Advertisement

Latin American democratisation and currency crises (1975–2008)

Original Article

Abstract

Latin America experienced a deep political transformation from authoritarianism to democracy in the recent decades. During the same period, many countries in the region also suffered severe currency crises. We contend that these two phenomena are causally related. Specifically, we argue that democratic transitions increase political demand for public spending, leading to budget deficits, and this increases investors’ propensity to liquidate local currency holdings. Moreover, we note an important ‘threshold’ effect, in which democratisation is particularly likely to lead to currency crises when the pre-existing fiscal deficits are already relatively high. Statistical analysis confirms these arguments in a sample of 25 Latin American countries in the period from 1975 to 2008.

Keywords

budget deficit currency crises democratisation herding Latin America political regime 

Notes

Supplementary material

41268_2016_55_MOESM1_ESM.doc (355 kb)
Online Appendix Tables C1–C8

References

  1. Ahmed, Shaghil (2003) ‘Sources of Economic Fluctuations in Latin America and Implications for Choice of Exchange Rate Regimes’, Journal of Development Economics 72(1): 181–202.CrossRefGoogle Scholar
  2. Alt, James E. and David Dreyer Lassen (2006) ‘Transparency, Political Polarization, and Political Budget Cycles in OECD Countries’, American Journal of Political Science 50(3): 530–50.CrossRefGoogle Scholar
  3. Avelino, George, David S. Brown and Wendy Hunter (2005) ‘The Effects of Capital Mobility, Trade Openness, and Democracy on Social Spending in Latin America, 1980–1999’, American Journal of Political Science 49(3): 625–41.CrossRefGoogle Scholar
  4. Barbeira, Lorena G. and George Avelino (2011) ‘Do Political Budget Cycles Differ in Latin American Democracies?’ Economia 11(2): 101–34.Google Scholar
  5. Block, Steven A., Karen Ferree and Smita Singh (2003) ‘Multiparty Competition, Founding Elections, and Political Business Cycles in Africa’, Journal of African Economies 12(3): 444–61.CrossRefGoogle Scholar
  6. Brender, Adi and Allan Drazen (2005) ‘Political Budget Cycles in New Versus Established Democracies’, Journal of Monetary Economics 52(7): 1271–95.CrossRefGoogle Scholar
  7. Brender, Adi and Allan Drazen (2007) ‘Electoral Fiscal Policy in New, Old, and Fragile Democracies’, Comparative Economic Studies 49(3): 446–66.CrossRefGoogle Scholar
  8. Brender, Adi and Allan Drazen (2009) ‘Consolidation of New Democracy: Mass Attitudes and Clientelism’, American Economic Review 99(2): 302–9.CrossRefGoogle Scholar
  9. Brown, David S. and Wendy Hunter (2004) ‘Democracy and Human Capital Formation: Education Spending in Latin America, 1980 to 1997’, Comparative Political Studies 37(7): 842–64.CrossRefGoogle Scholar
  10. Bueno de Mesquita, Bruce, Alastair Smith, Randolph M. Siverson and James Morrow (2003) The Logic of Political Survival, New York: The MIT Press.Google Scholar
  11. Carter, David B. and Curtis S. Signorino (2010) ‘Back to the Future: Modeling Time Dependence in Binary Data’, Political Analysis 18(2): 271–92.CrossRefGoogle Scholar
  12. Chari, Varadarajan V. and Patrick Kehoe (2004) ‘Financial Crises as Herds: Overturning the Critiques’, Journal of Economic Theory 119(1): 128–50.CrossRefGoogle Scholar
  13. Cheibub, Jose Antonio, Jennifer Gandhi and James Raymond Vreeland (2010) ‘Democracy and Dictatorship Revisited’, Public Choice 143(1): 67–101.CrossRefGoogle Scholar
  14. Chuwieroth, Jeffery M. and Andrew Walter (2010) ‘Financial Crises and Political Turnover: A Long Run Panoramic View’, International Political Economy Society Annual Meeting, Cambridge, MA: Harvard University.Google Scholar
  15. Easterly, William (2001) ‘The Lost Decades: Explaining Developing Countries’ Stagnation in Spite of Policy Reform 1980–1998’, Journal of Economic Growth 6(1): 135–57.CrossRefGoogle Scholar
  16. Edwards, Sebstian (2003) ‘Financial Instability in Latin America’, Journal of International Money and Finance 22(7): 1095–106.CrossRefGoogle Scholar
  17. Eichengreen, Barry (1999) Toward A New International Financial Architecture: A Practical Post-Asia Agenda, Washington DC: Institute for International Economics.Google Scholar
  18. Eichengreen, Barry and David Leblang (2008) ‘Democracy and Globalization’, Economics & Politics 20(3): 289–334.CrossRefGoogle Scholar
  19. Eichengreen, Barry, Andrew Rose and Charles Wyplosz (1997) ‘Contagious Currency Crises’, Working Paper, http://www.econ.berkeley.edu/~eichengr/research/pre5681.pdf (accessed 14 March, 2016).
