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Abstract:
This paper investigates empirically the political determinants of stock market development. We argue that those determinants are grounded in distributional cleavages among voters and interest groups. Our argument reverses the sign of the prevailing explanation about the role of partisanship in the literature, where it is usually assumed that left governments frighten investors. To the extent that financial development is translated into higher levels of investment that increases labor demand, workers and the parties representing them will adopt policies and regulations that favor the capitalization of financial markets. We explore the empirical content of our hypothesis against several competing explanations: the legal origins school, which argues common law proxies stronger investor protections than civil law; the electoral law school, which argues proportional representation provides weaker protections than do majoritarian ones; the institutional economics view, which argues that checks on policymaking discretion such as veto gates protect the property rights of investors and encourage investment. We test the implications of the different arguments on the level of stock market capitalization in a panel of 83 countries over the period 1975-2004. We find preliminary evidence in favor of the partisanship hypothesis: contrary to received wisdom, our results suggest that left-leaning governments are more likely to be associated with higher stock market capitalization than their counterparts to the right and center of the political spectrum. The association between the left and market capitalization is stronger in the 1990s. These results are consistent with recent theories emphasizing an emerging coalition of workers and owners against managers in favor of greater transparency and shareholder protection.

politics, finance, economic development, regulation, political economy

Abstract:
This paper explores the existence of partisan cycles in foreign direct investment performance. Our theoretical model predicts that the incumbent government's partisanship should affect foreign investors' decision to flow into different sectors of the host country: pro-labor governments would encourage the inflow of the type of investment that complements labor in production; pro-capital governments would promote the entry of investment that substitutes for labor. Empirical evidence from a sample of OECD countries reveals a pattern of foreign investors' response to partisan cycles consistent with the predictions of the model. First, foreign investment systematically flows into different sectors of the host economy under left and right leaning incumbents. Second, we find a positive correlation between foreign investment and changes in average wages under left-leaning incumbents, but no effect on wages under right-leaning governments.

foreign direct investment, partisan governments

Abstract:
This paper analyzes the relationship between inward foreign direct investment (FDI) and corruption. It is widely recognized that FDI has the potential to affect market and political conditions in host countries. Whether these effects are positive or negative is likely to depend on the underlying economic and political environments in the host. The structure of the economy and the availability of local resources determines the possibility of extracting rents. And rent sharing is at the center of most instances of grand corruption. Political development, on the other hand, determines the level of accountability of the incumbent, creates a check on the ability to appropriate those rents, and increases the probability of getting caught and sanctioned for engaging in corrupt behavior especially in the presence of a multinational corporation. Hence, we argue that FDI will be associated with higher corruption levels in political and economic environments where competition is restricted. Assessing the relationship between FDI and corruption empirically presents a technical challenge: while inward FDI has the potential to affect corruption levels in the host countries, corruption is also likely to affect investment flows. Most studies to date tend to overlook this endogeneity problem. We test our hypotheses in a instrumental variable two-stage least-squares setting, finding preliminary support for our hypotheses: The effect of FDI on corruption is positive in authoritarian and poor countries, and turns negative as countries become more democratic. We also find that the marginal effect of FDI on corruption is negligible in more developed economies

foreign direct investment, corruption, instrumental variables

Abstract:
Among IR scholars, a central empirical proposition is that democracies seek out other democracies as trading partners - the so-called democratic trade hypothesis. Yet, as revealed in a 2001 symposium on Green et al.’s “Dirty Pool” testing this hypothesis is entangled in debates over the appropriate statistical techniques and research design. We use this controversy as a springboard to offer a cautionary tale about how a large data set with a massive N can create overconfidence in hypothesis testing. On the one hand we have over 90,000 dyads of nation-years. On the other hand we can observe only a small number of national transitions in and out of democratic status. These considerations suggest that the proper estimation of a democracy effect (and its standard error) are not readily solved by mechanical resort to statistical formula, particularly with dyads as the units of analysis. Our central contribution is to employ randomization tests on the dyadic analysis to infer the correct p-values associated with the main hypotheses. Second, we model nation-years, where the question is whether the proportion of trade with other democracies increases when a country becomes more democratic. Third, we conduct a difference-in-difference analysis of change in trading partners following democratic or anti-democratic shocks. Finally, we embed our nation-state results in a multi-level framework, distinguishing between the short-term effects of democratic transitions on trade from the long-term effects of national democratic (or not) culture on trade. Rather than adding further layers of statistical complexity, these tests actually are simple and quite intuitive.

democracy, trade, permutation tests, hypothesis testing

Abstract:
This paper explores the existence of partisan cycles in foreign direct investment performance. Our theoretical model predicts that the incumbent government's partisanship should affect foreign investors' decision to flow into different sectors of the host country: pro-labor governments would encourage the inflow of the type of investment that complements labor in production; pro-capital governments would promote the entry of investment that substitutes for labor. Empirical evidence from a sample of Organisation for Economic Co-operation and Development countries reveals a pattern of foreign investors' response to partisan cycles consistent with the predictions of the model. First, foreign investment systematically flows into different sectors of the host economy under left- and right-leaning incumbents. Second, we find a positive correlation between foreign investment and changes in average wages under left-leaning incumbents, but no effect on wages under right-leaning governments.

Abstract:
The authors present and test a theory about the effects of political competition on the sources of economic growth. Using Mankiw, Romer, and Weil's model of economic growth and data for roughly 80 countries, the authors show that political competition decreases the rate of physical capital accumulation and labor mobilization but increases the rate of human capital accumulation and (less conclusively) the rate of productivity change. The results suggest that political competition systematically affects the sources of growth, but those effects are cross-cutting, explaining why democracy itself may be ambiguous. These findings help clarify the debate about regime type and economic performance and suggest new avenues for research.

political competition, economic growth, human capital, productivity, investment