Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-23T21:36:08.091Z Has data issue: false hasContentIssue false
  • English
  • Français

Democracy and Financial Crisis

Published online by Cambridge University Press:  24 July 2018

Phillip Y. Lipscy
Get access

Abstract

Existing scholarship attributes various political and economic advantages to democratic governance. These advantages may make more democratic countries prone to financial crises. Democracy is characterized by constraints on executive authority, accountability through free and fair elections, protections for civil liberties, and large winning coalitions. These characteristics bring important benefits, but they can also have unintended consequences that increase the likelihood of financial instability and crises. Using data covering the past two centuries, I demonstrate a strong relationship between democracy and financial crisis onset: on average, democracies are about twice as likely to experience a crisis as autocracies. This is an empirical regularity that is robust across a wide range of model specifications and time periods.

Type
Research Article
Information
International Organization , Volume 72 , Issue 4 , Fall 2018 , pp. 937 - 968
Copyright
Copyright © The IO Foundation 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I thank Jonathan Bendor, Lawrence Broz, Ruth Collier, Gary Cox, Barry Eichengreen, Jim Fearon, Jeffry Frieden, Justin Grimmer, Saumitra Jha, Steve Krasner, Helen Milner, T.J. Pempel, Jonathan Rodden, Kenneth Schultz, Michael Tomz, Steve Vogel, and participants of meetings at APSA, IPES, UC Berkeley, and Stanford for their helpful comments and suggestions. I also thank Trevor Incerti, Erica Kang, Xiaojun Li, Lizhi Liu, Ken Opalo, Sungmin Rho, Zheng Wu, and Matt Wujek for excellent research assistance. This research benefited from the generous support of Sakurako and William Fisher, the Hellman Faculty Scholar fund, and the Shorenstein Asia-Pacific Research Center at Stanford University.