  20. Epstein, Edward C. (1984) ‘Legitimacy, Institutionalization, and Opposition in Exclusionary Bureaucratic-Authoritarian Regimes’, Comparative Politics 17(1): 37–54.CrossRefGoogle Scholar
  21. Flood, Robert and Nancy Marion (1999) ‘Perspectives on the Recent Currency Crisis Literature’, International Journal of Finance and Economics 4(1): 1–26.CrossRefGoogle Scholar
  22. Flood, Robert and Peter M. Garber (1984) ‘Collapsing Exchange Rates: Some linear Examples’, Journal of International Economics 17(1): 1–13.CrossRefGoogle Scholar
  23. Frankel, Jeffery A. and Andrew Rose (1996) ‘Currency Crises in Emerging Markets: An Empirical Treatment’, Journal of International Economics 41(2): 351–66.CrossRefGoogle Scholar
  24. Frenkel, Roberto and Jamie Ros (2006) ‘Unemployment and The Real Exchange Rate in Latin America’, World Development 34(4): 631–46.CrossRefGoogle Scholar
  25. Frieden, Jeffry and Ernesto Stein (2001) The Currency Game: Exchange Rate Politics in Latin America, Baltimore, MD: Johns Hopkins University Press.Google Scholar
  26. Gasiorowski, Mark J. and Zaheer Poptani (2006) ‘The Macroeconomic Consequences of Democratic Transition: Learning Processes in the Third and Fourth Waves of Democratization’, Studies in Comparative International Development 41(1): 33–61.CrossRefGoogle Scholar
  27. Haggard, Stephen (2000) The Political Economy of the Asian Financial Crisis, Washington DC: Institute for International Economics.Google Scholar
  28. Haggard, Stephen and Robert Kaufman (1995) The Political Economy of Democratic Transitions, Princeton: Princeton University Press.Google Scholar
  29. Haggard, Stephen and Robert Kaufman (2008) Development, Democracy, and Welfare States: Latin America, East Asia, and Eastern Europe, Princeton: Princeton University Press.Google Scholar
  30. Hays, Jude C., John R. Freeman and Hans Nesseth (2003) ‘Exchange Rate Volatility and Democratization in Emerging Market Economies’, International Studies Quarterly 47(2): 203–28.CrossRefGoogle Scholar
  31. Heston, Alan, Robert Summers and Bettina Aten (2011) ‘Penn World Table Version 7.0’, Center for International Comparisons of Production, Income and Prices. University of Pennsylvania, http://cid.econ.ucdavis.edu/pwt.html (accessed 4 April, 2016).
  32. Huntington, Samuel (1968) Political Orders in Changing Societies, New York: Yale University Press.Google Scholar
  33. Jensen, Nathan M. (2003) ‘Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Investments’, International Organization 57(3): 581–16.CrossRefGoogle Scholar
  34. Kahler, Miles (1990) ‘Orthodoxy and Its Alternatives: Explaining Approaches to Stabilization and Adjustment’, in Joan Nelson ed., The Politics of Economic Adjustment in Developing Nations, 33–62, Princeton: Princeton University Press.Google Scholar
  35. Kam, Cindy D. and Robert J. Franzese Jr (2007) Modeling and Interpreting Interactive Hypothesis in Regression Analysis, Ann Arbor: University of Michigan Press.Google Scholar
  36. Kaminsky, Graciela, Saul Lizondo and Carmen M. Reinhart (1998) ‘Leading Indicators of Currency Crises’, IMF Staff Papers 45(1): 1–48.CrossRefGoogle Scholar
  37. Katzenstein, Peter (1985) Small States in World Markets: Industrial Policy in Europe, Ithaca: Cornell University Press.Google Scholar
  38. Kaufman, Robert and Barbara Stallings, eds. (1989) ‘Debt and Democracy in the 1980s: The Latin American Experiences’, in Debt and Democracy in Latin America, 201–23, Boulder: West View.Google Scholar
  39. Kaufman, Robert R. and Alex Segura-Ubiergo (2001) ‘Globalization, Domestic Politics, and Social Spending in Latin America: A Time-Series Cross-Section Analysis, 1973–1997’, World Politics 53(4): 553–87.CrossRefGoogle Scholar
  40. King, Gary, Robert O. Keohane and Sidney Verba (1994) Designing Social Inquiry: Scientific Inference in Qualitative Research, Princeton: Princeton University Press.Google Scholar
  41. Krugman, Paul (1979) ‘A Model of Balance-of-Payment Crises’, Journal of Money, Credit, and Banking 11(3): 311–25.CrossRefGoogle Scholar
  42. Leblang, David and Shanker Satyanath (2006) ‘Institutions, Expectations, and Currency Crises’, International Organizations 60(1): 245–62.CrossRefGoogle Scholar
  43. Leblang, David and Shanker Satyanath (2008) ‘Politically Generated Uncertainty and Currency Crises: Theory, Test, and Forecasts’, International Journal of Money and Finances 2(3): 480–97.CrossRefGoogle Scholar
