The merits of globalization have not spread equally across countries. In the wake of trade liberalization, developing countries are facing what the authors of Democracies in Peril identify as a revenue crisis, one that goes as far as threatening the very survival of democracy itself. Crucially, however, Ida Bastiaens and Nita Rudra argue that “globalization is not the crux of the problem” (p. 3, emphasis in the original). What makes the crucial difference, in their view, is the countries’ “political response” to trade liberalization.
To liberalize an economy, taxes and tariffs on trade are either heavily reduced or completely abandoned. Trade liberalization in the 1980s and 1990s, therefore, created a large hole in the budget of developing economies, which previously relied heavily on the “easy to collect” taxes on trade, and most often came after a period of import-substituting industrialization. These already revenue-strained economies thus faced the challenge of reforming their tax systems to fill the void. The response had to be an increase in domestic tax revenue, which can only be achieved through rigorous tax reform. Relocating the tax burden is a highly contentious task, and countries differed in their capacity to solve the challenge.
In this exceptional, theoretically rich, and empirically dense work, Bastiaens and Rudra identify an empirical puzzle: it is democracies that seem to struggle most to reap the benefits from globalization. In addressing the consequences of globalization, this book is particularly pathbreaking because of its focus on the too often neglected revenue side of countries’ economies. Whereas social policy and welfare state researchers emphasize the problematic consequences of trade liberalization for poverty reduction and the abatement of income inequality, Bastiaens and Rudra make a major contribution by taking a step back and drawing our attention to the inherent problem of revenue generation through taxes other than trade-related ones, which severely challenge democratic governments in finding support coalitions in the postliberalization era.
Analyzing macrolevel data on tax revenue and trade openness, the authors illustrate that authoritarian countries were better able than democracies to substitute the lack of trade taxes with domestic tax revenue. After introducing us to the puzzle in Chapter 1, Bastiaens and Rudra carve out their theoretical argument, which explains why democracies underperform in the generation of public revenue postliberalization. Building on selectorate theory and reasoning from special interest group research, the political-economy argument proposes that tax reforms in democracies are more heavily challenged because of “lower government confidence and quasi-voluntary compliance” (p. 27) and democracies’ limited means of coercion.
Democracies face a great dilemma: they need to reform the tax system to generate more revenue, but first, this means getting economic elites (firms) on board with the fiscal contract. However, these same elites profit from declining trade taxes and have a vested interest in opposing corporate income and value-added taxation. Second, the poor lack trust in the government because they do not receive sufficient public goods, which democracies are constrained to provide precisely due to the revenue shortage. With both groups opposing tax reforms, democracies have their backs up against the wall. Authoritarian governments, in contrast, can easily resort to coercive tools if citizens do not pay their tax duties, and given their resources for public good provision, they even receive confidence from the population. Liberal authoritarian regimes, more so than conservative authoritarian regimes, should achieve a beneficial balance of confidence and the means to coerce, thereby arriving at better outcomes in the expansion of domestic tax revenues.
To test this theoretical argument, Bastiaens and Rudra employ a diverse and impressive set of techniques and draw conclusions from triangulation: they start with macrolevel data on tax revenue, regime type, and trade openness and use sophisticated empirical models, always accompanied by rigorous robustness tests and excellent illustrations of the empirical findings with predicted probability plots. Subsequently, the authors meticulously study the microlevel mechanism of deficient trust among voters (Chapter 4) and firms (Chapter 5) with survey data. Conducting an original survey with Amazon Mechanical Turk (MTurk) to examine how far the willingness to pay taxes, satisfaction with public goods provision, and governmental trust differ by regime type, they reveal that the willingness to cheat on taxes is much higher in democracies in which citizens are also very dissatisfied with public goods provision compared to individuals in autocracies. Although Bastiaens and Rudra are always careful in the interpretation of the MTurk data and back it up with data from the World Values Survey, one could question how a sample of 300 respondents across 50 developing countries could be anything but suggestive. Still, using such tools in the developing-country context is an important step forward and should encourage scholars to see the advantages of using online surveys in less easily accessible contexts.
Before turning to examine the aftermath of trade liberalization and its consequences for tax reforms with exemplary and thorough case studies of India (democracy), China (conservative autocracy), and Jordan and Tunisia (liberal autocracies), the authors laudably do not hesitate to ask the “so what” question in Chapter 6. The statistical findings are straightforward: revenue shortages exert a negative impact on public goods provision and welfare outcomes. The result thus underlines the sobering insight of this book: democracies are caught in a “vicious cycle” of low confidence and low revenue (p. 114) and, hence, are in severe “peril.”
Throughout the book, regime type is the key explanatory variable, and democracy turns out to be a problematic regime type for addressing the revenue crisis that follows from globalization. But even though Bastiaens and Rudra provide a convincing microlevel framework based on elite interests, and emphasize this group’s exceptional influence in developing democracies, one could argue that it is not democracy as such that causes revenue problems, but rather a malfunctioning one. Indeed, the poor do not trust government institutions to do good with their tax money, but it is not just because of the suspicion that politicians fill their own pockets, but rather that the government unabashedly pursues special interest politics, providing public goods to the rich and granting tax exemptions to business elites. Because of dysfunctional democratic institutions (e.g., clientelism looms large), the poor do not have much of a voice. So, instead of democracy, the problem might be unequal representation.
Young democracies are somewhere between a rock and a hard place: they have to provide public goods to convince citizens that taxation is a good investment, but they are underfinanced because of a lack of tax revenue and therefore cannot provide more or better public goods. Of course, in many developing countries social spending follows a regressive pattern, and resolving this with a left-wing policy toward a progressive distribution could be done cost efficiently. Yet business elites likely oppose such reforms, which is why the underrepresentation of the poor becomes key. The rich insights provided in the case studies present important ground for further research that will scrutinize the formation of voter coalitions and ties between business elites and the state that might form a sustainable fiscal contract.
Ultimately Bastiaens and Rudra’s thoughtful contribution allows us to see the consequences of globalization from a different perspective: the revenue side. It is therefore a must read for scholars and students working on questions at the core of both political economy research and democratic theory.
