Tuesday, March 4, 2025

Global Minimum Tax, Digital Service Taxes and America First Foreign Economic Policy (2025)

The new U.S. administration pulled out of a landmark 2021 OECD international tax agreement and ordered the Treasury and the United States Trade Representative to investigate whether other countries impose extra-territorial or discriminatory taxes on U.S. companies, which could open the door to trade retaliation and punitive tax measures targeting foreign companies and individuals located in the United States as well as lead to broader conflict over the taxation of U.S. tech companies. On January 20, the new U.S. administration notified the OECD that any commitments made by the Biden administration will have no force within the United States. Under the OECD agreement, 140 countries committed to imposing a global minimum tax on large multi-national companies (MNCs). The administration also directed the Treasury and the United States Trade Representative to investigate the tax policies of other countries in view of extraterritoriality and discrimination and to present the president with a list of options of how to respond within 60 days. The Treasury and the USTR are to publish its findings within 60 days. If they find countries to be discriminating U.S. companies, the administration will be able to put raise taxes on them or take retaliatory trade measures. 

> The 2021 OECD-sponsored international tax agreement comprises 140 countries and aims among other things to limit inter-jurisdictional tax competition and the erosion of national tax bases by limiting the ability of multi-national companies (MNCs) to shift profits to low tax jurisdictions. 

> The agreement consists of two pillars. Pillar 1, applying to about 100 of the world’s largest MNCs, aims to reallocate a share of MNC-related taxes between jurisdictions. Pillar 1 negotiation have proven contentious and have not been finalized. The Joint Committee on Taxation estimates that if Pillar 1 were implemented the US would lose $ 1.5 billion in revenue per year and that 70% of reallocated taxes would come from US MNCs. Pillar 2 establishes a global minimum tax of 15 percent. The minimum tax allows for the imposition of top-up taxes in case the tax of the jurisdiction where the MNC is headquartered has a corporate tax of less than 15 percent. The o implementation of Pillar 2 was estimated to raise more than $ 200 billion in additional revenue.

> Existing domestic legislation (Section 891 of the Internal Revenue Code) allows the Trump administration to double taxes on companies and citizens of countries that are found to impose discriminatory taxes on companies. The legislation has never been invoked, no regulation pertaining to it has been promulgated, and it is not clear how the provision would apply in practice. 


If Treasury finds a country to be imposing discriminatory or extra-territorial taxes on U.S. persons, the executive will be able to double the tax rates for affected foreign companies and individuals without requiring congressional approval, and the Treasury and USTR may find provisions pertaining to the 15% global minimum tax as well as national digital services to discriminate against U.S companies. The OECD agreement was meant to resolve the conflict national digital services taxes. The conflict is a straightforward distributional conflict between the United States and other countries. The failure to finalize the tax agreement, especially Pillar 1, will also lead countries to introduce digital services taxes, which are strongly opposed by the U.S. But failure of Pillar 1 may lead more countries to introduce digital services taxes and lead to increased tensions with United States. Faced with the prospect of much higher U.S. taxes, most countries may find the costs of U.S. unfriendly measures outweigh the benefit of maintaining “discriminatory” taxes, including global minimum and digital services taxes. Smaller countries will find it difficult not to make substantial compromises. Even larger economies, like the EU, have already signaled their willingness to start talks with Washington. There may be room for compromise given that current US corporate tax regime in terms of rates is not way out of line with the 15 percent minimum tax, even if a different U.S. approach to the treatment of R&D and the grouping of international income into a blended rate might force U.S. MNCs to pay a top-up levy under the so-called undertaxed profit rule.

> In December 2022, the European Union unanimously moved forward to implement this country- by-country minimum tax by issuing a Council Directive (Pillar 2). Most EU countries with 12 or more MNCs enacted the Pillar 2 related income inclusion provision in 2024 and the undertaxed profit rule in 2025. Smaller EU countries were allowed to defer their implementation by up to 6 years. 

> In 2019 and 2020, USTRA Section 301 investigations found that digital taxes imposed by Austria, France, India, Italy, Spain and Turkey and US were discriminatory, but both the Trump and Biden administration suspended retaliatory trade measures following their commitment to remove the taxes following the successful conclusion of Pillar 1 negotiations.

> Another 140 countries agreed to a moratorium of new digital services taxes. This agreement has now lapsed. Relatedly, the WTO moratorium on customs duty on electronic transmissions was extended in March 2024 for another two years.


The investigation into the discriminatory tax treatment of U.S. companies overseas will further increase economic uncertainty and has the potential to lead the U.S. to introduce punitive tax rates on foreign companies located in the United States as well as retaliatory tariffs on countries found to impose a 15% percent minimum tax and/ or national digital services taxes. As many MNCs and especially tech MNCs are American, the introduction of a global 15 percent tax would make it more difficult for MNCs to shift their profits to low-tax jurisdiction. The minimum tax also imposes a higher tax burden if the corporate tax rate in the home country is lower than 15 percent. Under Pillar 2, large companies pay more taxes in countries where they have customers and less in countries where headquartered if the corporate minimum tax in their home country is lower than 15 percent. From an U.S. perspective, higher foreign taxes mean less income for shareholder of US companies. It may also lead to lower taxes to the extent that higher foreign taxes translate into domestic tax credits. 

> The tax agreement risks increasing taxes on U.S. multi-nationals and to reallocate tax revenue away from the United States. Conflict over digital services taxes are a long-standing source of tensions between the United States and the rest of the world and will be revived with force if Treasury or USTRA find them to be discriminatory. Targeted countries could then be faced with tax and tariff threats, which could prove highly disruptive to their economic relationship with the United States.

> Previous U.S. administrations opposed the introduction of national digital taxes. About half of EU members have announced, proposed or enacted digital services taxes. Trump administration launched Section 301 investigations. The first Trump administration launched a Section 301 investigation and threatened tariffs in response, which led to a moratorium pending the conclusion of Pillar 1 talks. The USTR threatened to impose a 25% tariff on $1.3 billion worth of goods. 

> The U.S. Global Intangible Low-Taxed Income (GILTI) tax imposes a minimum rate of 10.5 percent on a globally blended basis. However, because this tax rate is lower than the Pillar 2 minimum tax, it does not conform to the Pillar 2 rules and would subject many US MNCs to the so-called UTPRs abroad, forcing US multinationals to pay higher taxes in foreign jurisdictions under Pillar 2. 

The change of the U.S. stance on international taxation mirrors the greater reliance of unilateral measures to exploit economic dependence of other countries on the United States, and creates an additional source of economic friction. First, the U.S. exiting the OECD agreement and threatening to impose discriminatory taxes on selected countries will further undermine multilateralism and reflects a broader shift toward greater unilateralism under the Trump administration aimed at leveraging U.S. bargaining power. Second, by abandoning the global minimum corporate tax and, depending on the outcome of the Treasury investigations, economically weaker countries may be forced to abandon or scale back national digital taxes as well as a 15 percent minimum corporate tax, which will lead to a further erosion of their tax or lead them to forego revenue they would have received under the OECD agreement. This is particularly painful at time when both borrowing, and debt are high across advanced, emerging and developing economies. 