References

Abiad, Abul, Detragiache, Enrica, and Tressel, Thierry. 2010. A New Database of Financial Reforms. IMF Staff Papers 57 (2):281–302.Google Scholar
Acemoglu, Daron, Johnson, Simon, Robinson, James, and Thaicharoen, Yunyong. 2003. Institutional Causes, Macroeconomic Symptoms: Volatility, Crises and Growth. Journal of Monetary Economics 50 (1):49–123.Google Scholar
Acemoglu, Daron, Naidu, Suresh, Restrepo, Pascual, and Robinson, James A.. 2014. Democracy Does Cause Growth. National Bureau of Economic Research Working Paper Series, No. 20004.Google Scholar
Amyx, Jennifer. 2006. Japan's Financial Crisis: Institutional Rigidity and Reluctant Change. Princeton, NJ: Princeton University Press.Google Scholar
Archer, Candace C., Biglaiser, Glen, and DeRouen, Karl Jr. 2007. Sovereign Bonds and the “Democratic Advantage”: Does Regime Type Affect Credit Rating Agency Ratings in the Developing World? International Organization 61 (2):341–65.Google Scholar
Barbieri, Katherine, Keshk, Omar M.G., and Pollins, Brian. 2009. Trading Data: Evaluating Our Assumptions and Coding Rules. Conflict Management and Peace Science 26 (5):471–91.Google Scholar
Baron, Reuben M., and Kenny, David A.. 1986. The Moderator–Mediator Variable Distinction in Social Psychological Research: Conceptual, Strategic, and Statistical Considerations. Journal of Personality and Social Psychology 51 (6):1173–82.Google Scholar
Barro, Robert J. 1999. Determinants of Democracy. Journal of Political Economy 107 (6):158–83.Google Scholar
Beaulieu, Emily, Cox, Gary W., and Saiegh, Sebastian M.. 2011. Sovereign Debt and Regime Type: Re-Considering the Democratic Advantage. Working Paper.Google Scholar
Bebchuk, Lucian A., Cohen, Alma, and Spamann, Holger. 2010. The Wages of Failure: Executive Compensation at Bear Sterns and Lehman 2000–2008. Cambridge, MA: Harvard Law School Discussion Paper No. 657.Google Scholar
Bechtel, Michael M., Hainmueller, Jens, and Margalit, Yotam M.. 2014. Preferences Toward International Redistribution: The Divide Over the Eurozone Bailouts. American Journal of Political Science 58 (4):835–56.Google Scholar
Beck, Nathaniel, and Katz, Jonathan N.. 2001. Throwing out the Baby with the Bath Water: A Comment on Green, Kim, and Yoon. International Organization 55 (2):487–95.Google Scholar
Beck, Nathaniel, Katz, Jonathan N., and Tucker, Richard. 1998. Taking Time Seriously: Time-Series-Cross-Section Analysis with a Binary Dependent Variable. American Journal of Political Science 42 (4):1260–88.Google Scholar
Beck, Thorsten, Demirguc-Kunt, Asli, and Levine, Ross Eric. 2000. A New Database on Financial Development and Structure. World Bank Economic Review 14:597–605.Google Scholar
Bernanke, Ben S. 2000. Japanese Monetary Policy: A Case of Self-Induced Paralysis? In Japan's Financial Crisis and Its Parallels to US Experience, edited by Posen, Adam S. and Mikitani, Ryoichi, 149–66. Washington, DC: Institute for International Economics.Google Scholar
Boix, Carles. 2011. Democracy, Development, and the International System. American Political Science Review 105 (4):809–28.Google Scholar
Boix, Carles, Miller, Michael, and Rosato, Sebastian. 2013. A Complete Data Set of Political Regimes, 1800–2007. Comparative Political Studies 46 (12):1523–54.Google Scholar
Bordo, Michael D., Eichengreen, Barry J., and Irwin, Douglas A.. 1999. Is Globalization Today Really Different Than Globalization a Hunderd Years Ago? In Brookings Trade Policy Forum, edited by Collins, Susan and Lawrence, Robert, 1–50. Washington, DC: Brookings Institution.Google Scholar
Bordo, Michael D., and Murshid, Antu Panini. 2001. Are Financial Crises Becoming Increasingly More Contagious? What Is the Historical Evidence on Contagion? In International Financial Contagion, edited by Claessens, Stijn and Forbes, Kristin I., 367–403. Boston: Kluwer Academic.Google Scholar
Broz, J. Lawrence. 2012. Partisan Financial Cycles. In Politics in the New Hard Times: The Great Recession in Comparative Perspective, edited by Lake, David A. and Kahler, Miles, 75–101. Ithaca, NY: Cornell University Press.Google Scholar
