The Politics of Economic Crisis in Latin America

Erik Wibbels & Kenneth Roberts

Published online: 5 October 2010# Springer Science+Business Media, LLC 2010

Abstract Researchers widely recognize that economic crises have importantpolitical consequences, yet there is little systematic research on the political factorsthat make nations more or less susceptible to economic crisis. Scholars have longdebated the economic consequences of party systems, executive powers, and societalinterest groups, but their relationships to crisis proclivity are poorly understood. Weassess the political correlates of economic crisis using a cross-sectional time-seriesanalysis of 17 Latin American countries over nearly three decades. Crises aremeasured along two dimensionsdepth and durationand disaggregated into threetypes: inflationary, GDP, and fiscal crises. Statistical results suggest that politicalinstitutions have a modest, and often unexpected, correlation with crises. Moreimportant than institutional attributes are social organization and the nature of party-society linkages, particularly the existence of a densely-organized trade unionmovement and/or a powerful leftist party. Strong unions and powerful parties of theleft are associated with more severe economic crises, though there is some evidencethat the combination of left-labor strength can alleviate inflationary crises. Theresults demonstrate the need to disaggregate the concept of economic crisis andincorporate the societal dimension when studying the political economy of crisis andreform.

Keywords Economic crises . Political institutions . Latin America .Market reform

The global financial crisis is only the latest in a long line of economic crises thathave wreaked havoc on political and economic institutions in the developing worldover recent decades. These crises have been instrumental to the downfall of

St Comp Int Dev (2010) 45:383409DOI 10.1007/s12116-010-9072-x

E. Wibbels (*)Department of Political Science, Duke University, Durham, NC, USAe-mail: e.wibbels@duke.edu

K. RobertsDepartment of Government, Cornell University, Ithaca, NY, USAe-mail: kr99@cornell.edu

numerous regimes, forced others to implement painful austerity and structuraladjustment programs, and induced international financial institutions and donornations to develop multilateral emergency bailouts. Despite substantial efforts touncover the economic correlates of currency, bank, and debt crises (Frankel andRose 1996; Reinhart and Rogoff 2009; Kaminsky and Reinhart 2000), surprisinglylittle effort has been made to identify the political factors that make nations more orless susceptible to economic crises. Are crises triggered by economic factors that areindependent of political institutions and processes? Or are certain types ofinstitutional arrangements, party systems, or modes of societal organizationpredisposed to economic crisis? Why are some crises so persistent, while othersare short-lived? And are certain political conditions more likely to give rise to sometypes of economic crises than others?

Given the crisis proclivity of many developing nations and the dramatic politicalconsequences they often produce, these questions demand a more systematicempirical analysis of the political correlates of economic crisis. Like war andrevolution, economic crises can transform a political landscape in profound ways. AsDiamond, Hartlyn, and Linz state, economic crisis represents one of the mostcommon threats to democratic stability (1999: 36). Indeed, Przeworski et al.demonstrate that democratic breakdowns are more likely when a countryexperiences an economic crisis (2000: 111; see also ODonnell 1973). Economiccrises, moreover, may realign party systems (Burnham 1970), generate electoralvolatility (Remmer 1991; Roberts and Wibbels 1999), alter the relationships betweensocial actors (Gourevitch 1986), and create fissures in governing coalitions thatmake possible far-reaching policy and institutional changes. As Gourevitch explains(1986: 9), economic crises are critical moments when old relationships crumble andnew ones have to be constructed, creating a fluid political environment. It is notsurprising, then, that economic crises have played a central role in nearly everyexplanation of the trend toward free market reforms in regions as diverse as Africa(Callaghy 1991), Asia (Pempel 1999), the former Eastern bloc (Lijphart andWaisman 1996), and Latin America (Weyland 2002).

If economic crises shake the foundations of nations, the dearth of attentiondevoted to their political correlates is troubling. Scholars have long debated whatpolitical conditions lead to good economic performance, effective policymaking, or acapacity for economic reform, generally attributing such positive outcomes tospecific institutional configurations (Garrett 1998) or types of party systems (Geddes1994; Haggard and Kaufman 1995). By definition, however, crises are periods ofsevere disequilibria, and their gestation does not necessarily correspond to thedeterminants of economic performance in normal times.

Recognition of these attributes requires a different conceptualization andmeasurement of crises, particularly as typically done in the political scienceliterature. In that research, crises are treated generically, despite the fact that thereare different types of economic crises that may well be independent of each otherand have distinct political correlates. Likewise, there is significant variation in thedepth, duration and frequency of economic crises, and this must be factored intoexplanations of their political causes. Second, crises need to be separatedanalytically and measured independently of market-oriented economic reforms.Previous scholarship tends to conflate crisis and reform, reasoning tautologically

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that major reforms provide prima facie evidence of a severe crisis, while theabsence of reform is taken as an indicator of non-crisis. This circular reasoningdenies the possibility (apparent in many cases) that countries may sufferlongstanding crises without finding the political means to implement stabilizingreforms. Economic crises thus need to be operationalized in a way that is sensitiveto variation in their duration and intensity and independent of their allegedassociation with economic reform.

This study unpacks economic crises theoretically, recalibrates their mea-surement, and conducts a systematic empirical examination of their politicalcorrelates. Because we expect the political determinants of diverse crises to vary,we examine three types of economic crisis: inflationary, growth, and fiscalcrises. We put aside banking and balance of payment crises because a substantialbody of work exists on them in economics (Reinhart and Kaminsky 1999;Reinhart 2002; Reinhart and Rogoff 2004), and we are more interested in thepolitical correlates of crises in the real economy. We hypothesize that politicalconditions at three different levels of analysis influence these diverse types ofcrises. First, at the regime level of analysis, we test whether new democracies aremore vulnerable to crises than established ones. The second level of analysis is thatof sub-regime political institutions, where we examine the influence of executivepowers, types of party systems, and the extent of electoral competition. Finally, thethird level of analysis incorporates the organization of societal interests,specifically the impact of strong labor movements and left-wing political partieson crises.

We test hypotheses by conducting a series of regression analyses on a cross-sectional time-series sample of 17 Latin American nations between 1980 and 2006, aperiod that encompasses the debt crisis of the early 1980s, the collapse of importsubstitution industrialization (ISI), the spread of market-oriented reform programsacross the region, the fallout from the Asian financial crisis of the late 1990s, and thecommodity export boom of the early 2000s. Latin America provides an ideallaboratory for exploring the political correlates of economic crises, as the regionboasts a diverse array of democratic regimes, party systems, and modes of societalorganization during the period under study. The region also provides substantialvariation on our dependent variables; there are dramatic cross-national differences inthe types, severity and duration of crises.

