Ethnic Divisions, Political Institutions and the Duration of Declines - A Political Economy Theory of Delayed Recovery

29 Pages Posted: 29 Jan 2015

See all articles by Richard Bluhm

Richard Bluhm

Leibniz University Hannover; UNU-MERIT; Maastricht Graduate School of Governance

Kaj Thomsson

Maastricht University - Department of Economics

Date Written: January 15, 2015

Abstract

This paper analyzes the duration of large economic declines and provides a theory of delayed recovery. First, we develop a formal political economy model that illustrates a simple mechanism of how weak constraints on the political executive can lead to longer declines in ethnically heterogeneous countries. The model shows how uncertain post-recovery incomes and a ‘winner-take-all’ threshold effect create a commitment problem rendering a cooperative equilibrium inaccessible. Holding out can benefit groups by reducing the threshold effects in subsequent periods, thus limiting the remaining uncertainty. Placing strong constraints on the executive solves this commitment problem by reducing the uncertainty from the threshold effects, which brings about cooperation earlier on. Second, we then test several empirical predictions from the model using standard data on linguistic heterogeneity and more detailed data on ethnic power configurations. We find that the partial correlations are consistent with the proposed theory. The effect of executive constraints on the length of declines is very large in heterogeneous countries, but practically disappears in ethnically homogeneous societies. The adverse effect of heterogeneity is driven by the number of groups; increasing political concentration works in the opposite direction.

Keywords: economic crises, delayed recovery, political economy

JEL Classification: E6, O43, J15

Suggested Citation

Bluhm, Richard and Thomsson, Kaj, Ethnic Divisions, Political Institutions and the Duration of Declines - A Political Economy Theory of Delayed Recovery (January 15, 2015). Available at SSRN: https://ssrn.com/abstract=2556836 or http://dx.doi.org/10.2139/ssrn.2556836

Richard Bluhm (Contact Author)

Leibniz University Hannover ( email )

Institute of Macroeconomics
Koenigsworther Platz 1
Hannover, 30167
Germany

HOME PAGE: http://mak.uni-hannover.de

UNU-MERIT ( email )

Keizer Karelplein 19
Maastricht, 6211TC
Netherlands

Maastricht Graduate School of Governance ( email )

Keizer Karelplein 19
PO Box 616
Maastricht, 6200MD
Netherlands

Kaj Thomsson

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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