> The OECD estimates that the implementation of Pillar 2 would raise global tax revenue by $ 200 billion. The bulk of the additional taxes would go to advanced economies. But emerging and developing would nevertheless have received additional government income in the form. If these countries decide to abandon the 15% minimum tax and/ or digital taxes in response to U.S. pressure, they will forego much needed revenue in the face of continued and increasing fiscal and debt challenges. Every dollar counts.

Tuesday, February 25, 2025

Global Macro Outlook and Emerging and Developing Economies (2025)

The global macro cycle and especially the U.S. policy mix will prove to be a drag on emerging and developing economies, while the latter will remain at risk of experiencing further financial distress in the medium term, which, broadly speaking, will also raise the risk of domestic political instability. After more than a decade of ultra-low global interest rates and quantitative easing in the wake of the 2008 global financial crisis, significant flows of capital to emerging and developing economies. Low-income and lower-middle income economies have historically relied on official bilateral and multilateral financing, leading to Paris Club led restructuring. The tightening cycle was cut short by COVID-19, which lead for interest rates to effectively fall to zero and advanced (and even some non-advanced) central engaging in renewed quantitative easing, which effectively contributed to lowering long-term interest rates and support capital flows. The most recent tightening began in the wake of post-COVID-19 recovery, supply chain disruption, Ukraine energy shock and pent-up demand leading to most dramatic spike in inflation in more than forty years in advanced economies. As a consequence of economic shocks and higher borrowing costs, many especially developing economies experienced financial distress and several defaulted on their debt and/ or were forced to apply for IMF support. Sovereign distress, default and restructuring is only one variety of financial distress an economy can experience. Banking crises are another important source of financial instability. The past five years saw significant financial distress, particularly in low income countries, including several sovereign defaults. The economic shock related to COVID-19, higher U.S. interest rates and a stronger dollar led to financial distress in many developing economies, particularly in so-called frontier markets.

> In the past five years, the following countries have defaulted on and/ or were forced to restructure their sovereign international debt: Belize, Zambia, Ecuador, Argentina, Lebanon and Suriname. Argentina pre-emptively restructured its debt in 2020.

> According to the Bank of England default database, ten sovereigns accounted for 75% of the US-dollar value of debt currently in default globally (mainly Russia and Venezuela). the level of global public debt in default has averaged between 0.3% and 0.6% over the past decade, and currently stands at 0.5%.


The shift in U.S. economic policy will prove challenging for highly-indebted, low-income countries, as global interest rates will remain comparatively high, the dollar strong, the economic outlook (outside the United States) uncertain and the political-economic outlook fraught with risk. Adverse global economic and financial conditions, particularly in context of potentially inflationary and expansionary U.S. macroeconomic and trade policies, higher U.S. interest, rates, a stronger dollar, and lower dollar commodity prices could make things worse and lead to renewed financial, economic and domestic political distress in emerging and developing economies. An uncertain economic outlook in China due to structural and cyclical challenges as well as risks related to a conflictual U.S. economic policy toward Beijing has the potential to negatively impact low-income economies. Lower Chinese demand for commodities due to a move away from real-state and infrastructure-intensive growth and a reduced willingness to provide financing to low-income countries will negatively affect the economic and financial outlook. Emerging economies have generally solid economic fundamentals and sufficiently flexible policy regimes to limit the risk of a systemic financial crisis, including external debt defaults. Low-income countries have far greater financial vulnerabilities. Among emerging markets, Argentina, Ecuador as well as Pakistan face more significant financial challenges. But they also stand to benefit from IMF support, which means that if they follow IMF-prescribed policies in the context of an IMF program, they should be able to avoid another round of severe financial distress.

> The U.S. dollar on a trade-weighted basis. U.S. interest rate outlook has been revised upward in recent months in light of slow disinflation and risk of inflationary U.S. macroeconomic and trade policies. U.S. interest rates will decline only very modestly if all this year. Some market analysts even predict that the Federal Reserve may be forced to raise interest rates.

> Argentina, Ukraine, Egypt, Ecuador and Pakistan are the largest recipients of IMF loans, largely on account of their economic size. However, the bulk of countries receiving IMF support in the context of balance of payments problems is located sub-Saharan.

> Low-income, developing countries, including frontier markets, are most at risk of financial distress in light of significant bilateral and private external borrowing. Ghana and Zambia have just emerged from sovereign default. 


A significant number of mostly low-income countries (developing economies), as opposed to higher-middle income countries (or emerging economies) face various degrees of financial distress, including balance-of-payments problems, and are undergoing IMF-supervised economic adjustment. Short of a detailed economic, political and financial analysis of individual cases, sovereign credit ratings are an acceptable, if imperfect indicator of economic and financial risk in a country. However, they can and do sometimes miss risks, including non-sovereign financial risks. But broadly speaking, sovereign credit ratings (see table) seem strongly correlated with economic development and per capita income. Low-risk countries (rated A or higher) are largely advanced economies; the medium-risk category (rated BB or BBB) is dominated by emerging economies; the high-risk category consists mostly of low-income countries. A more fundamental reason why medium-term risk countries are less at risk than high-risk countries is their lower level of dollar-denominated risks, more independent central banks and more flexible exchange rates, which makes balance-of-payments more manageable. Often, they also benefit from a larger domestic investor base and stronger institutions. THis is not to suggest that countries like Brazil, Mexico, South Africa or Turkey will not face more challenging financial conditions, but they are unlikely to experience sovereign distress or external payments defaults in the next few years. 

> As of 2023, IMF estimated that share of developing economies in distress. It estimated that 25 percent of emerging and developing economies were at high risk and faced “default-like” spreads on their sovereign debt, meaning their ability to raise (or refinance) international debt was severely curtailed. About 15 percent of low-income countries were in debt distress, and an additional 45 percent are at high risk of debt distress. While some of these low-income countries are undergoing IMF-supervised definition and/ or have emerged from a debt restructuring, risks remain elevated, particularly in view of a worsening global macro environment. 

> A consequence of U.S. financial sanctions, Russia’s sovereign default (2022) was involuntary, while Ukraine’s default was largely the consequence of the war. Ukraine has successfully restructured (part?) of its private external debt, but not its official debt. 