Our findings are mixed. We do find that different types of economic crises arerelatively independent of each other and have distinct political correlates. While thematurity of democracies is associated with fewer and shorter crises of some varieties,they are unassociated with others. The findings on institutions are mostly null orcontrary to expectations. Neither powerful executives nor higher levels of electoralcompetition are systematically associated with crisis events or duration. On the otherhand, the fragmentation of the party system does matter, but it sometimes has effectsthat are the opposite of those expected. Easily our most consistent findings bear onparty-society linkagesnamely that the strength of the electoral left and laborunions are important correlates of crisis proclivity. We also find some suggestiveevidence that while powerful electoral lefts and union movements are positivelycorrelated with crises of various sorts, the combination of left-labor strength canfacilitate early exit from some crises.

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Conceptual and Methodological Challenges in the Study of Economic Crisis

The study of economic crisis is fraught with conceptual and methodologicalproblems. The most common drawback of such work is the tendency to define crisespre-operationally such that comparative research is problematic. Keeler (1993, 440),for instance, defines crises as a situation of large-scale public dissatisfaction or evenfear stemming from wide-ranging economic problems. Such a definition begs thequestion as to what qualifies as large-scale or wide-ranging. Likewise, prominentworks by Gourevitch (1986) and others offer compelling analyses of policyresponses to economic crises without providing clear-cut criteria to identify crisesor measure their relative severity.

The next most common shortcoming in the crisis literature is to conflateeconomic crises with annual economic performance. Przeworski, Alvarez, Cheibub,and Limongi (2000, 112), for instance, operationalize economic crises as averageGDP growth over a 3-year period. Similarly, Remmer (1991, 781) averages inflationand growth rates over the 2 years prior to elections, while Corrales (199798, 624)study of crisis provides data on annual GDP growth. Such approaches miss the factthat many economic crises last more than one, or two, or even 3 years, and perhapsmore importantly, fail to capture the singularly traumatic nature of crises. To explaintheir political determinants, it is necessary to focus analytically on crises as discreteevents by differentiating between crisis and non-crisis conditions, rather thaninferring the causes of crises from the determinants of economic performance moregenerally.

It is also important to recognize that all crises are not alike. Crisis episodes varydramatically in their depth and duration. Some nations slip into crisis and thenquickly restabilize, as with Bolivias hyperinflationary crisis in 1985, whereas othersremain mired in crisis for years at a time. Peru and Argentina in the 1980s and Brazilbefore 1994 are prominent examples of this latter pattern. Likewise, some nationsstabilize after a mild downturn, while others sink deeper into economic morass. Anypolitical explanation of crises must try to identify the factors associated with thisvariation in severity and duration.

Furthermore, crises not only vary in their intensity and duration, but also in theirtype. A crisis indicates that severe economic disequilibria exist, but thosedisequilibria can be manifested in many ways. Some crises are manifested inhyperinflation, for example, whereas others produce economic recession, and thetwo are not always closely related. The Phillips curve suggests that tradeoffs arecommon, at least in the short term. Governments may bear the risk of one type ofcrisis in hopes of evading or escaping the other. Different types of crises may thusoccur cyclically or independently rather than simultaneously, and these potentialtradeoffs create strong theoretical grounds for analyzing recessions and inflationarycrises separately.

A crucial question we explore is whether distinct types of crises have similar ordifferent political determinants. It is certainly plausible that some politicalconditionssay, a strong labor movement that opposes wage cuts, or a fragmentedand polarized party system that blocks the implementation of painful austeritymeasuresare more likely to engender a fiscal or inflationary crisis than arecession. As demonstrated by a body of literature that runs from Hibbs (1977) to

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Garrett (1998), governing parties respond to different socio-political constituenciesand adopt distinct policies. These policies may predispose governments to sometypes of economic crises as opposed to others. A leftist government, for example,that increases wages and prioritizes economic growth to generate employment forworking class constituencies may be less likely to experience recession, but morelikely to suffer an inflationary crisis. Conversely, a conservative government thatplaces a premium on price stability may tolerate the costs of a recession in order totemper inflationary pressures.

Finally, it is essential to disentangle economic crises from the adoption of marketreforms. The two phenomena are often conflated in the market reform literature, asresearchers widely agree that economic crises were a primary determinant of theshift toward market liberalism in the developing world in the late 20th century(Przeworski 1991). In Latin America and Africa, the collapse of ISI in the early1980s led to a lost decade in which nations struggled to implement varyingdegrees of the Washington Consensus of market reforms (Williamson 1990). Inthe former Eastern Bloc, the crisis of state planning forced a shift in the direction ofmarket reforms (Elster et al. 1998). More recently, some policy liberalization in EastAsia followed in the wake of the Asian financial crisis (Pempel 1999). In each case,economic hardship supposedly persuaded the public that reform was better than thestatus quo, while convincing politicians that reform was politically sellable. AsODonnell (1994: 175) explains the causal logic, After society touches bottom,draconian measures to control inflation and neoliberal restructuring efforts no longerconfront powerful blocking coalitions, making it easier for rulers to implementneeded reforms.

To test this hypothesized causal relationship between crisis and reform, it isessential to develop separate measures or indicators of the two variables. Theproblem, however, is that crisis and reform are sometimes conflated in the literature,such that the relationship between them becomes tautological and non-falsifiable.The adoption of economic reforms may be taken as evidence that a crisis exists,while poor performance that fails to trigger reform is presumed to fall short of acrisis. We know, however, that the timing and coherence of reforms vary widely.Some countries may adopt market reforms in the absence of a crisisdue to thediffusion of attractive policy models, for examplewhereas others may resistreforms even in the midst of a severe crisis. Brazil and Argentina, for example,suffered a series of multi-year crises before initiating market reforms, whileVenezuela backtracked on reform in the 1990s despite a steadily deepening crisis.Absent a measure that differentiates crises from reform, we cannot slice through thistheoretical dead-end and understand why nations experience crises of varying depthsand durations. Neither can we test whether crises give rise to reformsor, for thatmatter, whether a failure to reform is associated with the onset or deepening ofcrises.

To address these problems, we operationalize crises as a function of two crucialdimensions, namely depth and duration. Depth refers to the intensity of a crisis inany given year. Rather than operationalizing depth as a strict function of aggregateperformance, we measure crisis depth consistent with a strain of research ineconomics (Alesina and Perotti 1995; Kaminsky et al. 1998; Bussiere and Fratzscher2002) as negative deviations from the regional mean for the entire period under

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study. We augment and extend this approach by conducting a subsequent analysis ofthe duration of crisesa crucial step given the significant diversity in the length ofcrises across nations. Duration is measured as the number of continuous,uninterrupted years of crisis. By conducting two stages of analyses, we are able totest empirically whether crisis depth and duration are related to the same or differentpolitical conditions.

