Diversification and democracy

Date01 September 2018
DOI10.1177/0192512116679833
Published date01 September 2018
Subject MatterArticles
https://doi.org/10.1177/0192512116679833
International Political Science Review
2018, Vol. 39(4) 551 –569
© The Author(s) 2017
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DOI: 10.1177/0192512116679833
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Diversification and democracy
Ivar Kolstad
Chr. Michelsen Institute, Bergen, Norway
Arne Wiig
Chr. Michelsen Institute, Bergen, Norway
Abstract
Does diversification of an economy improve the chances of democracy? In theory, diversification may reduce
elite cohesion and improve citizens’ outside options, making democracy more likely. This paper estimates
the effect of export diversification on democracy, using data from 143 countries. We use variability within
countries in fertile soil as an instrument for diversification, controlling for country size. To address the
possibility that current fertile soil variability may have been influenced by historical country characteristics
that could also have affected democracy today, we control for historical changes in land cover. We identify
a statistically significant, positive effect of diversification on democracy.
Keywords
Diversification, concentration, democracy, political economy
Introduction
In a diversified economy, industrial activity is spread over many sectors. In this paper, we analyse
whether greater economic diversification increases the chances that a country will be democratic.
There are plausible theoretical arguments for a positive impact of diversification on democracy.
Diversification of an economy is likely to lead to greater diversity in economic interests, including
within elites, and less dependence and hence greater bargaining power for citizens since they face
better outside options. If this is the case, diversification should improve chances for democracy.
Conversely, incomes that originate from a highly concentrated industrial structure will lead to elites
being more cohesive, and citizens more dependent on the elites for survival, reducing the likelihood
of democracy.
Our empirical analysis estimates the effect of export diversification on democracy, using data from
143 countries. We use an instrumental variable approach to address the challenge that diversification
Corresponding author:
Ivar Kolstad, Chr. Michelsen Institute, P.O. Box 6033 Bedriftssenteret, N-5892 Bergen, Norway.
Email: ivar.kolstad@cmi.no
679833IPS0010.1177/0192512116679833International Political Science ReviewKolstad and Wiig
research-article2017
Article
552 International Political Science Review 39(4)
is endogenous. In this way, we get around the problem of reverse causality, i.e. the possibility that
elites in non-democracies create entry barriers to new firms, which may reduce diversification
(Acemoglu, 2008; Cuberes and Jerzmanowski, 2009). As our instrumental variable we use within-
country variation in fertile soil, controlling for country size. We expect (and find) that countries with
greater heterogeneity in bio-topographical conditions will have more diversified economies in terms
of exports. Controlling for country size, basic bio-topographical conditions are arguably exogenous
and can be used to identify the causal effect of diversification on democracy.
Our results show that diversification has a statistically significant, positive effect on democracy.
The magnitude of the effect is also sizeable. The results hold for all standard measures of diversi-
fication and all standard democracy indices. To address the concern that historical differences
between countries in institutional and other factors could have resulted in soil degradation or
improvement and also influenced current levels of democracy, we show that our results are robust
to the addition of measures of land cover changes since the year 1700, which would capture any
such differences. In addition, results are robust to the addition of a number of covariates, including
income, population size, ethnic fractionalization, religious composition of the population, inequal-
ity, trade, education, latitude, natural resource exports, region and colonial history. We provide
tentative evidence for two possible mechanisms behind the results: that diversification reduces
elite cohesion, and that it increases citizen power by improving their outside employment options.
Moreover, these mechanisms may imply heterogeneous effects of diversification on democracy; if
this is the case we show that our estimates identify a local average treatment effect at intermediate
levels of diversification.
Our analysis takes the literature on the link between economic and political structure in a new
and different direction. Following Lipset (1959), a number of studies have examined the idea that
as incomes increase societies are more likely to become democratic, known as the modernization
hypothesis (Acemoglu et al., 2008; Boix, 2011; Gundlach and Paldam, 2009; Kennedy, 2010).
Other studies have focused more on the relationship between inequality and democracy, tracing
their origins back to ideas expressed by Aristotle, de Toqueville and Marx, and offering similarly
diverging hypotheses on how inequality affects democracy (Ahlquist and Wibbels, 2012; Ansell
and Samuels, 2010; Boix, 2003). We look instead at the effect of industrial concentration, and find
little robust evidence that income or inequality has an effect on democracy once the degree of
diversification is controlled for. While some previous studies argue that diversification can improve
the chances of democracy (Ahlquist and Wibbels, 2012; Boix, 2011), this is mentioned mostly in
passing, and the role of diversification in doing so is not sufficiently explained and motivated. We
provide a more thorough examination of this relationship, theoretically and empirically.
The paper also speaks to the literature on globalization and development. There is considerable
disagreement on the impact of greater openness to trade and investment on democracy, and empiri-
cal studies come to different results (Ahlquist and Wibbels, 2012; Freeman and Quinn, 2012; Li
and Reuveny, 2003; Liu and Ornelas, 2014; López-Córdova and Meissner, 2008; Rudra, 2005). We
complement these studies by analysing the impact of the diversification of exports across sectors,
where these studies focus on the total amount of trade or the extent of financial openness. A number
of studies also suggest that concentration in particular industries may harm the chances of democ-
racy, in particular concentration in resources such as petroleum and certain minerals (Aslaksen,
2010; Caselli and Tesei, 2016; Ross, 2001; Tsui, 2011). We add to these studies by examining the
effect of diversification more generally on democracy. In this, we also add to a literature on diver-
sification that has so far focused on its economic preconditions and effects rather than its political
implications (Cadot et al., 2011).
The paper is structured as follows. The next section presents the conceptual framework underly-
ing our empirical analyses, theoretical arguments linking diversification to democracy, and

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