic activities by lowering the private appropriation of individual efforts. Depending on their extent, taxes reduce the productivity of any given economy as they lower the incentives of productive accumulation of capital and labor and raises the incentives to engage in compensating activities. These distortions of the allocations of resources produce welfare losses, the deadweight losses of taxation or excess burdens, which increase with the level of taxation (Auerbach & Hines 2001a; Feldstein 1999).24 The possible outcomes of the transition game denote varying extents of institutional alterations in terms of redistributive measures that are likely to harm economic productivity.25 Though the consequences of redistribution are examined using economic arguments and concepts, the model symbolizes the very notion of transfers of political rights and political power, i.e. of institutional alterations. The same accounts for taxation. Taxation and the depending economic losses account for any political and social costs that may occur because of altering accustomed institutional set-ups. The model emphasizes the fact that preferences towards distinct institutional arrangements are influenced by individual economic incentives. These incentives are shaped by the existing economic structure and – in terms of the model - by distinct alternative tax rates. Considering economic structures and focusing on the actors’ assessments of distinct institutional arrangements has an important ramification for the game play of the transition game. Consider some authoritarian-ruled society, which is characterized by inequality but also by high income levels. Although the citizens in such societies may have strong incentives to demand suffrage they may anticipate that 24 A

very simple illustration of the aggregated losses caused by distortionary taxation is given by the Laffer Curve. The Laffer Curve describes the relationship between the tax rate and the tax revenue as an inverted U-shaped function. The curve states that with increasing taxation at low levels the revenue rises but reaches a maximum if the tax rate rises faster and faster. Beyond that maximum the revenue decreases with rising taxation because the economic production is reduced by increasing distortions. 25 The related empirical literature provides strong evidences for this effect. See, for instance, Barro (1991) and Alesina et al. (1996) for the economic consequences of instability, and Perotti (1996) and Alesina & Rodrik (1994) for the consequences of redistribution.

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the consequences of challenging the elite will probably lead to substantial income losses. Hence, even if there is inequality the disenfranchised citizenry may not opt to challenge the regime in order to prevent economic consequences, which would harm their own well-being. In such cases, the proposed model predicts that the citizenry is likely to value the existing institutions as more beneficial than some alternative institutional set-up. Therefore, the transition game introduced here starts with an initial decision by the citizens of whether to challenge the elite. This marks a distinction from common game theoretic models of transition. In the majority of models the structure of the games has the government (elite, in the terminology used here) move first, and the opposition (citizens) respond to the move. Sutter (2000) models the dispute between government and opposition such that the government moves first and decides whether to liberalize the regime or to remain at the status quo, and the opposition responds by participation in the liberalization or pressing for further institutional changes. Przeworski (1991) and Colomer (1991) model transition as an outcome of a dispute that initially starts with a conflict between hardliners and moderates within the ruling elite. Implicitly the authors argue that some revolutionary threat forces the government to initiate changes, but this threat is not modeled explicitly. Acemoglu & Robinson (2006) do so by introducing a chance move which decides whether the elite faces a credible threat or not. Only very few models consider an initial decision by the citizens of whether to challenge the regime or to remain at the status quo. Kirstein & Voigt (2006) offer a model relying on the division of labor between two groups of actors in a society. The first group, known as the weak group, denotes the disfranchised, who start the game by making decision about their effort level that generates the societies social product; the second, strong group make a decision afterwards about how to distribute the wealth. Transition occurs in this game as a possible outcome if the weak do not accept the distribution decision of the strong and initiate a revolution. Modeling challenges as the initial move of the transition game account for two aspects: first, the move stresses the revolutionary threat. A credible challenge involves an explicit threat in the event that the elite does not meet the demand. The challenge is credible if and only if the institutional change provides gains for the disenfranchised citizens higher than the existing arrangements, such that the citizens will initiate a regime change if the elite rejects the demand for redistribution. Second, it emphasizes and models the argument of Haggard & Kaufman (1995) that transitions from authoritarian rule heavily rely

2.1 The structure of the argument

47

on the citizens’ assessment of the existing institutional arrangements with regard to the individual gains from these arrangements. The final part of the line of argument devised in this book states that economic consequences of institutional alterations are likely to be influenced by external markets. If one agrees that these economic consequences are severe and influence actors’ assessments of institutional alterations, one may further infer that the extent of these potential negative economic effects of alterations is related to the respective economy’s integration into world markets. This deduction simply relies on the argument and the findings of Frankel & Romer (1999). Providing strong evidence, they argue that the performance of any economy depends on the economy’s level of integration into world markets. Formalizing this widely accepted argument and including it in the frame developed here clearly shows that international markets also affect the extent of the consequences of institutional alterations. Intuitively one may consider for instance that institutional changes do not only disturb the accustomed behavior of the individuals in some society but also influence the behavior of international actors who are politically or economically engaged in the economy or with actors belonging to the ruling elite. If this holds, one should expect that an economy’s integration into world markets also affects domestic actors’ assessments of alternative institutional arrangements. Before the formal model will be introduced, the reasoning of the proposed causal chain will be unfolded in more detail in the following sections. Additionally, the sections review the related literature in order to report empirical evidence for the economic consequences of political instability, redistribution, and the impact of integration on national taxation. The chapter is structured as follows: first, the differentiation between democracy and non-democracy in terms of different institutional arrangements is covered. Section 2.3 summarizes the implications of the economic structure and the consequences created by political instability and redistribution. This section also focuses on the concept of deadweight losses of taxation and elaborates its impact on the transition game. Finally, the impact of international markets on economies is introduced along with an account of how the extent of international political and economic cooperation shapes the desirability of different outcomes of the redistributive conflict in authoritarian regimes. Sections 2.4 summarizes the implications of the argument.

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2.2 Preferences over institutions The model employs a minimalist definition of democracy which focuses on procedural and institutional elements of political systems highlighted by Schumpeter (1950), Sartori (1962) and Dahl (1971). Democracy is primarily understood as a political regime that possesses certain key institutional arrangements – such as free and fair elections, rule of law, and civil rights – which ensure public contestation over policy preferences as the essential basis of decision making. The major contribution of these key institutional arrangements to the democratic performance of some political system can be described as the ability to generate and ensure political equality. Without political equality as a fundamental underlying institutional precondition of participation, public contestation over policy preferences will become meaningless. In contrast to democratic rule, non-democracies are characterized by political inequality and, thus, lack of meaningful contestation (Dahl 1971). Consider that in non-democratic regimes political power is owned by small groups constituting the ruling class – referred throughout as the elite – while the majority of the members in these respective societies are disenfranchised from political power – the citizenry. Instead of free contestation over policy preferences, these regimes are in general characterized by policy-making in favor of the interests of the elite, while such policies are likely to disadvantage the disenfranchised majority.26 While policies in democratic settings are expected to be more beneficial for the majority of the whole population since democratic policy makers rely on the competition for support expressed by elections, in authoritarian institutional settings policy makers primarily aim to benefit the elite in order to gain further support for their policies and remain in power (Wintrobe 1998). By stressing this distinction of the logic of policy-making, political equality becomes a reliable criterion for distinguishing between democracies and authoritarian regimes, since political equality reflects the most important functional elements observable in democracies, but not shared in authoritarian regimes. With regard to this distinction between authoritarianism and democracy, transition is simply understood as the alteration of an institutional set-up that yields meaningful changes concerning the mechanisms of attaining political power and the logic of policy-making. Using this definition implies not that transitions are necessarily a one-way dead-end street leading to the establishment of democratic rule, but that 26 Throughout

this examination non-democratic and authoritarian are used synonymously.

2.2 Preferences over institutions

49

changes of the institutional arrangements may also lead to (other) authoritarian mechanisms. Hence, a democratic turnover of a non-democracy is characterized by institutional changes which yield an increase in political equality and feature majority-oriented policies, where institutions are defined as “. . . the humanly devised constraints that structure political, economic and social interaction” (North 1991: 97).27 This definition implies that even small alterations of institutional arrangements are likely to affect the decisions and actions of economic and social agents and may yield consequences for individuals’ well-being. Consider that the accumulation of capital, labor, and knowledge and their use in production determines economic performance in a given economy. The incentives to such productive accumulation solely depend on the individuals’ ability to appropriate privately the benefits of their efforts therefore the extent of private appropriation of returns of investment relies heavily on institutional arrangements – e.g., on what tax policies and regulation policies are adopted. In economies characterized by distributional conflicts, political decisions, which aim at redistribution, are likely to result in policies that allow less private appropriation. Thus, such policies are likely to reduce the incentives to accumulate, which in turn reduces economic performance (Persson & Tabellini 1994). Consequently individuals are assumed to consider such consequences in the processes of altering of institutions and are expected to have strong incentives to influence the direction of the institutional changes. In democratic settings individuals try to influence policy makers by formulating their policy preferences and participating in public contestation via organized interest and elections. Due to political inequality disenfranchised individuals in an authoritarian regime are not able to participate in the same way as citizens of democracies do. But this does not mean that disenfranchised individuals are not able to express their preferences and have no influence on policy makers. Although the elite monopolizes political power in terms of formal institutions, disenfranchised citizens outnumber the elite, such that they are able to challenge the elite by disturbing the stability of the political system, i.e. creating social unrest and disruption or even generating a serious revolutionary threat. 27 North

(1991:97) notes further that institutions “. . . consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Throughout history, institutions have been devised by human beings to create order and reduce uncertainty in exchange.[. . . ] Together with the standard constraints of economics they define the choice set and therefore determine [. . . ] the profitability and feasibility of engaging in economic activity” .

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Acemoglu & Robinson (2006) stress this point by arguing that even in regimes which deny their citizenry de jure political influence in terms of political rights and civil liberties, the disenfranchised masses possess de facto power. With regard to this one should assume that the elite of an authoritarian regime accounts for this de facto power and considers the citizens’ perceptions of policies in daily policymaking. The same applies to institutional alterations. If one follows the argument that changes of institutional arrangements rest upon individual preferences for particular institutional set-ups regarding their outcomes, one should consequently consider the preferences of the elite and the citizenry, or rather the distribution of these individual preferences in a given society. This deduction has important implications for the probability of transitions and the direction of institutional alterations. The more substantial the alterations of institutions, the more severe are the economic consequences. Since regime changes characterize the most substantial and exhaustive conceivable institutional alteration, the consequences for an individual’s wealth are expected to be enormous and difficult to predict. In this frame transitions only occur if the citizens value the consequences of transition positively – that is, the individual benefits of altering the institutions are higher than the costs – and may initiate a regime change and overthrow the elite. In this context the choices of the elite are narrowed to the question of whether they are able to prevent regime changes by repression or by liberalizing the regime. If the citizens expect that the economic consequence of regime change and democratic rule may make them worse off, they may value slightly altered authoritarian institutions more than democratic institutions and abstain from initiating a regime change. Instead of that, they may use their de facto power to press the elite for minor institutional alterations. It should not be denied that individuals may also have ideological and normative preferences regarding institutional settings; however, the model presented in this book states that if individuals face the question of whether to gamble on outcomes of substantial institutional changes, these individuals are likely to value socio-economic consequences more than ideological concerns.28 28 Although

this argumentation seems counterintuitive in the first instance, it becomes meaningful if economic structures and the international economic context of regimes are taken into account. Notice, for example, the findings of Przeworski et al. (2000) and Goldstone (2006) who provide strong evidence that economically prosperous non-democracies are less likely to break down than regimes with poor economic records. The argument presented here accounts for this finding. Consider that the economic individual losses connected to exhaustive institutional changes increase with economic

2.3 Economic structure

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2.3 Economic structure, sources of economic distortions, and integration into world markets

The main argument in this book states that institutional changes are connected to consequences that affect the actors’ well-being and that the anticipation of these consequences constrains policy-making. If one argues that institutions provide the fundamental incentive structure of any economy (North 1991), any institutional alteration is expected to distort accustomed individual behavior. In transition contexts, such distortions may be individually beneficial if one purely focuses on the transitions of command economies or highly corrupt kleptocracies, but if one focuses on the broader category of capitalist authoritarianism such distortions of accustomed economic behavior may also generate welfare losses – regardless of whether a regime develops towards democracy or towards other forms of authoritarianism. As it is argued here that the anticipation of gains and losses of institutional alterations constrains the options of institutional development, this section identifies the sources of the constraints and provides some stylized empirical evidence to corroborate the analytical deduction. The outcome of distributional conflicts between the elite and the citizenry is likely to be couched in terms of redistribution or political instability. The latter occurs if the elite suppresses the demands of the citizens, while redistribution either takes place as the result of regime change or in terms of minor institutional alterations towards democracy, i.e. some redistributive offers by the elite which are accepted by the citizenry. This section sketches the consequences of both outcome types and elaborates how the consequences of redistribution and political instability are likely to constrain policy options. As sketched above, the outcomes of the transition game represent distinct institutional alternatives, which are symbolized by distinct extents of redistribution performance. Thus, the individual incentives to initiate exhaustive changes decrease. This does not mean that the disenfranchised citizens favor authoritarian institutions to democratic rule but that they use their political power more sensitively to allow the elite to alter institutions with regard to the citizens’ preferences. While the concept of negotiated transitions accounts for the elite’s endeavors to sustain its privileged position as long as possible and accounts for the citizens’ acceptance of minor institutional alterations in order to avoid the genuine costs and risks of revolution, the argument presented here claims that citizens prefer minor alterations to radical regime change not only because of the genuine costs of revolution but also because of the sustainable long-term economic consequences.

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measures formalized by different tax rates. Drawing on the concept of the deadweight losses of taxation (Browning 1978 & 1987) it is argued that redistribution denotes the genuine sources of economic distortions which yield economic losses. The trade-off between these gains and losses – i.e. either the consequences of instability29 or the consequences of majority-oriented policies and the individual gains provided by the authoritarian status quo – characterizes the transition dynamics analyzed here. Political instability affects economic performance as it creates uncertainty about the political and legal environment of investment and production. Alesina et al. (1996), Alesina & Perotti (1996), Barro (1991), Gupta (1990), and Venieris & Gupta (1986) provide strong evidence for this claim by showing that instability negatively influences economic decisions and decreases economic agents’ incentives to engage in productive activity. The literature also argues that if economic and political inequality denotes the origin of instability, instability and the related negative effects may be prevented by redistributive measures, i.e. by attempts to reduce social discontent. Countering social discontent by redistributive measures is likely to prevent instability, but generates similar economic consequences. Bertola (1993), Alesina & Rodrik (1994), and Perotti (1996) show that redistributive taxation aiming to reduce income inequality is likely to reduce the incentives of productive activities and harm economic performance. Thus, if inequality fuels social discontent and motivates the disenfranchised citizens to challenge the status quo, the authoritarian elite faces a trade-off between the consequences of instability and the consequences of redistribution. Note that although the consequences of political instability and the consequences of redistributive taxation are both economic efficiency losses, the mechanisms are different. Instability reduces investment because of the uncertainty investors face regarding the appropriation of their investments or the validity of property rights, while taxation makes investors ab29 Notice

that any suppression of civilian action undertaken to achieve institutional alterations induces costs, which have to be financed by taxation. The repression of the citizenry simultaneously increases political instability, since repression measures increase uncertainty about the future of the political and legal environment. Consider, for example, that repression does not necessarily abandon the dispute. The conflict may continue and the actions undertaken by the citizens become more disturbing for the production process (e.g. interminable mass strikes or even violent resistance). Rejecting the demands may also create violent conflict between parts of the population and the security forces of a regime which raises the costs for additional security measures and increases the uncertainty about the duration and the outcome of the conflict.

2.3 Economic structure

53

stain from investment since taxation makes a genuinely profitable investment less beneficial, and raises the incentives to engage in less productive but tax-avoiding economic activities. Implicitly this last argument draws upon the concept of the deadweight losses of taxation. The concept states that transfers financed by proportional income taxes negatively influences the allocation of resources as taxes lower the private appropriation of individual efforts. In sum, taxes are expected to reduce the productivity of any given economy since it lowers the incentives of productive accumulation of capital and labor, and raises the incentives to engage in compensating activities. These distortions of market functions and productivity denote the genuine source of economic losses created by redistributive taxation. And these losses rapidly increase with rising tax levels (Auerbach & Hines 2001a; Feldstein 1999).30 With regard to the argument that redistribution results in efficiency losses and harms individual well-being, the democratization outcome of the transition game is not necessarily a desirable outcome for a disenfranchised citizenry that is aware of these losses – especially if the economy in question prospers. For the purpose of clarifying how these economic losses constrain the actors in the transition game, consider the tax-model of Meltzer & Richard (1981). The model formally proves that the amount of tax-financed re30 For

estimates of the extent of the economic losses see Browning (1987). However, one may counter this deduction by arguing that the deadweight losses of taxation are avoidable if lump-sum taxation is implemented to finance the respective measures. Lump-sum tax is defined as a tax of a fixed amount that has to be paid by everyone regardless of his income level and, thus, does not distort economic activity to the same extent as proportional income taxes do. The efficiency of such lump-sum taxes in terms of avoiding deadweight losses compared to the efficiency of proportional income taxes is widely discussed in the context of financing public goods provision (Wilson 1991; Barro & Sala-iMartin 1992). However, the literature on optimal taxation emphasizes that the imperfect information of the policy maker restricts the usefulness of lump-sum taxation in redistributive contexts (Mirrlees 1971; Auerbach & Hines 2001b). Consider a progressive tax system and a pure-redistributive twogroup case, where the high-ability types pay lump-sum taxes and the low-ability types receive some subsidies. The type of an individual is not observable for a policy maker since individuals hold private information about their productivity, the effort they exert, and their preferences, and so on. Given this lack of information, redistribution becomes a revelation mechanism problem. Since a policy maker is not able to evaluate the ability of an individual he relies on the revelation of the ability type of the individual himself. This revelation only occurs if the incentive compatibility constraint is satisfied. Nevertheless, if a certain amount of lump-sum allocation is reached the incentive compatibility restriction becomes binding and the high-ability type will prefer to pretend to be of a low type. Thus, lump-sum redistributions reach their limit. Proportional income taxes allow redistribution beyond that point – but introduce economic distortions (Roberts 1984; Boadway & Kean 2000).

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distribution under democratic rule depends on the relation of the median voter’s income to mean income in society. The higher the difference, the greater the amount of redistribution. Authoritarian regimes do not necessarily rely on the median voter to make a decision about the extent of redistribution. Therefore one may assume that a redistribution offer from an authoritarian regime’s elite, aiming to tranquilize the disenfranchised citizens, should be expected to be lower than the amount of redistribution realized under democratic rule. It follows that after initiating a regime change, redistributive taxation is higher than the taxation needed to finance the elite’s redistributive offer. Following the concept of the deadweight losses of taxation this means that the distortionary effects, which harm economic activities, are higher after regime change as these effects increase with taxation. Thus, one may further deduce that accepting some lower amount of redistribution – i.e. some minor institutional alterations towards franchise and democratic rule – may be evaluated by the citizenry to be more beneficial than some exhaustive regime change.31 The model of Meltzer & Richard (1981) yields the expectation that democracies tend to be more redistributive than authoritarian regimes. If this holds and one connects these findings to the concept of the deadweight losses of taxation, one may further expect that democracies produce more economic inefficiencies than authoritarian regimes. Barro (1996) empirically scrutinizes this relationship and finds a nonlinear effect of democracy on economic growth. In his cross-country study Barro shows that an increase in democracy tends to stimulate growth, but if a certain level of democracy is reached any further increase impairs economic growth.32 In transition contexts the question of whether transitions to 31 Notice

that the argument proposed here solely focuses on the consequences emerging from redistributive institutions. It is not claimed that capitalist authoritarian regimes are characterized by perfect markets and optimal allocation of resources. Instead, the elite of capitalist authoritarian regimes often takes economic advantage of mutually disrupting market functions and the allocation of resources. However, the efficiency losses induced by redistribution denote additional losses regardless of whether the ruling elite manipulates markets. The reason for this is the economic structure of capitalist authoritarian regimes, i.e. the interdependence between citizens and elite in realizing their respective incomes, which complicates the correction of elite-induced market inefficiencies. Even after successful revolution, the citizens have strong incentives to perpetuate the elite’s economic productive activities. Thus, authoritarian-induced distortions of market functions are supposed to persist some time beyond transitions. 32 The empirical literature focusing on this question provides ambiguous results. Persson & Tabellini (1994), for instance, report data that offers support for the notion that inequality – the source of redistribution – is likely to affect economic performance in democracies, but not in autocracies. However, this evidence is crucial since other studies were not able to reproduce this effect. Bollen &

2.3 Economic structure

55

democracy result in poor economic performance is widely disregarded. An exception is the study of Rodrik & Wacziarg (2005). They analyze this claim and report support for the contrary, i.e. that democratic transitions – especially of less developed countries – stimulate economic growth in the short run. But they also find strong evidence that minor institutional alterations of authoritarian regimes are associated with higher growth rates. The authors deem this result surprising and recommend further research on this question. The argument presented in this book may be a first step. In line with the argument that economic structures are likely to limit the extent of institutional alterations, the findings of Rodrik & Wacziarg (2005) support the suggestion that actors in prospering economies account for the consequences of exhaustive regime changes and may prefer minor alterations. In contrast to this, less developed authoritarian economies seem to be more prone to transitions to democracy and are likely to benefit economically in the short run – a finding which is also supported by Goldstone (2006) and seems to be related to Barro’s (1996) identification of a nonlinear relationship between democracy and economic growth. So far it has been elaborated that an economy’s structure and initial economic performance are likely to constrain actors’ choices and strategies in distributional conflicts. This chapter also adopts and substantiates the use of the tax metaphor to account for the consequences of institutional alterations. As the theoretical frame Jackmann (1985) do not find any relationship between democracy and inequality while Li, Squire & Zou (1998) refer to a negative relationship. Rodrik (1999) provides some evidence that the wages’ share of GDP is higher in democracies than in authoritarian regimes and concludes that democracies pay higher wages. Tavares & Wacziarg (2001) provide strong evidence that democracies’ liabilities to redistribution to the poor have some negative impacts on the accumulation of physical capital and they report democracies’ slightly negative effects on economic performance. In contrast to this finding, Mulligan et al. (2004) report no significant difference between democracies and non-democracies regarding government expenditure and social spending, which should reflect democracies’ liabilities to redistribution. Easterly (1999) studies the effects between growth and standard-of-living indicators – including income distribution – and finds negligible evidence of such a relationship. In his seminal contribution, Perotti (1996) addresses the ambiguity of this results and shows that the effect of democracy on growth is very sensitive to the specifications of the variables and the quality of data. However, he concludes that the hypothesis that equality produces fewer demands for redistribution and, therefore, fewer economic distortions is not supported. But Perotti also argues that this finding may be biased since democracies commonly belong to the group of highly developed countries, such that “it is virtually impossible to distinguish an income effect from a democracy effect in the relationship between income distribution and growth” (Perotti 1996:168). See Sirowy & Inkeles (1990) for a detailed review of the literature before 1990.

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2 The economic constraints on regime changes

assumes that actors in transition processes should be expected to assess gains33 and losses connected to distinct alternative institutional arrangements, the tradeoff between the anticipation of these gains and losses characterizes the transition dynamics analyzed in the transition game. Obviously, these economic constraints vary with the structure and the level of development of the respective economy. It should be clear that economic consequences of institutional alteration in less developed, e.g. purely agrarian-dominated economies, are negligible compared to consequences in highly developed industrialized economies in which economic transactions and relations are more complex and, thus, the distortions due to alterations are severe and the extent of losses is more difficult to predict. The constraints on institutional alterations become meaningful only in the latter.34 Additionally these constraints are likely to be influenced by international markets. Frankel & Romer (1999) show that integration into world markets stimulates economic performance. In their vein it is widely argued that increased trade, foreign direct investment and activities of multinational corporations serve as input to local production and increase economic output (see for instance Gao 2004 or Irwin & Terviö 2002). If one agrees that institutional alterations are likely to disturb economic production, one may further deduce that these distortions also affect the economic activities of foreign investors, of multinational corporations and also of other nation states who engage in the respective economy for various reasons. If one considers that external actors are incentivized by local institutions, one may also expect alterations of these institutions to affect the activities of external actors in the same way as alterations shape the incentive structure of local agents. In sum, one should expect the potential negative economic effects of alterations will be influenced by the extent of the respective economy’s integration into world markets, which generates additional constraints on local actors. Relying on the tax metaphor and understanding institutional alterations as an outcome of distributional conflicts serves to substantiate this link. The literature on tax33 Although the elaboration of the argument focused on the losses

connected to institutional alterations there also exist possible economic gains. Consider for instance, that authoritarian rulers may use their power to enrich themselves and carry out non-productive investments such that democratization is likely to stimulate economic development. 34 Note that this argument strongly challenges the modernization hypothesis. With regard to the reasoning elaborated above one should expect that radical, revolutionary regime changes occur in less developed societies rather than in developed economies.

2.3 Economic structure

57

ation widely agrees that national tax policies have an international dimension.35 Hines (1999) and Desai & Hines (2004) state that the importance of international transactions puts increasing pressure on national tax systems to accommodate the considerations of foreign actors. Concerning foreign direct investments Gordon & Hines (2002) argue that the desirability of an investment location is affected by commercial and regulatory policies36 and Hines (1996b) also shows that national taxation has strong effects on trade flows. Hines (1996a) concludes that international economic activities like investment, financing, and activities of multinational corporations are quite sensitive to institutional alterations such as changes of the taxation system. Although this literature primarily focuses on democracies, and especially on OECD countries, there is no reason to expect that the stylized facts of these impacts would not account for highly integrated capitalist authoritarian regimes.37 The literature on the international context of taxation suggests that integration into world markets bears multiple sources of economy losses induced by institutional alterations. Some of these consequences – e.g. the consequences of political instability – may influence productivity only temporarily. But with regard to redistributive consequences of alterations towards democratic rule the efficiency losses are fairly long term. Wildasin (2000) shows that increasing capital mobility tends to limit the initial effectiveness and attractiveness of redistributive policies. He demonstrates that capital is an attractive target for redistribution policies since capital is not very mobile in the short run. But in the 35 The

broad literature in this context addresses impacts of national taxation on foreign direct investment (e.g. Bénassy-Quéré, Fontagné & Lahréche-Révil 2005), on shifting profits of multinational corporations to low tax countries (e.g. Kind, Midelfart & Schjelderup 2005), and on international tax competitions that follow the internationalization of taxation and put strong downward pressure from the taxation on capital income (see for instance Razin & Sadka 2004). 36 See also Ondrich & Wasylenko (1993) or Swenson (2001) who report strong negative effects after analyzing impacts of varying state corporate income taxes in the USA on foreign investors’ decisions of whether to build new plants. Swenson shows further that these tax effects vary with the transactions undertaken: while the state corporate income taxes on foreign corporations negatively influence the establishment of new plants and plant expansions, high taxes are positively correlated with acquisitions of foreign investors. 37 The findings of Li & Resnick (2003) support this view. They provide strong evidence showing that within the group of developing countries multinational corporations prefer to invest in autocracies as long as they secure property rights. Other features of majority-oriented rule are not related to investment decisions – apparently because they are likely to pose unfavorable conditions for these companies. Li & Resnick (2003:176) argue, for instance, that “autocrats shield foreign capital from popular pressure for higher wages, stronger labor protection, or less capital-friendly taxation”.

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long run capital tends to flow out of the economy and this reduces the net return to labor despite the redistributive transfers a worker receives (see also Wallerstein & Przeworski 1995).38 Analyzing the development of factor prices Alesina & Perotti (1997) report that an increase in transfers financed by distortionary taxation has a negative impact, which impairs the international competitiveness of the respective economy.39 This brief review of the related literature supports the suggestion that integrated economies’ efficiency losses connected to redistributive measures are likely to be more substantial than the losses in closed economies, i.e. an economy that is barely connected to international markets. It follows that one should assume that local actors of integrated economies include this external impact in their assessment of alternative institutional arrangements. That is, citizens and the members of the elite are expected to consider the external consequences of redistribution, i.e. the tax burden on economic activity, connected to distinct institutional settings. Given this, democracy appears as a desirable institutional arrangement only if the local actors are able to minimize the tax burden on economic activity, i.e. to minimize the amount of redistribution. This focus on tax burdens should not lead to the initial income levels of citizenry being ignored. In the context of integration into world markets, modernization theorists may argue 38 Although the literature frequently demonstrates that international capital mobility increases the con-

straints on taxation policy, international tax competition has not led to a significant decline of redistributive taxation in democracies. Using a model that accounts for this expectation, Gottschalk & Peters (2003) explain why this is the case: they demonstrate that international tax competition lowers equilibrium tax rates, but not to such an extent that the expectation of a ‘race to the bottom´ is met. They show that voting serves as a mitigating effect. As voters infer negative consequences of globalization, they tend to support redistributive policies in order to take precautions against intensifying tax competition and, therefore, a decrease in redistribution. The authors finally conclude that whether the “consequences of tax competition and globalization will be less harmful depends on the degree of globalization” (Gottschalk & Peters 2003:466). 39 Bénassy-Quéré, Gobalraja & Trannoy (2007) address the contrary claim that public input financed by taxation on capital creates a trade-off for firms, such that investors accept higher taxation that is likely to lead to good infrastructure and beneficial public services. Analyzing US foreign investments in 18 European countries, they are not able to provide strong evidence for this claim. Combined with tax rates, geography, market size, and agglomeration effects publicly provided infrastructure positively influences a corporation’s location decision, such that – holding all other things equal – an increase in public capital by 10% induces a 2% inflow of foreign direct investment. The authors show that this only holds true if both the quality of public services compensates for higher taxation, and the public services are at least partially financed by taxation other than corporate taxes. However, an increase in public input, which is predominantly financed by corporate taxation, i.e. redistributive taxation, reduces inward foreign direct investments.

2.4 Summarizing the argument

59

that integration increases the overall economic output and, thus, the individual income levels. As high income levels do not necessarily affect the level of inequality, one may follow the modernization claim and expect increases of the income level to raise the chance of meaningful institutional developments towards democracy. In contrast to this expectation the argument elaborated in this book suggests that the tendency of citizens to accept minor changes to fundamental alterations is strengthened in highly integrated economies. If high income levels result from complex structures of division of labor between local and international input factors, disenfranchised citizens may demand redistribution but lack the incentives to initiate fundamental institutional alterations. The model clearly predicts that the incentives to initiate fundamental changes decrease with high income levels in support of accepting minor institutional changes, i.e. lower amounts of redistribution in order to minimize the losses induced by such exhaustive alterations.40 2.4 Summarizing the argument In order to make a contribution to solving the puzzle of directions of transitions this book proposes to focus on the consequences of regime changes understood as major alterations of institutional structures. Consistent with common models of transition, the origin of transition is identified by inequality – in terms of unequal distribution of political and economic power in a society. Inequality is the major source of conflict in democracies as well as authoritarian regimes and fuels the individual’s incentives to engage in activities that aim to alter those institutional elements that support the unequal distribution of income. The transition game – presented in the next chapter – and its underlying economic model stress the impact of economic structures on actors’ preferences and choices within social disputes over the distribution of political influence and economic wealth. In contrast to the modernization-related claim that globalization helps to build democracy it is argued here that integration into world economy constrains domestic policy-making and narrows the scope of institutional changes. The key hypothesis that economic integration is likely to limit the options of institutional changes is derived from the combination of three arguments: (1) that institutional alterations depend on actors’ assessments of existing and possible alternative institutional arrangements 40 This point will become clear when the formalization of the underlying economic model is introduced

in the next chapter.

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2 The economic constraints on regime changes

with regard to the individual gains these respective arrangements provide; (2) that these assessment are driven by anticipating consequences that are influenced by existing economic structures; and (3) that these economic consequences vary in the level of the respective economy’s integration into world markets. Since institutions provide the incentive structure of any economy, any alteration of an existing incentive structure is regarded as distorting accustomed economic activities. It is further argued that transitions from authoritarian rule as well as so-called reverse transitions from democracy denote the most substantial and exhaustive conceivable institutional alterations. Thus, the economic distortions – captured by the concept of the deadweight losses of redistributive taxation and the consequences of political instability – that come with regime changes are expected to be severe. The more vulnerable the society in question is to economic distortions the higher the affluence losses caused by substantial institutional changes. Note, this argument does not claim that non-democracies perform better than democracies per se, but that regardless of the initial performance, economic distortions caused by transitions affect individual wealth.41 The essential point influencing the transition decision is the magnitude of these distortions, which are negligible in less developed and closed economies but serious and substantial in developed societies whose economies rely on complex structures of division of labor between local and international input factors. Hence, and in contrast to the modernization perspective, the argument in this book suggests that highly integrated (and therefore potentially prosperous economies) are not prone to exhaustive regime changes. Radical changes of institutional arrangements are not necessarily changes towards democratic rule. The argument also accounts for reverse transition – the breakdown of democracy – and for transition to other types of authoritarian rule. The underlying mechanism remains the same. Moreover, minor institutional alterations modeled as the citizens’ acceptance of a redistributive offer by the elite, describe institutional shifts of authoritarian regimes which only slightly reshape the authoritarian nature of the regime but denote some evolution towards other types of institutional arrangements – be they democratic or not. This mechanism also captures the phenomenon of long-lasting transition, commonly explained as 41 Consider,

for instance, the political and economic transitions of the former communist regimes in Central and Eastern Europe. Although the transitions yielded capitalist economies, which are regarded as being more beneficial than command economies, these twofold transitions resulted both in welfare losses in the short term and in an increase in income inequality in the long term (Fleming & Micklewright 2000).

