External Shocks, Politics, and Private Investment: Some Theory and Empirical EvidenceThe manner in which the political system responds to external economic shocks in developing countries is a key determinant of the private investment response. We look at a simple model of political-economic equilibrium to make this intuition more precise. and develop the idea of a "political transmission mechanism." Even in the confines of this simple model, we find that ambiguities abound: domestic politics can magnify or dampen the effect of the external shock. In our empirical work. we find that a high level of urbanization magnifies the investment reduction in response to an external shock. This is consistent with the supposition that high levels of urbanization are conducive to distributive politics with pernicious economic effects. We also find that the provision of political rights is conducive to superior private investment behavior |
Common terms and phrases
aggregate investment ambiguity ARGENTINA Barry Eichengreen beta coefficients Bolivia BRAZIL Bureau of Economic capitalists captures conducive to superior DETEX distributive politics distributive struggle domestic investment domestic output domestic politics dummy variables Economic Research equilibrium level explanatory variables external shock framework GDPCAP GINV GRGDP income inflation Investment and workers investment reduction investment to GDP labor and capital levels of urbanization macroeconomic Massachusetts Avenue modern sector NBER negative non-cooperative game opportunity cost Ozler Dani Rodrik parameters Pazarbasioglu 1991 policy reaction function political activity political rights political system political transmission mechanism political variables political-economic equilibrium POLITICS AND PRIVATE private investment behavior private investment response PRIVATE INVESTMENT/GDP COUNTRIES proxies redistributive RLIBOR sample mean sensitivity specification standard deviation increase statistically significant struggle between labor Sule Ozler Dani tax on capital THEORY AND EMPIRICAL transfer to workers U.S. Multinational urban workers URBL wage World Bank world interest rates