Examining causality among militarized interstate disputes, regime type, trade openness, and economic growth

Democracy and free trade are thought to reduce international conflict and to promote economic growth. This study examines whether the peace and economic growth-promoting effects of trade openness and democracy are subject to reverse causation: peace and growth might promote openness and democracy. That these four variables—democracy, openness, conflict, and growth—are related is widely accepted; however, the causal relationships linking them are not clearly established.; I used two methods to examine causality among militarized interstate disputes, regime type, trade openness, and economic growth on the national level of analysis. Granger testing was employed with two- as well as four-variable models for a time period of 1885–1992. In addition, I examined causality with a system of four simultaneous equations using two-stage least squares as the estimation procedure. As most control variables are available only for the time after 1950, this set of tests had to be restricted to a shorter time period.; The most important finding emerging from both sets of tests is that trade openness reduces the likelihood of conflict, supporting the liberal view. No support for the reverse causation was found. Contrary to expectations, conflict is not significant in disrupting trade. A direct peace-promoting effect of democracy was not detected. However, democracy has an indirect conflict-reducing effect insofar as it increases openness. Controlling for simultaneous effects reveals that democratic states are more open but openness does mot necessarily lead to more democracy. There is some indication that economic growth increases the likelihood of conflict, as countries need to have the resources to launch a conflict. At the same time, economic growth indirectly reduces the likelihood of conflict by increasing a country's economic openness. Countries with high economic growth rates are more open in trade, whereas the findings for the reverse causation were mot conclusive. In the simultaneous equation models none of the endogenous variables was significant in explaining democracy or economic growth. Trade openness and democracy are indeed ways to achieve peace, and they go well together because politically liberal states are also more open economically.