2.4 Summarizing the argument

61

negotiated transition. In the sense of the argument presented here, lasting transitions are sequences of minor institutional alterations that minimize economic distortion and account for the interdependency of the conflicting interest. If economic consequences are taken into account, sequences of minor alterations are not only beneficial for authoritarian rulers and for citizens in order to avoid the genuine costs of revolution (as concepts of negotiated transitions often focus on), but this sequences are also beneficial for both groups to minimize long-term losses. Sutter (2000) points out that pacts between rulers and opposition only occur if both sides expect gains from transition. In contrast, the argument presented here explains such pacts – redistribution in authoritarian regimes – based on the expected gains of avoiding transition. Whenever the disenfranchised citizens challenge the elite of an authoritarian regime, they face a trade-off between reducing inequality and individual income losses, which are connected either to the activities of the challenge itself or to the redistribution of welfare if the elite meet the demand. This trade-off becomes severe to a much greater extent if the citizens initiate the change of institutions towards majority-oriented arrangements. Obviously, the citizens of an authoritarian regime are more likely to challenge the existing institutional arrangements if the gains provided by altered institutions are greater than the gains provided by the institutions at work. Nevertheless, they are more likely to accept a redistributive offer – that is, minor institutional alterations – if the subsequent economic consequences of regime change make them worse off. Following the understanding that redistribution denotes a metaphor for democratization allows taxation to be considered analytically both as the manifestation of institutional alteration and as the source of the costs of alterations. Though redistribution is examined using economic and financial arguments and concepts, it symbolizes the very notion of transfers of political rights and political power. The same accounts for taxation. Taxation and the connected economic losses account for any political and social costs, which may occur because of institutional changes. Consider, for example, that after revolution, former allies of citizen coalitions may fall apart and the respective groups try to influence redistributive policies in favor of their own clientele. The following formalization of this argument uses different tax rates to represent alternative institutional arrangements and the individual income losses created by taxation symbolize the losses that result from institutional changes.

3 Modeling transition

3.1 The focus of this chapter This chapter formalizes the argument that integration into global markets limits the options of domestic decision-making. The formalization is conducted in two steps: first, the economic structure is modeled by relying on a Cobb-Douglas production function that accounts for an economy’s integration into global markets. The production function serves to derive the individual utilities of the actors that are utilized to define the outcomes of the game theoretic model. The second step of the formalization, the transition game, reflects the dispute over wealth and political power between the elite and the disenfranchised citizens in a society. The game is characterized by two-sided incomplete information where the citizens are uncertain about the extent of the consequences of institutional changes and the elite has no information about the power of the citizenry. The game is solved in section 3.3.2 by applying the sequential equilibria solution concept established by Kreps & Wilson (1982). The formal proofs of the equilibria are reported in the Appendix. Applying such a two-stepped formalization strategy is motivated by the argument presented in the preceding chapter. If one argues that economic structures limit the options of actors, a proper formalization has to account for these structures and has to connect these structures’ impact on the individual utility. The formalization of the underlying economy serves this purpose and additionally prevents arbitrariness in the assignment of the outcomes of the transition game. This marks a distinction to the majority of game theoretic models in this research field which assign utilities to the actors without deriving theses outcome utilities in an analytically coherent way (see for instance Colomer 1991, Przeworski 1991, or

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3 Modeling transition

Sutter 2000). The examination of both the underlying economy and of the equilibria of the transition game yields the hypotheses that are discussed in section 3.4. 3.2 The economy In order to model the initial point of the argument that inequality constitutes the main source of any conflict in any given society, consider an economy consisting of two homogeneous groups: the citizenry (excluded from political power) and the political and economic elite, where the citizens outnumber the elite. The individuals in this society derive utility from income, i.e. yi . In order to model inequality, assume that the larger share of this economy’s total income is accrued by the elite. This assumption leads to two further assumptions: the income of a member of the elite is greater than the average income, while the income of a citizen is lower than the average income, i.e. ye > y¯ > yc , where the subindex e denotes the elite and the subindex c accounts for the citizens.42 Thus, the incentive of citizens to demand a larger share of total income increases with inequality, i.e. with the increasing share of total income being held by the elite. In more formal terms, consider the aggregated income of the economy as described by a Cobb-Douglas function: Y = AK α L1−α f (μ )

(3.1)

where A > 0 is the level of technology, K denotes durable physical inputs, i.e. capital, L represents human labor force, and the constant α with 0 < α < 1, that represents the output elasticities with regard to labor and capital. In a competitive economy, where inputs are paid their marginal products, these elasticities denote factor income shares, such that α denotes the share of total output apportioned to capital input, and 1 − α represents the share of output apportioned to labor. By definition, the exponents sum to one, (1 − α )+ α = 1, such that the Cobb-Douglas function exhibits constant returns to scale. Since the production function is firstorder homogeneous a scalar increase in all inputs yields the same scalar increase in output. In order to capture inequality, assume that the elite of the economy in question holds the total capital stock, while the citizens own only labor. In order 42 For

convenience the individual subscript i , where yei denotes the income of an individual who belongs to the elite, is ignored.

3.2 The economy

65

to account for the influences of international economic integration on this economy, which serve as an input to production (Frankel & Romer 1999; Gao 2004), the Cobb-Douglas function is expanded by the function f (μ ) with the properties f  (μ ) > 0 and f  (μ ) < 0. The parameter μ , where 0 < μ ≤ 1, represents the extent of the economy’s integration into world markets and f (μ ) indicates that – given a constant input of capital and labor – these external influences raise the national output, such that the production curve rises with a positive slope (because f  (μ ) > 0) and gets flatter as μ increases (since f  (μ ) < 0). This accounts for the argument that a fully integrated economy achieves its maximum productivity. Note also the implication of the production function (3.1) that external impacts are complementary to private inputs, such that an increase in μ raises the marginal product of labor and capital, i.e. the higher the level of economic integration, the higher the returns on a unit of capital and labor and the higher the income. Furthermore, note that the property of constant returns to scale and the linearity of the production function imply two important consequences for the economy: first, that neither group in this economy gains utility at the expense of the other, and second, that both groups benefit from integration into world markets. In this context, the assumed factor distribution – that the elite owns the durable physical inputs while the citizens own only labor – has an important implication. In order to realize total income – that is also to realize individual income – the two groups depend on each other. As elaborated in the last chapter, this has consequences for the role of the elite after a regime change. Since income denotes the primary source of utility, the exclusion of the elite from political and economic life after a transition would be harmful to the citizens’ well-being. With respect to that, the citizens are expected to include the elite of a former authoritarian regime in the institutional structure after the regime change in order to avoid economic losses. This means that even after a successful revolution, the elite of a regime is likely to sustain its economic position. Similarly, the citizens are of vital importance to the elite’s wealth, since the elite of an autocracy needs political and social stability to realize its income. For the purpose of deriving the individual utilities of the actors in the transition game the intensive form of the production function, yi = Akiα f (μ ), is of particular interest. Given a competitive economy the intensive form yields the individual returns on the respective inputs, i.e. it yields the expression for the income of an

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3 Modeling transition

individual belonging either to the elite or the citizenry: ye = r = α Akα −1 f  (μ ) > yc = w = (1 − α )Akα f  (μ )

(3.2)

where w denotes wage, i.e. the return on labor force input, and r the return on capital input. According to this intensive form of the Cobb-Douglas function, ultimately economic and political inequality rests on the basic assumption that the return on one unit of capital is higher than the return on one unit of labor. The literature on the economic consequences of inequality (e.g. Barro 1991; Alesina & Perotti 1996) states that political disturbances aroused by inequality are prevented by the redistribution of income. This redistribution has to be financed by taxation, which is in turn connected to losses in economic efficiency that result from the elimination of the mutual benefits of trading within an economy. These efficiency losses are referred to as deadweight losses of taxation (see Browning 1978 & 1987). Although the instrument of lump-sum taxation reduces these efficiency losses, this is of limited use in redistribution contexts. Since redistribution aims to reduce inequality, the tax system has to consider individual variation within the indicators of the ability to pay the taxes. Hence, in order to realize redistribution, the instrument of proportional income taxation has to be employed, meaning that relatively higher deadweight losses occur (Mirrlees 1971; Auerbach & Hines 2001b). For the sake of simplicity, assume that the proceeds are redistributed as a lump-sum to all the individuals in the society. Pre-tax income and the potential tax-financed lump-sum transfer define an individual’s utility in this economy:43 Ui (τx ) = yi (1 − τx ) + Tx − y¯κ

(3.3)

where yi denotes the individual pre-tax income given by equation (3.2); τ denotes some tax rate to finance the policy x, the parameter Tx represents transfers connected to the policy; and parameter κ denotes the costs of civil uprisings that occur if the citizens initiate a regime change. κ enters the utility function as the individual’s share of the welfare losses generated by revolution.44 This share is expressed in terms of losses in average income, y¯κ , which reduce the transfers T . 43 This

notation of the individual utility function and the following component properties have been taken chiefly from Acemoglu & Robinson (2006). Similar expressions with regard to this argument are given by Gradstein, Milanovic & Ying (2001), Boix (2005), and Przeworski (2005). 44 Even though the argument focuses primarily on medium- and long-term economic consequences,

3.2 The economy

67

Consider that transfers are constrained by the budget restriction   Tx =

n

∑ τx yi − μ (τx ) ny¯

= (τx − μ (τx )) y¯

(3.4)

i=1

with ny¯ representing total income as a normalization. This normalization ensures ¯ that the amount of the deadweight losses, μ (τx ), increases proportionally in ny. Substituting Tx into equation (3.3) yields Ui (τx ) = yi (1 − τx ) + y¯ (τx − μ (τx )) − y¯κ = yi (1 − τx ) + y¯ (τx − κ − μ (τx ))

(3.5)

The expression yi (1 − τx ) denotes the individual losses in income owing to taxation and y¯ (τx − κ − μ (τx )) represents the net lump-sum transfer. The function μ (τx ), where μ  (τx ) > 0 and μ  (τx ) > 0, formalizes the argument of economic efficiency losses owing to the deadweight losses of taxation. The key properties of this function define the deadweight losses as zero if τx = 0, but take into account the fact that losses increase rapidly as the tax rate rises. Since μ  (τx ) > 0, the curve of the costs of taxation rises with a positive slope and this slope rises steeply as the tax rate increases, because μ  (τx ) > 0. The properties μ  (τx = 0) = 0 and μ  (τx = 1) = 1 also indicate that the marginal costs of taxation are very small when the tax rate is low and that the losses mount increasingly quickly at higher levels of taxation. The whole formulation (3.5) emphasizes the fact that the economic losses due to the distortionary effects of taxation become extensive at high levels of taxation and that these costs reduce the benefits from net transfers (Gradthe basic mechanism also captures consequences aroused by varying levels of the genuine costs of regime change. These genuine costs are understood as all expenses that may arise if citizens violently overthrow the regime and undertake major institutional changes. Among others, these expenses cover the costs of production downtimes during the uprising, costs of organizing and equipping, or the costs arising from the destruction of the infrastructure. One may also refer to the citizens’ ability to solve collective action problems to get a sense of these genuine costs: powerful citizen movements may rely on an efficient structure of civil society, or on movements’ homogeneity concerning interests and political aims while weak movements may consist of heterogeneous subgroups and face problems of forming coalitions and so on. After a successful regime change, these expenses have to be equalized by taxation – in the same way that the costs of repression have to be financed. Given that the tax burden after regime change not only includes the redistribution measure but also the genuine cost of regime change, high costs of revolution additionally increase taxation, and thereby reduce the amount provided for redistribution.

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3 Modeling transition

stein, Milanovic & Ying 2001; Acemoglu & Robinson 2006). The individual utility function (3.5) is conditioned on the policy variable, expressed in terms of the tax rate that finances some policy x, τx . In order to define an individual’s preferences when it comes to policies and the connected tax rates, one has to examine the utility function and solve for individual i’s optimal economic decisions given the values of the policy variable. Individual i’s ideal tax rate is defined as the tax rate that maximizes Ui (τx ). This ideal tax rate is given by the derivation of Ui (τx ) with respect to the tax rate: Ui (τx ) = yi (1 − τx ) + y¯ (τx − κ − μ (τx ))   ∂ Ui (τx ) = −yi + y¯ 1 − μ  (τx ) = 0 ∂ τx

(3.6)

Since τx > 0 the derivative states that the individual costs of taxation have to equalize the benefits of redistribution. The marginal cost of taxation in this derivative ¯ − μ  (τx )). Re(3.6) is given by −yi and the marginal benefits are given by y(1  ¯ − μ (τx )) clearly shows that an increase arranging the derivative to −yi = −y(1 in the tax rate decreases the individual income, while higher taxes increase the net extra income. Moreover, equation (3.6) states that individuals with an aboveaverage income prefer no redistribution at all, while individuals with a belowaverage income are in favor of redistribution. In this regard, consider that for a person with the average income the derivative becomes −μ  (τx ) y¯ = 0. This statement holds true only if τx = 0, i.e. a person earning the average income prefers no taxation. Given the defined distribution of the income of the modeled economy, ¯ the derivative (3.6) yields that the elite prefers no redistribution (since ye > y), while the citizens have the incentive to realize redistribution in order to maxi¯ Additionally, the derivative (3.6) reveals that mize their utility (because yc < y). the desired amount of redistribution increases with inequality. Since inequality is reflected by the relation of the economy’s average income to a citizen’s pre-tax income, a high difference of y¯ − yc induces a higher optimal tax rate for citizens. Now let us consider how international integration affects this maximization problem in the derivative (3.6). In order to model the argument that integrated economies face higher deadweight losses of taxation than less connected economies, the notation of the deadweight losses of taxation consists of the parameter μ introduced as the level of integration into international markets in the Cobb-Douglas production function (3.1). Given a constant tax rate τx , modeling

3.3 The transition game

69

the losses of taxation as μ (τx ) implies that the losses rise as μ increases. Hence, the more an economy is integrated into international markets, the greater the efficiency losses in terms of deadweight losses of taxation. Accordingly, it follows ¯ − μ  (τx ). As a high level of integration from derivative (3.6) that: −yi = −y(1 reduces the net transfers – the right-hand side of the equation – it must be the case, for the equation to hold, that individual losses of taxation, denoted by the marginal cost of taxation −yi in the derivative (3.6), have to be lower, i.e. the tax rate has to be lower. Thus, the ideal tax rate decreases as the level of integration increases, such that the ideal tax rate of a citizen in an integrated economy is lower than the ideal tax rate of a citizen in a less integrated economy. Notice that the discussion of the ideal tax rate also helps to scrutinize the pref¯ it is erences of the elite. Although the elite favors no taxation at all, since ye > y, obvious that if the elite has to impose taxation, it will tend to minimize its losses. Given −yi = −y(1 ¯ − μ  (τx ) it follows that the elite of a less integrated regimes faces lower individual costs of taxation than the elite of an integrated economy. Consider also that this losses increase in μ  (τx ), i.e. the extend of the losses depends on the combination of the tax level and the level of integration. If one fixes the marginal costs, −yi , at a particular value (i.e. a cost value which may be affordable for both elite types), the derivative (3.6) shows that at low values of μ the tax rate becomes higher whereas at higher values of μ the tax rate has to be lower. This means that the elite of a less integrated regime is able to impose higher tax rates than the tax level which the elite of an integrated regime may afford. It follows that the range of tax rates minimizing the individual losses of the latter is narrower than the tax rates which may yield the less integrated regime’s elite second best outcome. 3.3 The transition game 3.3.1 The basic set up Figure 3.1 depicts the extensive form of the transition game. Two players, the citizenry C ∈ {P,W } and the elite E ∈ {H, L}, have a dispute over the distribution of wealth in a political system. Inequality concerning political, economic and social rights characterizes the political system in question in a way that the elite benefits from the institutional arrangements of the regime while these arrangements disadvantage the majority of the society – i.e. the citizens. The game

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3 Modeling transition

Figure 3.1: The transition game

OPP REV RED REV

REV RED REV r

1−r

s

t

P 1−t

P

1−s

r W

1 − r  s

φ

P θ

δ

SQ 1−v

λ

N2

1 − s W 1−t

t

H v

1 − v

W θ

1−λ

N2

1−θ P

1−v v SQ

1 − v SQ

φ

s

REV RED REV

v

t W

P 1−r

W L

1 − t

P r

δ

1−θ

L t

H

v

SQ

N1

OPP

1−s

r

1 − r

1 − t W  1 − s s

OPP REV RED REV

OPP

starts with the decision of the citizens to demand redistribution or to remain at the status quo. A demand for redistribution involves an explicit threat of initiating a revolution (or at least some action which heavily disturbs the economic and political stability of the regime) in the event that the elite does not offer redistribution in response to the demand. If the citizens do not demand redistribution, the game ends with the status quo outcome for both players. In response to a demand for redistribution, the elite must choose whether to offer redistribution of income or to repress the demand. Repressing the demand leads to the citizens’ decision of whether to initiate a revolution or to back down. If the elite offers redistribution, the citizenry has to choose between accepting the offer and pressing for revolution. The citizens hold private information about their ability to

3.3 The transition game

71

revolt, i.e. the genuine costs of revolution, while the elite holds information about the distortionary follow-up-costs of institutional alterations in terms of the deadweight losses of taxation. This information asymmetry primarily relies on the fact that the elite provides capital input into production, and that capital holders are expected to be more sensitive for economic disturbances induced by policy decisions and are expected to be more perceptive to responses of international markets than the citizenry. The citizens’ information advantage concerning the genuine cost of revolution relies on their knowledge about structural and socio-economic conditions within their group, such as the information about the homogeneity of interests, mobilization capacities or the degree of dissatisfaction with the political and economic situation. With probability λ and θ nature selects the type of the citizens and the type of the elite, respectively. P denotes the strong, i.e. powerful citizenry that is characterized by its capabilities of realizing regime changes at minimized costs, while W denotes the weak citizens who lack such capabilities. With probability θ nature decides whether the respective citizens encounter the type of elite who face the high follow-up-cost of institutional change, H, and with probability 1 − θ nature selects the low-follow-up-cost elite, L. The small characters denote the probabilities of observing the respective moves of the actors. The probability v denotes the probability of observing demands for redistribution by strong citizens, t refers to the probability of observing redistribution offers by the high-follow-up-cost elite, and r and s denote the probabilities of initiating radical institutional, either in response to repression, s, or by rejection of an offer, r. The prime above the respective probabilities at the bottom part of the game tree denotes the probabilities of moves by weak citizens, while t  refers to the probability that citizens receive some redistribution offer by the low-follow-upcost elite and t denotes an offer by the high-follow-up-cost elite. The parameter δ denotes the strong citizens’ updated belief of facing the high-follow-up-cost elite conditional on observing an offer, β denotes the updated probability of facing repression by the low-follow-up-cost elite45 and the parameter φ indicates the probability held by the high-follow-up-cost elite of facing a demand for redistribution by strong citizens. Again, the prime above the respective probabilities refers to the beliefs held by weak citizens and by the low-follow-up-cost elite. According to the redistribution metaphor, all possible outcomes of the distributional w and τ p deconflict result in a respective change of the taxation system. τrev rev note the post-revolutionary tax rates imposed by weak and strong citizens, where w > τ p owing to the strong citizens’ capability of realizing ‘cheap’ revolutions τrev rev p w refer to the and the weak citizens high genuine revolution costs. τrep and τrep 45 The

information set of β is omitted in Figure 3.1.

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taxation required to finance the costs of repression when the elite represses and citizens back down. As the repression of strong citizens is more ‘expensive’ than p w . Finally, τ , denotes the suppression of weak citizens, it must be that τrep > τrep e the redistribution tax rate which finances the redistribution offered by the elite. w > τ p > τ > τ p > τ w > 046 , and Given the assumptions of the tax rates, τrev rev rep e rep the follow-up-costs of institutional change the preference orders are derived with regard to the comparative static of the individual utility function given by (3.5), Ui (τx ) = yi (1 − τx ) + y¯ (τx − κ − μ (τx )). For the sake of simplicity it is assumed that strong citizens have no genuine revolution costs, i.e. κ = 0. For the same reason it is further assumed that an economy which is characterized by a low level of integration into international markets bears no externally induced losses of taxation; that is, μ (τx ) = 0. As the model primarily aims at showing how external values shape domestic decision-making, this simplification causes no loss of generalization. The game includes four possible outcomes: the status quo outcome, i.e. there are no institutional alterations and consequently no distortions of the economy at all; the settlement of the dispute by elite-induced redistribution financed by τe , which includes the continuity of the elite’s authoritarian leadership; the repression outcome; and finally the regime change, which is denoted by the notation c ) and indicates the outcome in which the citizens realize their optimal reUi (τrev distribution amount under democratic institutions. Although any redistribution of income and political power denotes some institutional alteration, only those alterations that establish majority-oriented decision-making institutions are regarded as democratization. This is symbolized by the citizens’ power to realize their optimal redistribution after regime change. Elite-induced redistributive measures denote alterations of existing institutions towards the political inclusion of the citizenry, but these shifts do not shape the authoritarian nature of the regime. It follows that the elite-induced redistribution outcome symbolizes minor institutional alterations towards democratic rule without crossing the threshold to democracy. These alterations are likely to lead to some other (sub) type of authoritarian rule. In contrast to this, the repression outcome simply refers to the reinforcement of authoritarian rule. As strong citizens possess the capability to realize radical institutional changes without inducing additional revolution costs, strong citizens prefer regime change to redistribution as long as they bargain with the low-followup-cost elite. Since in low-follow-up-cost situations taxation does not burden deadweight  p  losses 47and the full tax revenue can be distributed, both outcomes, Up τrev > U p (τe ) , are preferred to the redistribution outcome in a high-follow46 The 47 The

interesting task to include distinct redistribution tax rates is left to further research. preference orders are based on simulations of the utility function.

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up-cost economy. The utility of theredistribution in the dispute  p outcome   p ∗with the p ∗ > U p (τe ) > Up τrev θ −type elite is higher than Up τrev , i.e. Up τrev , where the asterisk indicates utilities in the high-follow-up-cost situation. In order to p comprehend this deduction consider that τrev > τe , i.e. the post-revolutionary tax rate set by strong citizens after regime change, is greater than the redistribution tax rate. The examination of the individual utility function (3.5) in the last chapter, Ui (τx ) = yi (1 − τx ) + y¯ (τx − κ − μ (τx )), revealed that the share of the tax revenue which is lost by the deadweight losses increases faster and faster with higher taxation such that the individual gains of a citizen decreases as taxation rises. Since p τrev > τe it has to be the case that the deadweight losses of the post-revolutionary taxrate are also higher than the losses induced by the redistribution taxes; that is, p > y¯μ (τe ). Thus, the individual utility of accepting a redistribution offer y¯μ τrev  p ∗ . is higher than the gains realized after the regime change, i.e. Up (τe )∗ > Up τrev  p   p ∗ . Putting this all together it follows that Up τrev > U p (τe ) > U p (τe )∗ > Up τrev As these outcomes generate a positive redistribution amount per capita, strong citizens prefer these outcomes to remaining at the status quo, in which the citizens derive utility only from their initial income. Both repression outcomes induce individual losses since the collected tax revenue is spent completely on equalizing the costs of repression. Given the induced by the deadweight  padditional   losses p ∗ losses it is the case that SQ > Up τrep > Up τrep . Assumption 3.1 summarizes the preference order of strong citizens: Assumption 3.1:  p   p ∗  p   p ∗ U p τrev > U p (τe ) > U p (τe )∗ > U p τrev > SQ > U p τrev > U p τrev

In contrast to the strong citizens, the weak prefer both redistribution outcomes to the revolution outcomes. As weak citizens have to compensate for the costs of revolution, the optimal tax rate under democratic conditions generates individual losses – even in the low-follow-up-cost situation. As these losses rise rapidly if the weak citizens revolt against the high-follow-up-cost elite, weak citizens prefer w > τw . the repression outcome in the high cost situation to revolution, because τrev rep Assumption 3.2 summarizes the preference order of the weak citizenry. Assumption 3.2:    w ∗ w ) > U τw w )∗ > Uw (τrev Uw (τe ) > Uw (τe )∗ > SQ > Uw (τrev w rep > Uw τrep

Given the discussion of the comparative static of the utility function (3.6), ∂ Ui (τx )  ∂ τx = −yi + y¯ (1 − μ (τx )) = 0, it is obvious that both elite types prefer the status quo outcome to the other four outcomes. As the initial income of a member of the elite is higher than the average income in the economy, ye > y, ¯ any taxa-

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tion generates income losses for a member of the elite. But the discussion of the optimal tax rate in the previous section also revealed that the 1 − θ –type elite is able to afford taxation costs to a certain extent.48 With regard to the assumption about the tax rates a member of the low-follow-up-cost elite prefers redistribution to repression since the losses caused by redistribution are lower than the losses caused by repression (even if the elite face strong citizens). Furthermore, due to the capabilities of strong citizens to realize a regime change without generating additional costs, which additionally disturb the taxation decision, a regime change initiated by strong citizens generates higher utility for a member of the elite than repressing strong citizens. Notice also that the tax revenue to finance the repression of strong citizens has to be higher than the revenue required repressing the weak citizens. The revolution by weak citizens represents the worst outcome for the elite in the low-follow-up-cost situation. Assumption 3.3 notes the respective preference order. Assumption 3.3:    p   p  w w ) > Ul τrev > Ul τrep > Ul (τrev SQ > Ul (τe ) > Ul τrep

Given the discussion of the ideal tax rate, the preference order of a member of the high-follow-up-cost elite differs in only one point: the utilities of the repression outcomes. As the range of tax rates which minimizes the costs of the θ –type elite is narrower than the range affordable for the low-follow-up-cost elite and since w , the θ –type prefers the repression of the weak citizenry to redistribution τe > τrep to the weak citizens. However, the high-follow-up-cost elite only prefers redistribution to repression if it encounters strong citizens and faces higher costs of p repression (τrep > τe ). In this case, the losses of redistribution – reduced by the lump-sum repayment – are lower than the losses induced by repression. Assumption 3.4 accounts for this difference in the preference order between high- and low-follow-up-cost elites. Assumption  w 3.4: ∗  p ∗  p ∗ w )∗ > Uh (τe )∗ > Uh τrep > Uh τrev > Uh (τrev SQ > Uh τrep

Given these assumptions about the preference orders of the respective actors and the game play, it can be shown that some strategies are always dominated. Therefore these dominated strategies are excluded in order to reduce the complexity of the game. Lemma 3.149 summarizes these strategies. It can be shown that 48 Additionally

one has to consider that the proceeds of redistributive taxation are redistributed lumpsum to all individuals in the economy, such that the elite’s losses of the redistribution outcome are reduced. 49 The formal proof of Lemma 3.1 is reported in the Appendix.

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75

powerful citizens’ demands always imply a credible threat of revolution since the powerful citizenry prefers the revolution outcome to repression in both cost situations, i.e. regardless of whether they encounter the high- or the low-followup-cost situation. As the remaining possible outcomes of the game – accepting redistribution by both elite types, and both revolution outcomes – are preferred to the SQ outcome, powerful citizens always demand redistribution. It can be proven that weak citizens always accept redistribution offers by the elite, since they prefer both redistribution outcomes to the respective revolution outcomes. Scrutinizing dominated strategies also reveals that the low-follow-up-cost elite always redistributes income after receiving a demand for redistribution, i.e. it never opts for repression at the respective decision node. Given this and according to the common-knowledge assumption weak citizens always back down if they face repression by the elite, because they infer that they are in a high-follow-up-cost situation. In contrast to the powerful citizenry weak citizens never initiate radical institutional alterations since they always accept redistribution offers and back down if they face repression, i.e. the transition game does not include any equilibrium solution in which weak citizens revolt. Lemma 3.1: i) Powerful citizens always demand redistribution regardless of the type of elite they encounter, v = 1, and the citizens’ demand implies a credible threat of revolution since s = 1, i.e. strong citizens always revolt if they face repression; ii) the transition game does not include any equilibrium solution in which weak citizens initiate radical institutional changes by revolution, i.e. weak citizens always accept some redistribution offer regardless of the elite type they encounter, r = 0. Furthermore, since the low-follow-up-cost elite always prefers to settle distributional conflicts by offering some redistribution (t  = 1), weak citizens infer that they are facing a high-follow-upcost elite when they observe repression as a response to their demand and, thus, backing down becomes their optimal choice, s = 0.

Beliefs off the equilibrium path denote a common problem in games of incomplete information. While on the equilibrium path beliefs represent the probabilities of reaching each node in equilibrium and are calculated using Bayes’ rule, Bayes’ rule is not applicable to beliefs off the equilibrium path. Off-the-path beliefs reflect a player’s plausible hypotheses about which defections from the equilibrium lead to those nodes and the modeler allows the player to use these hypotheses to compute his expected utility. In order to avoid discussions of which hypotheses are ‘plausible’ and which are not, Kreps & Wilson (1982) expatiate the construction of beliefs off the equilibrium path by requiring consistency between the hypotheses of defections and the beliefs on the equilibrium path. Kreps & Wilson

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(1982) state that an assessment – i.e. a pair of beliefs and strategies – is consistent if for each information set, the player reaching some information set can find a strategy profile that contains the specified beliefs at the information set. Given this definition, it follows that a player who unexpectedly finds himself at some information set is able to compute his beliefs if he can find an alternative strategy profile that reaches that information set with positive probability. This alternative strategy profile serves as a conjecture of the way the game had been played and allows the player to compute his beliefs using Bayes’ rule. As long as the original equilibrium assessment is consistent, there exists such an alternative hypothesis that contains the beliefs on some information set. In the transition game the players derive alternative hypotheses using the strategy profiles of the other types of players. Given the common-knowledge assumption, the weak citizenry knows the strategies of strong citizens, the low-follow-up-cost elite knows the strategies of the high-follow-up-cost type and so on. Applying the consistency criteria of Kreps & Wilson (1982) to the transition game yields that the limits of beliefs held by different types of actors coincide. The proof of Lemma 3.2 is reported in the Appendix. Lemma 3.2: In any sequential equilibrium of the transition game the beliefs held by the distinct types of actors coincide, i.e. φ = φ  , δ = δ  , β = β  .50

3.3.2 The sequential equilibria of the transition game The examination of the transition game reveals three major cases described by the strategy-belief combination {(v, r, s) (v , r s ) (t) (t  ) , (δ , φ , θ )}. The probability v denotes the probability of observing demands for redistribution by strong citizens, t refers to the probability of observing redistributive offers by the highfollow-up-cost elite, and r and s denote the probabilities of initiating radical institutional changes, either in response to repression, s, or by rejection of an offer, r. The prime above the respective probabilities denotes the probabilities of moves by weak citizens, while t’ refers to the probability that citizens receive some redistribution offer by the low-follow-up-cost elite and t denotes an offer by the high-follow-up-cost elite. The parameter δ denotes the strong citizens’ updated belief of facing the high-follow-up-cost elite conditional on observing an offer, β denotes the updated probability of facing repression by the high-follow-up-cost 50 Kreps

& Wilson (1982); Fudenberg & Tirole (1991). I owe this Lemma to Michel Bechtel.

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elite and the parameter φ indicates the probability of facing a demand for redistribution by strong citizens held by the high-follow-up-cost elite. The parameter θ indicates the initial belief of weak citizens that they will encounter a high-followup-cost situation. The game is solved by applying the sequential equilibrium solution concept established by Kreps & Wilson (1982). The first case characterizes a completely pooling sequential equilibrium and represents the complete redistribution outcome of the game. In this equilibrium both citizen types demand redistribution, both elite types offer redistribution to settle the conflict, and both citizen types accept the redistribution offer and abstain from initiating a radical regime change towards democratic rule, i.e. both citizen types accept minor institutional alterations. Given the fixation of the strategies of weak citizens and the low-follow-up-cost elite by Lemma 3.1, this equilibrium occurs if the weak citizens believe they will realize the redistribution outcome by demanding redistribution, θ < θ ∗ , and the high-follow-up-cost elite expects to encounter powerful citizens, who cannot be suppressed, φ > φ ∗ . In response, the strong citizenry believes to be in high-follow-up-cost situation such that accepting minor reforms is more beneficial than initiating a costly regime change, i.e. δ > δ ∗ , where  p  (y¯ − y p ) τe − τrev ∗  p  .  (3.7) δ = y¯ μ (τe ) − μ τrev The critical value δ ∗ indicates the ratio between the strong citizens’ income losses if they accept an offer (compared to the utility they would gain if they press for regime change) and the reductions of redistribution induced by the deadweight losses of taxation. In this equilibrium the weak citizens imitate the strong citizen’s behavior because they believe they will realize the redistribution outcome, i.e. they initially believe to be in a low-follow-up-cost situation, θ < θ ∗ . Proposition 3.1 summarizes this redistribution equilibrium.51 Proposition 3.1: In a sequential equilibrium of the transition game, the weak citizens demand redistribution if θ < θ ∗ , i.e. they believe they will realize the redistribution outcome, and the high-follow-up-cost elite never represses demands for redistribution by citizens if it thinks that it faces powerful citizens, i.e. φ > φ ∗ . In response to an offer by the elite strong citizens accept minor institutional alterations if they are certain that they 51 The

detailed technical proofs of the propositions are reported in the Appendix.

78

3 Modeling transition encounter the high-follow-up-cost elite, i.e. δ > δ ∗ . Since the low-follow-up-cost elite always offers some redistribution if they face demands and weak citizens always prefer minor institutional alterations to initiating radical institutional changes, the assessment {(1, 0, 1) (1, 0, 0) (1) (1) , (δ > δ ∗ , φ > φ ∗ , θ < θ ∗ )} characterizes a completely pooling sequential equilibrium where   p  y¯ − y p τe − τrev  p  , δ∗ =  y¯ μ (τe ) − μ τrev   w   w τe (yh − y) ¯ − y¯ μ τrep − μ (τe ) − yh τrep −τe (y¯ − yw ) ∗   p    φ = p , and θ ∗ = w −μ τ w −y¯μ (τe ) − y τrev (yh − y) ¯ − y¯ μ τrep τ rev h rep denote the threshold values of the beliefs held by the strong citizens, the high-followup-cost elite, and the weak citizens, respectively.

