Minimizing Output Loss - Role of Political Factors during Economic Crisis: Lessons for Developing Countries

The purpose of the dissertation is to understand the role of political factors during an economic crisis using a sample of developing countries. Variables are clustered in the categories of (a) prior economic performance, (b) economic policy, (c) economic characteristics, (d) institutional quality, (e) regional status, and (f) IMF involvement on the dependent variable of 144 developing countries' output loss from the crisis of 2008. The goal of the analysis is not merely to obtain a high R2 but also to identify and explore explanatory patterns in both linear and quantile regression carried out on the data, and to include infrequently studied institutional and political variables to the study of output loss.;The overall conclusion of the study is that countries growing rapidly before the crisis, and with relatively high GDP per capita, recovered faster than other countries. Social and financial policies were also found to be important. Countries with higher levels of financial openness and domestic credit suffered more during the crisis. In the presence of these controls, countries with higher numbers of veto players recovered more slowly from the crisis; however, the number of veto players was no longer significant when economic characteristics were added to the models. Indeed, as more explanatory variables are added to the models, and the more categories they cover, significantly fewer relationships were found between veto players and post-crisis economic recovery.;An interesting finding is that that democracy was significantly and negatively associated with output loss in all three models, indicating that democracy helped to protect against output loss. At the same time, political rights were significantly and positively associated with output loss in all three models, a finding that seems to be at odds with the observed democracy-output loss relationship. It is possible that the measure of political rights is conceptually related to trade or financial openness in that all three variables might measure some form of openness associated with inhibited decision-making or exposure to contagion. It might be the case that there were two distinct strategies employed successfully to minimize output loss: a democratic strategy and a "closed" strategy. The data suggest that output loss has much more to do with trade and financial openness, existing growth rates, and other economic fundamentals. In testing the second hypothesis, we observed a positive relationship between political rights and output loss; however, in that same hypothesis, we also saw that democracy exerted a protective factor on output loss. If we think in terms of R2, then institutional and governance variables did not contribute much to any of the models. The inference to reach is that the most open (in trade and finance) and fast-growing countries suffered the most because of their connectedness to other vulnerable portions of the global economy. These countries exhibited a great deal of variability in terms of their political orientations. The way to minimize the effects of crisis is not political repression, but rather a lesser degree of openness to international economic activity. One of the implications of this finding is that neither political and institutional changes nor IMF involvement are likely to minimize output loss from a crisis; the first developing countries to recover will be those that have already been experiencing high growth, that are already financially open, and that have higher GDPs per capita than their peers. However, it is possible that political and institutional variables become more important in a longer-term analysis, for example, over a period of 5 or 10 years post-recession. Therefore, the findings of the study should not be taken to indicate that political and institutional variables have no relevance to developing countries' long-term economic recovery.