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

37 Pages Posted: 8 Jan 2007

See all articles by Sule Ozler

Sule Ozler

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

Dani Rodrik

Harvard University - Harvard Kennedy School (HKS); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: January 1992

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.

Suggested Citation

Ozler, Sule and Rodrik, Dani, External Shocks, Politics and Private Investment: Some Theory and Empirical Evidence (January 1992). NBER Working Paper No. w3960. Available at SSRN: https://ssrn.com/abstract=476129

Sule Ozler (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Dani Rodrik

Harvard University - Harvard Kennedy School (HKS) ( email )

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HOME PAGE: http://www.ksg.harvard.edu/rodrik/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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