Democracy, trade and Inequality – A computer-aided thought experiment

Evidence suggests that free trade induces democratization by increasing inequality as democracy constitutes the most credible compromise that elites can offer to popular demand for redistribution. However, a close strand of literature claims that democracy fosters free trade, while yet another one finds that free trade generates inequality. The picture formed by these three claims is that democracy is an institutional solution to inequality that outputs trade policies that generate inequality. So could democracy entail a one-off decrease in inequality? Extending Bueno de Mesquita et al (2003) selectorate game I propose a model that intends to capture the interplay of political regime, inequality, redistribution and trade policy. Introducing factor ownership – capital owners and workers – and country factor abundance, I examine how the interaction of institutional variables and factor abundance influence policy output and characterize policy preferences of workers and capital owners via numeric simulation. The results suggest that without a general belief in expected aggregate gains from trade there will be no international trade. Furthermore the analysis shows that effects of democratization on trade policy depend on the distribution of factor ownership and the country’s factor abundance; and that when expectations of aggregate gains from trade are high enough, the workers are willing to vote for trade policies that entail less redistribution and more inequality.