Evolution of Risk and Political Regimes.docx
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EvolutionofRiskandPoliticalRegimes
EvolutionofRiskandPoliticalRegimes
MariaPetrovayandRobertBatesz
May2010
Abstract
Weanalyzetheinteractionbetweenagovernmentandcitizensinwhich,ineachperiod,thegovernmenthas
anoptiontopredate.Citizenspreferagovernmentthatiscompetentandnon-predatoryandstrivetoreplace
onesthatarenot.Regimesdi¤erinthedegreetowhichcitizenscansucceedindoingso.Inpuredemocracies,
citizenscandisplaceincumbentgovernments;inpureautocracies,theycannot;andinintermediatecases,they
candosoinprobability.Aftereconomicdownturns,theposteriorprobabilitythatthegovernmentiscompetent
andbenevolentdeclines.Accordingtothemodel,inintermediateregimes,butnotinothers,governmentscan
separatebytype.Theimplication,then,isthattheseregimesarepoliticallyandeconomicallymorevolatile,with
higherlevelsofvariationinassessmentsofpoliticalriskandineconomicperformance.Wetestourargumentby
measuringtheimpactofeconomicdownturnsontheperceivedriskofpoliticalexpropriationindi¤erentregime
types,usingasinstrumentstheincidenceofnaturaldisastersandunexpectedtermsoftradeshocks.
Anearlierversionofthispaperwascirculatedbythename“PoliticalExpectationsandEconomicPerformance."Wearegrateful
toSergeiGuriev,AlisonPost,KenShepsle,KatiaZhurvaskaya,andseminarparticipantsatHarvardUniversity,NewEconomicSchool,
MidwestPoliticalScienceAssociationmeetingandAmericanPoliticalScienceAssociationmeetingforhelpfuldiscussions.Wethank
GrigoryNaukhatskyforexcellentresearchassistance.
yNewEconomicSchool.SLONAssistantProfessorofMediaEconomics.Nakhimovskypr.47Moscow117418Russia.E-mail:
mpetrova@nes.ru.Correspondingauthor.
zHarvardUniversity.EatonProfessoroftheScienceofGovernment.DepartmentofGovernment,HarvardUniversity,1737Cam-
bridgeSt.,Cambridge,MA02138.robert_bates@harvard.edu.
1
1
Introduction
The"ThirdWave"referstotheprocessofdemocratizationthatbeganwiththetransitionfromauthoritarianrulein
Iberia,culminatedinthefalloftheSovietUnion,andinspiredpoliticalreforminlate-centuryAfrica(Huntington
1991).
AsnotedbyGeddes(2003),whatresultedwasnotthecreationofdemocracies;itwasthecreationof
intermediateormixedregimes.AsshowninFigure1,inthemid-1970’s,theseregimesprevailedinlessthan4%
oftheworld’sstates;bytheyear2000,theyprevailedinmorethanonequarter.
Thebehaviorofintermediateregimesappearserratic.Focusingonpoliticaloutcomes,Goldstone,Marshallet
al.(2003)andHegre(2004)andGates,Hegreetal.(2001)demonstratethattheyarelessstablepoliticallythan
arefulldemocraciesorautocracies(seealsoFearonandLaitin,2003).KenyonandNaoi(2010)demonstratethat
policyuncertaintyisalsogreaterinsuchregimes.AndEpsteinetal.(2006)…ndthatwhilepace(Przeworski,
Alvarezetal.2000),avarietyofmodernizationvariables,includingpercapitaincome,systematicallyrelatetothe
transitionfromauthoritariantodemocraticregimes,nonebearsasystematicrelationshiptotransitionsintoorout
ofthecategoryofintermediateregimes.Epsteinetal.(2006)thereforeappeartobespeakingforthegenerationof
scholarswho…rstaddressedthisnewcategoryofpoliticalsystemwhentheywrite:
"Theseare’fragile’democracies,
orperhaps’unconsolidateddemocracies.’Whateveronewishestocallthem,theyemerge..as[m]orevolatilethan
eitherstraightautocraciesordemocracies.Their[behavior]seemsatthemomenttobelargelyunpredictable"(p.
24).
Commonsenseandeconomicreasoning(NorthandWeingast1989;Acemogluetal.2003)positarelationship
betweenpoliticalrestraintandeconomicperformance.
Whenthosewhopossesscapitalfacetheprospectof
con…scation,theywillrefrainfrominvesting;andentrepreneurswillbemorewillingtoinnovatewhentheystand
toreapthefruitsoftheirlabor.Onthebasisofsuchreasoning,scholarsexpectedto…ndthatdemocracieswould
achievehighergrowthratesthandidauthoritarianregimes.However,theydidnot.AsdocumentedbyBoixand
Svolik(2008),Haber(2006),Haberetal.(2006)andGelbachandKeefer(20082009),someauthoritarianregimes
appeartobeablecrediblytosignalpoliticalrestraintandtoattractcapital.Asaresult,theireconomicperformance
approximatesthatofdemocracies.1Asscholarshaveprobedthestructureofnon-democraticregimes,theyhave
notedtheexistenceofinstitutionalchecks,suchaslegislatures,oppositionparties,andelections(Gandhi2008,
1See
alsotheliteratureonweakinstitutions,e.g.Acemogluetal.(2004),PadroiMiguel(2007),andBuenodeMesquitaetal.