> Ghana, Sri Lanka, Zambia have restructured their debt and continue to make progress on broader economic adjustment with fair prospect of regaining market access at the end of the IMF program. Argentina needs to secure an IMF agreement and move towards greater exchange rate flexibility to sustainably reestablish the equilibrium of its balance of payments. Lebanon and Venezuela (Republic and PDVSA) remain in default


An adverse macro environment and significant economic and financial vulnerabilities in low-income countries will keep the risk of political instability high, regardless of whether countries default and restructure their or avoid a debt restructuring but undergo significant policy adjustment. Domestic political instability often accompanies IMF programs, as policy adjustment and conditionality in the form of a tighter monetary policy, currency devaluation and fiscal adjustment, whether tax increases or expenditure, including subsidies cuts, prove deeply unpopular against the backdrop of initially often weak economic growth and high inflation. Opposition parties and where applicable coalition parties often have an incentive to criticize adjustment policies in view of the next elections, further fueling opposition to adjustment and their short-term economic costs. To the extent that IMF programs contain structural conditionality it may also require politically painful structural reform, such as the privatization of state assets and opposition from concentrated, well-organized and often politically influential domestic political interests. However, an external debt default is typically even more destabilizing, economically and politically, as it sharply limits a country’s access to external financing and forces a precipitous contraction of imports on the country as well as a lack of access to long-term financing of investment. Often, but not always, a default is accompanied by banking crises or domestic government debt crises. Governments tend to not to survive the economic turmoil in the wake of a disorderly default, but debtor governments and their creditors often kick the proverbial can down the road for too long and then get forced into an even more disruptive disorderly financial default rather than a pre-emptive debt restructuring against the backdrop of IMF support. This dynamic will also contribute to further financial distress, including sovereign debt crises and possibly defaults, in low-income countries in the next few years. But even if outright sovereign defaults can be avoided, increased financial distress will put increasing stress on many countries in the high-risk category.

> The potential for (very) adverse spill-over effects from financial distress in emerging and developing economies is very limited, particularly compared to the 1980s and 1990s, when defaults threatened to bring down the U.S. banking system or destabilize U.S. financial markets (e.g. Long-Term Capital Management). Today, the financial importance of non-advanced countries in financial distress is very limited. The systemic financial importance of the countries in the high-risk category is negligible (see table). 

> It took Zambia (2020-24) four years to restructure its debt. Ghana (2022-24) and Sri Lanka managed to do in in two years. While three countries hardly makes a large enough sample, it is possible that future debt restructuring will be completed less slowly, though much will in practice depend on how messy a default is and how willing debtors are to While the G20 Common Framework and Global Debt Roundtable have not delivered, debt restructurings seem to be completed less slowly in the context of non-Paris Club creditors like China 

Saturday, February 15, 2025

Political Economy of Fiscal Reform in Brazil (2025)

Brazil’s economic growth has outperformed expectations post-COVID-19, but this improved economic performance is unlikely to be sustained over the medium term due to continued low savings and investment After years of economic underperformance following the car wash scandal, economic growth has outperformed market economists’ expectations. Brazil’s economic fundamentals are relatively sound in terms of its international financial position, commitment to a floating exchange rate regime and the government’s net foreign currency creditor position, all of which mitigate the risks of a balance-of-payments or sovereign external debt crisis. However, domestic government debt is high and fiscal deficits are high, raising concerns about the medium- and long-term outlook for debt sustainability, and hence economic growth.

> According to the IMF, real GDP grew by 3% annually in 2022 and 2023, and it is expected to expand another 3% in 2024, supported by strong domestic consumption, increased agricultural and hydrocarbon output and a less than anti-cyclical fiscal policy. Real GDP growth averaged 0.5% a year over the past decade. According to the World Bank, real GDP per capita growth averaged a negative 1.6% annually.

> The Brazilian public sector is net foreign-currency creditor. Less than 5% of Brazilian public debt is foreign-currency-linked. Brazil’s international financing requirements are low and the central bank sits on $350 billion of foreign-currency reserves, while the current account deficit is more than fully financed by net foreign direct investment flows.

> Compared to the other two large Latin American economies, Argentina and Mexico, Brazil compares favorably in terms of long-term economic growth. In the past thirty years, both Argentina and Mexico registered real GDP growth of 2%, compared to Brazil 2.4%. Over the past decade, Brazil grew 0.5% annually, compared to Mexico’s 1.5%, while Argentinian real GDP did not grow at all.


While Brazil’s international financial position is very manageable, a modest medium-term growth outlook and adverse fiscal dynamics represent will sooner or later force the government to pursue a much more restrictive fiscal policy. While such an adjustment is necessary to ensure medium- to long-term debt sustainability, if would also, if implemented forcefully, help free up resources to be invested in the economy to raise medium-term growth. But this is unlikely to happen on a meaningful scale, as the Lula government is struggling to implement more decisive short- and medium-term fiscal adjustment, particularly in view of the 2026 presidential elections. The government has reformed the fiscal framework, but is struggling to take more decisive actions aimed at a fiscal adjustment in the short term to help stabilize the debt-to-GDP ratio. The government has also failed to address longer-term fiscal concerns related to high levels of education, health and pension spending, which will sooner or later prove unsustainable. Significant reform remains unlikely in the next two years.

> In 2023, congress approved a constitutional amendment replacing the zero cap on growth in real federal spending, which had been in force since 2016, with a corridor for real spending growth tied to both revenues and the difference between projected and targeted primary fiscal balances. The amendment re-established floors for mandatory education and health as well as investment spending. While the reform committed the government to improving the primary balance from -0.5% of GDP in 2023 to 1% of GDP by 2026, these are indicative targets only and can be changed with a simple majority vote in congress. Mandatory spending increases mean that the government is constantly struggling to mobilize greater revenues, while it limits the amount of money that can be spent on investment.

> Absent reform, public pension spending is projected to increase from 12% of GDP in 2016t to 16% in 2025 to 26% in 2050. This is not sustainable. Pension reform in 1998, 2003 and 2012 were insufficient to significantly impact the path of future spending. Adjusted for age, Brazil has the largest pension expenditure in the world, according to the IMF.

> The IMF projects gross government debt to increase from 85% of GDP in 2023 to 95% of GDP by 2027, which represents a substantial increase. The IMF also forecasts the structural primary balance to improve by 0.5 percentage points of GDP annually, which will likely prove way too optimistic. It also forecast real economic growth of 2.4% annually, which is way above the ten- and twenty year average of 0.5% and 2.3%.