The Political Determinants of Economic Crisis

In developing nations, international factors often play a preponderant role intriggering economic crises. Rising global interest rates, recessions in major exportmarkets, declining commodity prices, or sudden capital outflows can generate severedisequilibria. Such international shocks, however, produce generalized effects thatinfluence economic performance across a broad range of developing countries. Tounderstand cross-national variation in crisis severity and duration, it is essential toexamine how domestic political and economic conditions mediate internationalshocks (Garrett and Lange 1995). In particular, domestic political factors mayinfluence how flexible and decisive governments are in responding to gatheringeconomic storm clouds. In economies plagued by inflationary or balance ofpayments pressures, such as those of Latin America in the aftermath of the early1980s debt crisis, stabilization nearly always entails a mix of fiscal, monetary, andexchange rate policies that are politically unpopular or riskyand political systemsare likely to vary in their ability to adopt such measures.

Building on existing literature, we expect the correlates of crisis to operate atthree levels of analysis from which we draw hypotheses. At the regime level ofanalysis, scholars suggest two reasons that rulers in new democracies mightconfront formidable obstacles to pursuing economic policies that would precludecrises. First, governments in new democracies are often supported by weakcoalitions and face exceptionally strong distributive pressures, both from groupsreentering the political arena after long periods of repression and fromestablished interests demanding reassurance (Haggard and Kaufman 1995:152). Since democracy is not the only game in town in these inexperienceddemocracies, and regime consolidation is likely to be a salient consideration,political actors are likely to adopt short time horizons and eschew unpopularpolicies that might provide long-term gains (Haggard and Kaufman 1995). Inresponding to the immediate-term interests of voters, whether they be for wageincreases or expansionary fiscal policy, such governments might be more likely topursue policies that set the stage for subsequent crises. Second, in youngdemocracies politicians might not have had the time to learn which institutionsand policies promote economic success. As Gerring et al. (2005) note, regime typeis often best considered as a stock variable, whereby the length of the historicalexperience with democracy informs investments in political (and other forms of)capital. According to Gerring et al. (2005: 329), political capital contributes toimproved economic performance via market-augmenting economic policies,political stability (understood as a reduction of uncertainty), rule of law, andefficient public bureaucracies. In the absence of these features, it seems

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reasonable that young democracies will be more prone to economic instability andcrises. These arguments lead to our first hypothesis:

H1: Economic crises will be more severe and prolonged under young democraticregimes than established democracies.

A second set of explanations for the differences across democracies is located atthe sub-regime level of analysis, specifically at the level of party systems. Thedominant perspective views party system fragmentation as an impediment toeconomic efficiency (Haggard and Kaufman 1995; Mainwaring 1999: 283321). Intwo-party systems, executives are more likely to possess a legislative majority tosupport reform measures. In fact, loyal partisan majorities in Latin Americalegislatures have sometimes granted executives special decree powers to enacteconomic reforms in contexts of crisis.

In contrast, fragmented party systems make it less likely that executives will havea legislative majority to support stabilization measures designed to avert or escape acrisis. Indeed, they increase the number of veto players who can block reforms(Tsebelis 1995), making it more likely that executive-legislative gridlock willproduce a policy stasis that precludes nimble responses to changing economiccircumstances. As Mainwaring states, presidents that lack a legislative majorityusually need to negotiate with Congress and state governments in order to obtainwhat they want, and these negotiations curb their ability to undertake reforms(1999: 288). A related line of analysis emphasizes the positive relationship betweenthe number of parties in the legislature and ideological polarization.1 Polarized partysystems are likely to contain parties that express staunch ideological opposition tostabilization measures and engage in bidding wars that amplify the distributionaldemands coming from anti-adjustment interest groups (Haggard and Kaufman1995: 171). Reforms are thus likely to elicit political dissent and social mobilization,undermining confidence in their political sustainability and shortening the timehorizons of political and economic actors. Consequently, party system fragmentationexacerbates the coordination and collective action problems that inevitably plaguechanges in economic policy (Geddes 1994: 118).

Against the linearly additive theorization of parties as veto players, however, arearguments emphasizing the benefits of veto players for investor confidence.Consistent with a long line of historical work on the advantages of checks andbalances, Nooruddin (2010), for instance, emphasizes that institutionalized gridlockreduces policy volatility and stabilizes the expectations of market participants.Though his particular emphasis is on economic growth writ large, there is no reasonto think Nooruddins argument could not apply to a broad swath of policy-makingarenas that bear on the propensity for crises. The overarching expectation accordingto this line of theorizing is that party system fragmentation will stabilizeexpectations, reduce policy volatility and thereby militate against economic crises.

MacIntyre (2001) presents yet another possibility. In his formulation, politicalsystems must thread the needle between excessive policy rigidity and volatility.While the former precludes necessary adjustments that might forestall or shorten

1 Given the high correlation between measures of party system fragmentation and ideological polarization,it is not possible to distinguish the impact of the two in our data.

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economic crises, the latter introduces uncertainty that can spook market participants.As he explains, The wider the dispersal of veto authority, the greater the risk ofpolicy rigidity; conversely, the tighter the concentration of veto authority, the greaterthe risk of policy volatility (MacIntyre 2001: 81). He thus theorizes a hump-shapedrelationship between veto players and the quality of policymaking, or a U-shapedrelationship between veto players and economic crises, with high and low numbersof veto players most susceptible to deep and long crises. Only between theseextremes will political institutions produce the right mix of policy flexibility andcommitment. Following MacIntyres logic, then, we test the following hypothesis:

H2: The severity and duration of economic crises will have a U-shapedrelationship with the effective number of political parties.

Other scholars suggest that the competitiveness of party systems can influence thetime horizons of incumbents, thereby affecting their willingness to implement costlyreforms. Some argue that dominant parties are more likely to make difficulteconomic choices because their electoral stranglehold assures incumbents that thepolitical costs will not force them from office (Callaghy 1991). Alternatively, anewer body of research underscores the advantages of electoral competition forreforms aimed at increasing economic efficiency. Geddes (1994: 18485) suggeststhat administrative reforms are easier to implement in a competitive electoralenvironment where the political costs can be evenly distributed between tworelatively equal parties. Alt, Lassen, and Skilling (2001) formalize a similarargument, claiming that in competitive contexts incumbents may forego budgetarycontrol in return for rules that restrain their opponents should they gain office in thefuture. Likewise, the out party (or parties) should favor rules encouraging fiscalrestraint, as deficits accrued by incumbents will limit the latitude of futuregovernments.