This pooling equilibrium collapses if the high-follow-up-cost elite faces demands for redistribution but believes that weak citizens carry these demands forward, i.e. φ < φ ∗ . While the low-cost elite-type will offer redistribution in response to any demand by the citizens (given by Lemma 3.1), the high-follow-up-cost elite will repress the citizenry as it believes it faces a non-credible threat. In response to repression, the strong citizenry will initiate a regime change, given by Lemma3.1, while the weak citizens will back down, i.e. s = 1 and s = 0. Proposition 3.2 summarizes this partial repression equilibrium. Proposition 3.2: Given the dominated strategies of the low-follow-up-cost elite and the weak citizens, the assessment {(1, 0, 1) (1, 0, 0) (0) (1) , (δ = 1, φ < φ ∗ , θ < θ ∗ )} characterizes a completely pooling sequential equilibrium where   w   w − μ (τe ) − yh τrep τe (yh − y) ¯ − y¯ μ τrep      φ< p and p w −μ τ w τrev (yh − y) ¯ − y¯ μ τrep rev − yh τrep

θ
θ∗ =

−τe (y¯ − yw )  . w − y¯μ τ w −τe (y¯ − yw ) − yw τrep rep

If the weak abstain from demanding, the high-follow-up-cost elite would offer λv λ redistribution since φ = 1 – given by φ = λ v+(1− λ )v = λ +0 = 1. This means that the separation behavior of the citizens leads to the elite’s inference that it faces powerful citizens. However, if the elite offers redistribution, choosing no demand by the weak citizens at their first decision node would not be an optimal decision, and would violate the conditions of sequential rationality. Hence, as long as the elite offers redistribution to avoid regime change weak citizens will imitate the behavior of powerful citizens and there is no status quo outcome in pure strategies. Nevertheless, it can be shown that the status quo outcome is part of an equilibrium if the elite is able to make weak citizens indifferent about the choice between demanding redistribution and remaining at the status quo. Proposition 3.5 states this mixed-strategy summarizes this potential status quo equilibrium. The indifference of the weak citizens at their first decision node occurs if the elite mixes its strategies, i.e. the elite sometimes offers redistribution and sometimes represses the demands carried forward by the citizenry. Applying a mixed strategy at this decision note requires the high-follow-up-cost elite to consider that it cannot prevent regime changes as long as powerful citizens believe that they will gain from initiating a revolution. Hence, in order to secure political power the high-follow-up-cost elite also has to make strong citizens indifferent about their choice between initiating a revolution and accepting the offer. To make both citizen types indifferent at their respective decision nodes, the high-follow-up-cost elite mixes its strategy; that is 0 < t < 1, such that for a particular value of the probability t, denoted t 0 , strong citizens are indifferent at their last decision node and weak citizens are indifferent at the first decision node. Proposition 3.5: There exists a mixed-strategy sequential equilibrium of the transition game which includes the status quo outcome if each player – whose strategies are not fixed by the Lemmas – puts a positive probability on every action on the respective decision nodes, i.e. v > 0, t > 0, and r > 0.

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81

This equilibrium is characterized by the assessment     (1, 0 < r < 1, 1) , v = v0 , 0, 0 t = t 0 (1) , (δ = δ ∗ , φ = φ ∗ , θ = θ ∗ ) , where the mixed strategies are given by  p   p   ¯ − y¯ μ (τe ) − μ τrev λ (1 − r) τrev − τe (yh − y) 0     , and v = w − y¯ μ τ w − μ (τ ) λ τe (yh − y) ¯ − yh τrep e rep   p  y¯ − y p τe − τrev θ −1       , t0 = p p  θ y¯ − y p + y¯ μ τrev − μ (τe ) τe − τrev and the corresponding critical beliefs are   p  y¯ − y p τe − τrev ∗  p  , δ =  y¯ μ (τe ) − μ τrev w τe (yh − y) ¯ − yh τrep     φ ∗ =  p p  r τe − τrev (yh − y) ¯ − y¯ μ τrev − μ (τe )    w  − μ (τe ) −y¯ μ τrep      , and p w − y¯ μ τ w − μ τ p +τrev (yh − y) ¯ − yh τrep rev rep

   p   p  − ( y ¯ − y τ ( y ¯ − y ) τ − τ ) + y¯ μ τrev − μ (τe ) e w e w rev ∗  p     p    . θ =

p w (y¯ + y ) y¯ (y¯ − yw ) μ (τe ) τrev − μ τrev τe + μ (τe ) − μ τrev τrep w

Figure 3.2 summarizes the major sequential equilibria of the transition game, where the x-axis represents strong citizens’ belief that they will encounter the high-follow-up-cost elite conditional on observing an offer, δ , and the y-axis denotes the high-follow-up-cost elite’s belief that they will face strong citizens after observing a demand redistribution, δ . As Lemma 3.1ii) determines the strategies of weak citizens and the low-follow-up-cost elite, the depiction in Figure 3.2 is restricted to the behavior of strong citizens and the high-follow-up-cost elite. Recall that Lemma 3.1ii) states that weak citizens always accept an offer, that the low-follow-up-cost elite never represses when it receives a demand redistribution and that weak citizens never revolt in response to repression.

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H’s belief of facing strong citizens, φ

Figure 3.2: The sequential equilibria of the transition game

φ∗

1

Case 3 Case 1

Case 4 Case 2

0

δ∗

1

P’s belief of facing high-cost situation, δ

3.3.3 The comparative static Scrutinizing the critical value of the powerful citizens’ decision of whether to initiate a regime change or accept the offer by the elite, δ ∗ , reveals some interesting features of the discussed equilibria. The type of comparative static utilized in this section, does not directly analyze how the change of an exogenous variable affects the equilibrium value of an endogenous variable. Instead, the comparative static is conducted to derive conditions under which particular types of behavior, such as the strong citizens’ revolution decision, characterize an equilibrium. With regard to Figure 3.2, the analysis aims to examine the influences of changes of exogenous variables on the parameter spaces of δ , i.e. the strong citizens’ belief about whether they face the high-follow-up-cost elite which yields the decision rules of whether to initiate radical regime change or to accept minor institutional alterations. In this sense, the comparative static identifies the certain circumstances under which regime changes occur and yields the conditions under which citizens prefer minor institutional alterations in terms of the redistribution. Two exogenous variables are of special interest: the amount of offered redistribution and the initial (pre-tax) income of the citizens. Intuitively, one may expect that the elite is able to prevent revolution by offering a high amount of redistribution. In contrast, the examination reveals that this is not

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the case. In order to see this one has to differentiate the value of δ ∗ with respect to τe :  p  (y¯ − y p ) τe − τrev ∗  p  δ =  y¯ μ (τe ) − μ τrev  p   p    (3.8) ∂ δ ∗ (y¯ − y p ) μ (τe ) − μ τrev + τrev − τe μ  (τe ) =  p 2  ∂ τe y¯ μ (τe ) − μ τrev Given the assumptions about the parameters, it can be shown that this derivative (3.8) is less than zero, i.e. the critical value of the updated belief δ decreases as τe increases. This means - with regard to Figure 3.2 - that the range in which powerful citizens accept minor institutional changes increases.  p   p    ∂ δ ∗ (y¯ − y p ) μ (τe ) − μ τrev + τrev − τe μ  (τe ) = τrev p p  ; that becomes positive. If τe > τrev it has to be the case that μ (τe ) > μ τrev is, the deadweight losses of τe exceed the losses of taxation induced by the postrevolutionary tax rate. Notice how this variation of τe effects the nominator in p  (3.8). While the formulation becomes positive the second part in μ ( τ ) − μ τ rev e    p the brackets, τrev − τe μ (τe ), becomes negative: ⎛ ⎞ negative positive positive

   

  ⎜ ⎟ p p (y¯ − y p ) ⎝μ (τe ) − μ (τrev ) + (τrev − τe ) μ  (τe )⎠ .  p  is higher than the difference of the tax rates Since the difference μ (τe ) − μ τrev multiplied by the proportion of taxation, which is lost due to implementation of τe , the whole nominator becomes positive.  p  Since the denominator consists of multiplied by the average income the square of the difference μ (τe ) − μ τrev the term is also positive, and thus the whole derivative. Thus δ ∗ increases with τe . Although this result seems counterintuitive, the interpretation is straightforward: notice that a redistribution offer by the elite that exceeds the redistribution demands of strong citizens, i.e. a tax rate τe which is higher than the optimal p , implies the elite’s ability to realize ‘cheap’ redistriburedistribution tax rate τrev tion; that is, the elite faces fewer deadweight losses of taxation. If the citizens observe a disproportional redistribution offer they consequently infer being in a

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85

low-follow-up-cost situation and thus they infer the possibility to realize a regime change at minimum costs. This means with regard to Figure 3.2 that the range in which the strong citizens believe that they should encounter a high-follow-upcost situation decreases. Thus, the value range in which citizens accept an offer decreases, or rather the value range of δ in which strong citizens initiate major institutional alterations increases. This result has some interesting implications for the behavior of the elite. Given (3.8) it is obvious that neither elite type is able to prevent political and economic disturbances by offering an outstandingly high amount of redistribution. Moreover, the reverse holds, i.e. low offers by both elite types should be observed. As the high-follow-up-cost elite prefers redistribution to revolution but is limited in its capacities to finance redistribution, it will offer a low amount. Although the low-follow-up-cost elite has the capacities to redistribute a higher amount, it will imitate the behavior of the θ –type elite since it is not able to prevent revolution by oversupplying redistribution. Turning to the second exogenous variable of interest,the citizens pre-tax income, the discussion of the optimal tax rate of a citizen in the first section of this chapter shows that the optimal redistribution tax rate decreases as the individual’s pre-tax income increases. Given this, it intuitively should be the case that the parameter space of δ , in which the citizens believe to encounter a high-cost situation, increases with the citizens pre-tax income. This intuitive result can be proven by differentiating δ ∗ given by (3.7) with respect to y p :   p τrev − τe ∂δ∗  p  < 0 (3.9) =  ∂ yp y¯ μ (τe ) − μ τrev In order to show that (3.9) is lower than zero, consider the nominator first. Given the assumptions about the tax rates one knows that the post-revolution tax rate set by the strong citizens is higher than the offered redistribution taxation. So, the formulation in the nominator is positive. Turning to the denominator and accounting for the properties of the function μ (·) it becomes clear, that μ (τe ) −  p  is negative, and hence the whole denominator. μ τrev positive

  p − τe ) (τrev p y¯ (μ (τe ) − μ (τrev ))  

negative

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3 Modeling transition

Thus, (3.9) states that the critical value of encountering a high-cost situation, δ ∗ decreases with increasing individual income, i.e. with regard to Figure 3.2 the value range of δ in which strong citizens believe that they should face the highfollow-up-cost elite increases and, thus, strong citizens are more likely to accept an offer. Proposition 3.4 summarizes these findings. Proposition 3.6: p As long as τe < τrev , i.e. the redistribution offer by the elite is less than the postrevolutionary tax rate, δ ∗ decreases as τe increases. That is, the parameter space of the strong citizens’ belief of facing a high-follow-up-cost elite increases. But if the ofp fer exceeds the optimal redistribution tax rate realized after regime change, τe > τrev , the threshold belief of facing the high-follow-up-cost elite increases and thus, the range of δ in which strong citizens prefer revolution to accepting an offer. Furthermore, δ ∗ is decreasing as the individual income of a strong citizen, yc increases, such that the value range of δ , in which citizens believe to encounter a high-cost situation increases. Hence, high initial income raises the likelihood that powerful citizens will accept minor alterations of institutional designs.

3.4 Implications This section summarizes the findings of the transition game and the underlying economy and derives the hypotheses examined empirically in the next chapter. The comparative static of the individual utility function (3.6), ∂∂τx = −yi + y¯ (1 − μ  (τx )) = 0, in section 3.2 reveals that the probability of observing demands for redistribution increases with increasing inequality. For the purpose of recapitulation, consider that for an individual earning the average income the derivative becomes −μ  (τx ) y¯ = 0. This statement holds true only if τx = 0. This means that an individual earning the average income does not prefer taxation. Therefore, individuals with income yi < y¯ favor taxes in order to benefit from redistribution while persons with an above average or average income, yi ≥ y¯ prefer no income redistribution at all. Given the defined distribution of income in the modeled economy this statement yields that the elite prefers no redistribution ¯ while the citizens have incentives to realize redistribution in order (since ye > y) ¯ Notice that the degree of inequality is to maximize their utility, because yc < y. captured by the ratio between the average income in the economy and a citizen’s pre-tax income. The higher the difference, the more unequal is the distribution of income. Hence, the higher the inequality the more likely are demands for re-

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distribution by citizens. This prediction of the model corresponds to the common understanding of the origin of regime changes, namely that inequality fuels social discontent and conflict which are likely to yield the alteration of existing regimes (see for instance Dahl 1972, Boix & Stokes 2003, and Acemoglu & Robinson 2006). The examination of the underlying economy in section 3.2 shows that integration into world markets raises the marginal product of labor and capital, i.e. the higher the level of integration, the higher the returns on an unit of capital and labor and that is the higher the individual income.52 The comparative static of the utility function in section 3.1 clearly shows that high income levels are likely to influence the citizens assessment about alternative institutional designs. Moreover, the comparative static reveals that if higher individual incomes are connected to the economies cooperation with international markets, citizens tend to abstain from demanding institutional alterations. A second important finding is also derived by the examination of the comparative static of the utility function. The analysis of the ideal tax rate (3.6) of individuals in the modeled economy clearly states that the elite of an integrated economy is more reluctant to reform than the elite of a less integrated regime. Whereas the elite of a less integrated regime is more likely to meet demands by its citizenry in order to prevent its privileged position, the elite of an integrated economy tends to be more repressive (see also the assumptions about the preference order which rely on the comparative static of the utility function). Combining both major findings of the model yields the expectation that the integration negatively influences the prospects of democratization, but is likely to stabilize authoritarian rule.53 But if highly integrated authoritarian economies encounter demands by their disenfranchised citizenry, they tend to be more repressive than less integrated economies. Hypothesis 3.1: Higher levels of integration into world markets are likely to stabilize authoritarian rule. But if alterations are observed, integration raises the chance of observing developments towards stricter authoritarianism. 52 Notice

that this does not necessarily affect the level of inequality. The properties of the production function (3.1), Y = AK α L1−α f (μ ), ensure that both groups benefit from integration, such that there is no reason to expect that the level of inequality in the economy of question will change. 53 This deduction corroborates Haggard & Kaufman’s (1995) finding that economic performance has a negative impact on transitions from authoritarian rule. This implication of the transition game and its underlying economy also accounts for Goldstone’s (2006) findings that the typical regime, which experiences meaningful institutional alterations, is poor autocracy.

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This implication of the model strongly challenges the modernization related claim that integration into world markets helps to build democracy and also the common notion in democratization research that integration into the world economy constrains the elite’s use of repressive measures, such that highly integrated regimes or regimes that aspire to blend in international cooperation are less likely to rely on repressive policies (Yavuz 2002; Harff 2003). The examination of the transition game and the underlying economy clearly shows the contrary and argues further that disintegration widens the scope for at least minor institutional changes, since less integrated regimes are more redistributive than integrated regimes. In the transition game revolution occurs only if citizens are able to generate a credible threat of revolution. But this does not mean that a credible revolution threat necessarily yields regime changes. It was shown that the level of integration into global markets influences the citizenry similar to the way it influences the elite. High levels of integration make powerful citizens abstain from initiating revolution and encourage them to accept redistributive offers, as redistribution makes the citizenry better off. In order to see this, remember the interpretation of the critical value δ ∗ , which denotes the ratio between the gains of redistribution and the deadweight losses of taxation. If this value decreases, the space in which powerful citizens accept redistribution increases (see Figure 3.2 and the threshold condition of accepting redistributive offers). Proposition 3.6 states that the citizens’ critical value of believing that they face a high-cost situation is additionally influenced by the amount of redistribution which is offered by the elite. The comparative static leading to this proposition clearly shows that – as long as the offered redistribution amount is sufficiently smaller than the redistribution realized after regime change – citizens are more likely to infer that they are in a high-follow-up-cost situation. Thus, if powerful citizens believe that economic performance is vulnerable to distortions of economic and political stability, they will prefer minor institutional alterations even if inequality is substantially high (Proposition 3.1). Moreover, and with regard to the finding that integration raises the income of citizens, the comparative static leading to Proposition 3.6 reveals that higher income levels make citizens abstain from initiating exhaustive institutional changes in order to avoid substantial affluence losses connected to regime changes of highly integrated economies. It follows that, in the absence of external shocks, highly integrated regimes are much more successful in generating political stability through redistribution than closed economies. Hypothesis 3.2 accounts for this inference.

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Hypothesis 3.2: Even if some threat of revolution is credible, democratic developments of highly integrated authoritarian regimes are only expected to occur in terms of minor institutional alterations.

Both hypotheses challenge various claims that integration into world markets promotes democratization through diverse channels. This study accounts for such alterantive explanations and includes two alternative hypotheses. The third hypothesis is derived by relying on the modernization related claim, that integration into world markets promotes democratization. Hypothesis 3.3: The integration of some authoritarian regime into international cooperation positively influences the regime’s economic performance and wealth, and thus, the less likely is the regime to persist with authoritarian rule.

Besides the prominent modernization related claim, one other external democratization channel is described by the conditionality approach which relies heavily on the observed successful transitions of the communist regimes of Central and Eastern Europe in the 1990s. These successful democratizations are (at least partly) regarded as the result of the sustainable conditionality policy of the European Union (Whitehead 1996; Zilonka & Prawda 2001; Schimmelfennig, Engert & Knobel 2003; Dimitrova & Pridham 2004). Mansfield & Pevehouse (2006) and Pevehouse (2002) support this basic assumption by demonstrating that a regime’s membership in international organizations is positively related to its political liberalization and its institutional democratization. But they also state that this finding only accounts for regimes that are already on their transition path, i.e. regimes in which a regime change has already been realized and in which the elite is engaged in consolidating democracy. Only in such contexts do external influences play an important role in directing and guiding the transitory process (e.g. in terms of conditionality policies of international organizations). However, there is a much weaker external influence on domestic policies in authoritarian regimes or regimes that do not commit themselves to democratic development. Schimmelfennig, Engert & Knobel (2003) demonstrate that the success of the European Union’s conditionality policies depends heavily on domestic dispositions to democracy and the domestic evaluation of the benefits of complying with external conditions. Thus, only if societies commit themselves to democracy, external actors are able influence the direction of institutional development. The model

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developed here and Hypothesis 3.2 account for this view, and further emphasize that the commitment to democracy depends on the distribution of the actors’ expectations regarding whether democracy is more beneficial as modified but still genuinely authoritarian institutions.54 Aside from the conditionality literature, Hypothesis 3.1 and Hypothesis 3.2 also challenge the perspective of the world system theory and the diffusion approach. Both emphasize the idea that integration into international cooperation yields democratization. Bollen (1983), for instance, provides some evidence that supports the argument that different positions in the world system are associated with different levels of democracy. Using Snyder’s & Kick’s (1979) classification to measure a country’s position in the world system,55 Bollen’s analysis reveals that peripheral countries are less democratic than countries located at the core. The study of Doorenspleet (2004) focuses on the so-called fourth wave of democratization between 1989 and 1994 and she reports that peripheral states have a higher probability of moving towards democracy than states holding a core position. Since her finding contradicts the theoretical expectation of world system theory she argues that it “may be that peripheral countries have a lower level of economic development and growth, which have in their turn a positive impact on the probability that a country makes a transition to democracy”(Doorenspleet 2004: 328). The proposed model in this book accounts for her finding and emphasizes that both relatively high levels of development and high levels of integration into world markets negatively influence developments towards democratic rule. Thus, contrary to the expectations of world system theorists and authors focusing on democracy promotion by integration, the model clearly yields the expectation 54 Despite

the vast amount of literature which supports the idea of democracy promotion and democratic conditionality, the number of cases in which external actors meaningfully directed transition processes is rather small. The prominent and exhaustively analyzed developments in Central and Eastern Europe in the 1990s and Southern Europe in late 1970s denote only about 10% of all observed transition processes since 1950. Both hypotheses do not challenge the findings of the conditionality literature at all, but offer some refinement. Since the decline of the former Soviet Union these prominent cases represent – in terms of the argument presented here – disintegrated regimes, such that their development is easily understood in terms of radical institutional alterations in lowcost situations. However, this does not mean to underestimate the role of the European Union in the consolidation processes in Central and Eastern Europe. 55 Using a block model of the world system Snyder & Kick (1979) provide evidence for the central claim that a country’s position in the world system influences its level of democracy. To structure the world system they examine trade flows, treaty memberships, military interventions, and diplomatic relations as four types of international networks. They summarize these networks and find ten blocks which are collapsed into the categories core, semi-periphery, and periphery.

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that less developed and less integrated economies are more likely to democratize than prosperous and highly integrated economies. In order to account for these effects of conditionality and diffusion the following alternative hypothesis is also included in the analysis. Hypothesis 3.4: The higher an authoritarian regime’s integration into international and political cooperation, the less likely is the persistence of authoritarian institutional arrangements if the regime’s cooperation partners are democracies.

4 Research design

4.1 The Structure of this chapter This chapter connects theory to data and develops the design that yields the hypotheses test. It starts with the discussion of how to conceptualize institutional developments and how to operationalize the dependent variable institutional alteration in terms of the transition game. Part 4.3 introduces the operationalization of the key independent variables of the hypotheses derived in Chapter 3, discusses data sources and data quality, connects the utilized indicators to recent research, and summarizes the theoretical expectations. Section 4.4 introduces the applied estimation technique, an ordered logistic regression model, and formally derives the estimation equations with regard to the dependent variable institutional alteration. 4.2 The operationalization of institutional alterations Any comparative research on the evolution and change of authority patterns faces the academic debate over whether political systems should be classified using a continuous measure of regime type or a dichotomous concept. Some scholars such as Dahl (1971), Bollen & Jackmann (1989), Coppegde & Reinicke (1990) and Diamond (1999) favor graded concepts of democracy arguing that the threshold distinguishing democratic regimes from non-democracies is inherently blurred. Since the existence of some efficient democracy depends on the complex interaction of basic procedural and institutional elements – such as the eight institutional guarantees defined by Dahl (1971) – dichotomous regime classifications fall short of identifying important variations within regime types. Contrary to this

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view, Sartori (1987:184) maintains that political systems are “bounded wholes” which are characterized by essential elements that are either present or absent, and advocates the use of dichotomous concepts. Elsewhere Sartori (1970) argues that classification marks the origin of any conceptualization and that dichotomies and cut points are therefore essential to theoretical reasoning about concepts. He (Sartori 1970: 1039)claims that the more social scientists use quantitative methods and the more social scientist require unidimensional scales and continua,“ dichotomous categorizations serve precisely the purpose of establishing the ends, and thereby the uni-dimensionality, of each continuum.” A vast number of macro-quantitative democratization studies follows Sartori’s advise and employs a dichotomous regime classification, such as the research conducted by Linz (1975), Huntington (1991), or Geddes (1999). And indeed, defining transition as the “interval between one political regime and another”(O’Donnell & Schmitter 1986: 6) seems to call for such a dichotomous measure which provides thresholds in order to enable researchers to classify authority structures and identify institutional alterations towards democracy or authoritarianism (Collier & Adcock 1999). Przeworski and his co-authors adopt a dichotomous regime concept56 and furthermore emphasize that gradual concepts disregard the fact that political systems “cannot be half-democratic” (Alvarez et al. 1996: 21) – a highly disputable statement since the transition literature discloses a large number of transitions from authoritarianism that do not yield democracy in terms of a minimalist procedural definition, but rather establish ‘democracies with adjectives’ (Collier & Levitsky 1997; Zakaria 1997).57 Regarding the debate over whether to 56 Similar

to Dahl’s (1971) emphasis on contestation open to participation, Przeworski et al. (2000) classify a political system as democratic if (1) the chief executive as well as (2) the legislature is elected; (3) the political systems has more than one political party; and (4) an incumbent government was replaced by free and fair elections. A political system, which does not meet all four conditions, is classified as authoritarian. 57 O’Donnell & Schmitter (1986), for instance, identify political systems which meet some minimum criteria of democracy but restrict civil liberties and label these regimes as ‘democraduras’. Analyzing presidential systems of Latin America O’Donnell (1994) finds ‘delegative democracies’ in which the separation of powers is limited for the benefit of strong presidents. Karl (1995) identifies transitions of political system in Central America which yield ‘hybrid regimes’ in which especially the dominance of the military and restrictions on civil liberties – which are connected to human rights abuses – restrain the efficiency of democratic institutions. Diamond (2002) highlights the existence of competitive authoritarian regimes which indeed rely on the democratic procedure of elections but lack the defining attributes of full contestation or the effective power of government (‘electoral democracies’).

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employ continuous or dichotomous regime measures, the interesting fact is that these kinds of regimes are conceptually not classifiable as transitional institutional designs in the context of long-lasting regime changes. Some of these regimes located in an intermediate state between authoritarianism and democracy exhibit an extraordinary institutional stability and it is argued that these regimes may denote a specific type on the authoritarianism/democracy continuum (O’Donnell 1996). Hence, a gradual approach to measure democratic quality of political systems may be more reasonable. Epstein et al. (2006) rely on such findings and employ – although not a gradual measure – a three-way regime classification scheme, which includes an intermediate category, ‘partial democracies’, which possess some, but not all, attributes that define full democracies. Their re-examination of the modernization-democracy nexus is of particular interest since they conclude that regimes located in the intermediate category of partial democracies are “more volatile than either straight autocracies or democracies” and their institutional development seems to be “largely unpredictable” (Epstein et al. 2006: 566). The authors show that modernization indicators yield some meaningful information about transition from pure authoritarianism into the intermediate category, but the authors cannot identify factors that influence institutional developments of partial democracies either to full democracy or reverse transitions to authoritarianism. However, Collier & Adcock (1999) conclude their review of the conceptual debate by emphasizing that the decision of whether to use a dichotomous or a continuous measure of democracy finally depends on the purpose and the context of the research. In this sense, applying a dichotomous concept of institutional alterations, which only accounts for alterations which yield some regime change but ignores institutional alterations within a given regime type, disregards major predictions of the game theoretical model developed in the last chapter. The derivation of Hypothesis 3.2 stresses the fact that citizens of highly integrated economies favor minor institutional alterations to major changes in order to avoid substantial income losses. It follows that a research design that purely focuses on alterations that yield regime changes will ignore the key aspect of the modeled dynamics within the conflict between citizens and the elite of a given regime; i.e. citizens are successful in pushing their preferences against the elite by abstaining from radical changes in favor of minor but more beneficial alterations.58 Such mi58 Note

that throughout this book the expression institutional alteration is used as a generic term and characterizes all institutional developments regardless of whether the alterations yield regimes

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nor institutional alterations in favor of the citizens’ preferences may also account for Geddes (1999) observation that the majority of the regime alterations since 1974 have not yielded democracy but rather into other patterns of authoritarianism. Scrutinizing minor alterations of regimes may also account for the existence and the stability of partial regimes, i.e. political systems that include democratic institutions and procedures, but are dominated by an authoritarian mode of government. Empirically, a closer look at the cases examined in this study (see Table A1 in the Appendix 1) reveals why a dichotomous operationalization of transition to or away from democratic rule bears a severe problem. In some cases small alterations may yield regime changes whereas in other cases the same pointchange of the Polity IV measure does not yield to a regime crossing the threshold values. In 1955, Panama experienced an institutional alteration of 5 points on the polity score which resulted in a transition from autocracy to partial regime, while Brazil’s 5 point alteration in 1974 had no consequences for the regime type. Venezuela experienced a transition from partial regime to democracy by a small 3-point increase in 1968, and even Moldova by a 2-point increase in 1993, while the institutional alterations of Mexico in 1977 (3 points) and Slovakia (2 points) in 1998 did not yield regime changes. Naturally, the question of whether institutional alteration results in shifts of the regime types purely depends on the initial status quo – such that regimes that are located near to the threshold value only need small alterations to cross the distinction line. Nevertheless, if one assumes that the quantification of institutional patterns reflects reliable and valid measures of institutional characteristics, alterations of the same value should be expected to be comparable across polities. If institutional shifts of the same value are comparable, the distinction between alterations that yield regime changes and alterations that do not is somewhat odd. Instead of that, one would assume that positive or negative alterations of institutional set-ups of a given polity denote some movement towards or away from democracy defined by the used democracy measure. Thus, restricting the focus to institutional changes limits the sample of cases such that inferences about the origins of transitions to or away from democracy become highly questionable. At the least, this observation raises the question of whether focusing on institutional alterations instead of on pure regime changes sheds more light on the puzzle of the directions of transitions. Accounting for the theoretical changes while institutional change is strictly reserved for institutional developments that result in a proper regime change.

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groundwork and this observation, the dependent variable institutional alteration utilized in this work reflects the extent of institutional alterations, regardless of whether the alterations yield a regime change or not. To operationalize the magnitude of institutional alterations, variables provided by the Polity IV data set are used. Conceptually, the Polity measure was designed to reflect a minimalist concept of democracy that stresses procedural and institutional elements of political system highlighted by Schumpeter (1950), Sartori (1962) or Dahl (1971). The measure focuses on three regime characteristics, which structure the political interaction between rulers and people in nation states: the competitiveness of political participation, the openness and competitiveness of executive recruitment, and the level of constraints on the chief executive (Jaggers & Gurr 1995: 471). The operational indicator of Polity’s institutionalized democracy measure is derived from a weighted annual coding of these three dimensions and result in an additive eleven-point scale (0–10), where 10 denotes pure democracies. As political systems reveal mixed qualities of both democratic and authoritarian regime types such that “there is no ‘necessary condition’ for characterizing a political system as autocracy or democracy” (Jaggers & Gurr 1995:472), the authors of the project argue that each dimension should be measured independently.59 The same coding scheme, but with different weights regarding the parameter values of the three regime types, yields an institutionalized autocracy scale which also results in an additive eleven-point scale. Subtracting the value of the autocracy scale from the democracy scale provides a single regime score – the polity score – which ranges from +10 (full democracy) to −10 (full autocracy). The construction of the dependent variable institutional alteration relies on a somewhat gradual measure of institutional development that is provided by Polity IV: the change variable. The change variable covers the alterations of the polity score from one year to the following year. Since the Polity Project explicitly emphasizes the measurement of the institutional characteristics of a given political system (Jaggers & Gurr 1995), alterations of the polity score reflect institutional variation within or beyond some regime type. The change variable ranges from a negative extreme of −20 polity score points, i.e. exhaustive alterations towards authoritarianism, to a positive extreme of +20 points that indicate exhaustive institutional alterations towards full democracy. In the transition game, varying degrees of institutional alterations 59 For

a more detailed discussion of the construction of the Polity IV data see Marshall & Gurr (2001). For the conceptual foundation of the polity measure, see Eckstein & Gurr (1975).

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denote distinct outcomes of the distributional dispute between rulers and people. Hence, any influential positive alteration of the polity score is treated as an institutional alteration, which is beneficial for the citizens’ opportunities to realize their preferences, i.e. any positive institutional alteration reflects an improvement in terms of inclusiveness and participation. Conversely, any negative alteration denotes institutional developments that restrict the citizens’ preference formulation and realization, i.e. repression. The change variable is used to construct a categorical dependent variable, which captures the extent of all institutional alterations within a political system, disregarding whether the alterations yield regime changes in terms of exceeding defined thresholds. Increases of the polity score of 5 points or greater are coded as major positive institutional alteration. Decreases of 5 points or greater are coded as major negative institutional alteration. Alterations of the institutional design of some political system that range from 1 to 5 polity score points denote minor positive institutional alteration. Accordingly, institutional alterations ranging from −1 to −5 are coded as minor negative institutional alterations. The cut point of a five-point increase/decrease is taken from the Polity IV coding scheme that leads to the construction of the polity variable regtrans (Marshall & Gurr 2001).60 In contrast to the polity coding which ignores small alterations of one or two points, the operationalization employed in this study regards small changes as minor alterations, which are important with regard to the theoretical findings outlined above (see Proposition 3.6). It was shown there that even small alterations towards the preferences of citizens may settle (distributional) conflicts between the elite of autocracies and disenfranchised citizens. Hence, disregarding such small alterations ignores the dynamics of conflict settlement and, thus, the ability of autocratic rulers to generate regime stability by meeting the demands of the citizens.61 Chapter 5 examines how the decision to operationalize institutional alterations applying a dichotomous regime change measure influences the distribution of cases between 1950 and 2000 and how this 60 Alterations

below the 5-point threshold in the polity score are regarded as alteration sufficient to generate greater – or fewer – opportunities for regime opponents or disenfranchised citizens to participate and, thus, to influence decision-making. Alterations greater (respectively less) than a 6-point increase or decrease denote some consequential and lasting institutional alterations which are likely to yield extensive changes concerning inclusiveness and participation. 61 In order to control the influence on the results from the use of the coding scheme outlines above and from a dependent variable that includes six categories – two separate categories marking the small changes – robustness checks were conducted. The outcome remained unchanged.

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is likely to distort inferences about the factors that influence institutional shifts. The analytic groundwork also suggests ranking the outcomes of the categorical variable institutional alteration. Accounting for the citizens’ perspective, major negative alterations are regarded as the worst outcome as such alterations further restrict some institutional designs’ inclusiveness and participatory opportunities. Accordingly, major positive alteration denotes the highest outcome in terms of developments towards inclusiveness and participation, where no alteration denotes an outcome, which is better than repression but not as favorable as any positive alterations. Given the construction of the variable it also follows that the intervals between the adjacent categories are not equal. The distance between the respective major and minor alterations cannot be assumed to be the same as the distance between no alteration and the respective minor alterations. Thus, the dependent variable is constructed as a non-interval ordinal measure of institutional alteration. Although the Polity IV data set is widely used in comparative research, two methodological concerns should be briefly discussed. Quantitative measures of democracy are frequently included in studies drawing on statistical methods of causal inference which result in important contributions in various fields of political science. Regarding this development, Munck & Verkulien (2002:6) critically note that to “a large extent, problems of causal inference have overshadowed the equally important problems of conceptualization and measurement”. In their valuable review of existing democracy measures62 the authors focus on three major challenges: conceptualization, measurement, and aggregation. According to Munck & Verkulien (2002) a ‘good’ measure includes multiple indicators of appropriate attributes that constitute democracies, carefully considers appropriate levels of measurement for the indicators, and aggregates the collected information properly, i.e. without loss of information. Concerning the Polity Index the authors identify two important shortcomings. With regard to the conceptual challenge, they argue that Polity falls prey to the redundancy problem since the measure “identifies a pair of attributes (competitiveness and regulation of participation) that grasp only one aspect of democracy”, defined in terms of Dahl’s polyarchy concept, and omits the participation dimension. Secondly, Munck & Verkulien (2002) argue that Polity relies on an inappropriate aggregation proce62 The

review includes the data sets on democracy of Alvarez et al. (1996), Arat (1991), Bollen (1980, 1991 & 1993), Coppegde & Reinicke (1990), the Freedom House project, Gasiorowsky (1996), Hadenius (1992) Polity IV, and the Vanhanen Index (Vanhanen 2000).

