Dream of Californication - Trade, Human Rights and the California Effect

Abstract

For decades, a narrative dominating public discourse in many Western countries suggested that trade with countries with a lower level of institutional quality could induce democratic change and good governance. One potential explanation for a change in the institutions in exporting countries is the so-called “California effect”. However, developments in countries like Russia or China have led to disappointment regarding this hypothesis. Whether this disappointment is justified or only based on anecdotal evidence remains. In this article, we examine human rights spillovers through trade. We focus on the California effect of human rights in developed importing countries on the standards in developing exporting countries. Our sample includes 173 countries and covers the time period from 2000 to 2019. For four 5-year cross-sections, we estimate a spatial lag model by applying the generalized spatial two-stage least squares estimator using trade flows to construct the relevant weighting matrices. The results indicate positive human rights spillovers through trade and seem to be driven by spillovers from OECD to non-OECD countries, especially through trade in non-resource sectors. Our findings suggest the existence of the California effect and thus provide evidence contrasting the public opinion.