Do Weak Institutions Prolong Crises? On the Identification, Characteristics, and Duration of Declines During Economic Slumps

71 Pages Posted: 31 Jan 2020

See all articles by Richard Bluhm

Richard Bluhm

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

Denis de Crombrugghe

Maastricht University

Adam Szirmai

Eindhoven University of Technology (TUE) - Faculty of Technology Management

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Date Written: January 29, 2020

Abstract

This paper studies periods of prolonged contractions in output per capita in a sample of 145 countries from 1950 to 2014. Economic slumps are defined as abrupt interruptions of a period of growth by several regime switches. Slumps start with a sharp contraction along with a trend break, which is followed by another switch when growth stabilizes again. The paper then analyzes the correlates of these slumps, focusing on the length and depth of the contraction, from the beginning of the slump to its trough. The results establish three new stylized facts: (i) weak political institutions predate crises whereas political reforms tend to follow them, (ii) the length and depth of economic declines are robustly correlated with executive constraints and ethnic heterogeneity, and (iii) there is a robust interaction between these two variables, suggesting that institutions constraining leaders are important for stabilizing growth. This is particularly relevant for Sub-Saharan Africa, where politics are often ethnic and decision makers are comparatively unconstrained.

Suggested Citation

Bluhm, Richard and de Crombrugghe, Denis and Szirmai, Adam, Do Weak Institutions Prolong Crises? On the Identification, Characteristics, and Duration of Declines During Economic Slumps (January 29, 2020). World Bank Policy Research Working Paper No. 9127, Available at SSRN: https://ssrn.com/abstract=3527830

Richard Bluhm (Contact Author)

Leibniz University Hannover ( email )

Institute of Macroeconomics
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UNU-MERIT ( email )

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Maastricht Graduate School of Governance ( email )

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Denis De Crombrugghe

Maastricht University ( email )

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Maastricht, 6200MD
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Adam Szirmai

Eindhoven University of Technology (TUE) - Faculty of Technology Management ( email )

P.O. Box 513
5600 MB Eindhoven
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