Structural economic reform necessary to accelerate medium- to long-term economic growth is always difficult, particularly so in Brazil. Brazilian presidents typically face an unwieldly congress in several ways. First, the president’s own party generally controls an often miniscule share of seats in the chamber and the senate, forcing the formation of often disparate “presidential coalitions”. Second, the number of congressional political parties and hence congressional fragmentation is high, which further weakens the cohesion of presidential coalitions. Third, party discipline in Brazil is very low, largely due to an electoral regime that weaken party-political control of candidates and favor personalistic policies. More recently, changes to the way budget policy is implemented further has further weakened the president’s ability to win congressional support for a cohesive, long-term economic reform agenda. Finally, many important economic reforms require amendments to the constitution and this require super-majorities to pass them. This is not impossible, but does make it more difficult to pass reform legislation than in other countries. If Brazil fails to implement major spending reform, particularly pension and social spending, it will sooner or later fail to comply with its new fiscal framework and government debt will inevitably become unsustainable. It also means that the government will fail to mobilize the fiscal space required to increase investment and support medium- to -long-term economic growth.

> Consisting of 82 members, the Senate has 11 different political parties and groups. The high degree of fragmentation tends to limit the size of presidential coalitions. The government coalition consists of 42 senators. Consisting of 513 member, the chamber of deputies has 16 different parties and political groups. The government coalition consists of 225 deputies, falling short of an absolute majority, hence requiring wide-ranging compromise with independents or the opposition to pass legislation.

> Members of the chamber of deputies are elected on the basis of open list proportional representation, which gives voters extensive influence over who they elect and weakens party political control over candidates, leading to personalistic and clientelist politics. The centrao, the broadly centrist group of members of congress that lack ideological conviction or cohesion and engage in clientelist politics, is a reflection of the open list proportional representation. Senators are elected on the basis of a plurality regime, but due to weak national political parties and the senatorial candidates’ need to maintain close ties with and rely on state governments and governors (and their political machines) to be elected, they are similarly independent from the parties they represent.

> The Brazilian constitution established extensive social and economic rights, which require constitutional majorities to be amended. This is possible, particularly as far as it concerns minor issues, but it is generally politically challenging due to 4/5 super-majorities in both chambers.

Despite a surprisingly strong growth performance, the medium-term outlook remains challenging, not least because sooner or later Brazil will need to overhaul public finances. Over the medium term, the government will need to implement a more forceful fiscal adjustment to prevent a further increase in government debt, not least given the large social and pension obligations. A future government will implement reform only gradually in terms of the politics and economics. Politically, radical reform is politically very unpopular as it affected “acquired rights”, which often are grandfathered in. Economically and financially, the effects of reform are limited in the sense that they typically seek to prevent a further rise of pension spending rather than a decline in a context where spending is set to increase due demographic dynamics. This will also mean that Brazil will continue to be characterized by a low, perhaps even falling savings rate, which will constrain domestic investment, particularly in public infrastructure, and future economic growth. Other structural reform, such as greater trade integration, may support higher medium-term growth, but progress will be slow, while the international trade environment is set to worsen in the next few years in the context of the U.S. presidential elections. With major structural reform unlikely before the 2026 elections, Brazil’s economic performance is likely peaking and will deteriorate as 2026 approaches and beyond.

> According to IBGE, Brazil’s population currently at 216 million is projected to peak at 220 million in 2041 in the context of a rapidly falling fertility rate (falling from 2.3 in 2000 to 1.6 in 2023, and projected to reach 1.4 by 2040). The old-age dependence ratio increased from 10 in 2010 to 15 in 2023 and is projected to 36% by 2050. Brazil’s working-age population is estimated to have peaked in 2021 as share of the total population.

> Trade integration, defined as exports and imports of goods and services, Brazil ranks 184 out of 195 countries. Agricultural product and fuels and mining account for 75% of total exports, only 25% manufacturing. China accounts for 26% of exports, followed by 15% for the EU and 11% for the U.S. China accounts for 23% of all imports, followed by the U.S. with 19% and the EU with 16%.

> Federal capital expenditure typically amounts to less than 1% of GDP and the public sector is net dis-saver, meaning most public sector net borrowing finances non-investment expenditure. Public sector dissaving is the major cause of a low domestic savings ratio of less than 15% of GDP, and hence low investment.

 

Saturday, January 4, 2025

How Democracy and Prosperity Affect Alliance Formation and International Peace - Theory and Empirics (2025)

Intensifying geopolitical competition in the context of the Ukraine war has led to the emergence of opposing coalitions. On one side, there is Russia and countries like North Korea and Belarus that effectively lend support to Russia’s war effort. One may also want to include Iran in this group due to it reportedly supplying dual-use goods and weapons to Russia. Meanwhile, China, like so-called middle powers, including Brazil, India and Saudi Arabia, officially remains neutral but has expanded its commercial relationship with Russia, thus effectively lending indirect support to Russia. On the other side, there are the United States and the EU as well as selected US allies, all of which provide military support and financial support to Ukraine, while significantly curtailing their economic ties with Russia. The US-European coalition supporting Ukraine exclusively consists of democracies. The Russian coalition consists of non-democracies only.

Varieties of liberal thought have long held that democracy, economic freedom, and prosperity are inter-connected. Modernization theory, for example, argues that as countries become more prosperous, they become more democratic. Classic liberals like John Stuart Mill argued that economic freedom is conducive to economic prosperity. [1] Liberals also view democratic institutions as acting as a check on overbearing governments and hence being conducive to economic growth and prosperity. Moreover, international political economists view economic interdependence as reducing the likelihood of inter-state war, and many international relations theorists believe that liberal democracies do not go to war with one another. The former is sometimes referred to as “capitalist peace,” the latter as “democratic peace theory.” Yet other scholars see the causality running from peace to democracy. In short, liberal thinkers see democracy, prosperity, and peace as related, even if there is a disagreement about how exactly they are related, and which way causality runs.

The paper reviews the scholarly literature on the effects of democracy (and prosperity) on peace and alliance formation and analyses its implications for U.S, foreign policy and international politics more broadly. First, I will provide a critical overview of the literature on democratic peace theory. Second, I will review the literature on alliance formation and evaluate the so-called democratic alliance hypothesis. Third, I will assess to what extent the data collected by the Atlantic Council’s Freedom & Prosperity Index (FPI) lends support to the democratic alliance hypothesis. Fourth, I will discuss the implications of democratic peace and democratic alliance theory for U.S. foreign policy. Finally, I will assess what the democratization of China and Russia might mean for international competition and conflict.

Democratic Peace Theory

Democratic peace theory posits that democratic states do not go to war with one another, or at least that war among them is rare. Democratic peace theory attributes the relative absence of war between democracies to the existence of domestic liberal institutions and democratic norms, which constrain governments and their foreign policies and instill a culture of non-violent conflict and compromise, at least vis-à-vis other democracies. Although democracies often engage in armed conflict, they rarely to go to war with other democracies.[2] Foreign policy decision-making in democratic countries also tends to be more transparent, which may help generate greater trust and credibility, again particularly in interactions with other democracies. Some democratic peace theory research also emphasizes the importance of economic freedom, which makes “marketplace democracies” more likely to share common foreign policy interests with other democracies, including with respect to international law and economic cooperation. This makes them less likely to fight each other. 