Brune, Nancy, Garrett, Geoffrey, Guisinger, Alexandra, and Sorens, Jason. 2001. The Political Economy of Capital Account Liberalization.Working paper, UCLA. Available at <http://www.international.ucla.edu/cnes/article/3683>..>Google Scholar
Bueno de Mesquita, Bruce, Morrow, James D., Siverson, Randolph M., and Smith, Alastair. 1999. An Institutional Explanation of the Democratic Peace. American Political Science Review 93 (4):791–807.Google Scholar
Bueno de Mesquita, Bruce, Smith, Alastair, Siverson, Randolph M., and Morrow, James D.. 2005. The Logic of Political Survival. Cambridge, MA: MIT Press.Google Scholar
Calomiris, Charles W., and Haber, Stephen H.. 2014. Fragile by Design: The Political Origins of Banking Crises and Scarce Credit: Princeton, NJ: Princeton University Press.Google Scholar
Chancellor, Edward. 1999. Devil Take the Hindmost. London: Penguin.Google Scholar
Chinn, Menzie D., and Frieden, Jeffry A.. 2011. Lost Decades: The Making of America's Debt Crisis and the Long Recovery. New York: W.W. Norton.Google Scholar
Chwieroth, Jeffrey M. 2010. Capital Ideas: The IMF and the Rise of Financial Liberalization. Princeton, NJ: Princeton University Press.Google Scholar
Clague, Christopher, Keefer, Philip, Knack, Stephen, and Olson, Mancur. 1999. Contract-Intensive Money: Contract Enforcement, Property Rights, and Economic Performance. Journal of Economic Growth 4 (2):185–211.Google Scholar
Cohen, Benjamin C. 2009. A Grave Case of Myopia. International Interactions 35 (4):436–44.Google Scholar
Collier, David, and Levitsky, Steven. 1997. Democracy with Adjectives: Conceptual Innovation in Comparative Research. World Politics 49 (3):430–51.Google Scholar
Copelovitch, Mark, Frieden, Jeffry, and Walter, Stefanie. 2016. The Political Economy of the Euro Crisis. Comparative Political Studies 49 (7):811–40.Google Scholar
Copelovitch, Mark S., and Singer, David A.. 2012. Financial Levees: Traditional Banking, External Imbalances, and Banking Crises around the World. Working Paper.Google Scholar
Cox, Gary, and Weingast, Barry R.. 2015. Executive Constraint, Political Stability and Economic Growth. Unpublished paper, Stanford University.Google Scholar
Dailami, Mansoor. 2000. Managing Risks of Global Financial Market Integration. In Managing Financial and Corporate Distress, edited by Adams, Charles, Litan, Robert, and Pomerleano, Michael, 447–80. Washington, DC: Brookings Institution.Google Scholar
Demirgüç-Kunt, Asli, and Detragiache, Enrica. 1998. The Determinants of Banking Crises in Developing and Developed Countries. Staff Papers—International Monetary Fund 45 (1):81–109.Google Scholar
Eichengreen, Barry, and Leblang, David A.. 2008. Democracy and Globalization. Economics and Politics 20 (3):289–334.Google Scholar
Eichengreen, Barry, and Rose, Andrew K.. 1998. Staying Afloat When the Wind Shifts: External Factors and Emerging-Market Banking Crises NBER Working Paper No. W6370.Google Scholar
Fearon, James D. 1994. Domestic Political Audiences and the Escalation of International Disputes. American Political Science Review 88 (3):577–92.Google Scholar
Financial Crisis Inquiry Commission. 2011. The Financial Crisis Inquiry Report. Washington, DC. Available at <https://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf>..>Google Scholar
Freedom House. 2017. Freedom in the World. Washington, DC. Available at <https://freedomhouse.org/report/freedom-world/freedom-world-2017>..>Google Scholar
Galbraith, John Kenneth. 1990. A Short History of Financial Euphoria. New York: Penguin.Google Scholar
Gavin, Michael, and Hausmann, Ricardo. 1996. The Roots of Banking Crises: The Macroeconomic Context. In Banking Crises in Latin America, edited by Hausmann, Ricardo and Rojas-Suarez, Liliana, 27–63. Washington, DC: Inter-American Development Bank.Google Scholar
Gerring, John, Bond, Philip, Barndt, William T., and Moreno, Carola. 2005. Democracy and Economic Growth: A Historical Perspective. World Politics 57 (3):323–64.Google Scholar
Giuliano, Paola, Mishra, Prachi, and Spilimbergo, Antonio. 2009. Democracy and Reforms. Centre for Economic Policy Research Discussion Paper No. 7194. London.Google Scholar
