Democracies Not in Peril: Globalization and Tax Revenue

Abstract In a recent book, Bastiaens and Rudra (2018) claim that as governments embraced trade liberalization in the 1990’s, they experienced a revenue shock, and that democratic governments found it harder to repair the breach than did authoritarian ones. As a result, they argue, contemporary trade liberalizations have posed a danger to democracy by starving it for funds, forcing vulnerable governments to resort to politically unpopular policies. This is an important and provocative argument. However, good evidence contradicts its major premise. This research note critiques some data, presentation, and conceptual problems with the argument. It provides new analyses using the well-curated dataset from the International Centre for Tax and Development (ICTD, updated by UNU-WIDER), instead of the authors’ primary data from World Development Indicators . It shows that developing countries–and democracies especially–did not, in fact, suffer a revenue shock. On average, trade taxes constituted only a minor part of their government revenue. While the revenue they provided declined slightly over the period in question, this trend was overwhelmed by variation in other tax and non-tax revenues. As for total tax revenues, a key variable sometimes underemphasized in the book, ICTD data show that they expanded more rapidly in democratic developing countries than in non-democratic ones. Regression analyses with ICTD data also fail to confirm the authors’ finding of a revenue shortfall among developing democracies.