The benefits of electoral competition are two-fold. First, they allow for thesharing of the costs and benefits associated with policy reforms. Where the outcomeof future elections is uncertain, parties can unite behind reforms consistent with thepublic welfare, thereby splitting any electoral gains or losses. Hegemonic parties, onthe other hand, have to bear all the costs themselves, diminishing their incentives toreform. Second, in competitive contexts, out parties serve a crucial policing function.Understanding that any future government of their own would be constrained by aneconomic crisis induced by the in party, they are likely to oppose irresponsiblepolicies. Indeed, electoral competition itself can help discipline incumbents andpromote responsible policymaking, as the threat of future, retrospective vote lossesmay induce incumbents to avoid policies that promise short-term gains but increasethe risk of politically-costly crises down the road. Competition should, therefore,lengthen time horizons and promote policies that lower the probability of economiccrisis, whether this competition occurs in two-party or multi-party systems. Thesepropositions have received support in recent research on Latin America (Remmer1998) and the OECD (Alt et al. 2001), and at the state level in Mexico (Beer 2001)and Argentina (Remmer and Wibbels 2000). We thus test the following hypothesis:

H3: Economic crises will be more severe and prolonged in less competitiveelectoral environments.

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These party system characteristics are likely to be mediated by a sub-regimeinstitutional factor, namely executive power. In Latin America, where presidential-ism is the norm, researchers have noted that strong constitutional powers may allowpresidents to pursue crisis-avoiding policies in even the most inhospitable of partysystems and thus overcome executive-legislative gridlock (Haggard and Kaufman1995; Mainwaring and Shugart 1997). In such hyper-presidential systems,executives can initiate reforms by decree or override legislative opposition withvetoes. Extensive executive powers can forestall crises and facilitate reform for thesimple reason that presidents are the sole elected officials with national constitu-encies, and are thus more likely to emphasize macroeconomic stability overlegislators concerns with the distribution of particularistic benefits.2 Theseconsiderations result in the following hypothesis:

H4: Economic crises will be more severe and prolonged the weaker theconstitutional powers of chief executives.

A final explanation for crisis shifts attention away from formal politicalinstitutions to the organization of societal interests and party-society relations. Along tradition of research suggests that well organized social groups with divergentinterests can result in policy conflict and inertia (Fernandez and Rodrik 1991;Alesina and Drazen 1991; Tornell 1995). In such contexts, no single group canimpose its vision of economic policy on the rest of society. Because competingsocietal interests cannot find easy political targets upon which to externalize thecosts of reform, adjustments to negative shocks may be delayed. This war ofattrition among societal interests is resolved only when the strongest social group isable to withstand the costs of economic crisis better than its competitors and thusimpose its preferred policies on others.

In the period under study, profound social conflicts erupted in Latin Americawhen ISI ran up against global economic trends in the 1970s and 1980s. Thisdevelopment model, based on a distributive and protectionist state presiding over acoalition of import-competing elites, an organized working class, and the urbanmiddle classes, became increasingly tenuous as tensions between consumption andaccumulation threatened the peaceful cohabitation of coalition members. We suspectthat the more organized the societal support for ISI, the more difficult it was to breakwith this model and the deeper the crisis associated with the transition to marketliberalism.

In particular, Latin American scholarship has argued that strong, well-organizedlabor movements with deep roots in the ISI era and its highly protected labormarkets often perceived orthodox stabilization measures to be a threat to theirinterests (Murillo 2001). As a result, they pressured politicians to increase wages,control prices, and protect domestic industries. Such pressure has been particularlystrong when channeled through mass-based populist or leftist parties, producing apolicy dynamic that Dornbusch and Edwards (1991) have labeled the macroeco-

2 These arguments do not mean that executives from hegemonic parties should be more effective atavoiding crises than those from parties in more competitive party systems. The competitiveness of theparty systemthe independent variable in H3is different from the balance between executive andlegislative branches, which is the independent variable in H4.

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nomics of populism. Given the prevailing fiscal constraints, heterodox populistpolicies generated severe economic bottlenecks and inflationary pressures. Recentscholarship thus suggests that Latin American nations that developed strong labormovements and labor-mobilizing parties during the ISI era were especially prone toeconomic crises during the transition to free markets (Roberts 2002). UnlikeDornbusch and Edwards (1991), however, we do not blame left-labor alliances foreconomic crises; elite sectors that withhold investment or engage in capital flightsurely bear a significant part of the responsibility for Latin Americas economictravails. Our argument merely suggests that where populist or leftist partiesmobilized strong labor movements, the war of attrition was particularly acuteduring the transition to free markets, and the policy conflicts that resulted were morelikely to engender economic crises.3 Thus, we test the following hypotheses:

H5a: Economic crises will be more severe and prolonged the greater the strength oflabor-mobilizing populist or leftist parties.

H5b: Economic crises will be more severe and prolonged the greater the strengthof organized union movements.

H5c: Economic crises will be more severe and prolonged the greater the combinedstrength of left-labor alliances.

Finally, it is important to assess whether these hypothesized causal relationshipsinfluence some types of crises more than others, and whether their effect on depth isequivalent to that on duration. There are large literatures examining economicoutcomes in each policy sphere. Government partisanship, labor market institutions,and party system fragmentation, for instance, have been used to explain everythingfrom monetary policy to GDP growth to fiscal policy (Garrett 1998; Franzese 2002).Neither the political science nor economics literatures are sufficiently advanced toprovide strong a priori expectations about the differential impact of our causalvariables across distinct policy spheres. Nevertheless, the links between politics andeconomic crises outlined above all run through policies. That the case, the impact ofeach of the hypothesized mechanisms ought to be strongest on crises that are mostclearly tied to policies.

Our three types of crisesfiscal, inflationary, and GDPvary substantially inhow responsive they are to government policy. Least responsive is economic growth;indeed, Easterly (2005) finds a most tenuous link between policies and economicperformance. This weak link seems to result from the fact that growth is a complexphenomenon influenced by policymakers as well as domestic and internationalmarket participants. Monetary policy outcomes, on the other hand, are more tightlycontrolled by policymakers. While price increases are certainly impacted by theexpectations of market participants and inertial inflation can occasionally set in evenwithout extensive monetary growth, one of the most important factors influencinginflation rates is the growth of the money supply. Politicians and central bankershave a great deal of leeway in determining the growth of the money supply. Even in

3 Where strong left-labor blocs existed in the 1980s and 1990s, they generally were forged during the ISIera in the mid-20th century. As such, there is little reason to suspect endogeneity problems with ourmeasures of ideological polarization and union strength. Our party system and ideology variables reflectnational patterns that were usually well established at the onset of our period of analysis rather thanepiphenomena of the crises we are explaining.