Goemans, H.E., Gleditsch, Kristian Skrede, and Chiozza, Giacomo. 2009. Introducing Archigos: A Data Set of Political Leaders. Journal of Peace Research 46 (2):269–83.Google Scholar
Grimes, William W. 2002. Unmaking the Japanese Miracle: Macroeconomic Politics, 1985–2000. Ithaca, NY: Cornell University Press.Google Scholar
Gründler, Klaus, and Krieger, Tommy. 2016. Democracy and Growth: Evidence from a Machine Learning Indicator. European Journal of Political Economy 45 (Supplement):85–107.Google Scholar
Gurr, Ted Robert, and Eckstein, Harry. 1975. Patterns of Authority: A Structural Basis for Political Inquiry. New York: Wiley.Google Scholar
Haber, Stephen H., and Menaldo, Victor. 2011. Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse. American Political Science Review 105 (1):1–26.Google Scholar
Halper, Stefan. 2010. The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-First Century. New York: Basic Books.Google Scholar
Helleiner, Eric. 1994. States and the Reemergence of Global Finance: From Bretton Woods to the 1990s. Ithaca, NY: Cornell University Press.Google Scholar
Helleiner, Eric. 2010. A Bretton Woods Moment? The 2007–2008 Crisis and the Future of Global Finance. International Affairs 86 (3):619–36.Google Scholar
Helleiner, Eric. 2011. Understanding the 2007–2008 Global Financial Crisis: Lessons for Scholars of International Political Economy. Annual Review of Political Science 14:67–87.Google Scholar
Henisz, Witold J. 2002. The Institutional Environment for Infrastructure Investment. Industrial and Corporate Change 11 (2):355–89.Google Scholar
Jacques, Martin. 2009. When China Rules the World: The End of the Western World and the Birth of a New Global Order. New York: Penguin.Google Scholar
Johnson, Simon, and Kwak, James. 2010. Thirteen Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Pantheon.Google Scholar
Jordà, Òscar, Schularick, Moritz, and Taylor, Alan M.. 2017. Macrofinancial History and the New Business Cycle Facts. In NBER Macroeconomics Annual 2016, edited by Eichenbaum, Martin and Parker, Jonathan A.. Chicago: University of Chicago Press.Google Scholar
Kaminsky, Graciela L., and Reinhart, Carmen M.. 1999. The Twin Crises: The Causes of Banking and Balance-of-Payments Problems. The American Economic Review 89 (3):473–500.Google Scholar
Kaminsky, Graciela L., Reinhart, Carmen, and Vegh, Carlos A.. 2003. The Unholy Trinity of Financial Contagion. NBER Working Paper No. 10061.Google Scholar
Kant, Immanuel. 1795. Perpetual Peace: A Philosophical Essay. In Kant's Principles of Politics, Including His Essay on Perpetual Peace. A Contribution to Political Science, edited by Hastie, William, 77–148. Edinburgh: Clark.Google Scholar
Keefer, Philip. 2007. Elections, Special Interests, and Financial Crises. International Organization 61 (3):607–41.Google Scholar
Kindleberger, Charles P. 2000. Manias, Panics, and Crashes: A History of Fianncial Crises. New York: John Wiley and Sons.Google Scholar
King, Gary, Keohane, Robert, and Verba, Sidney. 1994. Designing Social Inquiry: Scientific Inference in Qualitative Research. Princeton, NJ: Princeton University Press.Google Scholar
King, Gary, and Zeng, Langche. 2001. Logistic Regression in Rare Events Data. Political Analysis 9 (2):137–63.Google Scholar
Kirkpatrick, Grant. 2009. The Corporate Governance Lessons from the Financial Crisis. OECD Journal: Financial Market Trends 2009 (1). Available at <http://dx.doi.org/10.1787/fmt-v2009-art3-en>..>Google Scholar
Klomp, Jeroen, and de Haan, Jakob. 2009. Political Institutions and Economic Volatility. European Journal of Political Economy 25 (3):311–26.Google Scholar
Laeven, Luc, and Valencia, Fabian. 2008. Systemic Banking Crises: A New Database. IMF Working Paper WP/08/224.Google Scholar
Lake, David A. 1992. Powerful Pacifists: Democratic States and War. American Political Science Review 86 (1):24–37.Google Scholar
Li, Quan. 2009. Democracy, Autocracy, and Expropriation of Foreign Direct Investment. Comparative Political Studies 42 (8):1098–127.Google Scholar
Lipscy, Phillip Y. 2017. Renegotiating the World Order: Institutional Change in International Relations. New York: Cambridge University Press.Google Scholar