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dure since the applied weighting scheme provides no theoretical justification, such that the resulting polity score is questionable. Concerning the measurement validity, Munck & Verkulien explicitly highlight Polity’s effort to provide clear and detailed coding rules, the project’s test of intercoder reliability, and the comprehensive empirical scope. In their reply to Munck & Verkulien, Marshall et al. (2002) reject the claim of conceptual misspecification. They stress the point that Munck & Verkulien disregard the functions of the applied indicators competitiveness of political participation and regulation of participation. Competitiveness of political participation is operationalized to reflect the extent to which alternative policy preferences can be pursued in the political arena. The indicator regulation of participation yields additional information of whether restrictions are employed regarding how alternative preferences are expressed. The Polity authors argue that the data finally reflects Dahl’s notion of participation since the measure “assesses the quality of political competition by focusing on the tenor of interactions and relations among contending political groups”(Marshall et al. 2002: 42). Regarding the missing theoretical foundation of the weighting scheme and the resulting arbitrariness in the construction of the polity score –a critique which is also put forward by Gleditsch & Ward (1997) and recently by Treier & Jackman (2008) – the reply from Marshall et al. is not compelling. The authors refer to the performance consistency of their measure and, secondly, stress the point that the respective democracy and autocracy scores are simply a summation of qualities of authority attributes which do not overlap between the distinct scales. Hence, from their point of view a combination of both scales is not problematic. Finally, they refer to the fact that researchers are free to select and reweigh the components of the additive democracy and autocracy scores, since all components and detailed coding rules are publicly available.63 Munck & Verkulien’s (2002) evaluation reveals that all reviewed indices exhibit some weaknesses and that there is no single index which offers a satisfactory response to the challenges of conceptual specification, measurement validity and appropriate aggregation rules. However, the authors also show that the Polity Index performs much better than other indices. Given that, and following a practical approach, the comprehensive em63 Indeed,

some authors follow this advice and operationalize democracy by drawing on components provided by the polity data. By arguing that constraints on the executive do not refer to the concept of competition and inclusiveness Ulfelder & Lustik (2005), for instance, omit the third characteristic – the level of constraints of the chief executive – and operationalize democracy using the polity component variables recruitment of the chief executive and competitiveness of political participation.

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pirical scope and the detailed and comprehensible coding rules support the use of the polity data. One should also consider that the construction of the dependent variable institutional alterations extenuates some of the critical points outlined above. The variable only accounts for observed alterations of some institutional characteristics, without questioning whether the measure adequately marks some political system as authoritarian or as democratic.64

4.3 Independent variables Hypothesis 3.1 and Hypothesis 3.2 state that economic integration into the world market hinders the prospects of meaningful institutional alterations towards democracy. Conceptually, economic integration denotes the extent of some regime’s economic interactions with and linkages to other economies or actors of the international market. Two distinct variables serve as approximation of economic integration: trade dependence and the ratio of the net foreign direct investment inflow to gross capital formation. Following the common wisdom in the literature, trade dependence is measured through the sum of imports and exports divided by the gross domestic product of any given economy (see for instance Rigobon & Rodrik 2005 or Eichengreen & Leblang 2006). The necessary trade data to calculate the trade-GDP ratio is taken from the Expanded Trade Data Set provided by Gleditsch (2002). Similar to changes of investment stocks, gross capital formation65 measures an economy’s gross domestic investment. Since in64 Additionally,

even if one raises objections that any measure of the latent concept of democracy influences the change observation, and thus, implies the possibility of measurement errors, a purely technical perspective allows the use of such a measure as long as it is used to construct the dependent variable in a regression model – since the possible measurement error is subsumed in the error term of the regression equation (Greene 2003). Of course, this does not hold if a poorly measured indicator is included as an independent variable: doing so results in biased and inconsistent estimates. 65 The United Nations System of National Accounts defines gross capital formation as “the total value of the gross fixed capital formation, changes in inventories and acquisitions less disposals of valuables”; where gross fixed capital formation measures “the total value of a producer’s acquisitions, less disposals, of fixed assets during the accounting period plus certain additions to the value of non-produced assets realized by the productive activity of institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly or continuously in other processes of production for more than one year”(United Nations 1994).

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formation about investment stocks is not available prior to 1980, an economy’s gross capital formation provides at least some reliable information on the extent of domestic investments. Hence, the ratio of foreign to domestic investments denotes a much more meaningful approximation of the economic importance of foreign actors, particularly multinational corporations, for a given economy, than purely relying on net FDI inflows or the inflow-to-GDP ratio.66 FDI inflows and gross capital formation data are taken from the World Development Indicators provided by the World Bank. Where possible, additional data was added from the Foreign Direct Investment Database provided by the United Nations Conference on Trade and Development. The trade data, the information used to compute the FDI-to-GCF ratio, as well as all following economic indicators are converted into constant US dollars (base year 1996) and deflated. While the trade data is available for the full period between 1950 and 2000, information about FDI flows is only obtainable starting with 1970. Obviously, this missing data on one of the core independent variables defines the time period of analysis. However, in order to provide robust estimates the basic models are re-estimated without the FDI indicator with a sample covering the full time period. Figures 4.1 and 4.2 compare the distributions of trade dependence and the FDI-to-GCF ratio for democracies and non-democracies in the full sample using quantile-quantile plots.67 Figure 4.1 displays the distribution of quantiles for trade dependence. The plot clearly shows that non-democracies’ interdependence values are significantly higher than the corresponding democracies’ values. For low values the distribution is nearly equal, while for higher values the quantiles move toward the x-axis. The plot also allows one to identify outliers, which all 66 Alternatively,

the economic importance of foreign investment may be evaluated by relying on the FDI-stock-to-GDP ratio (Gao 2005). As already mentioned, reliable data about investment stocks over time is barely available and, thus, the computation of the ratio is crucial and may introduce serious measurement errors as long as yearly inflows and stock information from distinct years are used to estimate the respective investment stocks (see Bussmann, de Sojsa & Oneal 2006). 67 A quantile-quantile plot is a plot of sorted observations of the first observation group against the observations of the second group and is derived by plotting the smallest value of the first observation group with the smallest value of the second group. The plots are formed such that the x-axis denotes the quantiles estimated from non-democratic observations and the y-axis denotes quantiles from democratic observations. Both axes are in units of the respective variable. If the two sets come from a population with the same distribution, the points should fall approximately along the diagonal reference line. The greater the deviation from this reference line, the greater the evidence for the conclusion that the two sets have come from populations with different distributions.

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0

trade dependence/ democracies 1 2 3 4

5

Figure 4.1: The distribution of levels of trade dependence between democracies and autocracies

0

1

2 3 trade dependence/ autocracies

4

5

belong to the non-democratic observations. The five points on the far right side denote that the five highest dependent non-democracies have higher dependency values than the five highest values of the democracy group. Intuitively one may suggest that export-oriented and resource-dominated economies are denoted by these outliers. But this is not the case: the observations within the sample which possess the highest values of the total-trade-to-GDP ratio are Taiwan between 1950 and 1958 (values ranging from 3.043 to 5.241), Libya between 1978 and 1981 (3.083 to 4.298), South Yemen in 1967 (3.179) and 1980 (4.298), and Singapore in 1995 which possesses a dependence value of 2.935. Although Libya and South Yemen – as oil-exporting countries – fit the intuition, Taiwan and Singapore do not. The highest dependency values in the democracy group belong to Belgium between 1979 and 2000 and Trinidad & Tobago in 1974 with economic interdependency values ranging from 1.330 to 1.501. Figure 4.2 shows the quantile-quantile plot for the FDI-to-GCF ratio. The distribution between democracies and non-democracies is nearly equal. The plot also shows that the highest FDI dependence of a democratic state (Belgium 2000, a ratio of 4.375) is higher than the respective non-democratic value (Bahrain 1996, 2.712). In contrast, the lowest value of a democracy is higher than the lowest value of an autocracy – Niger 1993 with a ratio of -0.345 vs. Sierra Leone 1986, -2.691. Nevertheless,

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−2

FDI−to−GCF−ratio / democracies 0 2

4

Figure 4.2: The distribution of FDI-to-GCF-ratio between democracies and autocracies

−2

−1

0 1 FDI−to−GCF−ratio / autocracies

2

the plot shows that the distribution of FDI dependence is not significantly different between democracies and non-democracies. These results prove to be interesting as common wisdom maintains that FDI prefers democratic institutional designs, which secure property rights, allow private appropriation of investment and guarantee the rule of law (see for instance Brunetti & Weder 1998). The descriptive finding appears to contradict this notion. Besides the major independent variables FDI and economic interdependency, the examination of the conflicting hypotheses requires the inclusion of standard variables used in the related literature. In order to account for the positive influence of economic development in the line with the modernization claim, GDP per capita is included which serves as an approximation for economic development. Following the expectation of the modernization literature, economic affluence should positively influence the likelihood of observing institutional movements towards democracy. In same vein, growth rates are included in the analysis. Similar to wealth, economic prosperity is expected to influence democratization positively. In contrast to the modernization claims and in line with the findings of Haggard & Kaufmann (1996) and Goldstone (2006), the findings of the transition game concerning the impact of wealth and economic prosperity point to the expectation that wealth and growth hinder institutional alterations. Both, growth and GDP per capita are taken from the Expanded Trade Data Set provided by

4.3 Independent variables

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0

per Capita GDP / democracies 10 20 30 40

50

Figure 4.3: The distribution of development levels between democracies and autocracies

0

10

20 30 per Capita GDP / autocracies

40

50

Gleditsch (2002). The per capita GDP is measured in thousands constant and deflated US dollars. The computation of growth also relies on measures in constant US dollars and deflated values. Figure 4.3 displays the distribution of per capita GDP in the sample. The quantile-quantile plot indicates that there is a significant difference between democracies and autocracies concerning their level of development. The curve towards the y-axis at intermediate levels of development indicates that democracies in this value range possess higher GDP-per-capita values than non-democracies – an observation which fits Lipset’s (1959) modernization hypothesis (at least for intermediate values) that democracy is related to higher development levels. However, the plot also shows that the distribution of GDP per capita is nearly equal for low development values, that there is a more equal distribution in increasing values, and that the high-level non-democracies are more developed than high-level democracies. This group is dominated by oil-exporting autocracies such as Qatar (a maximum per-capita GDP of $46064 in 1977), the United Arab Emirates ($43381 in 1979), and Kuwait ($27164 in 1976). Singapore, which possessed a maximum value of $27186 in 2000, denotes an exception in this group of highly developed autocracies. The most developed democracies possess values of $26608 (Denmark in 2000) and $33292 (USA in 2000). With regard to the ordered logistic regression model this descriptive findings confirm the need to control for the extraordinary economic performance of

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oil-exporting countries. This is controlled for by using a dummy variable that flags oil-exporting economies. The variable has the value 1 if a) the economy produces at least 1 million barrels of oil per day, and b) is a net oil exporter or c) is a member of OPEC. The necessary data to compute this variable is taken from the Energy Information Administration (official energy statistics from the U.S. Government) the World Bank’s World development indicators (fuel imports and exports), and from COW International Governmental Organizations Data Set (Pevehouse & Nordstrom & Warnke 2004). The examination of the economic model’s comparative static and the transition game’s equilibria suggest that the elite of a highly integrated regime is more likely to repress demands by its citizens compared to the elite of a less integrated regime. Hence, given high integration levels, one should expect minor negative alterations that are understood as the institutional consequence of the use of repressive measures by a regime’s elite. It follows that both indicators of economic integration, the FDI-to-GCF ratio and trade dependence, are expected to be negatively associated with institutional alterations towards democratic rule. Moreover, if integration into world markets raises the marginal product of labor and capital and positively influences economic development (Frankel & Romer 1999; Chapter 3), one should consequently deduce that an increase in economic wealth will increase the reluctance of a highly integrated elite towards redistribution and the related costs. Hence, in order to conduct a proper hypotheses test, one should include the interaction between both variables.68 The interaction effect is detected by multiplying the indicators trade dependence and GDP per capita. If integration into world markets positively influences economic development, the negative effect of integration into world markets on positive institutional alterations is expected to increase with economic development, i.e. highly integrated and highly developed economies tend to be less likely to democratize, but tend to be more repressive than less integrated and less developed economies. This expectation challenges the modernization-related expectation concerning this interaction term (Hypothesis 3.3). If integration into world markets positively influences the economic output, which in turn yields higher income levels, the modernization argument hypothesizes that the interaction of trade dependence with per capita GDP raises the prospect for democratic development, i.e. highly integrated and highly 68 For

the general use of interaction terms see Aiken & West (1991) or Brambor, Clark & Golder (2006).

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developed economies tend to be more alterative in a positive direction than less integrated and developed economies. According to the findings of Haggard & Kaufman (1995), the influence of economic performance measured by the indicator growth is expected to be negative. Political stability denotes a major feature of the transition game. In order to capture the influence of stability-related concerns of the actors in the game a measure for regime durability is included in the estimation. Since there is some evidence that previous regime alterations, i.e. periods of institutional instability, influence the likelihood of observing further alterations (Epstein et al. 2006), the expectation persists that stable regimes are less likely to alter their institutions. To measure previous instability, the durability variable of the Polity IV Data Set is used, which measures the polity durability since the last meaningful institutional change or since 1900. In the vein of Hypothesis 3.1 the variable regime durability is expected to have a negative influence on the prospects of democratization. Hypothesis 3.4 states that integration into democratic environments and cooperation with democratic partners increases the likelihood of some regime’s institutional movements towards democratic rule. In order to operationalize this claim – which contradicts the expectation of the transition game – two variables are utilized: the democracy level of a regime’s most important trading partners and a regime’s membership in international organizations. The COW International Governmental Organizations Data Set (Pevehouse & Nordstrom & Warnke 2004) provides information about a country’s membership in international organization. The variable used counts the memberships of an economy per year. The democracy level of the major trade partners is utilized by ranking the trade partners (imports plus exports) of an economy by year. The constructed variable regards the ‘big’ three trade partners of an economy and sums their polity scores. The variable ranges from −30 to 30 such that higher values indicate economic interactions in a more democratic trade environment. Following the claims of the diffusion and conditionality literature, both variables are expected to influence the probability of observing institutional changes towards democratic rule positively. With regard to this literature, the biasing influence of the European Union’s enlargement strategy towards the democratization of former Warsaw Pact members in Eastern Europe is also taken into account by including a dummy variable. An important variable of the transition game is the ‘strength’ of the citizenry. The arguments leading to Hypothesis 3.2 stress the existence of powerful citi-

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zens. In the last chapter it was argued that the credibility of revolution threats depends on the disenfranchised citizens’ capabilities to overcome collective action problems and mobilize against the ruling elite. Such capabilities are difficult to operationalize. There is, for example, no large data set covering civil society structures over time and societies, which may be utilized to capture structural mobilization capabilities of a given society. Moreover there are no large sample surveys which cover a long period of time and societies which may be used to capture the level of dissatisfaction with political leadership within a given society. However, this application adopts two alternative approximations for measuring the ‘strength’ of citizenry: (1) the extent to which the citizenry possesses some political influence and (2) the interaction of income inequality with ethnic homogeneity. The derivation of both indicators will be sketched in the following paragraphs. An argument elaborated in the theory chapter offers an intuitive way to operationalize this important feature by relying on the extent of political influence of the citizenry. It is argued that capitalist authoritarian regimes rely on the support of respective groups within the society – commonly the regime’s elite – which support the institutional structure of the regime as long as their preferences are satisfied. With regard to economic structures it was also analytically demonstrated that the elite’s preference realization depends on the cooperation of disfranchised citizens, and vice versa. Thus, from a purely analytical perspective one should expect capitalist authoritarian regimes to account for this dependency and differ in their levels of restrictiveness towards participation and inclusiveness, i.e. the levels of restrictiveness towards participation and inclusion reflect the economic importance of the citizenry. In order to measure inclusiveness and participation the Polity IV project’s measure of authoritarianism – the autocracy scale – is utilized. Given the conceptual frame of the polity measure, the autocracy scale purely measures the restrictions of participation and inclusiveness, but not the extent in which both principles are realized. It follows that regimes possessing the value null on the autocracy scale are not necessarily democratic.69 In this sense, low values on the autocracy scale indicate institutional designs in which the citizenry possesses at least some degree of political rights which in turn indicates some influence on policy-making processes. High values on the autocracy scale 69 Actually

the full sample consists of 243 observations which are not democracies although they have null points on the autocracy scale. The values of these observations’ overall polity scores range from 4 to 6 points.

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109

denote institutional designs in which the citizenry is not able to influence policy makers in institutionally organized and legal ways. Following this understanding of the indicator allows the autocracy score to be utilized as some measure of the political influence of citizens in political systems.70 This inference leads to a further deduction: regardless of whether these de jure rights influence policy makers meaningfully or not, the pure existence of an opposition party or civil society organizations indicates structural capabilities to mobilize against the ruling elite. Thus, the less restrictive, or the more inclusiveness a given political regime, the stronger is the citizens’ influence on policy-making, either through legal, institutional procedures or through their capabilities to overcome collective action problems. It follows that even low levels of inclusion and participation comprise some level of underlying de facto political power of the citizenry. This deduction raises two expectations concerning regimes which are characterized by low levels of autocracy: first, granting participation rights – even to a low extent – is likely to stabilize existing institutional designs; and second, if alterations are observed, one should expect minor positive alterations towards democracy rather than major positive alterations, since the elite is expected to account for the de facto power of the citizenry.71 Beside the validity problem of this indicator, the focal point of the examination is not to estimate whether simply the de facto political power of the citizenry influences the likelihood of observing meaningful institutional alterations but whether the likelihood of observing radical changes is constrained by the international economic environment. Hence it is reasonable to rely on those parameter values of the proxy that allow for an interpretation in the 70 Consider that institutional designs, which are less restrictive towards participation and inclusiveness,

allow the citizenry, for instance, to participate in the sense of Linz & Stepan (1996) in the political arena through parties or in the social arena through civil society organizations such as trade unions. Thus, the understanding that higher levels of inclusiveness and participation represent institutionalized processes to account for citizens’ preferences suggests that higher levels of participation are likely to generate support for the respective institutional design and the rulers. In sum, the indicator level of autocracy serves as a measure for the de jure political influence of the citizenry of a given political system. 71 The proxy level of authoritarianism faces one important problem. The de facto political power of the citizenry is not necessarily connected to the existence of de jure institutions. Although it is reasonable to infer that low levels of autocracy denote political influence and political power, it would be misleading to infer that high levels of autocracy indicate a citizenry that does not possess any possibility to generate a credible revolution threat. This raises concerns as to whether the indicator level of authoritarianism adequately represents the ‘strength’ of citizenry at all parameter values. Thus, the construct validity of this approximation is questionable.

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sense of the analytical construct. This is utilized by using the albeit weak proxy level of authoritarianism as the conditional indicator of an interaction term in order to examine the conditional hypothesis that integrated regimes are more likely to alter their institutions in terms of minor changes towards democracy if the citizenry of the respective economy is able to generate a serious revolution threat. The conditional hypothesis will be scrutinized by multiplying the indicators trade dependence and level of authoritarianism, where distinct levels and combinations of this interaction term may be understood as distinct scenarios that capture the assumptions and the structure of the transition game. In the sense of the transition game this interaction term reflects that high trade dependence conditioned on low autocracy values provides a situation in which citizens are much more successful in pressing their demands forward than in situations that are characterized by high trade dependence and high autocracy values, i.e. high levels of restrictiveness towards civil society and political liberties. Given the analytical derivations of the underling economy and the equilibrium solution of the transition game (Proposition 3.4), the elite as well as the citizenry of highly integrated regimes are reluctant to major institutional alterations in order to avert economic losses connected to exhaustive institutional alterations. Thus, in terms of the indicators utilized to operationalize the strength of citizenry, it is expected (according to the arguments leading to Hypothesis 3.2) that high interdependence levels conditioned on low autocracy values raise the likelihood of observing a minor institutional alteration towards democracy in contrast to observing negative developments or major positive changes. However, according to the equilibrium solution provided by Proposition 3.4 the likelihood of observing positive alterations should decrease whenever the elite of highly integrated economies believe it will face a citizenry which is not able to generate a serious risk of insurrection. Thus, as the level of restrictiveness increases – i.e. the approximation of whether the citizenry is able to mobilize opposition towards the elite – highly integrated economies are much more repressive than less integrated economies. Finally, both scenarios described by low interdependency are expected to raise the prospects for institutional alterations towards democracy. The logic behind this is straightforward and relies on the features of the transition game elaborated above. Compared to their counterparts in integrated economies, the elite of less integrated economies are more reform disposed in order to preserve their dominant position in the political system, such that even demands by weak citizens are met to prevent regime changes.

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111

Hence, one should observe positive institutional alterations regardless of whether low dependency values are conditioned to high or low autocracy levels. However, the overall coefficient of the interaction term is expected to be negative, since only low values of the autocracy score enable the citizenry to utilize political power in order to press for institutional changes. As discussed above the de facto political power of the citizenry is not necessarily connected to the existence of de jure institutions. The second alternative proxy for measuring the ‘power’ of citizenry – the interaction between income inequality and ethnic homogeneity – offers a solution for the aforementioned validity problem of the first proxy but introduces severe problems concerning the reliability of the measure. Before this problem will be addressed, the following paragraph introduces the alternative measure of the ‘power’ of citizens. A common argument of the democratization literature – also the central feature of the transition game – states that inequality fuels social conflict. It is also beyond dispute that high levels of inequality unfold their conflict-fueling potential only in societies in which the citizenry overcomes collective action problems, and thus generates a credible threat of revolution. An interaction term utilizing a measure of inequality and a measure of the homogeneity of a society may reflect this conditional argument. Following Olson (1965) homogeneity serves as an approximation of whether groups are able to overcome collective action problems. Following his reasoning that homogeneous groups are much more successful in overcoming collective action problems than the citizenry of heterogeneous societies, one may further deduce that in heterogeneous societies the conflict-fueling effect of inequality is undermined by the citizens’ inability to overcome the collective action problem that in turn erodes the credibility of the revolution threat. In these terms the interaction of both variables provides a measure of the strength of citizens, i.e. the credibility of the revolution threat. Inequality is operationalized by the Gini coefficient provided by the World Income Inequality Data Base72 which is an update of the widely accepted Deiniger & Squire (1996) measures. Although inequality information is available for a large number of countries, the data covers only particular years. In order to operationalize the homogeneity of societies, the ethnic fractionalization measure provided by Fearon (2003) and expanded by Schneider & Wiesehomeier (2008) is employed. Based on data from the Ency72 Published

by the United Nations University – World Institute for Development and Economic Research (http://62.237.131.23/wiid/wiid-documentation1.php, last accessed September, 13th , 2009).

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clopedia Britannica and other sources, Fearon (2003) collected detailed data on ethnic composition of 160 countries and constructed an ethnic fractionalization measure, which ranges from 0 to 1, where high values denote highly fractionalized societies and low values indicate homogeneous societies. Unfortunately Fearon’s measure does not account for changes of ethnic composition through time, since his data sources contain information about the ethnic structure in the respective countries in the mid-1990s only. Thus the reliability of the measure is disputable. With regard to this problem Alesina et al. (2003: 160) – who provide a similar fractionalization measure – argue “that group shares are sufficiently stable that changes have only minor impact on fractionalization measures.” They conclude this assumption to be reasonable at the 30 years’ horizon of analysis whereas this assumption would be less tenable for longer time periods. Although this argument is highly disputable – consider, for instance, ethnicity-based civil conflicts that yield mass killings and expulsion (as observed in Rwanda 1994 or in the former Yugoslavia in the 1990s) – the measure is utilized for the 1970–2000 sample. The data quality additionally suffers from missing observations on the inequality measure for the cases in this study. Due to these missings the sample size is reduced by two-thirds. Given the complex calculation of the Gini coefficient, imputation is not a reliable option. Accounting for the questionable data quality the measure of citizens’ power is only included as a weak approximation that may reveal some tendencies. It is expected that high levels of inequality will positively affect the probability of observing positive institutional alterations only in societies that are characterized by low ethnic fractionalization. In contrast to that a scenario characterized by high levels of inequality and high fractionalization levels is expected to negatively influence the prospects for democratization. Table 4.1 displays the summary statistics of the dependent and independent variables for the 1970–2000 sample.73 The summary statistics of the 1950-2000 sample are reported in the Appendix. All explanatory variables included in the examination are lagged, i.e. the previous year’s information is used to predict the current year’s institutional developments. This happens for one particular theoretical reason: the model assumes that institutional instability affects the per73 Data

sources: World Bank: World Development Indicators; UNCTAD: Foreign Direct Investment Database; Gleditsch (2002): Expanded Trade data; Polity IV Project; COW International Governmental Organizations Data Set; UNO-WIDER: World Income Inequality Data Base; Fearon (2003), Schneider & Wiesehomeier (2008): ethnic fractionalization measure

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Table 4.1: Summary statistics of the utilized variables (1970-2000) variable institutional alterations foreign direct investments trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member int. organization membership democracy level of trade partners Gini index ethnic fractionalization

obs

mean

std.dev.

min

max

3946 3946 3946 3946 3946 3946 3946 3946 3946 3944 3946 1254 3824

0.04 0.07 0.30 6.41 3.25 3.88 21.14 0.32 0.13 52.47 20.82 39.30 0.48

0.40 0.15 0.34 6.95 6.80 3.63 27.01

-2.00 -2.69 0.01 0.28 -55.36 0.00 0.00

20.65 10.92 10.39 0.26

5.00 -24.00 20.00 0.00

2.00 2.75 4.30 46.06 82.82 10.00 190.00 dummy dummy 134.00 30.00 73.90 0.95

formance of an economy. Hence, the values of the independent variables of the alteration year are assumed to be biased by the alteration itself, and thus bias the prediction.74 In order to provide a robust test of the claims of the transition game the examination includes the analyses of conflicting hypotheses that are derived by common explanations of regime changes. The expectations of Hypothesis 3.3 were already elaborated above. It should be obvious that the economic development indicator – the single indicator per capita GDP – is expected to have a positive impact on positive institutional alterations. Additionally, the interaction between trade dependence and per capita GDP is expected to be positively related to democratic institutional shifts. In order to account for Hypothesis 3.4 the democracy level of the trade environment and some regimes’ political integration into international organizations are expected to influence democratic alterations positively. With regard to this conditionality/diffusion impact, the biasing effect of the European Union’s enlargement policy towards Eastern Europe is also taken into account by including a former Warsaw Pact dummy that is expected to influence the positive alteration probability positively. Table 4.2 summarizes the conflicting hypotheses, the operationalization of the key variables, and the expectations. 74 The

variable Gini index is not lagged, since it is not assumed that inequality levels are changed within short time periods.

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Table 4.2: Operationalization of the hypotheses hypothesis Higher levels of integration into world markets are likely to stabilize authoritarian rule. But if alterations are observed, integration raises the chance of observing developments towards stricter authoritarianism.

Even if some threat of revolution is credible, democratic developments of highly integrated authoritarian regimes are only expected to occur in terms of minor institutional alteration.

The integration of some authoritarian regime into international cooperation positively influences the regime’s economic performance and wealth, and thus, the less likely is the regime to persist with authoritarian rule.

The higher an authoritarian regime’s integration into international and political cooperation, the less likely is the persistence of authoritarian institutional arrangements if the regime’s cooperation partners are democracies.

indicator

exp. impact

FDI-to-GCF ratio

negative

trade dependence

negative

trade dependence × per-capita GDP

negative

Gini index × ethnic fractionalization

negative

trade dependence × level of autocracy

negative

per-capita GDP

positive

trade dependence × per-capita GDP

positive

international organization membership

positive

democracy level of trade partners

positive

4.4 The estimation technique: the ordered logistic regression model The decision to focus on institutional alteration instead of regime changes yields the construction of an ordinal dependent variable, which includes five outcomes. Since the intervals between adjacent outcomes cannot be assumed to be equal, ordinal outcomes are not appropriately analyzed by estimation techniques developed for continuous variables – such as OLS. McKelvey & Zavonia (1975), McCullagh (1980), and Winship & Mare (1984) introduced and further developed

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extensions of logit and probit models for dichotomous variables which (1) account for noninterval ordinal measurement, (2) avoid arbitrary assumptions about the scale of ordinal variables, and (3) consider ordinal variables in equation models with variables at all levels of measurement (Winship & Mare 1984). These extensions are summarized as ordered regression models (Long 1997) which are briefly sketched in the following paragraph. Following the formal proofs of Long (1997:116–124) and Wooldridge (2002:504–508) this section serves to derive the equations to estimate the probabilities of observing institutional changes given the independent variables. The formulas will be derived with respect to the dependent variable institutional alteration. Ordered regression models assume that the ordinal, observed variable is related to some unobservable, continuous variable y∗ which ranges from −∞ to ∞. In the application conducted here, the y denotes the observed institutional alteration. It is assumed that this observation provides incomplete information about the underlying, latent continuum y∗ , which can be thought as some regime’s degree of institutional stability. More formally, for ordered categories m = 1 to J, observation yi equals m if τm−1 ≤ y∗i < τm . The τ ’s indicate cut points that divide the latent variable y∗ into values of the observed y according to the categories 1 to J where the extreme categories are defined by open-ended intervals with τ0 = −∞ and τJ = ∞. In order to illustrate this measurement equation, consider the dependent variable institutional alteration, which ranges from −2 (major negative) to +2 (major positive). The idea of a latent variable y∗ ranging from −∞ to ∞, which is mapped to an observable ordinal variable y leads to the following measurement model: ⎧ ⎪ −2 if τ0 = −∞ ≤ y∗i < τ1 , ⎪ ⎪ ⎪ ∗ ⎪ ⎪ ⎨−1 if τ1 ≤ yi < τ2 , (4.1) yi = 0 if τ2 ≤ y∗i < τ3 , ⎪ ⎪ ∗ ⎪ ⎪ 1 if τ3 ≤ yi < τ4 , ⎪ ⎪ ⎩ 2 if τ4 ≤ y∗i < τ5 = ∞. With regard to that mapping, the observed category changes can be thought of as the point at which the latent variable crosses the respective cut points. The ordered logit’s structural equation model for a single independent variable is the same as for the binary logit y∗i = α + β xi + εi

(4.2)

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where i denotes the observation, α the intercept, x indicates the independent variable, and ε the error term. If one assumes that ε has a logistic distribution with 2 a mean of zero and Var (ε ) = π3 one can compute the probabilities of observing values of y given x. Since the errors are distributed logistically around the regression line E (y∗ |x) = α + β x, the probability of observing outcome m corresponds to the range of the error distribution between the cut points τm−1 and τm . In order to compute this range, consider the probability that y = −2. Given the statements of the measurement model, one observes a major negative institutional alteration (y = −2) if τo ≤ y∗i < τ1 . This implies that Pr (yi = −2|xi ) = Pr (τo ≤ y∗i < τ1 |xi )

(4.3)

Substituting y∗ = xβ + ε yields Pr (yi = −2|xi ) = Pr (τo ≤ xi β + ε < τ1 |xi )

(4.4)

and subtracting xβ within the inequality leads to Pr (yi = −2|xi ) = Pr (τo − xi β ≤ ε < τ1 − xi β |xi )

(4.5)

Since the difference between the cumulative distribution function of two values yields the probability that a random variable is between these values, it follows that Pr (yi = −2|xi ) = Pr (ε < τ1 − xi β |xi ) − Pr (ε ≤ τ0 − xi β |xi ) = F(τ1 − xi β ) − F (τo − xi β ) ,

(4.6)

where F denotes the cumulative logistic distribution function. This procedure can be generalized to compute the probabilities of any observed outcome y = m given x: Pr (yi = m|xi ) = F(τm − xi β ) − F (τm−1 − xi β ) .

(4.7)

In order to derive the formulas for the ordered logit model estimated in this analysis consider equation (4.6). If one computes Pr (yi = −2|xi ) the term F (τo − xi β ) drops out since F (τo − xi β ) = F (−∞ − xi β ) given by τ0 = −∞, such that Pr (yi = −2|xi ) = F(τ1 − xi β ). In the case of the probability of observing major positive alteration, Pr (yi = 2|xi ) = F(τ5 − xi β ) − F (τ4 − xi β ), the first term

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equals 1 since F(τ5 − xi β ) = F(∞ − xi β ) given by τ5 = ∞ and the complete formula reduces to Pr (yi = 2|xi ) = 1 − F (τ4 − xi β ). Thus, the formulas for the ordered logistic regression applied to the test of the conflicting hypotheses are: Pr (yi = −2|xi ) = F(τ1 − xi β ) Pr (yi = −1|xi ) = F(τ2 − xi β ) − F (τ1 − xi β ) Pr (yi = 0|xi ) = F(τ3 − xi β ) − F (τ2 − xi β )

(4.8)

Pr (yi = 1|xi ) = F(τ4 − xi β ) − F (τ3 − xi β ) Pr (yi = 2|xi ) = 1 − F (τ4 − xi β ) . The ordered logistic regression model75 relies on the proportional odds assumption, which is also known as the parallel lines assumptions. This assumption states that all explanatory variables have an equal effect on each estimation in (4.8). The basic idea of parallel regression can be shown by reformulating the model in terms of the cumulative probability that an outcome is less than or equal to m:76 : Pr (y ≤ m|x) =

m

∑ Pr (y = j|x) = F (τm − xβ )

(4.9)

j=1

In the context of the present application Pr (y ≤ −2|x) denotes the cumulative probability of observing major negative institutional alterations, Pr (y ≤ −1|x) denotes the probability of major or minor negative alterations, and so on, such that the cumulative probabilities are given by the respective cumulative distribution function F computed at τm − xβ : Pr (y ≤ −2|x) = F (τ1 − xβ ) Pr (y ≤ −1|x) = F (τ2 − xβ ) Pr (y ≤ 0|x) = F (τ3 − xβ )

(4.10)

Pr (y ≤ 1|x) = F (τ4 − xβ ) Pr (y ≤ 2|x) = F (τ5 − xβ ) Given the equations in (4.10) it should be obvious that the general equation (4.9) defines a set of binary response models which only differ in the intercepts since β 75 See

Long (1997) for the derivation of the log likelihood equation. formulations follow the proof of Long (1997) but are rearranged in order to account for the present application.