Democratic peace theory has its critics. Some scholars challenge the causal logic underpinning the theory, others contest its empirical validity. Conceptually, there is also disagreement over how best to define (and code) “democracy” and “war”. Such disagreements have led researchers to reach different conclusions about the validity of democratic peace theory. At a minimum, democracy is thought to require the holding of (free and fair) elections. But there is disagreement as to how extensive the voter franchise and how extensive the ability of the legislature to hold the executive to account needs be, among other things, for a country to qualify as a democracy. Yet other researchers define democracy even more extensively, namely as a “liberal regime”, including a market-based economy and private property as constitutive elements.[3]

Another complicating factor is that many of the things that a make a democracy come in degrees. Imperial Germany (1871-1918) is today often seen as a non-democracy by virtue of its parliament’s inability to appoint or dismiss the head of government. But national elections were fair and free, parliament controlled the budget and legislation, the press was free, citizens were allowed to freely organize, and the economy was market oriented. Maybe it was a democracy, or maybe it was not. The point is that conceptual differences often lead to different empirical findings. By comparison, there is generally less disagreement about how to define war, which is generally taken to mean inter-state conflict that causes at least 1,000 battle deaths per year. But even here some researchers have defined war as militarized inter-state disputes regardless of the number of casualties.

This is not the place to assess or critique the various statistical studies, but rather to understand on what grounds democratic peace theory is rejected by its critics. Some research suggests that the evidence prior to World War II supports democratic peace theory, but also argues that there were too few democracies for this conclusion to be statistically significant.[4] As John Mearsheimer has put it: "Democracies have been few in number over the past two centuries, and thus there have been few opportunities where democracies were in a position to fight one another.”[5]

International Relations theorists, particularly those of a realist persuasion like Mearsheimer, do not necessarily contest that democracies rarely go to war with one another, but attribute this fact to system-level causes, such as the military alliances that happen bring together democracies in view of a common threat, such as NATO during the Cold War.[6]Along similar lines, the absence of hegemonic war between Britain and the United States and the transition from Pax Britannica to Pax Americana in the late 19th century is explained by the geopolitical constraints Britain faced in the face of an intensifying German threat rather than the fact both Britain and the United States were democracies.

Other scholars also accept that democracies tend not to go to war with one another but argue that causality runs from peace to democracy. So-called “territorial peace theory” posits that peace leads to democracy rather than the other way round. Yet other studies suggest that the relationship between democracy and peace is spurious. One study, for example, concedes that no wars took place between dyadic pairs of democratic states between 1816-1992. But it also argues that once political similarity, geographic distance, and economic interdependence is controlled for, the remaining causal effect of democracy is negligible to non-existent.[7] Other research similarly attributes the absence of war between democracies to other omitted variables, such as prosperity, economic interdependence, security alliances or American geopolitical dominance. 

Although its empirical and theoretical validity is contested, democratic peace theory has been called the “closest thing we have to an empirical law in the study of international relations.”[8] There are of course examples of democracies going to war with one another, such as, arguably, the War of 1812 that pitted Britain against America or, even more arguably, the Sicilian Expedition launched by democratic Athens against democratic Syracuse during the Peloponnesian War. But empirical laws in the social science are invariably statistical in nature. A small number of exceptions does not invalidate the seeming fact that instances of prosperous, liberal democracies engaging in armed conflict with one another are very rare.

On balance, the empirical evidence suggests that democracies are less prone to go to war with one another than with non-democracies, even if the underlying causal relationship remains contested. Leaving scholarly arguments aside, it does seem difficult to envision a scenario where a liberal European democracy goes to war with another European democracy, or where a liberal-democratic America and Canada engage in a military conflict with one another. When there is disagreement, even significant disagreement between democratic states, they tend to resort to diplomatic or economic pressure (or at most in covert action) to resolve conflict, but rarely do they resort to military force to settle disputes.

Democratic Alliance Theory

Systemic theories of international relations posit that states form alliances or coalitions to ensure their security or prevail in armed conflict.[9] Defensive alliances generally commit its members to lend each other support in case of an attack by a third party. Less formal and more ad hoc, coalitions emerge in the context of armed conflict and lead its members to coordinate their efforts in an attempt to achieve its agreed objectives. A case in point: the French Revolutionary or Napoleonic Wars (1792-1815) are divided into seven different “wars of coalition”.

International Relations theorist see anarchy as forcing states to resort to external balancing (formation of alliances with other state), especially if internal balancing (relying exclusively on one’s own resources) proves insufficient to provide states with the desired level of security.[10] Domestic regime type plays no role in systemic-realist theories of alliance formation. Alliance theory is closely related to balance of power theory, according to which states form alliances with the goal of establishing an equal distribution of power among (groups of) antagonists. Both less capability- and power-centered, balance of threat theory posits that threat perception, which is affected by geographic proximity, offensive capabilities, and perceived intentions, is the main driver of balancing behavior and alliance formation.[11]

But if democracies are less likely go to war with one another, should they not also be expected to be more likely to join other democracies to form alliances or coalitions? Research suggests that states with similar political regimes are indeed more likely to ally with one other, at least after 1945. [12] It also finds while two democracies are not more likely to form an alliance than two autocracies, democracies appear to be more likely to form alliances with one another than with non-democracies.[13] This is not the place to propose a theoretical synthesis, but it might be hypothesized that liberal democracies perceive other liberal democracies as less threatening or more trustworthy (perhaps due to the generally greater transparency of their domestic political processes) than other autocracies. Or perhaps their foreign policy goals are generally more aligned compared to those of non-democracies. 

Anecdotal evidence, such as World War II (1939-45) and the Cold War (1947-1989/91), if not necessarily World War I (1914-18), appears to be consistent with the democratic alliance (and coalition) hypothesis, namely that democracies are more likely to form alliances and coalitions with other democracies than with non-democratic states. World War II saw the emergence of an alliance and coalition largely, but not exclusively dominated by democracies pitted against an alliance and coalition consisting almost exclusively of non-democracies. The allied coalition that emerged during World War II comprised the leading democracies, such as the United Kingdom, the United States and, initially, France. But it also included several non-democracies, such as the USSR and China. However, none of the major Axis powers, Germany, Italy, and Japan, nor the minor axis powers were democracies. Finland was not formally allied with the Axis, but rather a co-belligerent, but was effectively member of the Axis coalition waging war against the USSR. The same pattern characterized the two coalitions (or blocs) during the Cold War. The U.S.-led “Western” alliance included at various points several non-democracies, such as Spain or South Korea, though its membership was dominated by democracies. By contrast, the USSR-led alliance did not include any democracies. Given that geopolitical expediency is supposed to drive alliance formation, alliance stratification along democracy/ non-democracy lines is surprising. 