  44. Li, Quan and Adam Resnick (2003) ‘Reversal of Fortunes: Democratic Institutions and Foreign Direct Investment Inflows to Developing Countries’, International Organization 57(1): 175–211.CrossRefGoogle Scholar
  45. MacIntyre, Andrew (2001) ‘Institutions and Investors: The Politics of the Economic Crisis in South East Asia’, International Organization 55(1): 81–122.CrossRefGoogle Scholar
  46. McCleary, Rachel M (1995) Dictating Democracy: Guatemala and the End of Violent Revolution, Gainesville: University Press of Florida.Google Scholar
  47. Meltzer, Allen and Scott Richard (1981) ‘A Rational Theory of The Size of Government’, Journal of Political Economy 89(5): 914–27.CrossRefGoogle Scholar
  48. Morrison, Kevin M. (2011) ‘Nontax Revenue, Social Cleavages, and Authoritarian Stability in Mexico and Kenya’, Comparative Political Studies 44(6): 719–46.CrossRefGoogle Scholar
  49. Morris, Stephen and Hyun Song Shin (1998) ‘Unique Equilibrium in a Model of Self-fulfilling Currency Attacks’, American Economic Review 88(3): 587–97.Google Scholar
  50. Nelson, Joan M., ed. (1990) ‘The Politics of Adjustment in Small Democracies: Costa Rica, the Dominican Republic, and Jamaica’, in Economic Crisis and Policy Choice, New York: Princeton University Press.Google Scholar
  51. Obstfeld, Maurice (1986) ‘Rational and Self-Fulfilling Balance-of-Payment Crisis’, American Economic Review 76(1): 72–81.Google Scholar
  52. Obstfeld, Maurice (1994) ‘The Logic of Currency Crises’, Cahiers économiques et monétaires 43(1): 189–213.Google Scholar
  53. Papaioannou, Elias and Gregorios Siourounis (2008) ‘Democratisation and Growth’, The Economic Journal 118(532): 1520–51.CrossRefGoogle Scholar
  54. Peltzman, Sam (1992) ‘Voters as Fiscal Conservatives’, Quarterly Journal of Economics 107(1): 327–61.CrossRefGoogle Scholar
  55. Pop-Eleches, Grigore (2008) ‘Crisis in the Eyes of Beholder: Economic Crisis and Partisan Politics in Latin America and Eastern Europe’, Comparative Political Studies 41(9): 1179–211.CrossRefGoogle Scholar
  56. Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub and Fernando Limongi (2000) Democracy and Development: Political Institutions and Well-Being in the World, 1950–1990, New York: Cambridge University Press.CrossRefGoogle Scholar
  57. Remmer, Karen L. (1990) ‘Democracy and Economic Crisis: The Latin American Experience’, World Politics 42(2): 315–35.CrossRefGoogle Scholar
  58. Remmer, Karen L. (2002) ‘Politics of Economic Policy and Performance in Latin America’, Journal of Public Policy 22(1): 29–59.CrossRefGoogle Scholar
  59. Richards, Gordon (1986) ‘Stabilization Crisis and the Breakdown of Military Authoritarianism in Latin America’, Comparative Political Studies 18(4): 447–85.CrossRefGoogle Scholar
  60. Roberts, Kenneth and Erik Wibbels (1999) ‘Party Systems and Electoral Volatility in Latin America: A Test of Economic, Institutional, and Structural Explanations’, American Political Science Review 93(3): 575–90.CrossRefGoogle Scholar
  61. Rodrik, Dani and Romain Wacziarg (2005) ‘Do Democratic Transitions Produce Bad Economic Outcomes?’ American Economic Review 95(1): 50–55.CrossRefGoogle Scholar
  62. Rogoff, Kenneth (1990) ‘Equilibrium Political Budget Cycles’, American Economic Review 80(1): 21–36.Google Scholar
  63. Roubini, Nouriel and Jeffery D. Sachs (1989) ‘Political and Economic Determinants of Budget Deficits in the Industrial Democracies’, European Economic Review 33(5): 903–38.CrossRefGoogle Scholar
  64. Schamis, Hector E. (1991) ‘Reconceptualizing Latin American Authoritarianism in the 1970s: From Bureaucratic-Authoritarianism to Neoconservatism’, Comparative Politics 23(2): 201–20.CrossRefGoogle Scholar
  65. Simmons, Beth and Jens Heinmueller (2005) ‘Can Domestic Institutions Explain Exchange Rate Regime Choice?’, Unpublished manuscript, Harvard University.Google Scholar
  66. Thies, Cameron and Moises Arce (2009) ‘The Politics of Exchange Rate-Based Stabilization versus Structural Reforms in Latin America’, Comparative Political Studies 42(9): 1193–216.CrossRefGoogle Scholar
  67. Weyland, Kurt (2002) The Politics of Market Reform in Fragile Democracies: Argentina, Brazil, Peru, and Venezuela, Princeton: Princeton University Press.Google Scholar
  68. World Bank (2011) ‘World Development Indicator 2011’, http://data.worldbank.org/data-catalog/world-development-indicators (accessed 4 April, 2016).

Copyright information

© Macmillan Publishers Ltd 2016

Authors and Affiliations

  1. 1.Global Affairs, George Mason UniversityFairfaxUSA
  2. 2.University of MissouriColumbiaUSA

Personalised recommendations