Lipscy, Phillip Y., and Na-Kyung Lee, Haillie. Forthcoming. The IMF as a Biased Global Insurance Mechanism: Asymmetrical Moral Hazard, Reserve Accumulation, and Financial Crises. International Organization 73 (1).Google Scholar
Lipscy, Phillip Y., and Takinami, Hirofumi. 2013. The Politics of Financial Crisis Response in Japan and the United States. Japanese Journal of Political Science 14 (3):321–53.Google Scholar
Lipset, Seymour Martin. 1959. Some Social Requisites of Democracy: Economic Development and Political Legitimacy. American Political Science Review 53 (1):69–105.Google Scholar
Lonnborg, Mikael, Ogren, Anders, and Rafferty, Michael. 2014. Banks and Swedish Financial Crises in the 1920s and 1930s. In History and Financial Crisis: Lessons from the Twentieth Century, edited by Kobrak, Christopher and Wilkins, Mira, 56–74. New York: Routledge.Google Scholar
Mackay, Charles. 1841. Extraordinary Popular Delusions and the Madness of Crowds. New York: Rivers Press.Google Scholar
Maddison, Angus. 2010. Statistics on World Population, GDP and Per Capita GDP, 1–2008 AD. University of Groningen. Available at <http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_02-2010.xls>..>Google Scholar
Maddison Project Database. 2018. Jutta, Bolt, Robert Inklaar, Herman de Jong and Jan Luiten van Zanden, Rebasing “Maddison”: New Income Comparisons and the Shape of Long-Run Economic Development. Maddison Project Working Paper 10. Available at <https://www.rug.nl/ggdc/historicaldevelopment/maddison/releases/maddison-project-database-2018>..>Google Scholar
Mansfield, Edward D., Milner, Helen V., and Rosendorff, B. Peter. 2002. Why Democracies Cooperate More: Electoral Control and International Trade Agreements. International Organization 56 (3):477–513.Google Scholar
Maoz, Zeev, and Abdolali, Narsin. 1989. Regime Types and International Conflict, 1816–1976. Journal of Conflict Resolution 33 (1):3–35.Google Scholar
Maoz, Zeev, and Russett, Bruce. 1993. Normative and Structural Causes of Democratic Peace. American Political Science Review 87 (3):624–38.Google Scholar
Marshall, Monty G., Gurr, Ted Robert, and Jaggers, Keith. 2010. Polity IV Project: Political Regime Characteristics and Transitions: 1800–2009. Center for Systemic Peace.Google Scholar
Martin, William McChesney. 1955. Address of Wm. Mcc. Martin, Jr., Chairman, Board of Governors of the Federal Reserve System before the New York Group of the Investment Bankers Association of America. New York. Available at <https://fraser.stlouisfed.org/files/docs/historical/martin/martin55_1019.pdf>..>Google Scholar
McGillivray, Fiona, and Smith, Alastair. 2008. Punishing the Prince: A Theory of Interstate Relations, Political Institutions, and Leader Change. Princeton, NJ: Princeton University Press.Google Scholar
McGrath, Liam F. 2015. Estimating Onsets of Binary Events in Panel Data. Political Analysis 23 (4):534–49.Google Scholar
Milner, Helen V., and Kubota, Keiko. 2005. Why the Move to Free Trade? Democracy and Trade Policy in the Developing Countries. International Organization 59 (1):107–43.Google Scholar
Mobarak, Ahmed Mushfiq. 2005. Democracy, Volatility, and Economic Development. The Review of Economics and Statistics 87 (2):348–61.Google Scholar
Mosley, Layna, and Singer, David A.. 2009. The Global Financial Crisis. International Interactions 35 (4):420–29.Google Scholar
Nelson, Rebecca Marie. 2009. Essays on the Politics of Sovereign Debt Markets. PhD Dissertation, Harvard University, Cambridge MA.Google Scholar
Nelson, Stephen C., and Katzenstein, Peter J.. 2014. Uncertainty, Risk, and the Financial Crisis of 2008. International Organization 68 (2): 361–92.Google Scholar
Nordhaus, William D. 1975. The Political Business Cycle. Review of Economic Studies 42 (2): 169–90.Google Scholar
North, Douglass C., and Weingast, Barry R.. 1989. Constitutions and Commitment: The Evolution of Institutional Governing Public Choice in Seventeenth-Century England. The Journal of Economic History 49 (4):803–32.Google Scholar
Noy, Ilan. 2004. Financial Liberalization, Prudential Supervision, and the Onset of Banking Crises. Emerging Markets Review 5 (3):341–59.Google Scholar