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the case of inflation, however, price levels are profoundly influenced by dynamics inthe international economy, particularly in small, open economies like many of thosein Latin America. In contrast, fiscal deficits are most directly attributable togovernment policies. Governments are able to make choices about tax rates, taxeffort, expenditure policies, and debt management. Obviously, the behavior ofmarket participants matters, particularly those in the financial sector who assesscredit worthiness, but the outcomes those market participants key on are often afunction of policy as well (Mosley 2003). Politics should therefore have the largestimpact on fiscal crises, then inflationary crises, and least so on growth crises. Thus,all of the hypotheses, whether they bear on political institutions (such as executivepower) or social conflict (as with left-labor power) should thus have their largesteffect running from fiscal crises to inflationary crises to GDP crises.

The relationship between policy and outcomes aside, there are theoretical groundsfor expecting some political factors to have an asymmetric impact on the depth andduration of different crises. First, as broad indicators of the intensity of distributionalconflicts, left-labor strength should have its strongest effect on crises with theclearest distributional implicationsnamely, inflationary crises. As extensiveresearch shows, inflation has its most profound consequences for the poor, whohave little savings and operate almost entirely in cash. In contrast, the wealthy oftenhave multiple means of hedging against crises, be that through asset diversificationor capital flight. Second, while the onset of crises is likely to reflect acutedistributional conflicts and structural conditions such as left-labor strength and theage of a democratic regime, the capacity of political systems to address crises oncethey develop will be heavily conditioned by political institutions. Thus, ourinstitutional indicators should have a greater impact on crisis duration than theonset and severity of crises.

Research Design

To test these propositions, we gathered data on 17 Latin American nations between1980 and 2006.4 We address three kinds of crises in our analysis: inflationary, GDPgrowth, and fiscal deficit crises. We study inflationary crises as much researchsuggests that hyperinflation defined the policy upheavals of the late ISI period(Remmer 1990) and facilitated the imposition of stabilization programs (Weyland2002). We explore GDP or recessionary crises, as GDP growth provides a powerfulmeasure of the state of the economy as a whole and has a major impact on electoraloutcomes. Finally, we analyze fiscal crises, as Tornell (1995) and others suggest thatrevenue shortfalls constrain the ability of governments to subsidize coalitionalcohabitation equilibria, leaving interest groups to compete over scarce resources.We leave aside banking and currency crises, both of which economists have studiedin some detail. It is also worth noting that the political salience of financial crises istypically mediated by their impact on the real economy, which we study here.

4 The nations included in the analysis are Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica,Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Paraguay, Peru, Uruguay, andVenezuela.

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Contrary to most previous empirical research in political science, which hasmeasured crises using indicators of performance, our measures are devised tocapture the singularly traumatic nature of crises and their duration. Unfortunately,while there is a large economics literature designed to predict the likelihood of crises(and currency crises in particular), there is no standard measure of crises (Milesi-Ferretti and Razin 1998; Sachs et al. 1996; Berg and Pattillo 1999; Bussiere andFratzscher 2002; Frankel and Rose 1996). Two general approaches dominate currentpractice. The first involves the measurement of national performance against samplecharacteristics such as how other nations perform (Sachs et al. 1996; Alesina andPerotti 1995). The second approach involves measurements from each nations trendor mean performance on a variable of interest (Berg and Pattillo 1999; Bussiere andFratzscher 2002). Each approach has benefits. While the former emphasizes cross-country differences in crisis propensity (i.e., identifying the factors that cause somenations to be more crisis prone than others), the latter permits analysis of intra-country dynamics through time (i.e., why a particular nation suffers sharp cyclicalturns through time). Given that many of the independent variables we are interestedin are systemic in nature and vary relatively little over time in any individual case,we have chosen to focus on the former approach. 5

To ensure that we are capturing crises rather than business as usual we measurecrises as deviations from the regional mean performance for the entire period understudy.6 When performance is more than one standard deviation worse than the mean,we code the country as experiencing a crisis.7 An example should help clarify thisoperationalization. The average annual fiscal performance for our entire sample is2.7% of GDP, with a standard deviation of 3.7. Thus, all years in which a countrysfiscal performance is better than 6.4 (2.73.7) receive a 0that country-year isnot in crisis. Deficits worse than 6.4% of GDP, however, receive a 1. Using thismeasure, 13% of country-years experience GDP crises, 11% experience inflationarycrises, and 11% experience fiscal crises. It is telling that the correlations between thethree types of crises are quite low, indicating that they are not closely related to eachother. The closest correlation is between growth and inflation crises, which arecorrelated at .26, clearly indicating that there is no strict Phillips curve tradeoffbetween the two types of crises in Latin Amerca. It is also the case that countriesprone to some types of crises avoid others. Honduras, for example, had a protracted

5 Both approaches have drawbacks. In the case of measurements from sample averages, country-specificcrises might be lost. Thus, 8% inflation in the U.S. would not appear as a crisis if it were being measuredagainst a regional average for the western hemisphere, despite the fact that it would certainly be perceivedas a crisis domestically. A measure from nation-specific averages solves this problem, but it createsanother-nations with consistently strong economic performance can appear to be in a crisis with even verymild deteriorations on economic indicators. In our dataset, for instance, Chile has an average fiscal balanceof +1.6 (or a surplus of 1.6% of GDP) and relatively little volatility in fiscal policy. As a result, using anation-specific cutoff for crises results in Chile entering fiscal crises with a modest deficit of 1.4%.Measured against the regional average for all years of 2.3%, however, underscores that by regionalstandards Chile at its worst is an enviable performer, rather than a country in crisis. If the U.S. case aboveis indicative of a problem, so is the Chilean example.6 This is the approach used by Alesina and Perotti (1995) and Sachs, Tornell, and Velasco (1996).7 As Berg and Pattillo (1999) note, there is no obvious threshold for identifying the onset of a crisis.Indeed, in the existing literature the cutoff varies widely with the distribution of the specific data underconsideration, as highly volatile data require a larger standard deviation cutoff. It is also important that theoperationalization produce a reasonable number of crisis-years.

394 St Comp Int Dev (2010) 45:383409

fiscal crisis in the 1980s but neither inflationary nor growth crises comparable tothose of a nation like Peru. In short, there are different kinds of economic crises, andcountries predisposed to one type need not be predisposed to others.

Because we are also interested in how politics conditions the capacity of countriesto emerge from crises, we subsequently test a second set of models for crisisduration. The crisis duration variable is a simple count of the number of consecutiveyears a nation has been in crisis.8 Countries receive a duration score of 1 for the firstyear of a crisis. With each additional, uninterrupted year of crisis, the duration scoreincreases by one. The duration of crises in our sample ranges from 0 to 15 years. Thelongest running crisis is Brazils inflationary run from 1980 to 1994. On average,GDP crises are shorter lived (1.5 years) than fiscal crises (3.4 years) which, in turn,are shorter lived than inflationary crises (nearly 5 years). It is also worth noting thatthe depth and duration of crises are distinct phenomena. While some countries haveexperienced particularly deep crises, they are not necessarily the same ones that havesuffered through long crises. In the early 1980s, for instance, Chile experienced oneof the worst growth crises in the region, but it lasted for only 2 yearsquite modestby comparative standards.