76 The

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is the same for all categories m. Hence, due to the changing intercepts the probability curves shift either to the left or to the right, but the slope is not influenced, such that the distinct curves are parallel. It follows that the ordered logistic regression model implicitly assumes that a change in an explanatory variable has the same effect on the probability of observing major alterations versus other categories. Consider, for instance, the variable per capita GDP: the parallel lines assumption assumes that the level of development influences the distinct probabilities equally, i.e. a change has the same effect on observing major negative, minor negative or no alterations versus minor positive alterations. Intuitively, this does not seem reasonable. In general, Long (1997) suggests that this crucial assumption is frequently violated and recommends testing for the assumption by using a Wald test proposed by Brant (1990). Unfortunately, Long’s expectation also holds true for this inquiry. Applying the Brant test to the data clearly shows that the parallel regression assumption is violated. In such cases, Long & Freese (2006) recommend using models that do not impose the constraint of parallel regressions, such as generalized ordered logit models or continuation ratio models. However, since such models are complex in interpretation and presentation some researchers continue with ordered logit models and report the results of less restrictive models in the appendix to confirm the results (e.g. Kirschmann & Schneider 2007). The conducted examination follows this approach and estimates a generalized ordered logistic regression model to show that the violation of the parallel lines assumptions does not bias the results of the constraint ordered logit. Additionally, the results of a Prais-Winston regression are reported in Appendix 5. The Prais-Winston regression utilizes the initial continuous change variable of the Polity IV measure as independent variable. The regression model also serves as a test of robustness, in particular testing whether the categorization biases the the results of the ordered logistic regression model. Another crucial point concerning the estimation is raised by the structure of the data. The adequate use of time series cross-section data with an ordinal dependent variable in terms of specification strategies is underdeveloped (Beck 2001). In order to deal with heterogeneity robust standard errors are reported. Following Wooldridge (2002) the robust standard errors are adjusted for clustering on each political system, such that observations are assumed to be independent across countries but not necessarily within countries over time. Second, to account for time effects the conservative method of including a set of time dummies is applied (denoted as dummy

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119

variable regression by Wooldridge (2002)). The dummies capture five-year time periods.77 As some applications include a full set of time dummies to account for unobserved time effects, the models are re-estimated using such a full set. As the results remain robust regardless of whether the full set or the period dummies are included, the period dummies are used within the final model in order to prevent the artificial rise of the model fit that is simply caused by the large number of time dummies. As a scalar measure of fit, McKelvey & Zavonia’s R2 (1975) is reported. According to simulations of Hagle & Mitchell (1992) and Windmeijer (1995) this measure is more appropriate for ordinal outcomes than Pseudo-R2 which was suggested by McFadden (1973).

77 In

this context the Prais-Winston model also tests whether time effects bias the ordered logistic regression model.

5 Results

5.1 Measuring institutional alterations: dichotomous vs. rank ordered measures In contrast to the vast majority of transition studies that utilize dichotomous measures of regime changes, this examination applies a categorical measure of institutional alterations in order to shed light on the puzzle of the directions of transitions. The ranked categorical dependent variable reflects all alterations of regime characteristics disregarding whether or not the alterations yield regime changes. It was argued above that alterations of the same value are comparable across polities as long as the quantification of institutional patterns denotes a reliable and valid measure of institutional characteristics. If institutional shifts of the same value are comparable across polities and time, the distinction between alterations that yield regime changes and alterations that do not is somewhat odd. Instead, one would assume that positive or negative alterations of institutional set-ups of a given polity denote some movements towards or away from democracy to an extent defined by the used democracy measure. The ranked categorical dependent variable institutional alterations serves this purpose. The variable reflects the extent of all institutional alterations disregarding whether the alterations yield regime changes in terms of exceeding defined thresholds. The construction of the dependent variable relies on the change-variable provided by the Polity IV Project. The change variable covers the alterations of the polity score from one year to the following year. As the polity project explicitly emphasizes the measurement of the institutional characteristics of a given political system (Jaggers & Gurr 1995), alterations of the polity score reflect institutional variation within or beyond some regime type. The change variable ranges from a negative extreme of −20 polity score points to

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a positive extreme of +20. Increases of the polity score of 5 points or greater are coded as major positive institutional alteration. Decreases of 5 points or greater are coded as major negative institutional alteration. Alterations of the institutional design of some political system that range from 1 to 5 polity score points denote minor positive institutional alteration. Accordingly, institutional alterations ranging from −1 to −5 are coded as minor negative institutional alterations. The cut point of a five-point increase/decrease is taken from the Polity IV coding scheme. According to that scheme, alterations below the 5-point threshold in the polity score are regarded as alteration sufficient to generate greater – or fewer – opportunities for regime opponents or disenfranchised citizens to participate and, thus, to influence decision-making. Alterations greater than a 6-point increase or decrease denote some consequential and lasting institutional alterations which are likely to yield extensive changes of regime (sub-) types. This chapter examines the decision to operationalize institutional alterations using annual changes of the polity score instead of applying a dichotomous regime change measure, and in particular how this decision influences the distribution of cases between 1950 and 2000. It was argued above that dichotomous measures fail to reflect the full variance of institutional alterations such that inferences about the factors influencing institutional shifts are questionable. This chapter scrutinizes this claim. Table 5.1 lists the directions of institutional alterations of political systems and shows whether these alterations yield meaningful changes of the regime types in terms of a shift from autocracy to a partial regime78 or to democracy, respectively. According to the structure of the Polity IV data, an observation denotes the institutional characteristics of a political system in a given year. As argued above, institutional alterations are captured by some change of the polity score from one year to the following year. Hence, a case denotes the variation of the institutional design in a country year. In cases that reflect multi-year transitions the first tran78 In

contrast to some parts of the literature (Collier & Levitsky 1997; Marshall & Gurr 2001; Epstein et al. 2006), regimes that exhibit democratic as well as authoritarian institutions are not labeled as ‘partial democracy’ or as ‘democracy with adjectives’. Although such regimes may possess a vast number of democratic institutions, it is argued here that they are dominated by authoritarian procedures. In this context, Karl’s (1995:80) view is more compelling: she elaborates that such regimes are “characterized by an uneven acquisition of the procedural requisites of democracy”, and that the development of democratic institutions has “not been accompanied by the establishment of the civilian control over the military or the rule of law. Elections are often free and fair, yet important sectors remain politically and economically disenfranchised”. Hence, they should not be labeled using the attribute democracy.

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Table 5.1: Institutional alterations vs regime change (1950-2000): overall sample and democracies overall sample alterations

democracies regime change

regime change

no

yes

∑

no

yes

∑

major negative minor negative no alterations minor positive major positive

10 102 5987 167 8

59 14 0 26 89

69 116 5987 193 97

0 15 1916 33 0

27 7 0 0 0

27 22 1916 33 0

∑

6274

188

6462

1964

34

1998

Spearman’s ρ : .1420

Spearman’s ρ : –.6507

sition year is coded to contain the information about the value change after the transition was completed.79 This happens for practical reasons in order to ensure that the economic data used in this study are not biased due to political instability within the transition period. Regarding the threshold polity score and whether a given regime is classified as autocracy, partial regime or democracy the coding scheme of the polity project is utilized; i.e. political systems that possess polity scores between −10 and 0 indicate autocracies; regimes within the range between +1 and +6 denote partial regimes; and democracies are political systems that expose polity values between +7 and +10. The figures on the left side report the distribution of cases for all polities between 1950 and 2000 and shows that just 26 out of 193 cases of minor positive institutional alterations yielded a regime change. The overwhelming majority of alterations summarized in this intermediate category did not lead to any meaningful change of the regime types. The same holds for minor negative alterations. Even 8 positive and 10 negative major institutional alterations failed to yield to other regime types. The table also reports Spearman’s measure of monotone association between the distinct measures of institutional alterations. The correlation coefficient (ρ ) of 0.1420 indicates a very 79 Most

studies use the last transition year to denote the direction and the magnitude of the regime change.

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Table 5.2: Institutional alterations vs regime change (1950-2000): partial regimes and autocracies partial regimes alterations

autocracies regime change

regime change

no

yes

∑

no

yes

∑

major negative minor negative no alterations minor positive major positive

0 11 659 16 0

32 7 0 19 1

32 18 659 35 1

10 76 3323 118 8

0 0 0 7 88

10 76 3323 125 96

∑

686

59

745

3535

95

3630

Spearman’s ρ : –.2763

Spearman’s ρ : .5703

low relationship between both variables. The coefficient denotes that only 14.2% of the observed institutional alterations are reflected by the dichotomous measure and strongly supports the assumption that the applied categorical measure of institutional alterations reflects more of the observed variance than a dichotomous measure. Table 5.1 also displays the institutional shifts of democracies between 1950 and 2000. The comparison between both measures yields similar tendencies than the comparison for the overall sample. The same holds for the examination of alterations of partial regimes and autocracies. Table 5.2 shows that 26 out of 53 minor alterations yield regime shifts while the remaining 27 institutional changes had no consequences for the regime types. Spearman’s ρ indicates a weak negative relationship between both measures supporting the expectation that dichotomous measures also fail to reflect the variance of institutional shifts in the sample of partial regimes and autocracies. With regard to the changes of autocracies, Table 5.2 also supports the use of the categorical variable. In 8 autocratic cases even major institutional alterations, which are expected to have a meaningful impact on the institutional design of a political system by definition, had no transitional impact.80 Again, Spearman’s correlation coefficient does not indicate a strong 80 These cases are:

Jordan 1951, Argentina 1955, North Yemen 1962, Nepal 1981, Taiwan 1987, USSR 1988, Algeria 1989, and Ghana 1991.

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Table 5.3: Institutional alterations vs regime change (1950-2000): partial regimes according Epstein et al. (2006) alterations

regime change no

yes

∑

major negative minor negative no alterations minor positive major positive

0 11 875 29 0

42 10 0 19 1

42 21 875 48 1

∑

915

72

987

Spearman‘s ρ : –.3691

relationship between both measures. In sum, if only the 188 cases (reported in Table 5.1) that led to the establishment of another regime type were considered, the majority of observable cases, 287, in which changes of institutional design had no consequences in terms of regimes shifts, would be ignored. That is, the majority of cases would be left out of the examination. The descriptive examination of the direction and the extent of institutional alterations reveals a second common problem connected to the application of some dichotomous or categorical regime measures. The problem concerns the definition of some threshold levels and the consequences of this definition for the distribution of regime types and transitions within some sample. Using Polity IV data, Epstein et al. (2006) define – in deviation to the Polity coding scheme – different cut points to construct their three-way classification of regimes: polity values between −10 and 0 denote autocracies, partial democracies lie in the range between +1 and +7, and democracies are operationalized as regimes which expose polity values between +8 and +10. As outlined above, Polity IV defines political systems in the range from +1 and +6 as partial regimes. Although this deviation seems rather negligible, the consequences for the distribution within the sample are tremendous. The changes regarding the sample used in this study are documented in Table 5.3, which displays the distribution of the directions of institutional development of partial regimes. First, using Epstein’s et al. (2006) threshold, the sample consists of 242 more partial regime observations than applying the polity threshold.

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Second, the distribution – whether institutional alterations yield regime changes or not – also differs from the polity coding. Here, 29 out of 48 minor positive alterations yield no shift of regime type: 13 cases more than in Table 5.2. The table stresses the important point that if one relies on the polity coding scheme, some institutional developments would be regarded as alterations which had no impact on the regime characteristics while using another threshold, even if there is only a slight quantitative difference, would yield a different categorization of the case, i.e. different samples. Such prominent borderline cases include Argentina 1989 and 1999 – two small alterations, both of one point, yield regime changes for Epstein et al. (2006), but no regime change for Polity IV – Brazil 1985 (major alteration to democracy given Polity or to partial democracies in terms of Epstein et al. and 1988, Peru 1990, or Russia 1992 – either a negative shift from democracy to partial regime or just some alteration within the partial regime type. In short, the existence of a vast number of such cases stresses the crucial point that the definition of some threshold value influences the distribution of observations and introduces arbitrariness to the process of case selection. Consequently, such arbitrariness – even if a consistent conceptualization provides the derivation of cut points as Sartori (1970) demands – obfuscates research results. Coppedge (1997), for instance, demonstrates this effect by reviewing different explanations of levels of polyarchy, which yield different results purely by applying different thresholds.81 In sum, these findings strongly support the use of the suggested ranked categorical dependent variable. Relying on annual changes of the polity score and disregarding whether the alterations yield regime changes, reflects more of the observable dynamics of institutional developments than a dichotomous measure. 5.2 Results of the ordered logistic regression model: first insights This section examines whether international political or economic ties influenced the probability of institutional alterations of political systems around the world between 1970 and 2000. Table 5.4 reports the results of the ordered logistic regression. In order to examine the conflicting hypotheses, five models are computed. The first, the baseline model, includes only the basic economic and structural indicators. The second model serves to examine whether the first hypoth81 With

regard to this effect, Epstein et al. (2006) note that they performed robustness checks of their estimates by shifting the threshold in both directions and they report that the results did not change.

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127

esis’ implication, that high income levels in highly integrated regimes generate stability, by examining the interaction between per capita GDP and trade dependence. The conditional Hypothesis 3.2 – that democratic developments of highly integrated regimes are expected to occur in terms of minor positive alterations only if demands for change are carried forward by powerful citizens – is examined by Model 3 and Model 4. The third model utilizes the interaction of the autocracy scale and the level of trade dependence to approximate the ‘strength’ of citizenry, and Model 4 includes the interaction between the Gini coefficient and the ethnic fractionalization measure. Finally, Model 5 accounts for the conditionality/diffusion claim by including the discussed indicators of democratic trade environments and the constraining effect of international organizations. The interpretation of coefficients estimated by an ordered logistic regression is vague. Since the variance of the latent variable cannot be computed using the observed data, the common and simple interpretation of unit changes is not useful. In some cases interpretations based on fully standardized coefficients (McKelvey & Zavonia 1975) can be utilized to interpret coefficients like coefficients of a linear regression model. But if the focus is on the distinct categories of the ordinal dependent variable interpretating standardized coefficients will be misleading. Given the structure of the dependent categorical variable (reaching from −2 to 2), the coefficient is estimated in relation to the highest outcome category (here major democratic alterations). Hence, only the algebraic sign of a coefficient indicates a tendency about either the chance to observe major democratic institutional alteration or that an observation belongs to a lower category within the apparent sample covering all nation states between 1970 and 2000.82 With regard to this 82 Although

asterisks report the significance levels of the respective coefficients in Table 5.4, the significances are not interpreted. In line with the argument of Berk et al. (1995:421) the dataset is regarded as an “apparent population”, i.e. a sample that is not generated by random sampling from a clearly defined population. Thus, inferences based on significance tests are meaningless. In a vast number of studies – which also rely on apparent populations – conventional statistical inferences are applied, by assuming that the collected data is a random realization of social processes that could have produced a very large number of possible other realizations. These possible other realizations are regarded as ‘superpopulation’(Berk et al. 1995). But this assumption lacks clear and precise understanding about the data generation processes and sampling rules. Thus, if generalizations are derived by relying on computation of significance levels and confidence intervals, researchers disregard the fact that these techniques require the information about the data generation process and sampling rules in order to compute the uncertainty which is introduced by data collection. By computing and interpreting significance levels the authors only draw imaginary inferences to imaginary

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the interpretation of coefficient does not yield information about the distinct categories. When research questions or hypotheses focus on specific categories of dependent variables (as in this application) Long (1997) suggests the interpretation of predicted probability curves for single categories. These probabilities are given by Pr (yi = m|xi ) = F(τm − xi β ) − F (τm−1 − xi β ) (4.7), which can be utilized to compute and plot relationships between independent variables and the respective distinct categories of the dependent variable.83 Before examining such plots, the results of Table 5.4 will be discussed briefly. Although the reported coefficients do not provide detailed and useful interpretations, they allow us to identify some tendencies that are useful for structuring and guiding the more detailed graphical interpretation of the predicted probabilities.84 The coefficients of the baselinemodel are in line with the expectations: both indicators of an economies’ international economic connectedness have negative signs. Thus, integrated economies tend to be less alterative in terms of major democratic institutional developments. However, the negative sign does not necessarily indicate that integrated regimes tend to be more repressive in terms of developing institutionally in a more authoritarian direction. Given the structure of the dependent categorical variable, the negative sign of the coefficient only indicates that integrated economies tend to be in lower outcome categories; the economies may also be in the 0-category, populations (Berk & Freedmann 1995). Concerning the dataset used in this application the crucial assumptions of an imaginary superpopulation would imply that economic and institutional developments of nations and information availability about these developments are completely random. This would be a highly disputable assumption. Consider for instance that authoritarian regimes are not likely to cooperate with institutions that collect data about economic performance, or consider that command economies do not have any FDI inflow. It follows that the missing information is not random, but strongly dependent on the regime type. Thus, the reported results only account for the cases and the information in this apparent sample and generalizations beyond the defined time period and cases are omitted. The asterisks are reported for those readers who do not follow this argument. 83 For example, the effect of foreign direct investments on the probability of observing ordinal outcomes is computed and plotted by holding all other independent variables constant and allowing FDI to vary (Long 1997). 84 This tendencies are confirmed by the results of the generalized ordered logistic regression and the Prais-Winston regression model which are reported in the Appendix. The tendencies also remain robust if the models are re-estimated using the sample covering the time period between 1950 and 2000. In order to facilitate a detailed replication of the reported results the data and documentations are available on the author’s website: http://www.politik.uni-mainz.de/cms/2793_ENG_ HTML.php.

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129

Table 5.4: The effect of economic integration on institutional alterations – results of the ordered logistic regression model (1970-200)

foreign direct investment trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member

model 1

model 2

model 3

model 4

model 5

–.100 (.385) –.346** (.171) .012 (.010) –.006 (.008) .144*** (.017) .001 (.002) –.420* (.221) .660** (.315)

–.058 (.381) .124 (.219) .037** (.015) –.007 (.008) .152*** (.018) .000 (.002) –.461** (.224) .608* (.325) –.049*** (.015)

–.153 (.390) .219 (.247) .010 (.010) –.006 (.008) .177*** (.023) .000 (.002) –.343 (.219) .701** (.318)

–1.520** (.670) –.739*** (.244) .083*** (.027) .034* (.020) .249*** (.043) –.006* (.003) –.082 (.451) 1.317*** (.440)

–.075 (.393) –.342** (.163) .003 (.010) –.007 (.008) .172*** (.019) –.000 (.002) –.565*** (.209) .800** (.341)

per capita GDP × trade dependence trade dependence × level of autocracy

–.107*** (.040) .083*** (.024) 4.214** (2.109) –.115** (.051)

Gini index ethnic fractionalization Gini index × ethnic fract.

.016*** (.006) .009** (.004)

democracy level of trade partners int. organization membership

N McKelvey & Zavoina’s R2 Wald Chi2 p-Value Log pseudolikelihood

3946 .100 166,45 .0000 –1465.633

3946 .104 168,55 .0000 –1463.431

3946 .103 169,02 .0000 –1463.879

1253 .195 91,13 .0000 –422.899

3944 .115 169,75 .0000 –1457.357

robust standard errors in parentheses; *** p < .01, ** p < .05, * p < .1

i.e. an economy does not alter its institutions. The modernization indicator fits the related literature’s assumptions and seems to support Lipset’s (1959) view, that modernization has a positive impact on democratic developments. Growth is

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slightly negatively related, whereas stability (regime durability) does not seem to have any effect. The coefficients of the dummy labeling oil-exporting countries and the dummy labeling the former Warsaw Pacts members are in line with the expectations elaborated in the previous chapters. In the terms of the transition game the citizenry of oil-exporting countries is not expected to have strong incentives to alter institutions, which is regarded as an effect of the countries’ extraordinary economic performance. The positive coefficient of the Warsaw Pact dummy clearly indicates that former Warsaw Pact members tend to be more alterative, i.e. they are more likely to experience meaningful democratic developments, than countries that did not belong to the Soviet Union’s sphere of influence.85 The positive coefficient of the measure of political influence of the citizenry (level of authoritarianism) reported in the baseline model is in line with the assumption that low levels of participation and inclusiveness do not necessarily affect the de facto power of the citizenry. The coefficient indicates that higher levels of restriction of participation and inclusiveness raise the probability of observing meaningful alterations towards democracy. However, as mentioned above the simple interpretation of the coefficient does not yield any valuable information about the outcome probabilities for low autocracy values. Model 3 focuses this point. Prima facie, the interaction term of trade dependence and per capita GDP reported in Model 2 shows the expected direction. One might argue that the strong significance of the coefficient points to collinearity between the constitutive indicators trade dependence and per capita GDP. But this is not the case. Although the variables are correlated by 0.43, the examination of the variance inflation reveals a factor of 1.35 for trade dependence and a factor of 1.89 for per capita GDP. Both values are below the crucial value of 2.5 (Allison 1999) such that there is no reason to expect a biased estimation. The coefficients of the constitutive indicators also support the expectations. Aiken & West (1991) and Brambor, Clark & Golder (2006) emphasize the fact that the constitutive elements of an interaction term have to be interpreted in relation to the respective conditioning indicator. Following this advise, trade dependence positively influences the likelihood of observing major institutional alterations towards democracy if per capita GDP equals zero. Respec85 After

the Soviet Union’s breakdown the former Warsaw Pact members became – in terms of the model – disintegrated regimes, such that institutional alterations were realized without externallyinduced economic losses. Thus, the positive coefficient seems to support the argument derived from the transition game.

5.2 First insights

131

0 −.2 −.4 −.6

marginal effect of trade dependence

.2

Figure 5.1: The marginal effect of trade dependence on institutional alterations as per capita GDP increases

0

10

20

30

40

50

economic development marginal effect of trade dependence 90% confidence interval

tively, the coefficient on the conditioning indicator is also interpreted as the effect on the dependent variable when the other constitutive indicator equals zero, i.e. modernization has a positive impact on meaningful democratization when trade dependence is zero. In order to interpret the interaction term properly Aiken & West (1991) Brambor, Clark & Golder (2006) advise reporting the marginal effects and employing visualization. Figure 5.1 shows the marginal effect of trade dependence on institutional alterations as the modernization level increases. The marginal effect of trade dependence produces a curve with a strong negative slope. The curve shows the probability of institutional alterations associated with a oneunit increase in trade dependence (from the variable’s minimum) across the range of the modernization indicator. The conditional effect indicates that trade dependence impact on the prospects for meaningful democratic developments decreases as the level of development increases. In the same direction as the interpretation of the coefficients, the figure shows that conditioned on the development level, the marginal effect of trade dependence has a weak positive impact in low levels of development, but that this positive effect diminishes rapidly as development increases. This first result supports the expectations derived from the transition game: the interaction of integration into world markets and high development levels hinders the prospects of democratic development, while the negative effect

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of integration into world markets is slightly reversed in the case of low-developed economies. This finding also partly contradicts Hypothesis 3.3 which claims that integration positively influences economic development, which in turn fuels democratization. This examination indicates that this claim needs to be a refined in cases of high developed autocratic economies, in which the country is more likely to alter its institution towards democracy if it is not strongly connected to world markets – i.e. the economies wealth does not depend on its interaction with actors on world markets. If a given economy’s wealth is connected to international trade and economic cooperation the likelihood of observing meaningful democratic developments decreases. In sum, Figure 5.1 supports the expectation of the transition game and underling economic model, that high-developed economies, which exhibit high levels of external trade dependence, are less likely to alter their institutions meaningfully towards democracy. However, the answer to the question of whether integrated economies tend to be more repressive than less integrated economies is left to the more detailed examination in the next section. Model 3 utilizes the interaction of trade dependence and level of autocracy to indicate the strength of citizenry. The coefficient reported in Table 5.4 shows the expected negative sign. As with the interaction term of Model 2, this interaction will also be examined following the advice of Aiken & West (1991). The marginal effect of trade dependence on meaningful institutional alterations towards democracy conditioned on the level of autocracy is depicted in Figure 5.2 and produces a negative sloped curve. The curve supports the tentative expectation that integrated economies will be less likely to alter their institutions exhaustively towards democracy as the level of restrictiveness increases – i.e. the approximation of whether the citizenry is able to mobilize opposition towards the elite. The figure is also in line with the expectation that the marginal effect of trade dependence will be positive only at very low levels of autocracy, i.e. in societies in which the citizenry possesses some political influence, the vulnerability of the economy slightly raises the prospects of observing major positive institutional democratic developments. Overall, Figure 5.2 confirms the expectation that in societies that are characterized by a ‘weak’ citizenry, the prospects for democracy decrease as economic integration increases. The interpretations of coefficients in Table 5.4 additionally support the expectation that integration is likely to raise the de facto power of citizens if the citizenry already possesses de jure influence. In contrast to the coefficient on trade dependence of the baseline model, the coefficient in

5.2 First insights

133

.1 0 −.1 −.2

marginal effect of trade dependence

.2

Figure 5.2: The marginal effect of trade dependence on institutional alterations as level of autocracy increases

0

2

4

6

8

10

level of autocracy marginal effect of trade dependence 90% confidence interval

Model 3 indicates a positive impact of trade dependence on major positive institutional changes if level of autocracy is zero. In order to conclude the examination of the second hypotheses, Model 4 includes the interaction term reflecting the alternative measure of the strength of citizenry. The term consists of the multiplication of inequality – measured using the Gini coefficient – and Fearon’s ethnic fractionalization measure serving as some approximation of the homogeneity of a given society. This interaction term represents a weak approximation of the strength of the citizenry and indicates that homogeneous societies are more likely to overcome collective actions problems, and are more likely to generate credible revolution threats. The coefficient on the interaction term shows the expected negative direction. The interpretation of the single constitutive items reveals that inequality has a positive impact on meaningful institutional alterations if the ethnic fractionalization measure equals zero, i.e. the society is homogeneous. This is in line with the expectation that inequality’s conflict fuelling effect yields meaningful alterations if the citizenry is able to generate a credible revolution threat. In contrast to this, the interpretation of the coefficient on ethnic fractionalization is not consistent with the theoretical expectation. Ethnic fractionalization has a strong positive impact on meaningful institutional alterations towards democracy when the Gini measure equals zero, i.e. if income is equally distributed within the

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.006 .004 .002 0 −.002

marginal effect of inequality

.008

Figure 5.3: The marginal effect of inequality on institutional alterations as ethnic fractionalization increases

0

.02

.04

.06

.08

.1

ethnic fractionlization marginal effect of inequality 90% confidence interval

society. Figure 5.3 visualizes the marginal effect of inequality as ethnic fractionalization increases. The slope of the curve supports the theoretical expectation. Inequality strongly fuels institutional alterations as long as societies are ethnically homogeneous; as ethnic fractionalization increases, the positive impact of inequality on meaningful institutional alterations fades but remains positive. Formulated in the terms of the transition game, inequality has a positive impact on institutional alterations if the elite of authoritarian regimes face powerful citizens. If the citizens’ capacity to pose a credible threat to the elite decreases, the positive influence of inequality on institutional alterations also decreases. Model 5 accounts for the claim formulated by Hypotheses 4 that an authoritarian regime’s integration into democratic trade and policy environments positively influences the prospects for democratic development. At first glance, both the indicator democracy level of trade partners and the indicator membership in international organizations show a slight positive impact that indicates some support for the diffusion/conditionality argument. In order to complete the first part of the examination, Table 5.5 reports the substantial effects of the models. The first column refers to the odds ratio of the baseline model and shows that economies that have a high FDI-to-GCF ratio are about 0.905 more likely to alter their institutions in a meaningful sense towards democracy than economies that are not

5.2 First insights

135

Table 5.5: The effect of economic integration on institutional alterations - odds ratios and percentage changes

foreign direct investment trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member

model 1

model 2

model 3

model 4

model 5

.905 –1.5% .708 –11.0% 1.012 8.3% .994 –4.2% 1.155 68.9% 1.001 2.8% .657 –12.7% 1.935 9.2%

.943 –.9% 1.132 4.3% 1.037 29.1% .993 –4.5% 1.165 73.9% 1.000 .1% .631 –13.8% 1.837 8.5% .953 –25.8%

.858 –2.3% 1.245 7.6% 1.011 7.5% .994 –4.1% 1.194 9.5% 1.000 .8% .710 –1.5% 2.015 9.8%

.219 –2.2% .478 –24.3% 1.087 81.6% 1.035 18.9% 1.283 111.0% .994 –2.2% .922 –2.5% 3.731 34.2%

.928 –1.1% .211 –1.8% 1.003 1.8% .993 –4.7% 1.189 87.0% 1.000 –.9% .568 –16.7% 2.226 11.3%

per capita GDP × trade dependence trade dependence × level of autocracy

.899 –21.7% 1.087 137.2% 67.634 175.9% .892 –75.6%

Gini index ethnic fractionalization Gini index × ethnic fract.

1.016 19.5% 1.009 2.3%

democracy level of trade partners int. organization membership

N

3946

3946

3946

1253

3944

as connected to international finance flows – holding all other variables constant. In terms of the percent change in odds for a standard deviation increase of the ratio, this means that highly connected economies have odds of being in the major democratic alteration category that are about 1.5% lower than those of less connected economies. The same pattern emerges for trade dependence: the odds of altering institutions towards democracy to a meaningful degree decreases by 11%. If not interacted with trade dependence, high development levels of an economy raise the odds of observing major democratic alterations by 1.012 times, i.e. by

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approximately 8.3%. However, as elaborated above, this support of Lipset’s claim disappears if the interaction of development and trade dependence is included in the model (Model 2). The interaction effect lessens the odds of observing meaningful democratic developments by approximately 26% within the apparent sample. In this context, the effects of the interaction constituting indicators are important and provide additional information to the visualization above. The odds of being in the major democratic alteration category increase by about 4% for a standard deviation increase of the trade-to-GDP ratio when per capita GDP is zero. This result sheds light on the ambiguous findings of the baseline model along the lines of Goldstone (2006): the examination of the interaction effect clearly shows that trade dependence hinders the prospects of democratization of highly developed economies, but raises the probability of democratization of less developed countries. The second operationalization of the strength of citizenry yields results in line with the expectation. The odds of observing alterations of the highest category decrease by 75.6% for a standard deviation increase of the interaction term Gini index x ethnic fractionalization. The effects in Model 5 indicate a weak influence of the democracy level of trade partners. Economies that have a more democratic trade environment are 19.5 times more likely to alter their institutions towards democracy in a meaningful way than economies whose trade environments are less democratic. Integration into international organizations leads to an increase in the odds of about 20%. In sum, the first results provide some support for the hypotheses derived from the transition game and the related economic model. Integration into world markets and connectedness to international finance flows hinders the prospects of meaningful democratic developments. Moreover, the modernization claim is not supported as an alternative solution for the puzzle of transition within the apparent sample. But Model 5 provides strong support for the diffusion/conditionality claim that a democratic trade environment positively influences meaningful democratization. The same holds for membership in international organizations. Hence, the first insights yield a slightly ambiguous result. At first glance, the basic expectations derived from the transition game are consistent with the data, while the alternative explanations are only partly supported. The examination so far only indicates that meaningful democratic institutional alterations are less likely if an economy is closely connected to international markets. The remaining question is whether economic integration or the alternative explanations account

5.3 The effect of integration on the prospects of democratization

137

for developments categorized below, i.e. minor democratic or autocratic developments. In order to conduct a more detailed examination the next section analyses the probabilities of observing the respective developments based on the ordered logistic regression model.

