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Financial Globalization as a Barrier to Democratic Consolidation: a North-South Model with Public Goods

Abstract This paper modifies the Acemoglu–Robinson model of the economic basis of democracy to discuss the impact of the international regime regulating capital flows on the consolidation and quality of democracy. Two regimes of capital mobility are considered, Bretton Woods and Rodrik’s hyperglobalization, in an international economy formed by an advanced North and a developing South. The model shows that hyperglobalization compromises the stability of democracy in the South by limiting the ability of the citizens to tax the elite and provide public goods which are critical for technical change and income distribution. At variance with the mainstream results, it is argued that financial globalization is a barrier to democratic consolidation. The model is consistent with key findings of the empirical literature on globalization and democracy, as well as with evidence from the economic history of Latin America.