Berger et al. (2013b)

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1 Berger et al. (2013b) Abstract: We provide evidence that increased political influence, arising from CIA interventions during the Cold War, was used to create a larger foreign market for American products. Following CIA interventions, imports from the US increased dramatically, while total exports to the US were unaffected. The surge in imports was concentrated in industries in which the US had a comparative disadvantage, not a comparative advantage. Our analysis is able to rule out decreased trade costs, changing political ideology, and an increase in US loans and grants as alternative explanations. We provide evidence that the increased imports arose through direct purchases of American products by foreign governments. 1

2 Background The general question of whether power is an important determinant of international trade, particularly in the more recent past, is difficult to examine empirically because shifts in power relations between governments are often the result of decisions that are made behind the veil of government secrecy. History provides us with many examples of the use of political power to promote trade and other national interests, the starkest being the unequal treaties imposed by Western powers on China and Japan during the nineteenth and early twentieth centuries. We surmount this problem by relying on the use of recently declassified CIA documents to generate a country- and year-specific measure of the influence of the US government over foreign countries. CIA documents older than 25 years fall under the Freedom of Information Act. 2

3 Related Studies: CIA during Cold War Dube et al. (2011) examine the stock prices of US companies in Iran, Guatemala, Cuba, and Chile before and after the CIA authorized plans for covert coups. They find that the stock returns of companies that were both connected to the CIA and stood to gain from the coups increased immediately after the authorizations. Berger et al. (2013a) examine the effect of interventions on democracy, and find that CIA and KGB interventions have a negative effect on subsequent democracy. They use lower frequency data at five year intervals. 3

4 Related Studies: Other International Settings Dreher and Jensen (2007) show that IMF conditionality is correlated with whether countries vote in-line with the US in the UN General Assembly. Kilby (2009) shows that the World Bank s structural adjustment conditions are less stringent for countries whose voting in the UN is more aligned with the US. Kuziemko and Werker (2006) show that when countries have a seat on the UN security council they receive more foreign aid from the US. 4

5 (Successful) CIA Intervation Measure USinfluence t,c is an indicator variable that equals 1, in a country c and year t, if the CIA either installed a foreign leader or provided covert support for the regime once in power. The activities used by the CIA to install and help maintain the power of specific regimes included: The creation and dissemination of (often false) propaganda, usually through radio, television, newspapers, and pamphlets. Covert political operations, which typically consisted of the provision of funds and expertise for political campaigns. The destruction of physical infrastructure and capital, as well as covert paramilitary operations, that included the supply of arms and military equipment, direct involvement in insurgency and counterinsurgency operations, and the coordination of coups and assassinations. 5

6 There are many instances in which the CIA set out to remove an existing leader and install a new leader in power. The CIA-organized coups in Iran in 1953, Guatemala in 1954, and Chile in 1973 are the most well-known examples of such cases. In other cases, the CIA did not engage in activities to install the leader into power, but once in power, at some point, began to engage in activities to help maintain the power of the regime. Typically, these were covert counterinsurgency operations undertaken by the CIA. We restrict our analysis to the Cold War period,

7 Illustration: CIA in Chile CIA involvement in Chile first occurred in the 1964 Presidential election, when the CIA provided covert funding and support for the Christian Democratic Party candidate Eduardo Frei Montalva. Eduardo Frei won the election and continued to receive CIA support while he was in power. In the 1970 election, Salvador Allende (he was not installed or supported by the CIA), a candidate from a coalition of leftist parties, was elected, and remained in power until the famous CIA orchestrated coup of After the coup, Augusto Pinochet took power and was backed by the CIA until USinfluence t,c equals 1 from 1964 to 1970, 0 in 1971 and 1972, and then 1 from 1973 to

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9 Trade Data: COW Dataset The Correlates of War (COW) Trade Dataset reports annual aggregate bilateral trade flows (measured in millions of nominal US dollars). For the post WWII period, the data are originally from the International Monetary Fund s Direction of Trade Statistics. The COW dataset imputes missing flows by using, for example, the exporter s trade statistics if data on imports are missing from the importer s accounts. Because importing countries typically keep more precise records of shipments (because of the existence of tariffs) than exporting countries, the dataset uses importing country accounts when both sources exist. 9

10 Estimated Relationship ln mus t,c = α t + α c + βusinfluence Y t,c + ϕ ln τus t,c t,c P US t P t,c + X t,c Γ + ε t,c. m US t,c is the imports into c from the US normalized by c s total GDP. X t,c includes ln per capita income, an indicator for Soviet/KGB interventions, an indicator variable that equals 1 if there is a change in leadership as well as a measure of the tenure of the current leader, Recent studies show that leaders matter (e.g., Jones and Olken (2009)). and an indicator variable that equals 1 if an observation is democracy. Berger et al. (2013a) shows that successful CIA interventions adversely impacted democracy, as defined by Cheibub et al. (2010). 10

11 For the bilateral trade costs τ t,c,e when shipping goods from c to e, lnτ t,c,e = µ 1 lndist c,e + µ 2 I lang c,e + µ 3 I border c,e + µ 4 I gatt t,c,e + µ t I rta t,c,e, where dist c,e is the distance between the two countries, Ic,e lang is an indicator variable that equals 1 if the two countries share a common language, I border c,e is an indicator for them sharing a border, I gatt t,c,e is an indicator that quals 1 if both are GATT participants in year t, and I rta t,c,e equals 1 if both countries belong to a regional trade agreement in t. As in Baier and Bergstrand (2009), lnp t,c + lnp t,e = where θ t,i Y t,i /Y W t. N θ t,i lnτ t,c,i + i=1 N θ t, j lnτ t, j,e j=1 N k=1 N m=1 Y t,e is total GDP of e in t, and Y W t is world GDP in t. θ t,k θ t,m lnτ t,k,m, 11