World War I is more arguable example. The principal coalition partners or members of the Entente comprised democratic France and (later) democratic America (technically an “associated power” and coalition partner rather than a formal alliance member) as well as the constitutional monarchies of Britain, Italy and Japan and the constitutional monarchy of Russia. Although Britain was a monarchy, the government was answerable to parliament not the monarch. As war dragged on, many countries joined the Entente as associated allies and co-belligerents, some of them democracies, others not so much. By contrast, the Central Powers consisted of the constitutional monarchies of Austria-Hungary, Germany, and Bulgaria as well as the absolute monarchy that was the Ottoman Empire. 

Leaving aside whether Britain should be considered a democracy in 1914-18, once again no democracy was allied with the Central Powers, unless one classifies Imperial Germany as a democracy (see above). If Imperial Germany is not considered to have been a democracy, the Central Powers did not have any democratic members. The Entente did. But while the Entente may not have been all democratic, all major democracies were part of it, while the non-democratic coalition has no democratic members, provided Germany is not seen as democratic.

The present Ukraine conflict does lend unambiguous support to the democratic alliance hypothesis. The U.S.-led coalition in support of Ukraine consists exclusively of democracies, mostly NATO. By contrast, Russia’s coalition comprises North Korea and Belarus, and arguably Iran. Meanwhile, the members of the Collective Security Organisation Treaty (CSOT), a defensive security alliance, of which Russia is a member and includes Armenia, Belarus, Kazakhstan, and the Kyrgyz Republic, have remained neutral, except for Belarus. Russia’s coalition partners are all non-democracies.]

US Alliances and Security Partners

Three strategic conflicts and the Ukraine conflict hardly make for a large enough, let alone an unbiased sample. Nevertheless, the tendency of coalitions to be somewhat stratified along liberal-illiberal lines is interesting to note. At the time of World War I, there existed few republican democracies, but no republican democracy was aligned with the Central Powers. During World War II, no democracy was aligned with the Axis (only Finland excepted). This was also true during the Cold War. In all three cases, the (predominantly) “democratic” alliance did have non-democratic members, but the “un-democratic” alliance had no democratic members with the possible exception of democratic Finland’s membership in the Axis-led coalition. Anecdotal evidence suggests that democracies have a greater tendency to align with other democracies, even if not all democracies align with one another, and even if predominantly democratic alliances do have some non-democratic members. And democracies are not likely to join non-democratic coalitions or coalitions led by a non-democratic great power.

Freedom, Prosperity and Alliances - Empirics

Perusing the Atlantic Council’s Freedom & Prosperity Index (FPI), this section analyses the propensity of democratic countries (or “free” countries in FPI terminology) to form alliances or engage in substantial security cooperation with other democratic countries.[14] This section will also analyze to what extent economic development (or “prosperity” in FPI terminology) affects a country’s propensity to form alliances with other prosperous countries. 

The FPI measures countries’ levels of freedom and prosperity. The concepts of freedom and prosperity underpinning the index are more multifaceted compared to basic definitions of democracy (e.g. free and fair elections) and economic well-being (e.g. per capita income). Or: “A distinctive aspect of the Freedom and Prosperity Indexes is their root in and reflection of an expansive understanding of what constitutes a free and prosperous society. The Freedom Index measures the economic, political, and legal dimensions of freedom. This broader definition of freedom differentiates the index from other measures focused on specific institutional (electoral, corruption, economic openness, and so on). Likewise, the Prosperity Index is more exhaustive than previous measurement projects such as the United Nations Human Development Index or various poverty indexes.” But both freedom and prosperity serves can be seen as acceptable proxies of democracy and economic well-being.

Analyzing FPI data, it is helpful to distinguish between formal alliances and broader security cooperation. The democratic alliance, broadly conceived, comprises NATO, Rio Treaty members, U.S. bilateral treaty allies, and the EU. The non-democratic alliance led by Russia consists of the members of CSOT and Russia’s bilateral treaty ally, North Korea. China, the other major non-democratic great power, has only one formal treaty ally, North Korea. China and Russia are not allied to one another, but they do maintain close security relations.

Admittedly, security cooperation varies in intensity and one can legitimately disagree over which countries should be classified as “close security partners”. In Russia, this groups arguably comprises, Iran, China, Syria, and Vietnam as well as various sub-Saharan countries (though Syria will likely cease being a Russian security partner following the fall of the Assad regime). Whether countries that maintain close diplomatic ties with Russia, such as Cuba, Nicaragua or Venezuela, should be included is debatable. In the case of China, Cambodia and Laos should probably be classified as close security partners. In the case of the United States, one can rely on Washington’s major non-NATO (MNNA) ally designation to decide which countries should qualify as close security partners. But whether Saudi Arabia, Singapore and the UAE, none of whom are MNNA, should also qualify, can be debated. The same is true for whether China and Russia should be seen as security partners. Admittedly, one can always quibble about the classification of individual countries, but the overall picture does not change much. Table 1 and the Annex show what countries were included in the alliance and security partner category with respect to the United States/ EU, Russia and China.

The democratic alliance comprises NATO, U.S. bilateral security partners, Rio Treaty members and due to the mutual defense clause adopted by the EU in 2009 (even though Austria and Ireland are strictly speaking neutral countries). Using this classification, 83% of the countries in the high freedom category (highly developed democracies) are allies. Of the 41 countries in this category, only Switzerland, the Seychelles, Barbados, Cape Verde, Singapore, Taiwan and Israel are not formally part of the democratic alliance. (However, Singapore is a close U.S. security partner and the U.S. is committed to lending support to Taiwan in case of an attack.) 

By comparison, none of the high freedom countries is formally allied with any of the major (or minor) non-democratic powers, China and Russia (or Iran and North Korea). Of the medium freedom countries, 49% are members of the democratic alliance, and only 5% belong to a non-democratic alliance. In the low freedom category, 37% of countries are members of the democratic alliance, while only 5% are allied to the major non-democratic countries. And only in the lowest freedom category do members of non-democratic alliances outweigh members of the democratic alliance (29% vs 10%). 

If one broadens the definition of alliance to include close security partners (as defined above), the picture is not much different. Adding MNNAs to the democratic alliance, a full 90% of high freedom countries and 44% of medium freedomcountries are part of the democratic alliance. If one adds close security partners in the case of China and Russia, their share among high and medium freedom countries remains unchanged at zero and 5%, respectively. But their share of security partners among low and lowest freedom countries increases from 5% to 17% and 12% to 43%, respectively.

The pattern is very similar in terms of prosperity due to the strong correlation between freedom and prosperity in the FPI. Most prosperous countries are members of the democratic alliance. On the more narrow alliance definition, 88% of high prosperity countries are members of the democratic alliance. On the more extensive definition that includes close security partners, the share increases to 98%. The share of countries among high prosperity countries allied to non-democratic alliances is zero. On both the narrow and the broader alliance/ security partner definition, there are also more democratic allies and security partners in the medium and low prosperity categories. It is only in the lowest prosperity category that China and Russia have significantly more allies and security partners than the democratic alliance.

