N-S Trade with Weak Institutions
States with weak institutions (South) can lose from institutional response to trade with North. A Ricardian model of trade subject to predation characterizes the case. South labor earns equal returns in production and predation. Institutions are needed for security improvement because equilibrium predation is invariant to globalization and productivity rises, contrary to casual intuition. Enforcement reduces predation with terms of trade effects that typically imply opposing North-South interests. Trade also incentivizes institutional regime change to counter or control predation. North para-state institutions gain by promoting corrupt South institutions – Mafias or their state equivalents – over welfarist South states.
An early version of this paper was presented to a workshop on economic interdependence and war, UCIrvine, April 21-22, 2017. I am grateful to Ben Zissimos for helpful comments on the penultimate version. The paper was completed while I was a visiting scholar at Oxford. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.