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14 Underlying Mechanisms: Government Purchase As a share of GDP, government purchases have typically been around 20 percent for industrialized nations and 15 percent for developing nations. Removing compensation to employees and focusing only on purchases of goods, the figures become 10.3 and 8.8 percent, respectively. In addition, it is well-known that government purchases are highly discriminatory, with suppliers typically based on criteria other than lowest costs, and that influence, power, and connections are important factors that affect governments choice of suppliers. The share of government expenditures in GDP is taken from the Penn World Tables 6.3. The industry level data are from the United Nations Comtrade Database. Only begin in 1962, and therefore the sample only includes years between 1962 and

15 2-digit Standard International Trade Classification (SITC) industries. Industry fixed effects are also included. Utilizing a South Korean 413-industry Input-Output (I-O) table from 2000, we construct measures of the proportion of total output from each industry that is sold to the government and the share of each industry s imports purchased by the government, and divides industries into those with above median levels of government purchases (or imports) and those with below median levels. 15

16 Interaction y = a + (b + cz)x y = a + bx + cxz y x z y x xz y = 1 + (5 + 2z)x

17 The effect of CIA interventions on observations between the tenth and nineteenth percentiles range from to The government expenditure shares for observations at the tenth and nineteenth percentiles are and

18 Testing Alternative Explanations: Trade Integration Balassa (1965) s measure of revealed comparative advantage: RCA t,c,i = x t,c,i c x t,c,i / i x t,c,i i c x t,c,i, where x t,c,i denotes the aggregate exports of country c in a 2, 3, or 4-digit SITC industry i in year t. The market size of less developed countries (LDCs) is much smaller than of DCs. An alternative measure of RCA is also calculated using only the share of exports to LDCs, rather than the share of exports globally. 18

19 ImporterRCA t,c,i and USInfluence t,c ImporterRCA t,c,i are also included. 19

20 Political Ideology Existing evidence that countries with more similar political ideologies trade more. We estimate a regression that examines each country s imports from all exporters (with country-pair fixed effects included), not just the US. Using voting data from the UN General Assembly, V US t,c 1 d t,c max c d t,c d t,c is the sum of the vote distance between country c and the US for all votes in year t, where a vote in opposition to the US is given a distance of 1, and a vote with the US is given a distance of 0. We also measure Vt,e US using indicator variables that equal 1 if: (i) exporter e was a NATO member, (ii) e was among the original OECD members (from 1961), or (iii) e is from Western Europe (or is the USA).. 20

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22 US Loans and Grants We examine the value of US economic aid (which includes grants and concessional loans) and military aid (which includes grants, concessional loans, and training) received by each country. Much of military aid is spent on goods exported overseas to support US troops and other personnel, and these goods are not included in the IMF s Direction of Trade statistics. We also examine loans given by the US Export-Import Bank (Ex-Im Bank), an institution with a mandate to provide loans to foreign firms that want but are having trouble obtaining financing from private lenders. 22

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24 References Baier, Scott L. and Jeffrey H. Bergstrand (2009) Bonus vetus OLS: A simple method for approximating international trade-cost effects using the gravity equation, Journal of International Economics, Vol. 77, No. 1, pp Balassa, Bela (1965) Trade Liberalisation and Revealed Comparative Advantage, The Manchester School, Vol. 33, No. 2, pp Berger, Daniel, Alejandro Corvalan, William Easterly, and Shanker Satyanath (2013a) Do superpower interventions have short and long term consequences for democracy? Journal of Comparative Economics, Vol. 41, No. 1, pp Symposium in Honor of Thrainn Eggertson. Berger, Daniel, William Easterly, Nathan Nunn, and Shanker Satyanath (2013b) Commercial Imperialism? Political Influence and Trade during the Cold War, American Economic Review, Vol. 103, No. 2, pp

25 Cheibub, José Antonio, Jennifer Gandhi, and James Raymond Vreeland (2010) Democracy and dictatorship revisited, Public Choice, Vol. 143, No. 1-2, pp Dreher, Axel and Nathan M. Jensen (2007) Independent Actor or Agent? An Empirical Analysis of the Impact of U.S. Interests on International Monetary Fund Conditions, Journal of Law and Economics, Vol. 50, No. 1, pp Dube, Arindrajit, Ethan Kaplan, and Suresh Naidu (2011) Coups, Corporations, and Classified Information, The Quarterly Journal of Economics, Vol. 126, No. 3, pp Jones, Benjamin F. and Benjamin A. Olken (2009) Hit or Miss? The Effect of Assassinations on Institutions and War, American Economic Journal: Macroeconomics, Vol. 1, No. 2, pp

26 Kilby, Christopher (2009) The political economy of conditionality: An empirical analysis of World Bank loan disbursements, Journal of Development Economics, Vol. 89, No. 1, pp Kuziemko, Ilyana and Eric Werker (2006) How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations, Journal of Political Economy, Vol. 114, No. 5, pp

Commercial Imperialism? Political Influence and Trade During the Cold War

Commercial Imperialism? Political Influence and Trade During the Cold War Daniel Berger University of Essex William Easterly New York University and NBER Nathan Nunn Harvard University, NBER, and BREAD