Correlation is not causation. America’s global military power or its greater prosperity may make it a more desirable alliance partner than China or Russia. Non-democratic Russia and China have far fewer alliance and security partners, while Iran has no formal ally and North Korea has only two bilateral security allies, China (1961) and more recently Russia (2024). America is evidently also more willing to form alliances and security partnerships than China or Russia (demand). Or perhaps countries are simply more eager to cooperate closely with the United States (supply). 

Moreover, greater economic interdependence may lead liberal, “market-oriented” democracies to share similar foreign policy goals and hence make them more likely to enter alliances with one another. Or maybe, and this would be consistent with the democratic alliance hypothesis, the U.S. (and the major European powers) offers more liberal leadership than non-democracies whereby domestic institutions translate into strategic restraint[15] and democratic alliance leadership is more predictable and transparent, making it a more attractive alliance partner overall, but particularly among free and prosperous countries. America does have security partnerships, if not treaty relationships, with less than liberal-democratic countries, particularly in the Middle East and the Gulf. But all U.S. allies are fairly to very democratic and prosperous. Among U.S. allies, only the Philippines, Thailand and Turkey do not fall into at least a both medium freedom and medium prosperity category. 

The data shows that the freer and more prosperous a country is, the more likely it is a member of the democratic alliance. The probability of a country being allied with non-democratic China and Russia increases, as a country’s prosperity and freedom decreases. Naturally, the higher percentages of democratic alliance partners in the high and medium freedom and prosperity categories compared to non-democratic alliance partners are also partly a reflection of the higher overall number of countries that are members of the democratic alliance. It is possible that the causality runs from prosperity to alliance membership rather than democracy, or that omitted variables, such as economic interdependence underpin the observed correlation. Yet, the fact remains that prosperous and free countries effectively form a broad democratic alliance and that such countries are not allied with non-democratic, less prosperous states, such as China or Russia.

Conversely, not a single high freedom country nor a single high prosperity country is allied with China or Russia, or is a close security partner of either country. Maybe this because high freedom and high prosperity countries are geographically concentrated in North America, Europe, East Asia and Australasia, and today’s geographically concentrated alliances are simply a legacy of the Cold War. But the Cold War ended more than thirty years ago. Moreover, formerly non-democratic, initially (presumably) low prosperity Warsaw Pact countries have joined the democratic alliance since the end of the Cold and after being transformed into medium to high prosperity and freedomcountries. A more thorough analysis of the FPI data, which goes back three decades, would show that Eastern European countries joined NATO only after they had become more free and prosperous, lending further support to the democratic alliance theory, at least as far Eastern Europe is concerned.

Whatever the underlying causal mechanism, the FPI data lend support to the democratic alliance hypothesis and it also lends support to what may be termed the enhanced democratic-prosperity alliance hypothesis, which posits a close relationship between freedom, prosperity and geopolitical alignment: the more free and prosperous a country is, the more likely it is allied with other prosperous democracies; and prosperous democracies do not form alliances or even security partnerships with major non-democratic powers.

Implications for U.S. Foreign Policy and Strategy

Liberal thought and theories have long posited a connection between democracy and prosperity as well as between democracy and peaceful international relations. Democratic peace theory posits that democracies do not go to war with one another and attributes this empirical fact to the democratic nature of democracies’ domestic political regime. Democratic alliance theory posits that democracies are more likely to form alliances and collations with another than with non-democracies. A corollary is that democracies very rarely join alliance led by non-democracies. If both of these theories are “true”, this has important implication for U.S. foreign policy.

If democratic peace theory and democratic alliance theory are correct, the larger the number of democracies, the less likely military conflict should become, all other things equal. And the larger the number of prosperous democracies, the larger the pool of potential alliance and coalition members for democratic states and the smaller the pool of potential allies for non-democracies. Again, democratic states do not necessarily join security alliances led by a liberal power, though high freedom and high prosperity seem to do so in overwhelming numbers; but they are highly unlikely to join alliances led by or dominated by illiberal states. 

If this is so, the United States and Europe should support economic development and democratization. Such a strategy will be countered by non-democratic powers, and for good reason. Undoubtedly, if the North Korea were to become democratic, it would lead to unification with South Korea. China would be deeply antagonized and would act forcefully to prevent such an outcome. After all, it intervened in the Korean War (1950-53) to prevent the emergence of a U.S.-allied state at its border. 

Similarly, a democratic Belarus would seek closer ties with the West, over time cumulating in NATO and EU membership, just like a democratic Ukraine might have done, had Russia not intervened. A democratic Iran would likely take a far less antagonistic position vis-à-vis the United States, and the United States vis-à-vis Iran, and might (again) become a major U.S. partner. Beijing and Moscow understand this, and the very prospect of non-democratic countries aligned with China or Russia turning democratic represents a threat to their geopolitical interests. This is why so-called color revolution tend to trigger strong reactions from both Russia and China. 

Supporting democratic and economic development and the widening the pool of potential allies is not least an imperative in light of China’s continued economic ascendance, which requires a forward-looking, alliance-based foreign policy strategy or extensive external balancing to maintain the balance of power in the future. It is also an imperative for another reason. According to non-partisan Freedom House, political rights and civil liberties worsened in 52 countries and improved in only 21 in 2023, representing a democratic decline for the 18th consecutive year.[16] If this trend is not halted and reversed, it might negatively affect the propensity of countries with weakening democratic institutions to join democratic alliances. They may even become potential allies of non-democratic alliances.

However, the evidence supporting democratic peace and democratic alliance theory must not be regarded as a license for a foreign policy of assertive regime change and democratization. How to best to promote democracy and prosperity sustainably is a separate question that cannot be dealt with here, except to say that establishing democracy by force has at best a mixed record.[17] It was successful in Germany Japan following World War II, it has failed in Afghanistan and Iraq. But it proved successful in the case of many formerly Communist countries in Eastern Europe. 

Moreover, policymakers should be aware that democracy promotion will be seen as a double threat to both China and Russia and they will likely ramp up countermeasures, as it threatens both their geopolitical position if its geopolitical partners are targeted for democratization and the legitimacy of their own political system if such efforts are directed at their democratization. [18] A strategically less risky approach would be to deprive China and Russia of potential allies by supporting democratization, particularly countries, which are geographically somewhat more “out of reach” for China and Russia and where their geopolitical interests are less intensive and extensive, like in Latin America and Africa.