This dual approach of measuring crisis events and crisis duration has severaladvantages over indicators of annual performance. First, by introducing a durationcomponent, this approach captures the temporal dynamic that is largely ignored byprevious large-n research, despite evidence that the cumulative weight of ongoingcrises eventually fostered economic reform in countries like Peru and Brazil. Byexamining both crisis duration and severity, we can assess the factors that preventnations from extricating themselves from crises, as well as those that cause nationsto plunge into crises. Second, our dichotomous measure of crisis events distinguishesbetween routine weak performance and a traumatic crisis that is likely to threatenestablished policies and political coalitions. Since we are not interested in normalcyclical fluctuations in economic performance, this measure disregards relativelyminor economic downturns. Third, by measuring crises as deviation from the meanfor the region as a whole, the indicator applies a standard baseline to all nations,enhancing cross-national comparability. It is again worth emphasizing, however, thatour results speak less to through-time, within-country variation in economicperformance than they do to the cross-national propensity for crises.

Our hypotheses on the correlates of crises are operationalized as follows.Hypothesis 1 on the crisis proclivity of new democracies is operationalized using theage in years of a democratic regime since the most recent transition fromauthoritarianism.9 We expect this variable to have a negative effect on crisis eventsand duration. Hypothesis 2 on the relationship between party system fragmentationand crisis is measured as the probability that two deputies picked at random from thelegislature will be of different parties; the variable ranges from 0 to .93 in oursample.10 To test the notion that fragmentation has a non-linear relationship with

8 A preferable approach would be to estimate a survival model for the death of crises. Unfortunately, therelatively small number of discrete crises makes this untenable. Our own efforts to estimate such modelsproduced very fragile results.9 We use Politys durable variable. Note that including instead a measure of the accumulated years ofdemocracy over the 20th century yielded insignificant results.10 Data is taken from the World Banks Database of Political Institutions (Beck et al. 2001).

St Comp Int Dev (2010) 45:383409 395395

crises, we also include a squared term of the fragmentation measure. We expectfragmented party systems to be more crisis-prone, producing a positive coefficient,but it might be that intermediate levels of fragmentation will provide the bestprotection against crisis, in which case the coefficient on the fractionalization termwill be negative and positive on the squared term. Hypothesis 3 on the advantages ofcompetitive party systems is operationalized by subtracting the runner-ups seatshare in congressional elections from the winners. As the electoral environmentbecomes more competitive, the value shrinks, so we expect a negative coefficient onthe variable reflecting the expectation that more competitive environments should beless crisis-prone.

For hypothesis 4 on the impact of executive strength we use Mainwaring andShugarts (1997: 49) ordinal scale for the legislative powers of the chief executive.The scale measures an executives constitutional powers to veto legislation, overridevetoes, issue decrees, and exclusively introduce legislation in particular policydomains. Since a score of 1 represents the lowest executive power and 4 the highest,we expect the indicator to have a negative coefficient. The final hypotheses on theimpact of leftist parties and labor unions are measured as the share of votes capturedby parties of the left, the percent of the population that is unionized, and aninteraction between the two.11

Generically, the model can be stated as:

CRISISit X

bjAGEjit X

bkINSTITUTIONSkit X

blLEFT=LABORlit

X

bmWORLDGROWTHmt

where CRISIS is the indicator of either the existence or duration of economic crises,the j AGE variable represents the age of the democratic regime, the vector of kINSTITUTIONS variables represents the number of legislative parties, thecompetitiveness of the electoral arena, and the formal powers of the executive, theLEFT-LABOR variables measure the organizational and electoral strength of laborand leftist groups, and m World Growth is an indicator of the world growth rate. Theindicator of world growth rate provides a measure of control for the effects ofinternational influences; inclusion of changes in a countrys terms of trade has noeffect on the results, so the variable is excluded. The s are parameter estimates andthe subscripts i and t denote the country and year of the observations, respectively.Since some of our independent variables vary little over time (executive strength, forinstance) and some countries do not experience some types of crises, we excludecountry dummies. Because a time trend is highly correlated with some of the

11 There is no single authoritative source that provides consistent and reliable estimates of trade union densityover time across our cases. Through extensive cross-checking of national and international sources we haveconstructed a time-series by obtaining unionization figures at the beginning, mid-point, and end of the timeperiod and interpolating scores to fill the gaps. Union density scores at the beginning of the 1980s are from theU.S. Department of Labors Country Labor Profile series and Kurian (1982). For the mid-1980s and 1990swe relied on data provided by the International Labour Organization (1997), with supplementation fromGreenfield and Maram (1987), Harper (1987), Upham (1996), McGuire (1997: 268), and Godio, Palomino,and Wachendorfer (1988: 8788). For the 2000s we drew estimates from the U.S. Department of StatesCountry Reports on Human Rights Practices. To measure the strength of leftist parties in legislativeelections, we combined the seat shares of the center-left and leftist parties in each country as identified byCoppedge (1997) and the World Banks Database of Political Institutions (Beck et al. 2001).

396 St Comp Int Dev (2010) 45:383409

institutional indicators, we also exclude it.12 Finally, since we find evidence of animportant interaction between the electoral strength of the left and the extent ofunion organization only in the models for inflationary crises, we exclude theinteraction term from the other models. The sample includes all country-years for 17Latin American nations between 1980 and 2006; the results are quite consistent tothe exclusion of authoritarian country-years.13 We estimate the crisis event modelsusing cross-sectional time-series logit analysis and the duration models using cross-sectional time-series poisson models.14 In the duration models, we include a controlfor the depth of the initial year of the crisis with the expectation that deep initialcrises will last longer.

Results and Discussion

For the sake of comparison, Table 1 displays the results for simple cross-sectionaltime-series models of economic performance rather than crises, where performanceis simply measured as annual performance on each of the economic dependentvariables. The most important observation to make about these results is that withthe exception of the inflation model, very few of the political indicators have asignificant relationship with performance. This finding is broadly consistent with thework of Easterly (2005) and others showing that policies have a limited effect onyear-on-year economic performance. That the factors conditioning ups and downs inthe business cycle are quite different than those impacting the propensity for crisisevents becomes immediately clear when comparing these results to those in Table 2.

The results for our models of three types of crisis events appear in Table 2. Whencomparing these results with those in Table 1, the most striking observation is thatpolitics play a much stronger role in producing crises than they do in year-to-yearperformance. As expected, it is also the case that politics seems to have a moresignificant effect on the probability of inflationary and fiscal crises than on growthcrises.