5.3 The effect of integration on the prospects of democratization If research questions or hypotheses focus on specific categories of dependent variables, as in this application, the interpretation of the coefficients estimated by an ordered logistic regression will be misleading. In such cases Long (1997) suggests an interpretation of predicted probability curves for the respective categories of the dependent variable. These probabilities are given by Equation (4.7), Pr (yi = m|xi ) = F(τm −xi β )−F (τm−1 − xi β ), and can be utilized to compute and plot relationships between an independent variable and the respective dependent categories holding all other independent variables constant. In this application the dependent variable has five outcomes: major positive institutional alterations, minor positive alterations, no alterations, minor negative alterations, and major negative institutional alterations. Figure 5.4 shows the predicted probabilities of observing the respective outcomes as the FDI-to-GCF ratio varies. The predicted probability curves reflect the uneven distribution of alterations in the sample (see Table 5.1). The possibility of observing economies that do not alter their institu-

−4

−2

0 FDI−to−GCF−ratio

major negative alterations minor negative alterations no alteration

(a) with no alteration outcome

2

4

0

0

.2

outcome probability .01 .02 .03

outcome probability .4 .6 .8

.04

1

Figure 5.4: The outcome probabilities as FDI-to-GCF-ratio increases

−4 major positive alterations minor positive alterations

−2

0 FDI−to−GCF−ratio

major negative alterations minor negative alterations

2 major positive alterations minor positive alterations

(b) without no alteration outcome

4

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tional design is about 90%, while the probability of observing the other outcomes is below 10%. Although this visualization does not optimally serve the purpose of analyzing the probabilities of all outcomes, the figure shows that the slope of the curve that denotes the no-alteration outcome is slightly positive. In order examine the other outcomes in more detail consider the figure on the right side, which extracts the other outcomes. This detailed figure shows that at low values of the FDI-to-GCF ratio the probability of an economy’s minor positive institutional development is twice as high as the probability of observing major democratic developments. With regard to the percentages these slopes should not be overestimated. The chance of observing minor positive changes as the FDI-to-GCF ratio varies is always less than 5%. However, as the FDI-to-GCF ratio increases, the probability of minor positive alterations slightly decreases, while the probability that an economy develops towards authoritarianism by minor negative alterations increases. Although both curves which denote the probabilities of positive alterations decrease as the dependence on international financial markets increases, the chance of observing minor positive movements towards democracies is higher than the negative alteration outcomes. A different pattern reveals when the outcome probabilities are computed allowing trade dependence to vary (Figure 5.5). The slope of the curve denoting minor negative changes rises with interdependence, such that at high interdependence values the probability of observing minor negative alterations is four to five times higher than the chance of observing minor positive alterations. Even the probability of observing major negative developments is twice as high as the probability of observing economies that are in the minor positive category. It is again important to note that the probabilities of observing any changes are substantially less than the chance of observing the no alteration outcome. This result is partly in line with the findings of Epstein et al. (2006: 563) who report that trade openness “helps stabilize full democracies, but it does not help autocratic or partially democratic regimes move up the ladder”. The authors report a negative impact of trade openness on democratization of autocratic and partial regimes in their table on the same page but interpret the negative coefficient as a positive impact on the stability of the regimes. As the authors use a dichotomous measure it is argued here that their inference does not account for the whole story. With regard to the findings reported above, high levels of trade dependence not only stabilize authoritarian regimes but also tend to increase the chance of developments towards autocracy. Regarding the results depicted in Figure 5.4

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0

.01

outcome probability .02 .03 .04

.05

Figure 5.5: The outcome probabilities as trade dependence increases

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1

2 trade dependence

major negative alterations minor negative alterations

3

4

major positive alterations minor positive alterations

and Figure 5.5 as tendencies, both findings provide some support for Hypothesis 3.1. Hypothesis 3.1 states that integration into international economic cooperation hinders the prospect for institutional changes but stabilizes existing institutional designs. However, the results based on the graphical interpretation of the influence of both indicators of integration reveal some ambiguity: besides its stabilizing impact, FDI dependence influences minor positive developments to a higher degree than authoritarian tendencies. But the probability of observing positive impacts decreases as the FDI inflow increases. In contrast to this, rising trade dependence positively influences negative developments. These results also support the second part of the hypothesis, which expects that highly integrated regimes will tend to be more repressive than less integrated regimes. As elaborated in the operationalization chapter, negative developments towards authoritarianism can be understood as the institutionalization of repression. In this sense, the detailed examination of the impact of integration on institutional developments confirms this expectation, whereas the negative effect is much stronger for trade dependence than for FDI dependence. This result seems to be in line with the findings of Li & Resnick (2003) that authoritarian regimes reform in order to attract FDI, though the reforms are restricted to the protection of property rights and the appropriation of investment. Figure 5.6 depicts the predicted probabilities of the four possible outcomes if the development level varies. The no alteration outcome is dominant

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.01

outcome probability .02 .03 .04

.05

Figure 5.6: The outcome probabilities as economic development increases

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20 30 economic development

major negative alterations minor negative alterations

40

50

major positive alterations minor positive alterations

again and omitted in order to provide a detailed visualization of the other outcomes. As long as trade dependence is held constant, development increases the chances of observing minor positive alterations and to a lesser extent also major alterations towards democracy. The slope of both negative outcome categories is negative, i.e. economies are less likely to alter their institutions towards authoritarianism as their level of development increases. As argued above, the simple interpretation of the influence of development levels on the probabilities of institutional changes is misleading if one does not account for the interaction of development levels and economic integration. Figure 5.7 and Figure 5.8 display the predictions of observing the respective outcomes based on the regression results reported in Model 2. Figure 5.7 depicts the effect of high levels of trade dependence on the outcome probabilities as the level of development increases.86 The figure on the left side shows that the probability of observing no alterations of highly integrated regimes decreases in higher values of per capita GDP. In line with the expectation, the stability-reducing effect of high income levels does not yield institutional developments towards democracy but negative alterations. The 86 This

method of examining interaction effects is proposed by Long & Freese (2006). The predicted probabilities are plotted holding the indicator of interest at a fixed value and allows the conditioning indicator to vary. Here trade dependence is fixed at a high and a low value to simulate two distinct scenarios.

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0

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20 30 economic development

major negative alterations minor negative alterations no alteration

(a) with no alteration outcome

40

50

major positive alterations minor positive alterations

0

0

.05

.2

outcome probability .1 .15 .2

outcome probabilty .4 .6 .8

1

.25

Figure 5.7: The effect of high trade dependence on institutional alterations as economic development increases

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10

20 30 economic development

major negative alterations minor negative alterations

40

50

major positive alterations minor positive alterations

(b) without no alteration outcome

chances of observing minor negative or major negative changes increases by up to 20% while the probability of observing no alterations decreases by almost 40%. A positive impact of high trade dependence on the probability of observing positive institutional alterations is only reported for low income values (see Figure 5.7b)). As per capita GDP increases, the probability of observing minor and, to a lesser extent, major negative alterations of highly integrated economies increases rapidly up to 25%, while the probabilities of observing positive outcomes is almost zero. Figure 5.8 depicts the outcome probabilities for low levels of the interdependence ratio as the modernization indicator increases. As expected in this scenario, the effect is reversed in favor of the modernization claim. Given low values of trade dependence, an increase of per capita GDP raises the probabilities of observing positive institutional alterations. While increasing economic development raises the chances of observing negative institutional developments in highly integrated economies, the positive impact of development on positive alterations becomes meaningful if the interdependence ratio is fixed at a low value. Compared to the percentage changes indicated by the probability curves of the high interdependence scenario, the impact of low economic interdependency conditioned on the level of development is negligible. Nevertheless, the result strongly supports the findings of the previous section that the modernization claim needs some refinement concerning the interaction of economic development measured in per capita GDP and the trade dependence ratio. The examination so far suggests that the

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outcome probability .02 .03 .04

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Figure 5.8: The effect of low trade dependence on institutional alterations as economic development increases

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20 30 economic development

major negative alterations minor negative alterations

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major positive alterations minor positive alterations

impact of development on the probability of democratic alterations depends on the level of the connectedness to international markets. The positive effect of development on democratization partly disappears if the development’s interaction with trade dependence is explicitly modeled and included. This important result supports the findings of Rudra (2005), who argues that international finance openness has a positive impact on the democratization of less developed countries, and the findings of Goldstone (2006), who shows that poor economies are more likely to experience transitions. The detailed examination of Model 1 and Model 2 provides some support for Hypothesis 3.1. The examination of the predicted probabilities for each outcome category reveals that integration into world markets has a stabilizing impact on institutional designs. In addition, there is also some support for the expected tendency that integrated regimes are more repressive than regimes that are loosely connected to international markets, whereas the negative effect is much stronger for trade dependence than for FDI dependence. Models 1 and 2 also provide some insights concerning the modernization claim that is captured by Hypothesis 3.3. If the international economic context is not taken into account, the analysis supports the claim that economic development positively influences the likelihood of observing democratic institutional alterations. However, this positive impact partly disappears if the underlying as-

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sumption that yields Hypothesis 3.1 is taken into account. Given that integration into world markets raises the marginal product of labor and capital (Frankel & Romer 1999) and given that high income levels deter disenfranchised citizens to initiate institutional alterations, the interaction between both variables becomes an important indicator in order to conduct a proper hypothesis test. The results provided by Model 2 in Table 5.4 as well as the graphical interpretation provide strong support for the argument that high income levels deter citizens from initiating harmful, i.e. costly, institutional alterations. Nevertheless, the results also indicate that modernization remains a strong predictor in the case of less integrated economies. Hypothesis 3.2 claims that highly integrated economies alter their institutions towards democracy only in terms of minor changes and only if a powerful citizenry exists, which is able to generate a credible threat to the ruling elite. Some evidence for the first part of the conditional hypothesis is provided by the examination of the predicted outcome probabilities allowing trade dependence to vary (Figure 5.5) and by the discussed effect of high trade dependence conditioned on the level of development depicted in Figure 5.7. In both graphs, the curves of the minor negative change outcome report higher probabilities than the major positive outcome option. The first vague proxy for measuring the ‘power’ citizens combines the de jure influence of the citizenry with high levels of trade dependence. The interaction term accounts for the argument that high integration levels and institutional granted participation possibilities strengthen the position of citizens in the bargaining with the elite. Figure 5.11 draws the distinct outcome probabilities for high trade dependence values and allows the conditional indicator – level of autocracy – to vary. The probability curves depicted in Figure 5.9 show that higher participation rights of the citizenry combined with higher levels of trade dependence raise the chance of observing positive institutional developments. Given high levels of interdependence conditioned on low autocracy values, the probability of observing minor positive alterations is higher than the probabilities of observing major positive or negative outcomes. (Of course, the omitted probability of remaining stable dominates the alteration probabilities). As the level of autocracy increases, i.e. as the citizens’ de jure participation rights decrease, the probability of observing minor positive alterations towards democracy decreases while the probability of observing minor negative alterations increases. However, with regard to the low probabilities reported in Figure 5.9, one has to rate

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0

0

.02

outcome probability .01 .02 .03

outcome probability .04 .06 .08

.1

.04

Figure 5.9: The effect of trade dependence on institutional alterations as level of autocracy increases

0

2

4 6 level of autocracy

major negative alterations minor negative alterations

(a) high trade dependence

8

10

major positive alterations minor positive alterations

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4 6 level of autocracy

major negative alterations minor negative alterations

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major positive alterations minor positive alterations

(b) low trade dependence

this results as weak tendencies. The effect of low interdependence conditioned on the level of autocracy reveals an interesting result, which is also in line with the theoretical expectations. Figure 5.9b) shows that the reform-pressing effect of low autocracy values nearly disappears if trade dependence is fixed at a low level. It also indicates that negative developments are less likely to be observed. In terms of the transition game this may be evaluated as some weak support for the assumption derived from the underlying economic model that less integrated regimes are reform prone since institutional alterations in favor of redistributive measures are not connected to externally-induced economic losses. In order to confirm these tendencies the second proxy for the ‘strength’ of citizenry must be examined. The interaction of income inequality with ethnic heterogeneity reported in Model 4 accounts for the conditional nature of the argument that inequality fuels institutional alterations only if the citizenry possesses the power to generate a credible revolution threat. Assuming that citizens of homogeneous societies are much more successful in overcoming collective action problems than the citizenry of heterogeneous societies, it was argued that in heterogeneous societies the conflict-fueling effect of inequality is undermined by the citizens’ inability to overcome the collective action problem, which in turn erodes the credibility of the revolution threat. In these terms, the interaction of both variables provides a measure of the strength of citizens, i.e. the credibility of the revolution threat. At first glance, the visualization of the marginal effects of

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0

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.2

outcome probability .05 .1

outcome probability .4 .6 .8

1

.15

Figure 5.10: The effect of inequality on institutional alterations as ethnic fractionalization increases

0 0

.2

.4 .6 ethnic fractionalization

major negative alterations minor negative alterations

(a) high inequality

.8 major positive alterations minor positive alterations

.2

1

.4 .6 ethnic fractionalization

major negative alterations minor negative alterations no alteration

.8

1

major positive alterations minor positive alterations

(b) low inequality

inequality on institutional alteration conditioned on the levels of ethnic fractionalization (Figure 5.3) provides support for the assumption that high levels of inequality produce conflict-fueling effects if societies are ethnically homogeneous. As fractionalization levels increase, inequality’s impact on positive institutional changes decreases. In the same way that the other interaction effects are examined Figure 5.10, and Figure 5.11 plot the probability curves by holding the inequality at fixed values and allowing ethnic fractionalization to vary. Figure 5.10 confirms the first findings and provides some support for the claim that homogeneity and high levels of inequality increase the likelihood of observing minor positive and, to a lesser degree, major positive alterations. With low fractionalization values the probability of observing minor positive alterations is about 10% while the chance of observing radical positive changes is about 5%. As societies become heterogeneous in terms of their ethnic compositions, both probability curves rapidly decrease. Sub-figure b) additionally includes the no-alteration probability and shows that the chance of observing no institutional alterations increases with fractionalization by about 10%, i.e. given high inequality levels, fractionalization tends to stabilize existing institutional designs. Conversely, low inequality conditioned on the homogeneity measure reverses the effect of observing institutional developments. Figure 5.11 indicates that the probability of observing positive changes slightly increases with heterogeneity, while at low levels of fractionalization minor neg-

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0

outcome probability .01 .02 .03

.04

Figure 5.11: The effect of low inequality on institutional alterations as ethnic fractionalization increases

0

.2

.4 .6 ethnic fractionalization

major negative alterations minor negative alterations

.8

1

major positive alterations minor positive alterations

ative developments are more likely.87 However, the visualization in Figure 5.11 may be misleading if the percentage values are disregarded. Low inequalities’ impact on the probability of observing any institutional alteration is below 5%, while the chances of observing positive changes given high inequality and low fractionalization are about 10%. In sum, the detailed examination of the proxies for the ‘strength’ point to a tendency that is in line with the expectation in Hypothesis 3.2. Societies in which (1) the citizenry possesses some political influence or societies which are characterized by ethnic homogeneity, and (2) are strongly connected to international mar87 This

is not a surprising result. Collier (1998) points to the complex relationship of high fractionalization and political stability. He shows that high ethnic diversity is less likely to foster violent conflicts than moderate levels of fractionalization. He also provides support for the claim that ethnic diversity has a negative impact on economic performance – by increasing interaction costs – especially in economies which are characterized by limited political liberties and rights. In this context he elaborates and shows that power-sharing institutions are likely to eliminate these negative effects. Hence, highly fractionalized societies may be expected to be more reform prone in terms of establishing power-sharing institutions in order to reduce interactions costs in favor of economic cooperation between the ethnic groups. In the same vein the literature on the onset of civil war which examines the hypotheses that ethnic diversity increases the risk of violent conflict, confirms this finding: fractionalization does not necessarily boost social conflicts to civil war (see for instance Cederman & Giradin 2007, Fearon, Kasara & Laitin 2007, or Schneider & Wieshomeier 2008).

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kets are more likely to alter their institutions in terms of minor positive changes than in terms of radical alterations. But these results do not provide strong support for Hypothesis 3.2: as elaborated in the operationalization chapter, the quality of data used to utilize the idea of the strength of citizenry is highly questionable. The validity of the indicator level of authoritarianism is questionable as it only offers a weak analytical approximation to reflect the de facto political influence of the citizenry of a given political system. Moreover, the second proxy – the interaction of the Gini coefficient with the ethnic fractionalization measure – suffers from problems of availability (Gini) and problems of reliability (fractionalization). With regard to this shortcoming, the supportive results are only evaluated as tendencies which are in line with the findings of the transition game and motivate further research. But further research on this issue faces a worrisome data situation. Although almost any rationalist explanation of regime change relies on the assumption that some revolution threat by the citizenry presses elite or authoritarian governments to reform – as elaborated in the theory chapter – this claim is difficult to confirm using a broad quantitative set-up. There is no large data set over time and space that includes information about societal sentiments towards governments or information about individual well-being or dissatisfaction about policies, nor data sets that include information about the structures and capabilities of civil society structures, which may be utilized to construct valid measures of some revolutionary potential. A loophole out of this worrisome data situation may be the compilation of existing polls and individual data. The source of this compilation may be the World Value Survey, which is limited in time and space and is poorly documented in some cases (e.g. there is no detailed information about sampling and data collection of the Chinese polls); or the Afrobarometer which contains individual information of selected African countries since 1999; and also the Latinobarometer which provides individual data from 1995. There are also some polls of Latin American societies conducted by Gallup starting in the 1970s that may be utilized to construct measures of dissatisfaction and societal sentiments, which in turn yield some approximation of revolutionary potential. Besides all of the methodological problems that arise from utilizing distinct and mostly poorly documented polls, such a compilation would, relatively to relying purely on structural indicators, facilitate a more adequate examination of the underlying assumption that dissatisfaction with governments or individual wellbeing fuel social conflicts.

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The last results to scrutinize in detail are those of Model 5 reported in Table 5.4. Model 5 examines whether diffusionalist and conditionality arguments shed some light on the directions of observed institutional alterations covered in the apparent sample. Hypothesis 3.4 predicts that a democratic trade environment and membership in international organizations will bear some positive impact on the chance of observing regime alterations towards democracy. The ordered logistic regression yields slightly positive coefficients and indicates a positive impact on the probability of observing alterations towards democracy. Figure 5.12 supports this first interpretation. The curves on the left side show that the probability of observing institutional shifts towards democracy slightly increases with membership in international organizations while the chance of observing negative developments decreases. This supports the claim that integration into international organizations has a constraining effect on the use of repressive policies (indicated by negative institutional developments). The depiction on the right side reveals a similar pattern. The chance of observing the use of repressive measures is approximately 2.5% at low values of the additive polity scores of the major trade partners. This chance decreases in favor of democratic shifts if the trade environment becomes more democratic. Figure 5.12b) clearly shows that the chances of observing minor positive developments and, to a weaker extent, major positive shifts increase with the democracy level of the trade partners. Although both figures provide some support for the claims of the conditionality and the diffusion literature, one

0

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outcome probability .02 .04

outcome probability .01 .02 .03

.06

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Figure 5.12: The outcome probabilities as membership in int. Organizations varies and the democracy level of trade partners increases

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50 100 membership in int. organizations major negative alterations minor negative alterations

150

major positive alterations minor positive alterations

(a) membership in int. Organizations

−20

−10 0 10 democracy level of trade partners major negative alterations minor negative alterations

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major positive alterations minor positive alterations

(b) democracy level of trade partners

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should keep in mind that in both cases the probabilities of observing any alteration outcome is very low compared to the stabilizing effects of the indicators. 5.4 Scrutinizing distinct regime types One may argue that the analysis of directions of transitions using a sample that consists of all polities since 1970 disregards the fact that distinct initial institutional set-ups influence the directions of change. Epstein et al. (2006), for instance, argue that the institutional development partial regimes are difficult to predict. While institutional movements of straight regime types are predictable by relying e.g. on modernization indicators, the authors are not able to forecast the institutional dynamics of partial regimes. They finally reason that the volatility of partial regime types weakens the explanatory power of the modernization claim. Since Epstein et al. (2006) are primarily focused on transitions towards democracy and also on modernization’s impact – as argued above, they disregard findings which suggest international economic constraints of institutional developments – their conclusion that partial regimes are crucial to understanding democratization motivates me to scrutinize whether the already identified effects differ with regard to distinct pre-transitional institutional designs. Table 5.6 reports the results of the ordered logistic regression for distinct sub-samples. Model 6 only accounts for institutional developments of authoritarian regimes; Model 7 accounts for partial regimes defined using the Polity IV coding scheme; Model 8 employs Epstein et al’s coding of partial regimes; and Model 9 reports the results of democratic regimes’ institutional movements. The pure regime types are identified using the Polity coding scheme.88 Instead of re-estimating all five models, only the model that includes the interaction between trade dependence and per capita GDP are computed. Prima facie, the coefficients of Model 6 show the same tendency as the coefficients computed using the overall sample. An autocracy’s dependence on foreign direct investment negatively influences the likelihood of observing exhaustive democratic developments. Figure 5.13 indicate that (1), an increase of the FDI-to-GCF ratio has a stabilizing impact on autocracies. The figure also shows that (2) the chance of observing positive minor institutional developments decreases as the FDI dependence increases, while the probability of observing negative developments increases with the FDI dependence. This is 88 For

the distinct definitions of partial regimes see Chapter 5.2.

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Table 5.6: Effect of economic integration on institutional alterations - distinct subsamples (1970-2000) model6

model 7

model 8

model 9

autocracies

partial regimes (a)

partial regime (b)

democracies

per capita GDP × trade dependence

–.337 (.378) –.023 (.210) .016 (.020) –.006 (.008) .155*** (.030) –.002 (.005) –.338 (.274) 1.071*** (.310) –.0327* (.018)

–.376 (1.158) –.120 (2.081) .117 (.144) –.014 (.016) .030 (.064) .010 (.009) .608 (.642) –.155 (.970) –.109 (.438)

.620 .(866) –1.372 (1.361) .094 (.093) –.008 (.014) –.045 (.051) .010 (.007) .403 (.521) .165 (.784) .156 (.264)

1.432** (.582) 2.157 (1.449) .132*** (.047) .007 (.030) –.027 (.054) –.007** (.003) –.723* (.373) .686 (.609) –.174** (.086)

N McKelvey & Zavoina’s R2 Wald Chi2 p-Value Log pseudolikelihood

2566 .109 89.59 .0000 –1104.421

464 .128 46.36 .0000 –204.933

633 .086 46.36 .0000 –289.402

1380 .095 26.57 .0219 –315.990

foreign direct investment trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member

robust standard errors in parentheses; *** p < .01, ** p < .05, * p < .1

an important difference to the overall sample: here minor movements towards authoritarianism have a higher chance than minor positive movements, i.e. concerning autocracies the ambiguity of the integration effects disappears, supporting Hypothesis 3.1. Regarding the important interaction term, which operationalizes the nexus between wealth and connections to international markets, the coefficient is in line with the already discussed findings. The graphical depictions in Figure 5.14 show that the institutional stability of highly dependent autocratic economies declines as wealth increases, while the probability of observing repressive institutional developments rapidly increases. The results of the regression equations, which yield the results of models 7 and 8, clarify the problem of the definition of distinct thresholds to classify partial regimes: due to the change of the thresh-

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0

.02

outcome probability .04 .06 .08

.1

Figure 5.13: The outcome probabilities as FDI-GCF-ratio increases

−4

−2

0 FDI−to−GCF−ratio

2

major negative alterations minor negative alterations

4

major positive alterations minor positive alterations

old value by one point on the polity scale the signs of the indicators of interest change. The influence of FDI dependence is positive in Model 8 and negative for the initial Polity IV coding scheme. Figure 5.15 contrasts the predicted chances of observing distinct outcomes from both sub-samples. As the FDI-to-GCF ratio increases, the curves in a) – i.e. the partial regimes given the Polity coding –

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economic development major negative alterations minor negative alterations no alteration

major positive alterations minor positive alterations

(a) without no alteration outcome

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outcome probability .4 .6 .8

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Figure 5.14: The effect of trade dependence on institutional alterations of authoritarian regimes as level of autocracy increases

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economic development major negative alterations minor negative alterations

major positive alterations minor positive alterations

(b) without no alteration outcome

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outcome probability .02 .04

outcome probability .02 .04 .06

.06

.08

Figure 5.15: The outcome probabilities as FDI-to-GCF-ratio increases

−1

−.5

0 FDI−to−GCF−ratio

major negative alterations minor negative alterations

.5

1

−1

major positive alterations minor positive alterations

(a) partial regimes according Polity IV

−.5

0 FDI−to−GCF−ratio

major negative alterations minor positive alterations

.5

1

minor negative alterations major positive alterations

(b) partial regimes according Epstein et al. (2006)

depict a slight decrease in the minor positive outcome, while both outcomes that denote negative institutional developments slightly increase. On the right side the effect is reversed: here the minor democratic alterations increase while the chance of observing negative movements decreases as the FDI inflow increases. The same holds for the interaction term and the constituting indicator trade dependence. Model 8 states that the chance of observing meaningful democratic alterations decreases with rising economic integration if the economy is less developed. In Model 7 the probability of observing exhaustive democratization

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outcome probability .1 .2

outcome probability .01 .02 .03

.3

.04

Figure 5.16: The effect of high trade dependence as economic development increases

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10 economic development

major negative alterations minor negative alterations

15

major positive alterations minor positive alterations

(a) partial regimes according Polity IV

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10 economic development

major negative alterations minor negative alterations

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(b) partial regimes according Epstein et al. (2006)

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increases with integration conditioned on low development levels. Figure 5.16 contrasts both models regarding the interaction effect employing predicted outcome probability plots.Figure 5.16a) depicts the effect of high trade dependence as the development level increases for the sample which utilizes the Polity coding scheme and Figure 5.16b) visualizes the effect computed using the Epstein et al. (2006) coding. While on the left side the chances of observing the respective outcome categories are only small and indicate slightly decreasing negative effects of integration conditioned on development (interestingly, the exhaustive negative development has a higher chance than the minor negative outcome), one is able to identify a strong positive impact in the case of the alternative partial regime sample. In Figure 5.16b), the chance of observing minor positive developments rises by about 20%. With regard to the already elaborated discussion of the consequences of defining thresholds, this result strongly confirms the reservations concerning any interpretation. In line with Epstein et al. (2006) one may endorse the claim that institutional developments of partial regimes are less easy to understand – not only because of their assumed institutional volatility, but also to a large extent because of conceptual specification problems which complicate quantitative measurement. Model 9 reports the regression results using the sub-sample that consists of democracies, i.e. regimes which possess at least seven points on the polity scale. Comparing the results in Model 9 with the autocracy samples in Model 6 and also the overall sample (see Table 5.4) it is striking that the FDI dependence becomes positive but that the effect of the interaction term is negative. Figure 5.17 clearly shows that an increase of the FDI-to-GCF ratio raises the chance of observing minor positive alterations by 30%. With regard to the result of the autocracy sample – depicted in Figure 5.14 – the examination of the democracy sample supports the suggestion that the effect of FDI dependence differs between autocracies and democracies: while FDI dependence seems to press regimes that already comply with Dahl’s democracy criteria to further democratization, the effect on autocracies is reversed. In the latter, (1) a rising FDI-to-GCF ratio tends to stabilize authoritarian rule and (2) if alterations are observed the chance of observing minor negative changes rises with FDI dependence. This result partly questions the findings of Li & Resnick (2003) – that authoritarian regimes only slightly reform in order to attract FDI – and suggests the refinement of their claim concerning partial regimes. Figure 5.17b) depicts the effect of high levels of trade dependence on

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.2

outcome probability .01 .02 .03

outcome probability .4 .6 .8

.04

1

Figure 5.17: The outcome probabilities as the integration indicators increase

−1

0

1 economic development

major negative alterations minor positive alterations

2

minor negative alterations no alterations

(a) FDI-to-GCF-ratio

3

0

10

20 economic development

major negative alterations minor positive alterations

30

40

minor negative alterations

(b) trade dependence/ econ. development

the outcome probabilities as the level of development increases for the democracy sample. Although there are only slight effects, one is able to identify a decreasing chance of observing minor alterations towards more democratic institutions and an increasing probability of observing negative institutional developments as the level of dependency increases. This result points to an interesting issue: it seems that regimes that at least comply with some minimum criteria of democracy are more likely to develop further if the economy depends on foreign direct investment, but that high trade dependence combined with high development levels decreases the prospects for further democratization. In these cases the interaction of high trade dependence and high development levels has a strong stabilizing effect and if any institutional developments are observed, it is more likely that we will observe changes towards authoritarianism than towards democratic rule. 5.5 Summarizing the findings The examination of the conflicting hypotheses presented in the last sections revealed mounting evidence that economic integration into world markets has a negative impact on the prospects of democratization. These findings strongly challenge the modernization related claim that economic integration helps to build democracy. The examination reveals that economic integration has a striking effect on stabilizing institutional designs and if changes are observed both indicators of integration raise the chance of observing minor negative developments, Nega-

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155

tive developments are understood as repressive measures and interpreted as developments toward stricter autocratic government. These findings are only partially in line with the sketched literature on the nexus between globalization and democratization. While Li & Reuveny (2003) report a positive impact of FDI on democratization in general and Burkhart & de Soysa (2003) specify that when foreign direct investment dominates an economy it tends to have positive effects on the chances for democratization, the empirical results in this book suggest the opposite: the positive effect on democratic development of foreign direct investments diminishes if the dependence on FDI increases. The examination revealed that a positive (in terms of observing changes towards democracy) impact of FDI is visible in only those economies that are not dominated by foreign investments, while high levels of FDI dependence increase the likelihood of institutional movements towards stricter autocracy – especially in the autocratic sub-sample. This result is in line with the literature that connects the attraction of foreign investments to the existence of property rights protection and rule of law (see for instance Brunetti & Weder 1998 or Li & Resnick 2003). In this vein, the results of this examination suggest that authoritarian economies that have a low FDI inflow are likely to reform towards democracy in order to attract foreign direct investment. This minor developments may be limited to the rule of law and certain economic policies. However, if the FDI level increases, the necessity to reform further diminishes. On the other side, it could be shown that this reasoning does not hold in the case of partial regimes. Concerning trade dependence’s impact on observing democratization, the findings presented above do not show a positive impact of trade on democratization as reported by Lopez-Cordova & Meissner (2005) and Yu (2005), or some vague, not-systematic, positive impact (Papaioannou & Siourounis 2008). In contrast to those findings, this inquiry is in line with the inference of Milner & Kubato (2005) that trade does not serve as a predictor for democracy. Moreover, the results presented here strongly support the suggestion that the link between trade and democratization is negative and thus, confirms Rigobon & Rodrik’s (2004) general conclusion. Besides the strong stabilizing impact, high levels of trade dependence seem to be more likely to encourage authoritarian rulers to further restrict participation rights. In this context, the second major finding of Chapter 5 has to be considered: as predicted by the model of the underlying economy, the negative effect of trade becomes stronger as the development level, i.e. the income level, of a given economy increases. This means, as the well-being

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of economies is tied to high levels of integration into world markets, the chances of observing alterations towards democracy decrease in favor of movements towards stricter authoritarian rule. Given low development levels, the impact of trade on democratization is positive. This finding has some severe consequences for the evaluation of the modernization claim. As shown above, if the connection of trade and development is explicitly modeled, i.e. the source of economic wealth is somehow attributed to interaction with international markets, the link between wealth and the occurrence of democracy is negative. Trade only seems to encourage democratization only in the case of low-developed economies.89 The results of this examination are also only partially in line with the important work of Przeworski et al. (2000) and Przeworski & Limongi (1997) who demonstrate that political systems with higher levels of per-capita GDP are more likely to remain stable. With regard to the finding that dichotomous measures of regime changes negatively influences the variance within samples and are likely to bias inferences, the results of Przeworski et al. (2000) are questionable. Consider that the authors utilize a dichotomous measure of regime changes and disregard institutional developments that do not lead to regime changes. Therefore, the high probabilities of observing minor negative developments observed in this examination are mostly included in the stability outcome of Przeworski’s et al. (2000) measure. It was shown that disregarding institutional developments that do not yield regime changes obfuscates an aspect important to shedding light on the puzzle of the directions of transitions. Figures 5.7a) and 5.16a) clearly show that the likelihood of observing meaningful negative institutional alterations, i.e. alterations which are likely to indicate regime changes from one type of authoritarianism to another, increases when highly developed economies are strongly connected to international markets. The measure of Przeworski et al. (2000) ignores such institutional shifts within authoritarianism. The results visualized in Figures 5.7a) and 5.16a) show that highly developed and strongly integrated economies also tend to radically alter their institutions, which may shape the distribution of wealth or account for changed cleavages within the society, but do not yield institutional designs that are regarded as democratic.90 Przeworski’s et al. (2000) dichotomous measure 89 A

result which is in line with the findings of Goldstone (2006) terms of the transition game this may denote that such alterations occur in order to minimize economic costs, which are expected by the actors if the autocratic characteristics are to be completely abandoned in favor of majority-oriented policy-making. This means that the actors’ value individual outcomes of altered but still authoritarian institutions higher than outcomes of democratic

90 In

5.5 Summarizing the findings

157

also ignores the impact of minor changes on generating support and political stability. In contrast to Przeworski et al. (2000), this examination shows that political stability of authoritarian rule does not purely depend on high income levels that prevent alterations, but on high income levels which are connected to high levels of integration. In sum, regarding the directions of transitions, integration into the world market seems to be an eligible predictor of institutional alterations. Integration stabilizes designs, but if changes occur, the chances of observing movements towards authoritarianism are higher than changes towards democracy. This summary should not neglect the fact that the results of the examination of the conflicting hypotheses are ambiguous. Although economic integration’s impact strongly supports the deductions from the transition game and the underlying economic model, accounting for diffusionalist and conditionality indicators provides some support for the arguments from this literature. Both indicators – democratic trade environments and the membership in international organizations – show a positive, though slight, impact on democratization and raise suggestions that conditionality measures and diffusion through trade are likely to pull regimes towards democracy. Another crucial point of the examination concerns the important analytical feature of whether or not the de facto power of the citizenry makes the observation of minor democratic reforms more likely. Although scrutinizing both proxies points to the expectations formulated in Hypothesis 3.291 , the result is only evaluated as a tendency in favor of the model. As elaborated above, the questionable data quality inhibits a straight interpretation of the results and points to a severe problem. Although rationalist explanations of regime changes rely on the assumption that some revolution threat posed by the citizenry presses elite or authoritarian governments to reform, there exists no data to test this claim. There exists no large data set that covers a large number of cases over time and space, which includes valuable information about societal sentiments towards governments or information about individual well-being, or dissatisfaction about policies. The same holds for data sets that include information about the structures and capabilities of civil institutional set-ups. (1) societies in which the citizenry possesses some political influence or societies that are characterized by ethnic homogeneity, and (2) societies that are strongly connected to international markets, are more likely to alter their institutions in terms of minor positive changes than in terms of radical alterations.

91 That

158

5 Results

society structures, which may be utilized to construct valid measures of some revolutionary potential. A loophole out of this worrisome data situation may be the compilation of existing polls and individual data. Besides all methodological problems that arise from utilizing distinct and mostly poorly documented polls such a compilation would facilitate a more adequate examination than relying on structural indicators.92 However, the results reported above should be regarded as tendencies, which provide some support for both hypotheses, i.e. that integrated regimes are more repressive than less integrated regimes (Hypothesis 3.1), and according Hypothesis 3.2 that democratic developments of highly integrated authoritarian regimes are only expected to occur in terms of minor institutional alterations if demands for reform reflect some credible threat of revolution.

92 Realizing

this is left to further research.

