The Political-Economy Trilemma

Author Name Joshua AIZENMAN (University of Southern California and NBER) / ITO Hiroyuki (Visiting Fellow, RIETI)
Creation Date/NO. March 2020 20-E-018
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This paper investigates the political-economy trilemma: policy makers face a trade-off of choosing two out of three policy goals or governance styles, namely, (hyper-)globalization, national sovereignty, and democracy. We develop a set of indexes that measure the extent of attainment of the three factors for 139 countries in the period of 1975-2016. Using these indexes, we examine the validity of the hypothesis of the political-economy trilemma by testing whether the three trilemma variables are linearly related. We find that, for industrialized countries, there is a linear relationship between globalization and national sovereignty (i.e., a dilemma), and that for developing countries, all three indexes are linearly correlated (i.e., a trilemma). We also investigate whether and how three political-economic factors affect the degree of political and financial stability. The results indicate that more democratic industrialized countries tend to experience more political instability, while developing countries tend to be able to stabilize their politics if they are more democratic. The lower level of national sovereignty an industrialized country attains, the more stable its political situation tends to be, while a higher level of sovereignty helps a developing country to stabilize its politics. Globalization brings about political stability for both groups of countries. Furthermore, more globalized countries, whether industrial or developing, tend to experience more financial stability.

Published: Aizenman, Joshua, and Hiroyuki Ito, 2020. "The political-economy trilemma," Open Economies Review, Vol. 31(5), 945-975.