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