6 Conclusion

Much has been written about regime transitions and the origins of democratization. Unfortunately, the majority of this literature has failed to observe that a large number of transitions have not yielded democracies. Inspired by Geddes’(1999) observation and relying on Polity IV data it was shown that the majority of regime changes of the observed 188 transitions between 1950 and 2000 yield to regime types that are characterized by the dominance of authoritarian institutional arrangements rather than by democratic rule. In this time period 41 autocracies and 21 partial regimes broke down and their transitions yielded the establishment of democratic rule, while 54 transitions from authoritarian rule and 8 breakdowns of democracies resulted in the creation of partial regimes. In the same time spread 65 regime changes – the breakdown of 39 partial regimes and 26 democracies – ended in the establishment of authoritarianism. This observation reveals an interesting puzzle: although democracy is spreading all around the world and had outnumbered authoritarianism by the end of the twentieth century, democratic rule is not the dominant outcome of institutional alterations. Instead one is able to observe a large number of institutional alterations towards authoritarianism, which apparently contradicts the common notion of the success of the second and the third wave of democratization (Huntington 1991). The most interesting question raised by this puzzle is why some autocracies have made a transition that resulted in the establishment of democratic rule, while some autocracies only modified their autocratic institutional design, and others remain stable. If one agrees that partial regimes are autocracies rather than democracies, the post-war record of regime changes indicates that understanding movements away from democracy or slight developments towards democratic rule are as important to solving this puzzle of the directions of transitions as understanding the origins of democra-

160

6 Conclusion

tization. With the purpose to contribute to solving this puzzle of the directions of transitions, this book re-examines the claim that integration into world markets fosters the prospects of democratization. As it was argued that this claim is theoretically underdeveloped. the model proposed in this book relies on the theoretical synthesis embedding micro-theoretic reasoning in structural contexts as suggested and employed by Karl (1990), Haggard & Kaufman (1996), and Acemoglu & Robinson (2001 & 2006). The developed transitions game and its underlying economic model stress the impact of economic structures on actors’ preferences and choices within social disputes over the distribution of political influence and economic wealth. It is essentially argued that integration into global markets constrains domestic policy-making by raising the costs of institutional alterations. In contrast to the majority of transition models, the transition game and the underlying economic model clearly show that both actors – elite and the disenfranchised citizenry – are constrained by the economically induced costs of institutional alterations. The reasoning behind this approach combines three analytical arguments: • first, that institutional alterations depend on actors’ assessments of existing and possible alternative institutional arrangements with regard to the individual utility that these respective arrangements supply; • second, that these assessments are driven by anticipating consequences which are influenced by existing economic structures; • and third, that these economic consequences vary with the level of the respective economies’ integration into world markets. Since institutions provide the incentive structure of any economy, any alteration of an existing incentive structure is regarded as distorting accustomed economic activities and generating economic, political or social costs. It was argued further that transitions from authoritarian rule as well as so-called reverse transitions from democracy denote the most substantial and exhaustive conceivable institutional alterations. Thus, economic distortions resulting from regime changes – captured by the concept of the deadweight losses of redistributive taxation and the consequences of political instability –are expected to be severe. In Chapter 3 the employed economic model and the devised transitions game demonstrated how institutional alterations are accompanied by income losses, the extent of which depends on both the development level and the extent of integration into world markets of any given society. The central derivation of the

6 Conclusion

161

formalization of the argument yields the statement that the more vulnerable the society in question is to economic distortions the higher the affluence losses caused by substantial institutional changes. It followed that any transition decision is influenced by the anticipation of the magnitude of these distortions, which are negligible in less developed and closed economies but serious and substantial in developed societies whose economies rely on complex structures of division of labor between the local input factors and the international input factors. Given the utility functions derived by the underlying economy, the transition game showed that whenever the disfranchised population challenges the elite of an authoritarian regime, it faces a trade-off between reducing inequality and individual income losses. These losses are either connected to the activities of the challenge itself or to the redistribution of welfare if the elite meets the demand, or to a much more greater extent if the citizens initiate the change of institutions towards majorityoriented arrangements. The citizens of an authoritarian regime are more likely to challenge the existing institutional arrangements if the utility supplied by altered institutions is greater than the utility supplied by the institutions at work. It was also analytically demonstrated that citizens are more likely to accept redistributive offers – that is, minor institutional changes – if they expect that the subsequent economic consequences of regime change will make them worse off. With regard to this, the comparative static of the underlying economy clearly states that the income levels of both groups increase in integration, such that the incentives of the citizenry to risk economic distortions in the wake of regime changes decrease. The model clearly showed that if economic consequences are taken into account, sequences of minor changes are not only beneficial for authoritarian rulers and for citizens in order to avoid the genuine costs of revolution (as concepts of negotiated transitions often focus on), but the sequences are also beneficial for both groups to minimize long-term losses. Sutter (2000) points out that pacts between rulers and opposition only occur if both sides expect gains from transition. In contrast, the argument presented here explains such pacts – redistribution in authoritarian regimes – based on both actors’ expected gains of avoiding transition. The four propositions derived in Chapter 3 yield two hypotheses: 1. Higher levels of integration into world markets are likely to stabilize authoritarian rule. But if alterations are observed, integration raises the chance of observing developments towards stricter authoritarianism.

162

6 Conclusion

2. Even if some threat of revolution is credible, democratic developments of highly integrated authoritarian regimes are only expected to occur in terms of minor institutional alteration. The empirical examination utilized an ordered logistic regression model93 in order to test these hypotheses and two conflicting hypotheses that reflect the argument of modernization literature, the reasoning carried forward by diffusionalist explanations and the conditionality approach. In contrast to common analyses that only focus on regime changes by applying a dichotomous regime-change measure, this study employed a dependent variable that disregards regime changes but focuses on different degrees of institutional alterations towards or away from democracy. This approach was taken mainly because of the analytical groundwork that emphasizes the role of any institutional changes for conflict settlement. This approach was also motivated by the intensively discussed empirical record showing that using dichotomous regime-change measures ignores the majority of observable institutional alterations, which do not yield a regime change. Applying descriptive statistics demonstrated that using some dichotomous measure of regime changes instead of a measure that accounts for distinct degrees of institutional alterations decreases the variance in the sample and is likely to distort inferences (Chapter 5.1). The examination of the conflicting hypotheses relied on the ordinal dependent variable institutional alteration and revealed mounting evidence that economic integration into world markets bears a negative impact on the prospects of democratization. It was indeed shown that economic integration has a striking effect on stabilizing institutional designs, and that if changes are observed both indicators of integration raise the chance of observing minor negative developments, which are understood as repressive measures and interpreted as developments toward stricter autocratic government. Both indicators that utilized the concept of economic integration into world markets – an economy’s FDI dependence and trade dependence – support the implications of the transition game. The examination partially rejects the findings of the literature on the nexus between globalization and democracy (see Burkhart & de Soysa 2003 or Li & Reuveny 2003). Chapter 5 reveals the tendency that a positive (in terms of observing changes towards democracy) impact of FDI is visible in only those 93 With

the purpose to test the robustness of the results a Prais-Winston model was estimated which is reported in the Appendix. This model was estimated by utilizing the initial continuous variable reflecting the extent of institutional alterations.

6 Conclusion

163

economies that are not dominated by foreign investments, while high levels of FDI dependence increase the likelihood of institutional movements towards stricter autocracy. The examination further reveals that the positive effect on democratic development of foreign direct investments diminishes if the structural dependence on FDI increases. This suggests that the positive impact of FDI on democratic reforms of economies that have low values on the FDI-to-GCF ratio, only happen to attract investments insofar as these reforms secure private appropriation of returns of investment. However, if such appropriation securing institutions are developed, the incentives to reform further diminish.94 Concerning trade dependence’s impact on observing democratization, the findings in Chapter 5 reject the reported positive impact of trade on democratization in the relevant literature (see Lopez-Cordova & Meissner 2005 or Yu 2005). In contrast to those findings, this inquiry reveals a result which confirms Rigobon & Rodrik’s (2004) general conclusion that trade negatively influences prospects of democratic development and is in line with the inference of Milner & Kubato (2005) that trade does not serve as a predictor for democracy. Moreover, the results presented here support the suggestion that the link between trade and democratization is negative. Besides the strong stabilizing impact, high levels of trade dependence actually seem to be more likely to encourage authoritarian rulers to further restrict participation rights. The examination also strongly supports the basic implication of the transition game and questions the modernization claim’s basic expectation that high income levels are positively related to democratization. It was analytically shown that income levels of both groups increase with integration, such that the incentives of the citizenry to risk economic distortions in the wake of regime changes decrease. Hence, if economic development is connected to trade and commerce, highly integrated and developed regimes are less likely to move towards democracy. Empirically this was captured by explicitly modeling the interaction between an economy’s development level and the level of trade dependence. The negative effect of trade on positive institutional alterations becomes stronger as the development level, i.e. the income level, of a given economy increases. As the well-being of an economy is connected to external markets, the chances of 94 In

this context, partial regimes may denote an exception. The analysis of the respective sub-samples revealed that partial regimes are likely to develop further towards democracy with increasing FDI dependence. But it was demonstrated that this results are crucial. If distinct partial regime thresholds are utilized this positive effect on democratization diminishes.

164

6 Conclusion

observing alterations towards democracy decrease in favor of movements towards stricter authoritarian rule. Given low development levels, the impact of trade on democratization is positive. This finding has some severe consequences for the evaluation of the modernization claim. If the connection between trade and development is explicitly modeled, the modernization claim has to be refined: when the source of economic wealth is somehow attributed to interaction with international markets, the link between wealth and the occurrence of democracy is negative. In contrast to the common wisdom in the literature, trade only seems to encourage democratization in the case of low-developed economies. In sum, the level of integration into world markets of an economy is an eligible predictor of the direction of the institutional alteration of that economy. Integration stabilizes regimes, but if changes occur, the chance of observing movements towards authoritarianism is higher than changes towards democracy. However, this summary should not neglect that the results of the examination are also ambiguous. Although economic integration’s impact strongly supports the deductions from the transition game and the underlying economic model, the test of the diffusionalist and the conditionality indicators provides some support for the arguments of this literature. Both indicators – democratic trade environments and the membership in international organizations – show a positive, though slight, impact on democratization and support the argument that conditionality measures and diffusion through trade are likely to pull regimes towards democracy. A crucial point of the examination concerns the important analytical feature of whether or not the de facto power of the citizenry makes the observation of minor democratic reforms more likely. As elaborated above, the questionable data quality inhibits a straight interpretation of the results and points to the severe problem that rationalist explanations (which utilize the assumption that some revolution threat by the citizenry presses elites or authoritarian governments to reform) are difficult to test empirically. As argued above, the data situation is unsatisfactory. A loophole out of the data situation may be the compilation of existing polls and survey data. Besides all of the methodological problems that arise from utilizing distinct and mostly poorly documented polls, such a compilation would, relatively to relying purely on structural indicators, facilitate a more adequate examination of the underlying assumption that dissatisfaction with governments or individual well-being fuel social conflicts, which may lead to institutional changes. As already mentioned, this is left to further research.

6 Conclusion

165

This study provides some evidence that understanding the puzzle of the directions of transitions has to be connected to structural contexts combined with microtheoretic reasoning – this book focused on externally induced economic constraints, which are expected to strongly influence the strategies and options of actors engaged in political, social, and economic disputes in a given society. Besides other structural claims, these results also seem to support Whitehead’s (1986) notion that institutional development towards democracy does not take place in an international vacuum, but not in the sense Whitehead and others expected, i.e. that integration fosters democratization. The examination clearly shows that the international structure negatively influences the prospects of democratization. This result is obtained mainly because of one theoretical reason: in contrast to Whitehead and the dominant part of the transition literature, which attempts to explain democratization, the approach developed here focuses on a broader range of transition outcomes and questions of why democracy should be automatically regarded as the most beneficial institutional outcome in all circumstances. Additionally, as the majority of the related literature focuses on democratization they employ dichotomous regime change measures that disregard institutional shifts that do not lead to regime change in terms of a regime’s crossing of defined thresholds. By doing this, the authors include the majority of observable institutional movements in the measure’s parameter value that indicates stability. Hence, the authors often report ‘no influence’of indicators that are expected to have a positive impact on democratization or some ‘surprising’ result.95 . The examination conducted in this book showed that explicitly including any type of institutional shifts in analysis and accounting for any direction of changes strongly contribute to the understanding of the origins of institutional alterations. Following Haggard and Kaufman’s (1995) reasoning that preference over institutional designs fuels transitions allows contexts to be considered in which authoritarian rule could be seen as more valuable, i.e. more beneficial, than democratic institutional designs. The perspective offered in this study allows the possibility that some kind of liberalized authoritarianism could be valued higher by disfranchised citizens of an authoritarian regime than the establishment of full democracy. Combined with the inclusion of externally induced economic constraints, this approach offers some illustrative 95 See,

for instance, Rodrik & Wacziarg (2005) who report that minor positive institutional developments are positively related to economic prosperity or the already discussed findings of Doorenspleet (2004) Epstein et al. (2006)

166

6 Conclusion

insights into the observed puzzle of the directions of regime alteration. Accounting for economic consequences of distinct institutional designs and allowing for varying preferences over alternative institutions offers an explanation of the puzzle of the directions of transitions which is not overburdened by the normative presumption that democracy is the sole feasible and desirable regime type. Thus, the rise of the so-called partial regimes, for instance, cannot be explained by referring to the extraordinary power of single autocratic hardliners and an opposition which is constrained by the hard liner’s power, but can be understood as the result of the distribution of preferences over alternative institutional designs within the entire society, i.e. the elite and the disenfranchised citizenry. The finding that radical institutional alterations are more likely to occur in disintegrated and poorly developed economies provide strong support for the argument that citizens who have literally nothing to lose are more disposed to risk the consequences of institutional changes than the citizenry of regimes that provide at last some level of individual well-being. The empirical results suggest some explanatory power of this approach which challenges common notions of past democratization research. However, a great deal of further research has to be conducted in order to confirm this first evidence. Given the poor data situation, the next step of this research process may include detailed qualitative case studies and data collection in order to provide a fertile base to conduct further examinations of the implications of the transition game and the related economic model.

Appendix

Table A1: List of cases country

year

pre-change Polity IV score

Cuba Cuba Haiti Haiti Haiti Haiti Haiti Haiti Haiti Haiti Dominican Rep Dominican Rep Dominican Rep Dominican Rep Dominican Rep Jamaica Trinidad Trinidad Mexico Mexico Mexico Mexico Guatemala Guatemala Guatemala Guatemala Guatemala

1952 1959 1958 1961 1971 1977 1986 1991 1994 1999 1961 1963 1978 1994 1996 1993 1984 1997 1977 1988 1994 2000 1950 1954 1958 1966 1970

3 -9 -5 -8 -9 -10 -9 7 -7 7 -9 8 -3 6 5 10 8 9 -6 -3 0 6 5 2 -6 -5 3

extent of alteration

major negative minor positive minor negative minor negative minor negative minor positive major positive major negative major positive major negative major positive major negative major positive minor negative minor positive minor negative minor positive minor positive minor positive minor positive major positive minor positive minor negative major negative minor positive major positive minor negative

continued on next page

(-12) (2) (-3) (-1) (-1) (1) (16) (-14) (14) (-9) (17) (-11) (9) (-1) (3) (-1) (1) (1) (3) (3) (6) (2) (-3) (-8) (1) (8) (-2)

transition

partial regime to autocracy no change no change no change no change no change autocracy to democracy democracy to autocracy autocracy to democracy democracy to autocracy autocracy to democracy democracy to autocracy autocracy to partial regime no change partial regime to democracy no change no change no change no change no change autocracy to partial regime partial regime to democracy no change partial regime to autocracy no change autocracy to partial regime no change

168

Appendix

country

year

pre-change Polity IV score

Guatemala Guatemala Guatemala Guatemala Guatemala Honduras Honduras Honduras Honduras Honduras Honduras Honduras El Salvador El Salvador El Salvador El Salvador El Salvador El Salvador El Salvador Nicaragua Nicaragua Nicaragua Nicaragua Panama Panama Panama Panama Panama Panama Panama Panama Colombia Colombia Colombia Colombia Venezuela Venezuela Venezuela Venezuela Guyana Guyana Guyana Ecuador Ecuador Ecuador Ecuador

1974 1978 1982 1984 1996 1956 1971 1972 1980 1985 1989 1999 1956 1960 1964 1972 1977 1979 1991 1979 1984 1990 1995 1955 1968 1978 1982 1984 1987 1989 1994 1957 1974 1991 1995 1958 1968 1992 1999 1968 1978 1992 1961 1968 1970 1979

1 -3 -5 -7 3 -3 -1 0 -1 6 5 6 -6 -5 -3 0 -1 -6 6 -8 -5 -1 6 -1 4 -7 -6 -5 -6 -8 8 -5 7 8 9 -3 6 9 8 2 1 -7 2 -1 5 -5

extent of alteration

minor negative minor negative minor negative major positive minor positive minor positive minor positive minor negative major positive minor negative minor positive minor positive minor positive minor positive minor positive minor negative minor negative major positive minor positive minor positive minor positive major positive minor positive minor positive major negative minor positive minor positive minor negative minor negative major positive minor positive major positive minor positive minor positive minor negative major positive minor positive minor negative minor negative minor negative major negative major positive minor negative major positive major negative major positive

continued on next page

(-4) (-2) (-2) (10) (5) (2) (1) (-1) (7) (-1) (1) (1) (1) (2) (3) (-1) (-5) (12) (1) (3) (4) (7) (2) (5) (-11) (1) (1) (-1) (-2) (16) (1) (12) (1) (1) (-2) (9) (3) (-1) (-2) (-1) (-8) (13) (-3) (6) (-10) (14)

transition

partial regime to autocracy no change no change autocracy to partial regime partial regime to democracy no change no change no change autocracy to partial regime no change no change partial regime to democracy no change no change no change no change no change autocracy to partial regime partial regime to democracy no change no change autocracy to partial regime partial regime to democracy autocracy to partial regime partial regime to autocracy no change no change no change no change autocracy to democracy no change autocracy to democracy no change no change no change autocracy to partial regime partial regime to democracy no change democracy to partial regime no change partial regime to autocracy autocracy to partial regime partial regime to autocracy autocracy to partial regime partial regime to autocracy autocracy to democracy

List of Cases

169

country

year

pre-change Polity IV score

Ecuador Ecuador Ecuador Ecuador Ecuador Peru Peru Peru Peru Peru Peru Peru Brazil Brazil Brazil Brazil Brazil Brazil Bolivia Bolivia Bolivia Bolivia Bolivia Bolivia Bolivia Paraguay Paraguay Paraguay Paraguay Paraguay Paraguay Chile Chile Chile Chile Chile Chile Argentina Argentina Argentina Argentina Argentina Argentina Argentina Argentina Uruguay

1984 1988 1997 1998 2000 1950 1963 1968 1978 1990 1992 1993 1958 1961 1974 1982 1985 1988 1952 1964 1970 1978 1980 1982 1985 1954 1967 1989 1992 1998 1999 1955 1964 1973 1983 1988 2000 1955 1966 1973 1976 1981 1983 1989 1999 1952

9 8 9 8 9 2 4 5 -7 7 8 -3 5 6 -9 -4 -3 7 -5 -3 -4 -7 -4 -7 8 -5 -9 -8 2 7 6 2 5 6 -7 -6 8 -9 -1 -9 6 -9 -8 8 7 0

extent of alteration

minor negative minor positive minor negative minor positive minor negative minor positive minor positive major negative major positive minor positive major negative minor positive minor positive major negative minor positive minor positive major positive minor positive minor positive minor negative minor negative minor positive minor negative major positive minor positive minor negative minor positive major positive minor positive minor negative minor positive minor positive minor positive major negative minor positive major positive minor positive major positive major negative major positive major negative minor positive major positive minor negative minor positive major positive

continued on next page

(-1) (1) (-1) (1) (-3) (2) (1) (-12) (14) (1) (-11) (4) (1) (-15) (5) (1) (10) (1) (2) (-1) (-3) (3) (-3) (15) (1) (-4) (1) (10) (5) (-1) (1) (3) (1) (-13) (1) (14) (1) (8) (-8) (15) (-15) (1) (16) (-1) (1) (8)

transition

no change no change no change no change democracy to partial regime no change no change partial regime to autocracy autocracy to democracy no change democracy to autocracy autocracy to partial regime no change partial regime to autocracy no change no change autocracy to democracy no change no change no change no change no change no change autocracy to democracy no change no change no change autocracy to partial regime partial regime to democracy democracy to partial regime partial regime to democracy no change no change partial regime to autocracy no change autocracy to democracy no change no change no change autocracy to partial regime partial regime to autocracy no change autocracy to democracy no change no change autocracy to democracy

170

Appendix

country

year

pre-change Polity IV score

Uruguay Uruguay Uruguay Uruguay Ireland France France France Spain Spain Portugal Portugal Germany East Germany East Poland Poland Poland Poland Poland Poland Hungary Czechoslovakia Slovakia Albania Albania Albania Croatia Croatia Yugoslavia Yugoslavia Yugoslavia Yugoslavia Greece Greece Greece Cyprus Cyprus Bulgaria Moldova Romania Romania Romania USSR USSR Russia Russia

1971 1978 1985 1989 1952 1958 1969 1986 1975 1982 1974 1982 1950 1960 1980 1981 1983 1987 1989 1995 1988 1989 1998 1990 1996 1997 1995 1999 1980 1993 1997 2000 1967 1974 1986 1963 1974 1990 1993 1977 1989 1996 1953 1988 1993 2000

8 -8 -7 9 8 10 5 8 -7 9 -9 9 -7 -8 -7 -6 -8 -7 -6 8 -7 -7 7 -9 5 0 -3 -5 -7 -5 -7 -6 4 -7 8 8 7 -7 5 -7 -8 5 -9 -7 6 4

extent of alteration

major negative minor positive major positive minor positive minor positive minor negative minor positive minor positive major positive minor positive major positive minor positive minor negative minor negative minor positive minor negative minor positive minor positive major positive minor positive major positive major positive minor positive major positive minor negative minor positive minor negative major positive minor positive minor negative minor positive major positive major negative major positive minor positive minor negative minor positive major positive minor positive minor negative major positive minor positive minor positive major positive minor negative minor positive

continued on next page

(-16) (1) (16) (1) (2) (-5) (3) (1) (16) (1) (18) (1) (-1) (-1) (1) (-2) (1) (1) (14) (1) (17) (15) (2) (14) (-5) (5) (-2) (12) (2) (-2) (1) (13) (-11) (15) (2) (-1) (3) (15) (2) (-1) (13) (3) (2) (7) (-2) (3)

transition

democracy to autocracy no change autocracy to democracy no change no change democracy to partial regime partial regime to democracy no change autocracy to democracy no change autocracy to democracy no change no change no change no change no change no change no change autocracy to democracy no change autocracy to democracy autocracy to democracy no change autocracy to partial regime partial regime to autocracy autocracy to partial regime no change autocracy to democracy no change no change no change autocracy to democracy partial regime to autocracy autocracy to democracy no change no change no change autocracy to democracy partial regime to democracy no change autocracy to partial regime partial regime to democracy no change no change no change partial regime to democracy

List of Cases

171

country

year

pre-change Polity IV score

Ukraine Belarus Armenia Armenia Georgia Azerbaijan Azerbaijan Azerbaijan Guinea-Bissau Guinea-Bissau Equatorial Guinea Equatorial Guinea Gambia Gambia Gambia Gambia Mali Mali Senegal Senegal Senegal Senegal Senegal Benin Benin Benin Benin Mauritania Mauritania Niger Niger Niger Ivory Coast Ivory Coast Ivory Coast Guinea Guinea Guinea Burkina Faso Burkina Faso Burkina Faso Burkina Faso Burkina Faso Burkina Faso Sierra Leone Sierra Leone

1996 1995 1995 1998 1995 1992 1993 1998 1984 1991 1969 1993 1981 1990 1994 1996 1991 1997 1962 1974 1978 1981 2000 1963 1970 1972 1990 1962 1991 1991 1996 1999 1990 1994 1999 1984 1991 1995 1969 1977 1980 1991 1997 2000 1967 1968

6 7 7 -6 4 -3 1 -6 -7 -8 2 -7 8 7 8 -7 -7 7 -1 -7 -6 -2 -1 2 -7 -2 -7 -4 -7 -7 8 -6 -9 -7 -6 -9 -7 -5 -7 -4 5 -7 -5 -4 6 -7

extent of alteration

minor positive major negative major negative major positive minor positive minor positive major negative minor negative minor negative major positive major negative minor positive minor negative minor positive major negative minor positive major positive minor negative major negative minor positive minor positive minor positive major positive major negative minor positive minor negative major positive minor negative minor positive major positive major negative major positive minor positive minor positive major positive minor positive minor positive minor positive minor positive major positive major negative minor positive minor positive minor positive major negative major positive

continued on next page

(1) (-14) (-13) (11) (1) (4) (-7) (-1) (-1) (13) (-9) (2) (-1) (1) (-15) (2) (14) (-1) (-6) (1) (4) (1) (9) (-9) (5) (-5) (13) (-3) (1) (15) (-14) (10) (2) (1) (10) (2) (2) (4) (3) (9) (-12) (2) (1) (4) (-13) (8)

transition

partial regime to democracy democracy to autocracy democracy to autocracy autocracy to partial regime no change autocracy to partial regime partial regime to autocracy no change no change autocracy to partial regime partial regime to autocracy no change no change no change democracy to autocracy no change autocracy to democracy democracy to partial regime no change no change no change no change autocracy to democracy partial regime to autocracy no change no change autocracy to partial regime no change no change autocracy to democracy democracy to autocracy autocracy to partial regime no change no change autocracy to partial regime no change no change no change no change autocracy to partial regime partial regime to autocracy no change no change no change partial regime to autocracy autocracy to partial regime

172

Appendix

country

year

pre-change Polity IV score

Sierra Leone Sierra Leone Sierra Leone Sierra Leone Sierra Leone Sierra Leone Ghana Ghana Ghana Ghana Ghana Ghana Ghana Ghana Togo Togo Cameroon Cameroon Cameroon Cameroon Cameroon Nigeria Nigeria Nigeria Nigeria Nigeria Nigeria Nigeria Gabon Gabon Central African Rep Chad Chad Chad Congo Brazzaville Congo Brazzaville Congo Brazzaville Congo Kinshasa Uganda Uganda Uganda Uganda Kenya Kenya Kenya Kenya

1971 1978 1991 1992 1996 1997 1962 1966 1969 1972 1978 1981 1991 1996 1967 1991 1966 1972 1982 1983 1992 1964 1978 1984 1989 1993 1995 1998 1968 1990 1991 1975 1991 1996 1963 1991 1997 1990 1966 1979 1985 1993 1966 1969 1979 1982

1 -6 -7 -6 -7 4 -8 -9 -7 3 -7 6 -7 -1 -6 -7 -6 -7 -8 -7 -8 8 -7 7 -7 -5 -7 -6 -7 -9 -7 -9 -7 -4 4 -8 5 -9 7 -7 3 -7 2 0 -7 -6

extent of alteration

major negative minor negative minor positive minor negative major positive minor positive minor negative minor positive major positive major negative major positive major negative major positive minor positive minor negative minor positive minor negative minor negative minor positive minor negative minor positive major negative major positive major negative minor positive minor negative minor positive major positive minor negative minor positive major positive minor positive minor positive minor positive major negative major positive major negative minor positive major negative major positive major negative minor positive minor negative major negative minor positive minor negative

continued on next page

(-7) (-1) (1) (-1) (11) (1) (-1) (2) (10) (-10) (13) (-13) (6) (3) (-1) (5) (-1) (-1) (1) (-1) (4) (-15) (14) (-14) (2) (-2) (1) (10) (-2) (5) (12) (2) (3) (2) (-11) (13) (-11) (1) (-14) (10) (-10) (3) (-2) (-7) (1) (-1)

transition

partial regime to autocracy no change no change no change autocracy to partial regime no change no change no change autocracy to partial regime partial regime to autocracy autocracy to partial regime partial regime to autocracy no change autocracy to partial regime no change no change no change no change no change no change no change democracy to autocracy autocracy to democracy democracy to autocracy no change no change no change autocracy to partial regime no change no change autocracy to partial regime no change no change no change partial regime to autocracy autocracy to partial regime partial regime to autocracy no change democracy to autocracy autocracy to partial regime partial regime to autocracy no change partial regime to autocracy no change no change no change

List of Cases

173

country

year

pre-change Polity IV score

Kenya Kenya Tanzania Tanzania Tanzania Burundi Burundi Rwanda Rwanda Rwanda Somalia Djibouti Djibouti Djibouti Ethiopia Ethiopia Ethiopia Angola Mozambique Mozambique Mozambique Zambia Zambia Zambia Zambia Zimbabwe Zimbabwe Zimbabwe Zimbabwe Malawi South Africa South Africa Lesotho Lesotho Botswana Botswana Botswana Swaziland Swaziland Madagascar Madagascar Madagascar Comoros Comoros Comoros Comoros

1991 1997 1992 1995 2000 1963 1992 1973 1993 2000 1969 1992 1996 1999 1974 1984 1994 1991 1986 1991 1994 1968 1972 1991 1996 1979 1983 1987 2000 1993 1990 1992 1973 1993 1969 1987 1997 1973 1993 1972 1991 1997 1976 1978 1982 1985

-7 -5 -7 -6 -1 0 -7 -5 -7 -6 7 -8 -7 -6 -9 -7 -8 -7 -8 -7 -6 2 0 -9 6 4 5 1 -6 -9 4 5 -9 -7 6 7 8 0 -10 -1 -6 9 5 -4 -5 -6

extent of alteration

minor positive minor positive minor positive minor positive minor positive major negative minor positive minor negative minor positive minor positive major negative minor positive minor positive major positive minor positive minor negative major positive minor positive minor positive minor positive major positive minor negative major negative major positive minor negative minor positive minor negative major negative minor positive major positive minor positive minor positive minor positive major positive minor positive minor positive minor positive major negative minor positive minor negative major positive minor negative major negative minor negative minor negative minor negative

continued on next page

(2) (3) (1) (5) (3) (-7) (4) (-2) (1) (2) (-14) (1) (1) (8) (2) (-1) (9) (4) (1) (1) (12) (-2) (-9) (15) (-5) (1) (-4) (-7) (1) (16) (1) (4) (2) (15) (1) (1) (1) (-10) (1) (-5) (15) (-2) (-9) (-1) (-1) (-1)

transition

no change no change no change no change autocracy to partial regime no change no change no change no change no change democracy to autocracy no change no change autocracy to partial regime no change no change autocracy to partial regime no change no change no change autocracy to partial regime partial regime to autocracy no change autocracy to partial regime no change no change no change partial regime to autocracy no change autocracy to democracy no change partial regime to democracy no change autocracy to democracy partial regime to democracy no change no change no change no change no change autocracy to democracy no change partial regime to autocracy no change no change no change

174

Appendix

country

year

pre-change Polity IV score

Comoros Comoros Comoros Mauritius Morocco Morocco Morocco Morocco Morocco Algeria Algeria Algeria Algeria Tunisia Tunisia Tunisia Tunisia Tunisia Sudan Sudan Sudan Sudan Sudan Iran Iran Iran Turkey Turkey Turkey Turkey Turkey Turkey Turkey Turkey Turkey Turkey Iraq Iraq Iraq Egypt Egypt Syria Syria Syria Syria Syria

1990 1999 2000 1982 1963 1965 1977 1992 1998 1965 1989 1992 1995 1970 1971 1981 1987 1993 1958 1964 1969 1985 1989 1953 1979 1997 1954 1960 1965 1971 1973 1980 1983 1989 1993 1997 1958 1968 1979 1952 1976 1950 1951 1954 1962 1970

-7 4 -2 9 -5 -2 -9 -8 -7 -8 -9 -2 -7 -9 -8 -9 -8 -5 8 -7 7 -7 7 -1 -10 -6 7 4 9 8 -2 9 -5 7 9 8 -4 -5 -7 1 -7 -7 2 -7 -2 -7

extent of alteration

major positive major negative major positive minor positive minor positive major negative minor positive minor positive minor positive minor negative major positive minor negative minor positive minor positive minor negative minor positive minor positive minor positive major negative major positive major negative major positive major negative major negative minor positive major positive minor negative minor positive minor negative major negative major positive major negative major positive minor positive minor negative minor negative minor negative minor negative minor negative major negative minor positive major positive major negative major positive major negative minor negative

continued on next page

(11) (-6) (6) (1) (3) (-7) (1) (1) (1) (-1) (7) (-5) (4) (1) (-1) (1) (3) (2) (-15) (14) (-14) (14) (-14) (-9) (4) (9) (-4) (5) (-1) (-10) (11) (-14) (12) (2) (-1) (-2) (-1) (-2) (-2) (-8) (1) (9) (-9) (14) (-14) (-2)

transition

autocracy to partial regime partial regime to autocracy autocracy to partial regime no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change democracy to autocracy autocracy to democracy democracy to autocracy autocracy to democracy democracy to autocracy no change no change autocracy to partial regime democracy to partial regime partial regime to democracy no change democracy to autocracy autocracy to democracy democracy to autocracy autocracy to democracy no change no change no change no change no change no change partial regime to autocracy no change autocracy to partial regime partial regime to autocracy autocracy to democracy no change no change

List of Cases

175

country

year

pre-change Polity IV score

Syria Lebanon Jordan Jordan Jordan Jordan Jordan Jordan Israel Israel Yemen North Yemen North Yemen North Yemen North Yemen North Yemen Yemen South Yemen South Yemen South Yemen South Kuwait Kuwait Kuwait Kuwait Kuwait Kuwait Bahrain Bahrain Bahrain Oman Oman Afghanistan Afghanistan Afghanistan Turkmenistan Tajikistan Tajikistan Kazakhstan China China China Mongolia Mongolia Mongolia Taiwan Taiwan

2000 1970 1951 1957 1974 1984 1989 1992 1967 1999 1962 1966 1974 1977 1988 1991 1970 1974 1978 1986 1965 1971 1976 1981 1986 1990 1973 1975 1993 1957 1991 1964 1989 1992 1992 1992 1997 1995 1966 1969 1976 1952 1990 1996 1975 1987