The most consistent predictors of crises are the indicators of the strength of theelectoral left and labor unions. Given the difficulty of interpreting these coefficients,Table 3 presents the predicted probability of a crisis in an otherwise average countrywhen measures on the significant variables move from low (one standard deviationbelow their average) to high (one standard deviation above the average). Thesesimulations show that shifting from low levels of left electoral support to highincreases the predicted probability of a growth crisis from 11% to 19% and increases

12 A time trend is correlated with party system fractionalization at .47, fractionalization squared at .47,political competition at .48 and executive constraints at .43.13 The only changes are that the left vote variable fails to achieve significant in the inflation crisis modeland the squared party fractionalization measure fails to achieve significance in the fiscal crisis model.14 We estimate the models in Stata 10. See footnote 9 on the benefits, but infeasibility, of estimatingsurvival models for crises. One concern is how to deal with the temporal dependence in the data. Giventhat many of our independent variables change little over the course of the study, it is not obvious thatincluding the lagged dependent variable is appropriate. Nevertheless, we estimated the models reported inTable 2 including a lagged dependent variable. The results were robust for both the growth and inflationmodels. The results for the fiscal crisis model did change, however, with the party system characteristicsfalling below traditional measures of significance.

St Comp Int Dev (2010) 45:383409 397397

the predicted probability of a fiscal crisis from 6% to 14%. Union strength has aneven larger effect on predicted growth crises, increasing the probability of such anevent from 1% to 18%.

Because the effect of union strength and the vote share of the left are conditionalon each other in the model for inflationary crises, Figure 1 plots the conditionalprobability of an inflationary crisis across levels of left strength and low and highlevels of unionization. The results provide evidence of a fascinating dynamicwhereby the electoral strength of the left increases the probability of an inflationary

Table 1 Economic performance, 19802006

GDP growth Logged inflation Fiscal performance

Democratic Age .014 (.013) .010*** (.004) .009 (.015)Electoral Competitiveness .009 (.010) .002 (.002) .015 (.010)Party Fractionalization 7.215 (9.906) 5.374** (2.509) 6.304 (10.069)Party Fractionalization^2 1.456 (3.335) 1.882** (.893) 2.459 (3.524)Executive Power .098 (.200) .022 (.041) 2.33 (.157)Left Vote .009 (.015) .019** (.009) .007 (.013)Union Strength .058 (.049) .066*** (.016) .070* (.038)Left*Union .001* (.001)World Growth .762*** (.320) .019 (.037) .137 (.158)

N= 453 453 431

R2 .06 .30 .05

Models are estimated with panel corrected standard errors with an AR1 correction. Entries areunstandardized beta coefficients with panel corrected standard errors in parentheses

*=significant at .10; **=significant at .05; ***=significant at .01

Table 2 Crisis events, 19802006

Growth Crisis Inflation Crisis Fiscal Crisis

Democratic Age .011 (.010) .215** (.090) .110*** (.038)Electoral Competitiveness .002 (.007) .014 (.015) .017* (.010)Party Fractionalization 6.578 (6.841) 80.696*** (20.392) 17.269 (10.069)

Party Fractionalization^2 2.972 (2.418) 27.188*** (6.951) 8.430* (4.825)Executive Power .073 (.114) .163 (.234) .405** (.173)Left Vote .017** (.008) .272*** (.067) .037** (.018)

Union Strength .053*** (.018) .641*** (.126) .051 (.048)

Left*Union .017*** (.004)World Growth .350*** (.130) .268 (.270) .020 (.180)N= 453 453 453

Crises are scored as 1 when performance is more than one standard deviation worse than the regionalaverage. Models are estimated using logit analysis. Entries are unstandardized coefficients with standarderrors in parentheses

*=significant at .10; **=significant at .05; ***=significant at .01

398 St Comp Int Dev (2010) 45:383409

crisis only when unions are weak. One case in our data that illustrates this dynamicis Peru, which suffered a prolonged hyperinflationary crisis in the late 1980s whencenter-left and leftist parties were electorally powerful but their labor union base hadbeen seriously weakened by a decade of economic decline. In contrast, theprobability of a crisis declines when a powerful electoral left has close ties tostrong labor unions that are able to moderate workers demands and institutionalizebargaining over distributive issues. A quintessential case of this dynamic in our datais Venezuela, which has a history of moderate left-wing parties (pre-Chvez),relatively strong unions, and comparatively restrained monetary policy. A relatedstory can be told temporally in Argentina, where inflationary crises have notoccurred when the labor-based Peronists have been at their strongest; in contrast, thecountrys most serious inflationary crises occurred when the Peronists wereelectorally weak and out of power.

This overall finding is broadly consistent with a long line of work on corporatistinstitutions in the OECD, which suggests that the combination of a strong electoral leftand a powerful union movement allows policymakers to negotiate pacts between capitaland labor on wages, investment, and employment that can temper distributive conflictsand foster good economic outcomes; in contrast, the presence of one in the absence of

Table 3 Predicted probability of crisis events

Growth crisis

Low high

Left Vote 0.11 0.19

Union Strength 0.1 0.18

World Growth 0.19 0.1

Inflationary Crisis

Low High

Democratic Age 0.22 0.03

Party Frac see Fig. 2

Party Frac*2

Left Vote see Fig. 1

Union Strength

Left*Union

Fiscal Crisis

Low High

Democratic Age 0.15 0.01

Political Competition 0.1 0.05

Party Frac See Fig. 3

Party Frac*2

Exec Power 0.08 0.16

Left Vote 0.06 0.14

The table presents the predicted probability when measures on the significant variables on the left are setat one standard deviation below their means (Low) and one standard deviation above their means(High) and all other variables in the Model are held at their mean. These results are simulated on thebasis of the models reported in Table 2

St Comp Int Dev (2010) 45:383409 399399

the other can exacerbate distributive conflicts and produce poor economic outcomes(Garrett 1998). In particular, this literature stresses the importance of strong left-laborblocs and corporatist bargaining in moderating labor militancy and encouraging wagerestraint, thus dampening the wage component of inflationary pressures. Notsurprisingly, then, our results suggest that strong left-labor blocs help guard againstinflationary crises, but do not influence the likelihood of other types of crises.

After left-labor strength, the most consistent political factor affecting crises is theage of the democratic regime, which has a significant, negative relationship withinflationary and fiscal crises. As the age of the democratic regime goes from low(0 years) to high (38 years), the predicted probability of an inflationary crisis goesfrom 22% to 3% and the predicted probability of a fiscal crisis goes from 15% to 1%.These are powerful effects that underscore the arguments of Gerring et al. (2005) andothers about the extent of political learning that takes places as regimes mature.

