External conditions have historically influenced economic outcomes and have also impacted
political institutions in developing countries. Focusing on these changes, this article develops a
theoretical model of political conflict and democratic stability in a small open developing
economy, using as the basis a structuralist macroeconomic model. In this model, political
institutions are given in the medium run, but vary in the long run as a result of political conflict
between capitalists, formal workers, and informal workers excluded from the benefits of social
protection. The model suggests that a democratic breakdown is more likely the larger the informal
sector, the lower the structural competitiveness of the economy, and the weaker the country’s
democratic tradition. The model also links the possibility of coups and democratization process
with external shocks. Based mainly on the Latin American experience in democratic and dictatorial
regimes, the article claims that combining industrial and technological policies—which ease the
Balance-of-Payments constraint—with the building of a comprehensive system of social
protection is key for the consolidation and stability of democracy.