Papaioannou, Elias, and Siourounis, Gregorios. 2008. Democratisation and Growth. The Economic Journal 118 (532):1520–51.Google Scholar
Partell, Peter J., and Palmer, Glenn. 1999. Audience Costs and Interstate Crises: An Empirical Assessment of Fearon's Model of Dispute Outcomes. International Studies Quarterly 43 (2):389–405.Google Scholar
Przeworski, Adam, and Limongi, Fernando. 1997. Modernization: Theories and Facts. World Politics 49 (2):155–83.Google Scholar
Puente, Lucas. 2012. Political Influence and Tarp: An Analysis of Treasury's Disposition of CPP Warrants. PS: Political Science and Politics 42 (2):211–17.Google Scholar
Quinn, Dennis P. 2000. Democracy and International Financial Liberalization. Working Paper, Georgetown University, Washington, DC.Google Scholar
Quinn, Dennis P., and Toyoda, A. Maria. 2007. Ideology and Voter Preferences as Determinants of Financial Globalization. American Journal of Political Science 51 (2):344–63.Google Scholar
Raftery, Adrian E. 1995. Bayesian Model Selection in Social Research. Sociological Methodology 25:111–63.Google Scholar
Rancière, Romain, Tornell, Aaron, and Westermann, Frank. 2008. Systemic Crises and Growth. The Quarterly Journal of Economics 123 (1):359–406.Google Scholar
Reinhart, Carmen M., and Reinhart, Vincent R.. 2008. Capital Flow Bonanzas: An Encompassing View of the Past and Present NBER Working Paper No. W14321Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth. 2008. Is the 2007 US Subprime Crisis So Different? An International Historical Comparison. American Economic Review 98 (2):339–44.Google Scholar
Reinhart, Carmen M., and Rogoff, Kenneth. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton, NJ: Princeton University Press.Google Scholar
Rosas, Guillermo. 2006. Bagehot or Bailout? An Analysis of Government Responses to Banking Crises. American Journal of Political Science 50 (1):175–91.Google Scholar
Rosas, Guillermo. 2009. Curbing Bailouts: Bank Crises and Democratic Accountability in Comparative Perspective. Ann Arbor: University of Michigan Press.Google Scholar
Russett, Bruce, and Oneal, John R.. 2001. Triangulating Peace: Democracy, Interdependence, and International Organizations. New York: W.W. Norton.Google Scholar
Saiegh, Sebastian. 2005. Do Countries Have a “Democratic Advantage”? Political Institutions, Multilateral Agencies and Sovereign Borrowing. Comparative Political Studies 38 (4):366–87.Google Scholar
Schaeck, Klaus, and Cihak, Martin. 2007. How Well Do Aggregate Bank Ratios Identify Banking Problems? IMF Working Paper. Washington, DC: International Monetary Fund.Google Scholar
Schultz, Kenneth A. 1999. Do Democratic Institutions Constrain or Inform? Contrasting Two Institutional Perspectives on Democracy and War. International Organization 53 (2):233–66.Google Scholar
Schultz, Kenneth A., and Weingast, Barry R.. 2003. The Democratic Advantage: Institutional Foundations of Financial Power in International Competition. International Organization 57 (1):3–42.Google Scholar
Taylor, John B. 2009. The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong. NBER Working Paper No. 14631.Google Scholar
Thegeya, Aaron, and Navajas, Matias Costa. 2013. Financial Soundness Indicators and Banking Crises. IMF Working Paper. Washington, DC: International Monetary Fund.Google Scholar
Treier, Shawn, and Jackman, Simon. 2008. Democracy as a Latent Variable. American Journal of Political Science 52 (1):201–17.Google Scholar
Williamson, John. 2004. A Short History of the Washington Consensus. Fundación CIDOB. Barcelona, Spain. Available at <https://piie.com/commentary/speeches-papers/short-history-washington-consensus>..>Google Scholar
Yang, Benhua. 2008. Does Democracy Lower Growth Volatility? A Dynamic Panel Analysis. Journal of Macroeconomics 30 (1):562–74.Google Scholar
Yu, Miaojie. 2010. Trade, Democracy, and the Gravity Equation. Journal of Developmental Economics 91 (2):289–300.Google Scholar
Supplementary material: File

Lipscy supplementary material

Lipscy supplementary material 1

Download Lipscy supplementary material(File)
File 30.5 MB