(2003),andonthepoliticaloriginsofeconomicinstability,i.e.Acemogluetal.(2003),Rodrik(2000),CuberesandJerzmanowski
(2009).
1
GandhiandPrzeworski2006and2007,Cox2009,CollierandLevitsky1997,LevitskyandWay2002,Magaloni
2006andothers,suchasBoixandSvolik2008Pop-ElichesandRobinson2009).
Givenarelationshipbetween
politicalrestraintandeconomicperformance,andgiventheinstitutionalheterogeneityofautocracies,thatthe
economiesofsomeoutperformthoseofthedemocraciesislesssurprising.For,asnotedbyBesleyandKudamatsu
(2008),whilethemeanrateofgrowthamongautocraciesmayhavebeenlowerthanthatfordemocracies,"the
distributionhasfattertails...."(p.453)
Thisarticlerepresentsanattempttomodelthemajorcharacteristicsofintermediateregimessoastoaccount
fortheireconomicbehavior.
Whileweareunabletotestourmodeldirectly,wedoexploitoneofitsbasic
implications:
thatunderwell-speci…edconditions,economicperformanceispoliticallyinformative.Inparticular,
themodelimpliesthatatintermediatelevelsofpoliticalrestraint,assessmentsofpoliticalriskshouldvarywith
thestateoftheeconomy.Totestthisimplication,weusepanelcountrydata.
Measuresofcountryrisk,such
as"expropriationrisk"variableofKnackandKeefer(1998),o¤erproxiesfortheriskofpredation.Toidentify
thee¤ectofeconomicdownturns,weinstrumentthemwithanincidenceofnaturaldisastersandunexpected
terms-of-tradeshocks.Todealwithunobservedheterogeneity,wecontrolforcountry…xede¤ects.
InformalArgument
Thepolityispopulatedbyagovernmentandthecitizens.
Thegovernmentderivesutilityfrombeingino¢ce
andthebene…tsofpoliticalpredation.2
Thecitizensderiveutilityfromanoutcome,y,whichwewillinterpret
aseconomicgrowth.Attheendofeachperiod,citizenscanseektoreplacethegovernment.Theysucceedwith
someprobability,whichdependsonthenatureofpoliticalinstitutions.
Governmentsdi¤erintheirtype.Somearecompetent:
theydonoharmtotheircitizensand,uponoccasion,
deliverpositivepolicyoutcomes.Othersareincompetent:
theyareincapableofdoinggoodfortheircitizensand,
uponoccasion,dothemharm.Inaddition,somegovernmentsareimpatientandcareonlyaboutcurrentpayo¤s;
2By
predatorypolicieswemeanthepoliciesthatmaybepro…tableforthegovernmentbutharmfulforthethelongrunwelfare
ofcitizens.Expropriationcanbeblatant,asinthecaseofZimbabwe,wherethegovernmentseizedthelandoffarmers,theassets
of…rms,andtheforeignexchangedepositedwithbanks.Itcanalsoresultfromthemanipulationoftheinterestandexchangerates,
theregulationofproductorfactormarkets.Thepossibilityofpolicychangesinthefutureincreaseuncertaintyandrisksforpotential
investors.Andin‡ationo¤ersawayinwhichgovernmentscanseizecashbalancesfromprivateagents,evenwhennotovertlyendorsing
policiesofexpropriation.
2
otherspossesslongertimehorizonsandcareaswellforfuturerents.
Thebehavioroftherulersthusdependsupontheirtypeandtheincentivesgeneratedbypoliticalinstitutions.A
governmentwithashorttimehorizonalwayspredates.Butthebehaviorofagovernmentwithalongtimehorizon
dependsonthepowerofthecitizens,i.e.theirabilitytochangetheirgovernment.
Iftheycaneasilydismiss
thegovernment,bothcompetentandincompetentgovernmentswithlongtimehorizonswillchoosetorefrainfrom
predation.Ifitisdi¢cultforthecitizenstodoso,bothcompetentandincompetentgovernmentswilladopt
policiesthatmaximizetheirper-periodrents.Thelevelofpoliticalconstraintsthatmakesapatientgovernment
indi¤erentbetweenpredationandrestraintishigherforthecompetentgovernment.Underintermediatelevelof
constraints,competentgovernmentsthatpossesslongtimehorizonswillrefrainfrompredationwhileincompetent
governmentsmaynot.
Inconsolidateddemocracies,then,governments,regardlessoftheirpreferences,aretooconstrainedtobehave
inapredatorymanner.
Infullautocracies,theabsenceofconstraintsleadsevengovernmentsthatvaluethe
socialwelfaretoengageinpredation.Inintermediateregimes,bycontrast,governmentswithdi¤erentvalues
"separate,"thusrevealingtheirtypeandgeneratingadispersioninthelevelsofinvestmentandgrowthrates
amongintermediateregimes.
Themodelthusimpliesthat"intermediate"regimesshouldbeespeciallyunstable.Asdi¤erenttypesofgov-
ernmentsbehavedi¤erentlyonlyinintermediateregimes,thereshouldbeahighervariationofriskwithinthem
thanwithinfulldemocraciesorautocracies.Moreover,insuchcountries,underimperfectinformation,theriskof
predationshouldrespondmoresigni…cantlytoeconomicshocks,aspeopletreatthemassignalsaboutthenature
oftheirgover