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External Shocks, Politics and Private Investment: Some Theory and Empirical Evidence

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  • Sule Ozler
  • Dani Rodrik

Abstract

The 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3960.

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Date of creation: Jan 1992
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Publication status: published as Journal of Development Economics July, 1992
Handle: RePEc:nbr:nberwo:3960

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Cited by:
  1. Aisen, Ari & Veiga, Francisco José, 2013. "How does political instability affect economic growth?," European Journal of Political Economy, Elsevier, Elsevier, vol. 29(C), pages 151-167.
  2. M. Ayhan Kose & Raymond Riezman, 1999. "Trade Shocks and Macroeconomic Fluctuations in Africa," CSGR Working papers series, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick 43/99, Centre for the Study of Globalisation and Regionalisation (CSGR), University of Warwick.
  3. Nauro F. Campos & Jeffrey B. Nugent, 2000. "Who is Afraid of Political Instability?," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 326, William Davidson Institute at the University of Michigan.
  4. Mehlum, Halvor & Ove Moene, Karl, 2011. "Aggressive elites and vulnerable entrepreneurs - trust and cooperation in the shadow of conflict," Memorandum, Oslo University, Department of Economics 16/2010, Oslo University, Department of Economics.
  5. Chen, Baizhu & Feng, Yi, 1996. "Some political determinants of economic growth: Theory and empirical implications," European Journal of Political Economy, Elsevier, Elsevier, vol. 12(4), pages 609-627, December.
  6. António Afonso & João Tovar Jalles, 2011. "Linking Investment and Fiscal Policies," Working Papers Department of Economics, ISEG - School of Economics and Management, Department of Economics, University of Lisbon 2011/16, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  7. Banerji, Arup & Ghanem, Hafez, 1995. "Political regimes, trade, and labor policies in developing countries," Policy Research Working Paper Series, The World Bank 1521, The World Bank.
  8. Stephen S. Everhart & Mariusz A. Sumlinski, 2001. "Trends in Private Investment in Developing Countries : Statistics for 1970-2000 and the Impact on Private Investment of Corruption and the Quality of Public Investment," World Bank Publications, The World Bank, The World Bank, number 13989, February.
  9. Richard Mash, 1999. "The Investment Response to Imperfectly Credible Trade Liberalisation with Endogenous Probability of Reversal," Economics Series Working Papers, University of Oxford, Department of Economics WPS/1998-13, University of Oxford, Department of Economics.
  10. Alesina, Alberto & Perotti, Roberto, 1994. "The Political Economy of Growth: A Critical Survey of the Recent Literature," World Bank Economic Review, World Bank Group, World Bank Group, vol. 8(3), pages 351-71, September.
  11. Bowe, M. & Dean, J.W., 1997. "Has the Market Solved the Sovereign-Debt Crisis?," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 83, International Economics Section, Departement of Economics Princeton University,.
  12. Tang, Chor Foon & Abosedra, Salah, 2014. "The impacts of tourism, energy consumption and political instability on economic growth in the MENA countries," Energy Policy, Elsevier, Elsevier, vol. 68(C), pages 458-464.
  13. Sturm, Jan-Egbert, 2001. "Determinants of public capital spending in less-developed countries," CCSO Working Papers, University of Groningen, CCSO Centre for Economic Research 200107, University of Groningen, CCSO Centre for Economic Research.
  14. Jennifer Tobin & Susan Rose-Ackerman, 2003. "Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 587, William Davidson Institute at the University of Michigan.

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