But what if it were possible to transform China and Russia into democracies? Democratic peace theory suggests that the risk of armed conflict would decline (and relations might improve). However, a caveat that needs to be borne in mind, however, is that research suggests that countries transitioning toward democracy become more militarily aggressive, at least temporarily. This is attributed the lack of accepted democratic norms or political entrepreneurs seeking to gain votes by playing the nationalist card.[19]

These are not particularly novel ideas novel ideas. The “China as responsible stakeholder” theory[20] was in part premised on the expectation that China’s increasing prosperity would transform it into a liberal polity, while a high level of international economic interdependence would lead China to accept the international status quo. Similarly, liberals hoped that political and economic liberalization in Russia would end geopolitical competition in Europe. Neither was an unreasonable expectation from a liberal point of view. China and Russia may yet become more democratic. For now, however, China has not moved toward a more liberal-democratic form of government, and its challenging the international status quo. Similarly, Russia remains a non-democracy quite willing to pursue its interests by force. Nevertheless, U.S. and European foreign policymakers should consider supporting democratization and prosperity in order to reduce the likelihood of armed conflict and limit the pool of potential alliance members of non-democratic powers. The more the focus of such a policy moves from strategically peripheral countries to the major non-democratic powers themselves, the stronger the geopolitical pushback of the latter will be. 

Policy Recommendations

> Washington should continue to lend support to democratization, from strategically peripheral countries to non-democratic great powers, to help reduce the risk of inter-state armed conflict, all other things equal. If democratic peace theory is correct, then the larger the number of democracies, the less frequent inter-state military conflict becomes, all other things equal. A caveat here is that a larger number of democracies diminishes the overall likelihood of war but may do little to prevent great power war between democracies and non-democracies. It may even make it more likely if non-democracies come to view their geopolitical position deteriorate as a consequence of a lack of allies and coalition partners.

> Washington should continue to support democratization to reduce the number of countries inclined to align with non-democratic powers and to increase the number of potential U.S. allies and security partners. If the democratic alliance hypothesis is correct, then geopolitical competition with Russia (and China) is the America’s (and its democratic allies) to lose – provided the world does not regress in terms of democracy. The more countries become democratic, the fewer potential alliance partners non-democracies, like Russia, North Korea, Iran and China will have. An implication of democratic alliance theory for U.S. foreign policy is that lending support for democratization and economic prosperity would reduce the pool of countries willing to align with non-democratic alliances and coalitions, while increasing the number and propensity of countries to align themselves security-wise with democratic alliances.

> Washington may also want to support democratization in China and Russia, bearing in mind that Beijing and Moscow will consider this a direct threat and cognizant of the concomitant risk of a further deterioration of relations. If democratic peace theory is correct and if China and Russia were to become democracies, the risk of great power war should recede, especially once democratic norms and culture are consolidated the previously non-democratic countries. A caveat here is that countries in the early of democratization may behave more belligerently. Another caveat is that a policy aimed turning low freedom into high freedom countries will make non-democratic powerss foreign policies more antagonistic and potentially bellicose, as they fear losing potential allies and view democratization efforts aimed at them as a direct threat to the regime survival. This should be taking into account when designing foreign policies and strategy. 

Conclusion

The empirical support for democratic peace theory is strong, and the hypothesis that democracies do not go to war with other democracies can be considered a relatively well-confirmed empirical generalization, even if there are disagreement as to its underlying causal logic. The evidence in favor of democratic alliance is theory is also fairly solid. Both theories provide a sound intellectual basis for a U.S. foreign policy and strategy that support democratization (and prosperity). If democratic peace theory is correct, then the larger the number of democracies, the less frequent inter-state military conflict becomes, all other things equal. If democratic alliance theory is correct, then the larger the number of democracies the larger the potential pool of U.S. allies and the smaller the pool of actual and potential allies of non-democratic great powers. If democratic peace theory is correct, successful and sustainable democratization of China and Russia does hold out the prospect of a more peaceful future, perhaps even the sort of perpetual peace Immanuel Kant envisioned. 

As Jack Levy wrote shortly after the end of the Cold War: “It [democratic peace theory] also provides additional hope to those who believe that world politics is undergoing a fundamental transformation in which war will play a more limited role, and that activist state policies to encourage the spread of democratic institutions and attitudes on a world scale can contribute to this transformation.[21]



Bibliography


[1] Markus Jaeger, Pathways to Prosperity, Atlantic Council, 2023: https://www.atlanticcouncil.org/in-depth-research-reports/books/pathways-to-economic-prosperity-theoretical-methodological-and-evidential-considerations/


[2] Jack Levy, The Democratic Peace Hypothesis: From Description to Explanations, Mershon International Studies Review 38, 1994


[3] Michael Doyle, Kant, Liberal Legacies, and Foreign Affairs, Philosophy and Public Affairs 12(3), 1983


[4] Joanne Gowa, Ballots and Bullets: The Elusive Democratic Peace. Princeton: Princeton University Press, 1999


[5] Quoted in David Spiro, The Insignificance of the Liberal Peace. In Michael Brown et al., Debating the Democratic Peace, Cambridge: MIT Press, 2001


[6] Henry Farber and Joanne Gowa, Polities and Peace, International Security 20(2), 1995


[7] For example, Is Democracy a Cause of Peace? Oxford Encyclopedia of Politics, 2017


[8] Jack Levy, Domestic Politics and War, The Journal of Interdisciplinary History 18(4), 1988


[9] Kenneth Waltz, Theory of International Politics, 1979


[10] Glenn H. Snyder, Alliance Politics, Ithaca: Cornell University Press, 1997


[11] Stephen M. Walt, Alliance Formation and the Balance of World Power, International Security 9(4), 1985


[12] Brian Lai and Dan Reiter, Democracy, Political Similarity, and International Alliances, 1816-1992, The Journal of Conflict Resolution 44(2), 2000


[13] See previous footnote


[14] For methodology and underlying data, see Atlantic Council, Freedom and Prosperity Index, 2024: https://freedom-and-prosperity-indexes.atlanticcouncil.org/#map and https://freedom-and-prosperity-indexes.atlanticcouncil.org/about


[15] G. John Ikenberry, After victory, Princeton: Princeton University Press, 2001


[16] Freedom House, Freedom in the World, 2024


[17] Patrick Quirk, Advancing Freedom, Defeating Authoritarianism, Atlantic Council 2024: https://www.atlanticcouncil.org/in-depth-research-reports/report/advancing-freedom-defeating-authoritarianism-a-democracy-agenda-for-2025-2029/


[18] Herfried Münkler, Welt in Aufruhr, Hamburg: Rowohlt, 2023


[19] Edward D. Mansfield and Jack Snyder, Democratization and the Danger of War, International Security 20(1), 1995


[20] Department of State, Whither China: From Membership to Responsibility, 2005: https://2001-2009.state.gov/s/d/former/zoellick/rem/53682.htm


[21] Jack Levy, The Democratic Peace Hypothesis: From Description to Explanations, Mershon International Studies Review 38, 1994