Economic Liberalization and Domestic Instability

Diplomarbeit von Nina Wiesehomeier

Abstract:

During the nineties globalization has become one of the most disputed issues in the social sciences and a lively debate about its possible detrimental or beneficial consequences is going on. Among economists there exists the general consensus that global economic integration enhances welfare through market allocations that are assumed to be efficient. The majority of papers hereby concentrate on explaining what the causes for the increasing economic liberalization are, the feasibility of these reforms, limiting the debate to the question of correct sequencing of the distinct measures, or to the causes of either their success or failure. Another phenomena of the last decade has been the increasing amount of armed intrastate conflicts around the world which reached its peak in the early 1990s. Although economic aspects gained in interest as roots of internal war, economic liberalization per se was not considered as a causal factor.

This study therefore examines the question of whether economic liberalization is likely to fan the flames of domestic violent conflict, thereby distinguishing between long-term and short-term consequences of this process. I assume that in the long-term economic liberalization has a pacifying effect as the abolition of trade barriers fosters export-led growth. On the contrary, in the short-term, after an economic reform has been introduced, distributional effects will have a major impact on society, causing winners and losers. This situation is likely to trigger domestic instability and violent conflict if the winners are not able or willing to compensate the losers for their economic losses. To explain cleavages arising in society, this study adds an institutional perspective to Rogowski’s model based on the Stolper-Samuelson Theorem and highlights it with an exemplary application with the Rubinstein Model. I illustrate the propositions derived from this model by presenting the case of Guinea-Bissau. Testing statistically the causal mechanism between economic liberalization and domestic conflict and intervening factors of political, sociological, and economical kinds, it furthermore engages in comparative work in a dual sense: the study moves across different levels of analysis and compares the three statistical tools ordinary logit, random effects logit and general estimating equation. It first starts with a sample comprising 90 developing countries for the time period of 1978 to 1998 and focuses afterwards on African countries for the same time period.

The outcomes do support the question of interest and are robust to sample size and estimation methods applied, which strengthens the confidence in the findings. In both samples, trade to GDP, the proxy for the long-term effects, predicts peace strongly. For the short-term effects, this study uses a new dataset collected at the University of Konstanz, which is based on a combination of trade policies and institutional exchange arrangements, thereby taking into account institutional settings necessary for the process of liberalization. It predicts conflict strongly for both samples, whereas the results are more compelling for the African sample.

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