Political Institutions and Output Collapses

IMF Working Papers, February 17, 2023

Source details

Major output collapses are costly and frequent in the developing world.
Using cross-country data, five-year periods are classified in a two-dimensional state space based on growth regimes and political institutions.
The joint evolution of output growth and political institutions is modeled as a finite state Markov chain to study how countries move between states.
Key empirical findings:
- Growth is more likely to be sustained under democracy than under autocracy.
- Output collapses are more persistent under autocracy.
- Stagnation under autocracy can give way to outright collapse.
- Democratic countries appear to be more resilient.

Data structure:
- Analysis uses cross-country data aggregated into five-year periods.
- Classification of periods into states uses a two-dimensional state space defined by growth regimes and political institutions.
Modeling approach:
- The joint evolution of output growth and political institutions is modeled as a finite state Markov chain.
- The framework allows study of transitions between growth/institutional states, including persistence and probability of moving into collapse states.

Persistence and transition patterns:
- Output collapses exhibit greater persistence under autocratic political institutions.
- Democracies show higher likelihoods of sustaining growth and greater resilience against collapse.
- Stagnation under autocracy is identified as a danger zone that can transition into outright collapse.
Implication for developing countries:
- Political institutions are strongly associated with the dynamics of output collapse and recovery.
- Institutional regime (democracy versus autocracy) alters the risk profile for prolonged stagnation and collapse.

Strengthening democratic institutions may increase the probability of sustained growth and resilience to output collapses.
Monitoring and addressing stagnation in autocratic contexts is important because stagnation can precede collapse.
Policies aimed at reducing the persistence of collapses under autocracy could focus on institutional reforms that enhance accountability and checks on power.