An Economic Theory of Foreign Interventions
and Regime Change
Roberto Bonfatti
School of Economics
CCPR Workshop, Jan 15 2015
Introduction
Introduction
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CIA interventions hindered democracy in Latin America
(also Easterly et Al., 2011).
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A greater geopolitical importance of Latin America meant
more CIA interventions that hindered democracy.
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This cannot be entirely explained with ideology.
This paper
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Economic theory of foreign interventions that can account
for these and other facts.
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Main ingredients:
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Incumbent elite (i) versus challenging democratic party (c).
Domestic country’s main economic partner (F ), and its
geopolitical enemy (E).
i can concede F rents in the domestic economy.
Once rents are in place, re-negotiation may be difficult
(because of reputation concerns on the side of F ), and may lead
to bilateral tensions. This makes a change in government a
geopolitical hazard for F .
Historical evidence in support of the model’s prediction.
Overview of game
Timing of the game:
1. Strategic rents: i may unilaterally concede rents R to F .
2. Regime change.
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I
I
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Nature pick µ from a distribution F (.).
i may surrender power. If he doesn’t, he may invest m ≥ 0 in
repression...
... after which F and E may (sequentially, with the country that
supports i moving first) invest mF R 0 and mE R 0 in foreign
interventions.
If i has not surrendered power, c may overthrow him at a cost
µ + m + mF + mE . If she does, she can appropriate τ of i’s
income (θ).
3. International agreements. Whoever is in power negotiates an
agreement with F , or with F ’s competitor E if negotiations with F break
down.
Overview of game
Timing of the game:
1. Strategic rents: i may unilaterally concede rents R to F .
2. Regime change.
I
I
I
I
Nature pick µ from a distribution F (.).
i may surrender power. If he doesn’t, he may invest m ≥ 0 in
repression...
... after which F and E may (sequentially, with the country that
supports i moving first) invest mF R 0 and mE R 0 in foreign
interventions.
If i has not surrendered power, c may overthrow him at a cost
µ + m + mF + mE . If she does, she can appropriate τ of i’s
income (θ).
3. International agreements. Whoever is in power negotiates an
agreement with F , or with F ’s competitor E if negotiations with F break
down.
Overview of game
3. International agreements
I Agreement between domestic country and F :
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Gain to i: γ i − φ2 r
Gain to c: γ c − φ2 r
Gain to F : γ ∗ + r − κI(r < λR),
where γ i , γ c , γ ∗ , φ ≥ 1, κ > 0 and high, and λ ∈ [0, 1] are parameters.
I Agreement between domestic country and E:
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Gain to i: − φ2 r
Gain to c: − φ2 r
Gain to E: γ ∗ + r ,
I Outcome of period:
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If λR small, both i and c sign with F .
If λR large, some may sign with E.
In both cases, Nash bargaining determines r .
Overview of game
2. Regime change
1. Strategic rents: i may unilaterally concede rents R to F .
2. Regime change.
I
I
I
I
Nature pick µ from a distribution F (.).
i may surrender power. If he doesn’t, he may invest m ≥ 0 in
repression...
... after which F and E may (sequentially, with the country that
supports i moving first) invest mF R 0 and mE R 0 in foreign
interventions.
If i has not surrendered power, c may overthrow him at a cost
µ + m + mF + mE . If she does, she can appropriate τ of i’s
income (θ).
3. International agreements. Whoever is in power negotiates an
agreement with F , or with F ’s competitor E if negotiations with F break
down.
Overview of game
1. Strategic rents
Timing of the game:
1. Strategic rents: i may unilaterally concede rents R to F .
2. Regime change.
I
I
I
I
Nature pick µ from a distribution F (.).
i may surrender power. If he doesn’t, he may invest m ≥ 0 in
repression...
... after which F and E may (sequentially, with the country that
supports i moving first) invest mF R 0 and mE R 0 in foreign
interventions.
If i has not surrendered power, c may overthrow him at a cost
µ + m + mF + mE . If she does, she can appropriate τ of i’s
income (θ).
3. International agreements. Whoever is in power negotiates an
agreement with F , or with F ’s competitor E if negotiations with F break
down.
Results
Result 1. In the SPNE, if γ i = γ c = γ ∗ = 0, foreign interventions never occur.
Regime change happens iff:
µ < 0.
Results
Result 2. In the SPNE:
1. If F (.) ∈
/ F, i sets R = 0. An intervention by F may occur in equilibrium,
and it is always in support of i if γ i > γ c , in support of c otherwise. An
intervention by E never occurs. Regime change happens iff:
φ−1 i
µ<
γ − γc .
(1)
φ
Both i and c sign an agreement with F .
2. If F (.) ∈ F, i sets R > 0. An intervention by F may occur in equilibrium,
and it is always in support of i. An intervention by E may never occur in
equilibrium, but may occur off the equilibrium path (and it is always in
support of c). Regime change happens iff:
φ−1
φ
µ < −γ +
max γ i − γ ∗ , 2γ c < 0.
(2)
φ
2
i signs an agreement with F , c signs it with E.
Where F is a set of distributions. A necessary condition for F to be non-empty
is γ i > γ c , a sufficient condition is λ ≥ λ and φ ≤ φ, with λ ∈ (0, 1] and
φ > 1. If F is non-empty, an increase in θ results in an expansion of F.
Comments
I Economic nationalism a determinant of regime change.
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Economic nationalism more salient, the more unequally distributed
the gains from an international agreement (the higher γ i − γ c )
I Countries more likely to be intervened by their main trading partner
(spheres of influence).
I When established rents are hard to re-negotiate, society may become
polarised on international alignment, even when there are no strong
ideological preferences.
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This more likely in more unequal societies (higher θ)
Regime change less likely the higher geopolitical tension (the
higher γ ∗ ).
Regime change leads to bilateral disruption.
Current ideas
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Does the elite retard economic reforms to maintain a
special relations with foreign protectors?
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Do strategically important countries receive more foreign
aid? The role of trade in strategic minerals.
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Can economic nationalism help the strong ruler?