-9 2 -10 -1 -9 -10 -9 -4 10 9 -6 0 -3 -4 -6 -5 -5 -6 -7 -8 -8 -9 -8 -10 -8 -10 -10 -7 -10 -6 -10 -10 -7 -8 -8 -2 -6 -3 -8 -9 -8 -9 -7 9 -8 -7

extent of alteration

minor positive minor positive major positive major negative minor negative minor positive minor positive minor positive minor negative minor positive major positive minor negative minor negative minor negative minor positive minor positive minor negative minor negative minor negative minor positive minor negative minor positive minor negative minor positive minor negative minor positive minor positive minor negative minor positive minor negative minor positive minor positive minor negative minor positive minor negative minor negative minor positive minor negative minor negative minor positive minor positive minor positive major positive minor positive minor positive major positive

continued on next page

(2) (3) (9) (-8) (-1) (1) (5) (2) (-1) (1) (6) (-3) (-1) (-2) (1) (3) (-1) (-1) (-1) (1) (-1) (1) (-2) (2) (-2) (3) (3) (-3) (1) (-4) (1) (3) (-1) (1) (-1) (-4) (5) (-1) (-1) (1) (1) (2) (16) (1) (1) (6)

transition

no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change no change autocracy to democracy no change no change no change

176

Appendix

country

year

pre-change Polity IV score

Taiwan Taiwan Korea North Korea North Korea South Korea South Korea South Korea South Korea South Korea South Korea South Korea South Korea South India India India Bhutan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Pakistan Bangladesh Bangladesh Bangladesh Bangladesh Bangladesh Myanmar (Burma) Myanmar (Burma) Myanmar (Burma) Myanmar (Burma) Myanmar (Burma) Sri Lanka Sri Lanka Sri Lanka Nepal Nepal Nepal Nepal Nepal Nepal Thailand

1992 1996 1956 1966 1952 1960 1961 1963 1972 1973 1981 1987 1998 1975 1977 1995 1953 1956 1958 1962 1973 1977 1985 1988 1997 1999 1974 1978 1982 1986 1991 1962 1974 1980 1988 1990 1970 1978 1982 1951 1957 1960 1981 1990 1999 1952

-1 7 -7 -8 -3 -4 8 -7 3 -9 -8 -5 6 9 7 8 -10 5 8 -7 1 8 -7 -4 8 7 8 -7 -4 -7 -5 8 -7 -6 -8 -6 7 8 6 -5 -7 2 -9 -2 5 -3

extent of alteration

major positive minor positive minor negative minor negative minor negative major positive major negative major positive major negative minor positive minor positive major positive minor positive minor negative minor positive minor positive minor positive minor positive major negative major positive major positive major negative minor positive major positive minor negative major negative major negative minor positive minor negative minor positive major positive major negative minor positive minor negative minor positive minor negative minor positive minor negative minor negative minor negative major positive major negative major positive major positive minor positive minor negative

continued on next page

(8) (2) (-1) (-1) (-1) (12) (-15) (10) (-12) (1) (2) (12) (2) (-2) (1) (1) (2) (3) (-15) (8) (7) (-15) (3) (12) (-1) (-13) (-15) (3) (-3) (2) (11) (-15) (1) (-2) (2) (-1) (1) (-2) (-1) (-2) (9) (-12) (7) (7) (1) (-3)

transition

autocracy to democracy no change no change no change no change autocracy to democracy democracy to autocracy autocracy to partial regime partial regime to autocracy no change no change autocracy to partial regime partial regime to democracy no change no change no change no change partial regime to democracy democracy to autocracy autocracy to partial regime partial regime to democracy democracy to autocracy no change autocracy to democracy no change democracy to autocracy democracy to autocracy no change no change no change autocracy to partial regime democracy to autocracy no change no change no change no change no change democracy to partial regime no change no change autocracy to partial regime partial regime to autocracy no change autocracy to partial regime no change no change

List of Cases

177

country

year

pre-change Polity IV score

Thailand Thailand Thailand Thailand Thailand Thailand Thailand Thailand Thailand Thailand Cambodia Cambodia Cambodia Cambodia Cambodia Laos Vietnam North Vietnam North Malaysia Malaysia Malaysia Philippines Philippines Philippines Philippines Indonesia Indonesia Indonesia Indonesia Solomon Islands Fiji Fiji Fiji Fiji

1955 1958 1968 1971 1973 1976 1977 1988 1991 1992 1970 1975 1979 1997 1998 1960 1960 1969 1969 1971 1995 1950 1969 1981 1986 1950 1957 1966 1998 1990 1987 1990 1999 2000

-6 -3 -7 2 -7 3 -7 2 3 -1 -9 -5 -7 1 -7 8 -9 -8 10 1 4 2 5 -9 -6 3 0 -5 -7 7 9 -3 5 6

extent of alteration

minor positive minor negative major positive major negative major positive major negative major positive minor positive minor negative major positive minor positive minor negative major positive major negative minor positive major negative minor positive minor positive major negative minor positive minor negative minor positive major negative minor positive major positive minor negative minor negative minor negative major positive minor positive major negative major positive minor positive minor negative

(3) (-4) (9) (-9) (10) (-10) (9) (1) (-4) (10) (4) (-2) (8) (-8) (4) (-15) (1) (1) (-9) (3) (-1) (3) (-14) (3) (14) (-3) (-5) (-2) (14) (1) (-12) (8) (1) (-1)

transition

no change no change autocracy to partial regime partial regime to autocracy autocracy to partial regime partial regime to autocracy autocracy to partial regime no change partial regime to autocracy autocracy to democracy no change no change autocracy to partial regime partial regime to autocracy autocracy to partial regime democracy to autocracy no change no change democracy to partial regime no change no change no change partial regime to autocracy no change autocracy to democracy partial regime to autocracy no change no change autocracy to democracy no change democracy to autocracy autocracy to partial regime no change no change

178

Appendix

The proofs of the Lemmas

Lemma 3.1 i) Powerful citizens always demand redistribution regardless of the type of elite they encounter, v = 1, and the citizens’ demand implies a credible threat of revolution since s = 1, i.e. strong citizens always revolt if they face repression; ii) the transition game does not include any equilibrium solution in which weak citizens initiate radical institutional changes by revolution, i.e. weak citizens always accept some redistribution offer regardless of the elite type they encounter, r = 0. Furthermore, since the low-follow-up-cost elite always prefers to settle distributional conflicts by offering some redistribution (t  = 1), weak citizens infer that they are facing a highfollow-up-cost elite when they observe repression as a response to their demand and, thus, backing down becomes their optimal choice, s = 0. The proof of Lemma 3.1i) requires to ensure that strong citizens demand redistribution regardless the cost situation,i.e. v always equals 1 and that strong citizens always revolt in response to repression, i.e. s = 1. In order to prove both statements it is necessary to show that both decsions are always optimal choices for strong citizens at the respective decision nodes. The proof is conducted in two steps: first, it will be shown that strong citizens always choose s = 1 and, second, that strong citizens always demand redistribution. In order to prove that s = 1, i.e. strong citizens revolt in response to repression, it is sufficient to show that regardless of the type of the elite, the citizens’ utility of revolution is always greater than their utility of backing down. Consider the situation at the last decision node after the strong citizens observe repression in response to their demand. At this node, strong citizens have the choice between initiating radical institutional alterations by revolution and backing down. In order to decide between the options citizens compare their expected utility of revolt and their expected utility of back down in response to repression, and choose the option which yields higher pay offs. The claim of the lemma postulates that the expected utility of pressing for regime change exceeds the expected utility of accepting repression in both cost situations, formally EUp (revolt) > EU p (back down), which is equivalent to  p ∗  p  p ∗ p β U p (τrev ) + (1 − β )U p (τrev ) > β U p τrep + (1 − β )U p τrep . In order to ensure that revolt is the optimal choice regardless of the elite type one has to split the cases according to the different elite types. Assume that the updated belief β equals 1, such that at this decision node the strong citizens that face the high follow-up-cost elite. In this  p think  they ∗ p ∗ case the inequality is reduced to U p τrev > U p τrep , which is true given the assumption about the strong citizens’ preference order given by Assumption 1. If the strong citizens are confident  p that they encounter the low follow-up-cost elite, i.e. β = 0, the inequality is simplified to U p τrev >  p U p τrep ,which also holds true given Assumption 1. Combining both results shows that strong citizens never back down in response to a repression, i.e. s = 1, since in both cases revolt yields a higher pay off than back down. The second step of proving Lemma 3.1i) requires showing that strong citizens always demand redistribution regardless of the type of elite they encounter. The proof is conducted in the same way as above; that is, to split the cases with respect to the elite types. Consider the first node at the upper branch (Figure 3.1) where thestrong citizens face the high-cost elite. For v = 1 to hold it must be the case that the expected utility of demanding redistribution yields a higher pay off than

The proofs of the Lemmas

179

remaining at the status quo, i.e. EU p (demand) > EU p (SQ), respectively     p ∗  p ∗ p ∗ ) + (1 − r)U p (τe )∗ + (1 − t) sU p (τrev ) + (1 − s)U p τrep t rU p (τrev > SQ. Given that strong citizens never back down as a response to repression, i.e. s = 1, one can simplify the left-hand side of this inequality:   p ∗ p ∗ ) + (1 − r)U p (τe )∗ + (1 − t)U p (τrev ) > SQ. t U p (τrev Since the left-hand side of this inequality consists of a convex combination of expected utilities, it is sufficient to show that for all possible outcomes the respective utility is greater than SQ. To obtain the possible outcomes one has to split cases into the possible pure strategies the actors may choose. Consider what happens if the high follow-up-cost elite responds to the demands by the citizens  p with ∗ repression, i.e. the elite opts for t = 0. This reduces the left-hand side of the inequality to Up τrev > SQ. Given the strong citizens preference order in Assumption 1 this statement holds true. Consider what happens if the elite offers redistribution, i.e. t = 1. In this case the inequality is reduced to p ∗ rU p τrev + (1 − r)U p (τe )∗ > SQ. Depending on whether the citizens accept the offer or not, i.e. the  p ∗ values of the parameter r, the inequality simplifies to either U p (τe )∗ > SQ or again to U p τrev > SQ. With regard to the preference order in Assumption 1 both statements hold true. Therefore, demand is the optimal choice for strong citizens at their first decision node, i.e. v = 1. Turning to the lower branch – where the strong citizens face low follow-up-cost elite – the comparison of the expected utility of demand with the utility of remaining at the status quo leads to   p  p p t [rU p (τrev ) + (1 − r)U p (τe )] + (1 − t) sU p (τrev ) + (1 − s)U p τrep > SQ which is again reduced by s = 1 to p p ) + (1 − r)U p (τe )] + (1 − t)U p (τrev ) > SQ. t [U p (τrev

Again, this inequality denotes a convex combination of expected utilities such that splitting cases into p  the respective pure strategies yields the reductions U p τrev > SQ and U p (τe ) > SQ. With regard to the preference order in Assumption 1 both statements hold true, such that demand also denotes the optimal choice if strong citizens encounter low follow-up-cost elite. Combining both results establishes that strong citizens always demand redistribution at the first decision node regardless of the type of the elite, thus v = 1, since demanding redistribution yields in both cases higher pay offs than remaining at the status quo. The proof of Lemma 3.1ii) is conducted in the same and is therefore omitted.

180

Appendix

Lemma 3.2 In any sequential equilibrium of the transition game, φ = φ  , δ = δ  , β = β  .96 The parameter δ denotes the strong citizens’ belief that they will face a high follow-up-cost elite conditional on observing an offer, β denotes the probability of facing repression by high follow-upcost elite and the parameter φ indicates the probability held by the high follow-up-cost elite of facing a redistribution demand by strong citizens. Again, the prime above the respective probabilities refers to the beliefs held by weak citizens and by the low follow-up-cost elite. Suppose (σ ∗ , ψ ) is a sequential equilibrium with the strategy profile σ ∗ and a set of corresponding beliefs ψ = {φ , φ  , δ , δ  , β , β  } . Thus there exists a sequence of strategy profiles σ n converging to σ ∗ , such that for players’ i strategies σin ∈ ΔAi are completely mixed. Therefore, along the sequence, all information sets are reached with positive probability and the corresponding beliefs can be computed by applying Bayes’ rule:

φn = =

δn = =

βn = = =

λ θ σ pn (v) λ σ pn (v) = n n  n λ θ σ p (v) + (1 − λ ) θ σw (v ) λ σ p (v) + (1 − λ ) σwn (v ) λ (1 − θ ) σ pn (v) = φ n λ (1 − θ ) σ pn (v) + (1 − λ ) (1 − θ ) σwn (v ) λ θ σ pn (v)σHn (t) σHn (t) = λ θ σ pn (v)σHn (t) + λ (1 − θ ) σ pn (v)σLn (t  ) θ σ pn (v)σHn (t) + (1 − θ ) σLn (t  ) (1 − λ ) θ σwn (v )σHn (t) n  (1 − λ ) θ σw (v )σHn (t) + (1 − λ ) (1 − θ ) σwn (v )σLn (t  )

= δ n

λ θ σ pn (v) (σHn (1 − t)) n n λ θ σ p (v) (σH (1 − t)) + λ (1 − θ ) σ pn (v) (σLn (1 − t  )) θ (σHn (1 − t)) n θ (σH (1 − t)) + (1 − θ ) (σLn (1 − t  )) (1 − λ ) θ σwn (v ) (σHn (1 − t)) n n  (1 − λ ) θ σw (v ) (σH (1 − t)) + (1 − λ ) (1 − θ ) θ σwn (v ) (σLn (1 − t  ))

= β n

Since φ n = φ n , δ n = δ n , and β n = β n , their limits must coincide.

96 Kreps

& Wilson (1982); Fudenberg & Tirole (1991). I owe this Lemma to Michel Bechtel.

The proofs of the Lemmas

181

The proofs of the propositions Proposition 3.1 In a sequential equilibrium of the transition game, the weak citizens demand redistribution if θ < θ ∗ , i.e. they believe they will realize the redistribution outcome, and the high-follow-up-cost elite never represses demands for redistribution by citizens if they think that they face powerful citizens, i.e. φ > φ ∗ . In response to an offer by the elite strong citizens accept minor institutional alterations if they are certain that they encounter the high-follow-up-cost elite, i.e. δ > δ ∗ . Since the low-follow-up-cost elite always offers some redistribution if they face demands and weak citizens always prefer minor institutional alterations to initiating radical institutional changes, the assessment {(1, 0, 1) (1, 0, 0) (1) (1) , (δ > δ ∗ , φ > φ ∗ , θ < θ ∗ )} characterizes a completely pooling sequential equilibrium where  p  τe − τrev (y¯ − y p )  p  , δ∗ =  y¯ μ (τe ) − μ τrev   w   w τe (yh − y) ¯ − y¯ μ τrep − μ (τe ) − yh τrep ∗     p  φ = p , and w −μ τ w τrev (yh − y) ¯ − y¯ μ τrep rev − yh τrep

θ∗ =

−τe (y¯ − yw ) −y¯μ (τe )

denote the threshold values of the beliefs held by the strong citizens, the high-followup-cost elite, and the weak citizens, respectively. The proof amounts to checking whether each proposed assessment – a strategy-belief combination {(1, 0, 1) (1, 0, 0) (1) (1) , (δ > δ ∗ , φ > φ ∗ , θ < θ ∗ )} – satisfies the conditions of a sequential equilibrium. In order to prove whether the pooling equilibrium claimed in Proposition 3.1 is a sequential equilibrium one has to show that the proposed strategy-belief combination satisfies the corresponding conditions, i.e. the strategy profile and the system of beliefs satisfy sequential rationality at every information set and are consistent with each other in the sense of Lemma 3.2. Proposition 3.1 states that both citizen types demand redistribution, v = 1 and v = 1, both elite types respond by offering some redistribution, t = 1 and t  = 1, and the citizens accept the offer, r = 0 and r = 0. These strategies are the best responses as long as the strong citizen are convinced that they face the high follow-up-cost elite; that is, the updated belief exceeds the respective critical value, δ > δ ∗ , and the high-cost elite believes it will encounter strong citizens, i.e. φ > φ ∗ . The proof of this proposition is conducted by backwards induction. Given that weak citizens always accept an offer – established by Lemma 3.1ii) – one has to show that the strong citizens also accept redistribution, i.e. r = 0. In order too see this, one has to analyze the powerful citizens’ choices at their last decision node and to identify the conditions in which citizens revolt. The powerful citizens opt for revolution if the expected utility of revolution exceeds the expected utility of accepting an offer, i.e. U p (revolt) > U p (accept offer) which corresponds to p ∗ p δ U p (τrev ) + (1 − δ )U p (τrev ) > δ U p (τe )∗ + (1 − δ )U p (τe )

182

Appendix

Solving for the updated belief δ yields the critical value of the updated belief δ ∗ :  p  UP (τe ) −U p τrev  p ∗  p  δ< = δ∗ U p τrev −UP τrev −U p (τe )∗ +U p (τe ) Substituting the individual utility functions, Ui (τx )∗ = yi (1 − τx ) + y( ¯ τx − κ − μ (τx ))(3.5), in the formulation above yields  p   τe − τrev (y¯ − y p )   p  δ< y¯ μ (τe ) − μ τrev This critical value of δ yields the threshold condition of r: ⎧ p τ − τ y−y ¯ ⎪ ⎨0 if δ > ( e ( rev ))( p p ) y¯(μ (τe )−μ ((τrev ))) r= p τ − τ y−y ¯ ⎪ ⎩1 if δ < ( e ( rev ))( p p ) y¯(μ (τe )−μ ((τrev ))) The critical value of δ denotes the ratio between strong citizens’ losses if they accept an offer (compared to the utility they would gain if they press for regime change) and the reductions of redistribution induced by the deadweight losses of taxation. Accepting the elite’s offer is only the optimal choice at this information set if powerful citizens are sure that they encounter the high follow-up-cost elite, δ > δ ∗ . Proving the consistency of the strategy and the belief, requires to apply Bayes’ rule, which θt θ leads to δ = θ t+(1− θ )t  = θ +(1−θ ) = θ . This indicates that the strategy combination that leads to this decision node yields an updated belief, which contains no further information about the elite type. Since both elite types send the same signal, i.e. both offer redistribution, the decision of whether to revolt or to accept an offer depends on the initial beliefs about the cost situation. Nevertheless, this result satisfies the condition. Therefore, if the initial belief about the cost situation θ exceeds the losses of accepting an offer strong citizens will accept the redistribution offer. Lemma 3.1 states that the low follow-up-cost elite always offers redistribution. In order to check whether t = 1, i.e. the high follow-up-cost elite offers some redistribution, is also sequentially rational given the proposed strategy combination, consider the high follow-up-cost elite’s decision after receiving a demand by the citizens. This elite type offers if EUh (offer) > EUh (repression), which is equivalent to       p ∗ w ∗ φ rUh (τrev ) + (1 − r)Uh (τe )∗ + (1 − φ ) rUh (τrev ) + 1 − r Uh (τe )∗     p ∗    w ∗  p ∗ w ∗ ) + (1 − s)Uh τrep ) + 1 − s Uh τrep + (1 − φ ) sUh (τrev . > φ sUh (τrev Since s = 1, s = 0 and r = 0 by Lemma 3.1, that is the weak citizens never revolt and the strong type revolts in response to repression, the inequality is reduced to   p ∗ p ∗ w ∗ φ rUh (τrev ) + (1 − r)Uh (τe )∗ + (1 − φ )Uh (τe )∗ > φ Uh (τrev ) + (1 − φ )Uh (τrev ) . Solving for the updated belief φ about the cost situation yields the critical value φ ∗ :  w ∗ −Uh (τe )∗ Uh τrep     = φ∗ φ >   p ∗ ∗ w ∗ −U τ p ∗ r Uh τrev −Uh (τe ) +Uh τrep h rev As Proposition 3.1 states that the strong citizens do not revolt in response to an offer, this inequality is reduced further to   w    w ∗ w −Uh (τe ))∗ τe (yh − y) ¯ − y¯ μ τrep − μ (τe ) − yh τrep Uh τrep     p   ∗  p ∗ = p φ> w w w τrev (yh − y) ¯ − y¯ μ τrep − μ τrev − yh τrep Uh τrep −Uh τrev

The proofs of the propositions

183

This critical value of the updated belief, φ ∗ , denotes the threshold condition of t, i.e. whether to repress the demand or to respond with an offer. Hence, if φ > φ ∗ the high follow-up-cost elite will offer redistribution, and if φ < φ ∗ they will repress the demand: ⎧ ∗ U (τ w ) −U (τ ))∗ ⎪ ⎨0 if φ > h wrep ∗ h ep ∗ Uh (τrep ) −Uh (τrev ) t= ∗ w ∗ ⎪ ⎩1 if φ < Uh (τwrep )∗ −Uh (τep)) ∗ Uh (τrep ) −Uh (τrev ) λv Applying Bayes’ Rule yields φ = λ v+(1− λ )v = λ , such that the condition of the consistency of beliefs is satisfied and Bayes’ rule states that the decision purely depends on the elite’s prior about the distribution of weak and strong citizens. Since t  = 1 and v = 1 by Lemma 3.1, i.e. the low followup-cost elite always offers redistribution and strong citizens always demand, the last thing to prove is that demands for redistribution made by weak citizens are also sequentially rational given the statement in Proposition 3.1. Consider the first decision node of the weak citizens of whether to demand redistribution or to remain at the status quo. If EUw (demand) > EUw (SQ) holds, which corresponds to      w ∗  w ∗ θ tUw (τe )∗ + (1 − t) sUw (τrev ) + 1 − s Uw τrep        w  w + (1 − θ ) t Uw (τe ) + 1 − t  sUw (τrev ) + 1 − s Uw τrep > SQ

the weak type will demand redistribution, i.e. v = 1. Simplifying and solving for θ , the initial belief about the cost situation, yields

θ
0, t > 0, and r > 0.

    The assessment (1, 0 < r < 1, 1) , v = v0 , 0, 0 t = t 0 (1) , (δ = δ ∗ , φ = φ ∗ , θ = θ ∗ ) describes this equilibrium, where the mixed strategies are given by   p   p  ¯ − y¯ μ (τe ) − μ τrev λ (1 − r) τrev − τe (yh − y)    , and  v0 = w − y¯ μ τ w − μ (τ ) λ τe (yh − y) ¯ − yh τrep e rep  p  τe − τrev (y¯ − y p ) θ −1   p  ,   t0 = p θ τe − τrev (y¯ − y p ) + y¯ μ τrev − μ (τe ) and the corresponding critical beliefs are  p  τe − τrev (y¯ − y p )  p  , δ∗ =  y¯ μ (τe ) − μ τrev w τe (yh − y) ¯ − yh τrep   p   φ ∗ =  p  r τe − τrev (yh − y) ¯ − y¯ μ τrev − μ (τe )   w   −y¯ μ τrep − μ (τe )      , and p w − y¯ μ τ w − μ τ p +τrev (yh − y) ¯ − yh τrep rev rep    p   p  − μ (τe ) −τe (y¯ − yw ) τe − τrev (y¯ − yw ) + y¯ μ τrev   .        θ∗ =  p p p w (y¯ + y ) y¯ (y¯ − yw ) μ (τe ) τrev − μ τrev τe + μ (τe ) − μ τrev τrep w

    The assessment (1, 0 < r < 1, 1) , v = v0 , 0, 0 t = t 0 (1) , (δ = δ ∗ , φ = φ ∗ ) postulates that there exists a mixed strategy equilibrium in which the strong citizens mix their strategies after receiving an offer 0 < r < 1. This holds if the elite is able to make them indifferent by offering redistribution with probability  p  τe − τrev (y¯ − y p ) θ −1   p  .   t0 = p θ τe − τrev (y¯ − y p ) + y¯ μ τrev − μ (τe ) Playing offer with probability t 0 requires that the high follow-up-cost elite expects to benefit equally from either choosing repression or from choosing to make an offer, i.e. they have to be indifferent at the decision node after observing a demand. This only holds true if the probability t 0 also makes the weak citizens indifferent at their first decision node, such that they also mix their strategies of whether to demand redistribution or to remain at the status quo. The proof is conducted by backwards induction and checks whether the strategy-belief combination satisfies the conditions of a sequential equilibrium. In order to prove whether Proposition 3.5 satisfies the conditions of a sequential equilibrium, assume that the strong citizens randomize their last move after they have received an offer from the elite, i.e. 0 < r < 1. The strong citizens randomize if their expected utility of initiating a revolution equals their expected utility of accepting the redistribution offer. In this – and only in this – case choosing revolt

The proofs of the propositions

185

is as rational as accepting the offer which requires that the citizens’ belief equals the the critical value of δ as derived in the poof of Proposition 3.1:  p  U p (τe ) −Uh τrev  p ∗  p  δ∗ = Uh τrev −Uh τrev −U p (τe )∗ +U p (τe ) According to Lemma 3.1ii) the low follow-up-cost elite always offers redistribution. This leaves the question of which value of t generates the critical belief above, i.e. makes strong citizens indifferent between revolting and accepting an offer. Given t  = 1 and solving for t, Bayes’ rule leads to t = (θ −1) δ ∗ 0 θ (1−δ ) . Substitutiong δ with δ allows us to extract an expression for t :   p  (θ − 1) U p (τe ) −U p τrev   p ∗  t0 = θ U p (τe )∗ −Uh τrev or in terms of the individual utility function  p  τe − τrev (y¯ − y p ) θ −1   p     t0 = p θ τe − τrev (y¯ − y p ) + y¯ μ τrev − μ (τe ) Choosing this value of t requires the θ −type elite to be indifferent to repression and offer, i.e. both options are rational. Indifference at this decision node requires that the elite’s expected utility of offering redistribution equals the elite’s expected utility of repression, EUh (offer) = EUh (repression) which corresponds to       p ∗ w ∗ φ rUh (τrev ) + (1 − r)Uh (τe )∗ + (1 − φ ) rUh (τrev ) + 1 − r Uh (τe )∗         w ∗  p ∗ p ∗ w ∗ ) + (1 − s)Uh τrep ) + 1 − s Uh τrep + (1 − φ ) sUh (τrev = φ sUh (τrev Since s = 1,s = 0 and r = 0 by Lemma 3.1ii) this inequality is reduced to    w ∗ p ∗ p ∗ φ rUh (τrev ) + (1 − r)Uh (τe )∗ + (1 − φ )Uh (τe )∗ = φ Uh (τrev ) + (1 − φ )Uh τrep and solving for φ and substituting the individual utility function yields the critical value     w − y¯ μ τ w − μ (τ ) τe (yh − y) ¯ − yh τrep e rep ∗   p        φ =  p  p w − y¯ μ τ w − μ τ p r τe − τrev ¯ − y¯ μ τrev (yh − y) ¯ − yh τrep (yh − y) − μ (τe ) + τrev rev rep If the high-follow-up-cost elite belief about the citizen type equals this critical value, i.e. φ = φ ∗ , they are indifferent between offer and repress. Given that the strong citizens always make a demand – established by Lemma 3.1i) – applying mixed strategies at this decision node requires that the elite sometimes observes a demand by weak citizens and sometimes does not. In order to obtain a formulation for this particular value of v – the probability that the weak citizens demand – one uses Bayes’ rule and substitutes φ with φ ∗ :   p   p  ¯ − y¯ μ (τe ) − μ τrev λ (1 − r) τrev − τe (yh − y)     v0 = w − y¯ μ τ w − μ (τ ) λ τe (yh − y) ¯ − yh τrep e rep In order to complete the proof of Proposition 3.5 the last thing to show is that this probability v0 of observing demands by weak citizen is sequentially rational. Playing v0 requires that the probability of receiving an offer t 0 makes weak citizens indifferent at their first decision node. This holds if the weak

186

Appendix

citizens’ expected utility of demanding redistribution equals the citizens’ expected utility of remaining at the status quo, i.e. EUw (demand) = EUw (SQ) which is equivalent to   w ∗  θ tUw (τe )∗ + (1 − t)Uw τrep + (1 − θ )Uw (τe ) = SQ. Soving for θ and substituting t with t 0 generates the critical value of the initial belief that makes weak citizens indifferent between demand and not demand:    p   p  −τe (y¯ − yw ) τe − τrev (y¯ − yw ) + y¯ μ τrev − μ (τe ) ∗   .  p     p  θ =  p w (y¯ + y ) y¯ (y¯ − yw ) μ (τe ) τrev − μ τrev τe + μ (τe ) − μ τrev τrep w Thus, there exists a mix-strategy equilibrium of the transition game which includes the status-quo outcome if the elite mixes its strategies and offers redistribution with probability t = t 0 and if weak citizens demand redistribution with proability v = v0 .

The proofs of the propositions

187

Table A2: Summary statistics of the overall sample (1950-2000

variable institutinal alterations trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member int. organization membership democracy level of trade partners Gini index ethnic fractionalization

obs

mean

std.dev.

min

max

6103 6103 6103 6103 6103 6103 6103 6103 6028 6094 1673 5934

0.02 0.27 5.58 3.58 4.15 20.48

0.39 0.35 6.14 7.03 3.62 26.52 0.29 0.22 21.17 14.20 10.88 0.27

–2.00 0.00 0.28 -55.36 0.00 0.00

2.00 5.25 46.06 199.40 10.00 190.00 dummy dummy 134.00 30.00 73.90 0.95

46.14 18.64 38.98 0.45

0.00 –25.00 15.90 0.00

188

Appendix

Robustness tests

Table A3: The effect of economic integration on institutional alterations – the results of the Prais-Winston regression utilizing a continous dependent variable (1970-2000)

foreign direct investment trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member

model 1

model 2

model 3

model 4

model 5

–.083 (.324) –.179** (.075) .008 (.006) –.000 (.005) .081*** (.012) .002 (.001) –.180* (.104) .484*** (.095)

–.054 (.328) –.001 (.090) .018** (.009) –.000 (.005) .084*** (.013) .001 (.001) –.195* (.107) .465*** (.091) –.019** (.009)

–.140 (.323) .318** (.122) .007 (.006) .000 (.005) .111*** (.015) .001 (.001) –.110 (.095) .520*** (.086)

–1.150 (.984) –.297 (.193) .057*** (.015) .004 (.017) .173*** (.030) –.003 (.002) –.112 (.129) .794*** (.209)

–.120 (.318) –.138* (.071) –.000 (.005) .000 (.005) .102*** (.014) .001 (.001) –.265** (.106) .485*** (.107)

per capita GDP × trade dependence trade dependence × level of autocracy

–.099*** (.022) .043*** (.016) 1.867 (1.242) .049 (.032)

Gini index ethnic fractionalization Gini index × ethnic fract.

.006* (.003) .009** (.002)

democracy level of trade partners int. organization membership constant

–.174** (.073)

–.238*** (.087)

–.314*** (.082)

N 3946 3946 3946 R2 .021 .021 .023 p-Value .0000 .0000 .0000 rho –.019 –.019 –.018 robust standard errors in parentheses; *** p < .01, ** p < .05, * p < .1

–2.086*** (.656)

–.739*** (.152)

1253 .069 .0000 .015

3944 .027 .0000 –.020

Robustness tests

189

Table A4: The effect of economic integration on institutional alterations – the results of the ordered logstic regression (1950-2000)

trade dependence per capita GDP growth level of autocracy regime durability oil exporting country former W-Pact member

model 1

model 2

model 3

model 4

model 5

–.348** (.136) .017* (.010) –.007 (.007) .138*** (.015) .003 (.002) –.528** (.212) –.077 (.199)

–.127 (.195) .038*** (.014) –.008 (.007) .143*** (.015) .002 (.002) –.547*** (.210) –.123 (.204) –.036** (.015)

–.115 (.272) .016 (.010) –.007 (.007) .148*** (.019) .003 (.002) –.505** (.216) –.073 (.199)

–.765*** (.188) .057** (.026) .026 (.020) .220*** (.041) –.003 (.003) –.091 (.456) .618 (.397)

–.358*** (.120) .006 (.010) –.011 (.008) .176*** (.017) .002 (.002) –.685*** (.203) .332 (.220)

per capita GDP × trade dependence trade dependence × level of autocracy

–.038 (.037) .074*** (.021) 4.337** (1.790) –.121*** (.045)

Gini index ethnic fractionalization Gini index × ethnic fract.

.017*** (.005) .010** (.004)

democracy level of trade partners intern. organization membership

N McKelvey & Zavoina’s R2 Wald Chi2 p-Value Log pseudolikelihood

6103 104 186.80 .0000 –2148.253

6103 106 187.96 .0000 –2146.467

6103 105 194.62 .0000 –2147.932

robust standard errors in parentheses; *** p < .01, ** p < .05, * p < .1

1672 182 82.34 .0000 –541.960

6019 124 204.32 .0000 –2098.780

190

Appendix

Table A5: The effect of economic integration on institutional alterations – the results of the generalized ordered logstic regression (model 3)

institutional alterations major negative

minor negative

no alteration

minor positive

foreign direct investment

3.117 (4.049)

0.283 (0.68o)

–0.034 (0.433)

–1.678** (0.851)

trade dependence

–3.455 (3.389)

1.628** (0.779)

–0.187 (0.647)

0.891 (1.380)

per capita GDP

–0.085 (0.193)

0.178*** (0.047)

0.039 (0.032)

0.094 (0.076)

growth

–0.062 (0.067)

0.011 (0.014)

–0.011 (0.009)

0.0130 (0.014)

level of autocracy

0.560*** (0.100)

0.231*** (0.038)

0.135*** (0.023)

0.223*** (0.030)

regime durability

0.125** (0.063)

0.017** (0.008)

–0.009** (0.004)

–0.022** (0.010)

oil exporting country

–0.492 (1.069)

–0.605** (0.308)

–0.220 (0.295)

–0.137 (0.428)

11.912*** (0.926)

–0.194 (0.609)

0.648 (0.435)

0.494 (0.389)

per capita GDP × trade dependence

2.358 (1.678)

–0.141*** (0.036)

–0.144 (0.103)

–0.490 (0.402)

constant

1.305** (0.548)

0.862*** (0.318)

–4.100*** (0.307)

–5.724*** (0.474)

former W-Pact Member

N Pseudo R2 Wald Chi2 p-Value Log pseudolikelihood

3946 0.0876 861.81 0.0000 –1384.492

robust standard errors in parentheses; *** p < 0.01, ** p < 0.05, * p < 0.1

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