Regime type aside, the findings on electoral and party systems are weak orcontrary to expectations. The extent of political competition has no significantrelationship with growth or inflationary crises, though it does have a small affect onthe predicted probability of a fiscal crisis. As shown in Table 3, as the gap betweenthe vote shares of the top two parties goes from low (1%) to high (57%), thelikelihood of a fiscal crisis rises from 1% to 5%. Similarly, the indicator forexecutive strength only has a statistically significant relationship with fiscal crises,albeit in a manner contrary to expectations. Increasing the power of the chiefexecutive from low to high increases the predicted probability of a fiscal crisis from8% to 16%.15 These results suggest that the checks and balances associated with

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

1 2 3 4 5 6

Party FractionalizationFig. 1 Conditional probability of inflationary crises at varying levels of left and union strength

15 Unreported versions of our models that include a dummy variable indicating whether the executivesparty has a legislative majority (data from the World Banks Database of Political Institutions) andinteractions between it and the indicator for the power of the chief executive do not alter the resultsreported here. In the 9 resulting models (three crises types * three separate interactive specifications), theindicator for presidential majority and/or the interaction term with the institutional indicators do notachieve significance in any cases.

400 St Comp Int Dev (2010) 45:383409

electoral competition and strong legislatures, rather than power concentrated indominant parties or executives, provide safeguards against fiscal crises.

Party system fractionalization has a significant effect on inflationary and fiscalcrises. Given that any change in the fractionalization measure also impacts itssquare term, Figs. 2 and 3 simulate the predicted probability of inflationary andfiscal crises across the range of scores on fractionalization. Turning first toinflationary crises, the results run contrary to expectations. Not only does thetypical account whereby party fractionalization makes crisis more likely not hold,but neither does MacIntyres theorization of a U-shaped relationship betweenfractionalization and outcomes. Indeed, quite the opposite seems to holdthepredicted probability of inflationary crises are lowest at the extremes and highest atintermediary levels. This might be consistent with some functionalist interpretationsof institutions, whereby institutions (in this case independent central banks) are morelikely to appear the more dramatic their need, but considerably more work isnecessary to make this anything more than a conjecture.16 A different pictureemerges in Fig. 3, which shows that the predicted probability of fiscal crises fallsrapidly with party system fractionalization. This finding comes closer to reflectingNooruddins (2010) suggestion that institutionalized gridlock reduces policyvolatility and mistakes than the more conventional veto player analysis ofinstitutional obstacles to policy reform. In short, rather than blocking economicadjustment, fragmented party systems may impede the adoption of risky policies thatcould trigger crisis episodes.

Finally, consistent with research on the association between business cycles inwealthy and developing nations (Agenor et al. 2000), strong global growthreduces the likelihood of GDP crises. A shift from low to high global growthreduces the predicted probability of a growth crisis from 19% to 10%. On the otherhand, global economic conditions appear to be unassociated with inflationary andfiscal crises.

It is also instructive that with the exception of the findings on leftist andunion strength, the political determinants are not entirely consistent across thethree types of crisis. Thus, all crises are not created equally, even if they sharecommon roots in the distributional conflicts arising from partisan and socio-political blocs. Interestingly, the only other variable to achieve significance in atheoretically consistent manner across more than one model is the age of thedemocratic regime, an institutional variable that falls outside of muchcontemporary thinking on institutions.17 The only other theoretically coherentfinding when one looks across crises is that, as expected, executive strength has itsclearest impact on the outcome most directly linked to government policy, namelyfiscal deficits.

Turning to the duration models, Table 4 presents the results of pooled time-seriespoisson regressions where the dependent variable is a count of the number of

16 Alt, Lassen, and Skilling (2001) find that highly competitive electoral environments are more likely togenerate the fiscal institutions that check the autonomy of policymakers and reduce deficits. Here we aresuggesting that the same effect might be produced in fragmented party environments.17 To be clear, regime type is studied commonly enough in the institutionalist literature, but regime age isnot.

St Comp Int Dev (2010) 45:383409 401401

continuous years of crisis.18 The table entries are incidence-rate ratios. Ratios lessthan 1 reflect a negative effect of the variable of interest; ratios above 1 reflectpositive effects. Three general observations are in order. First, in comparison withthe results reported in Table 2, our political variables provide less insight into thefactors that lengthen crises than the emergence of a crisis in the first place. Fewer ofthe political variables achieve statistical significance, and as will be seen below,when they are significant, their effects are less profound than in the crisis eventmodels.

Second, as with crisis events, strong left parties and union movements have themost consistent impact on crisis duration. Looking first at the duration of fiscalcrises, a 1% increase in the lefts vote share decreases the length of fiscal crises byabout 2%. Put differently, going from a weak left to a strong left reduces thepredicted length of a fiscal crisis by about 9 months. A similar effect is predicted byraising union strength from low to high. This finding suggests an interestingasymmetry between the causes and length of crises. While powerful lefts seem tomake fiscal crises more likely (see Table 2), they also contribute to shorter crises.Turning to the duration of inflationary crises, we find evidence of similar interactiveeffects as discovered above. Again, the interaction term complicates the interpreta-tion of the findings, but by generating predicted duration counts, it becomes clearthat increasing the electoral strength of the left serves to lengthen inflationary crises,

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0 15 30 45 60 75

Left Vote

Low Unionization High UnionizationFig. 2 Predicted probability of inflationary crisis at varying levels of party system fractionlization

18 This approaching to counting crisis years and estimating poisson regressions is less than ideal. We areclearly violating the assumption that any particular years count is independent of the previous years. Seefootnote 10, however, on why survival analysis is not an option for our data despite being moreappropriate for this kind of problem. As an alternative, we did estimate models using ordered logit. Theresults for the inflation and growth models produced very similar results, with only the union variablemoving from marginally significant to significant at 10%. There are larger differences in the model offiscal crisis duration, in which several of the institutional indicators do achieve significance in a mannerconsistent with the hypothesized relationships. We have chosen to present the more conservative resultshere.

402 St Comp Int Dev (2010) 45:383409

but only at low levels of unionization. When unions are weak, increasing theelectoral strength of the left from 0 to .7 increases the predicted length of a crisis by1.9 years. In contrast, a stronger left has a modifying effect on the length of criseswhen unions are strong. The same increase in the electoral strength noted aboveserves to reduce the predicted length of crises by about 3 months.

Third, the institutional indicators provided limited insight into the duration ofcrises. At the regime level, the length of the democratic regime has no significanteffect in any of the duration models. The same applies to our measures of electoral

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

1 2 3 4 5 6

Party System FractionalizationFig. 3 Predicted probability of fiscal crises at varying levels of party system fractionalization

Table 4 Crisis duration

Growth crisis duration Inflation crisis duration Fiscal crisis duration

Democratic Age .987 (.013) .996 (.020) 1.021 (.032)

Electoral Competitiveness .991 (.007) 1.005 (.004) 1.000 (.003)

Party Fractionalization 235** (168) .161 (.766) 111 (111)

Party Fractionalization^2 .007* (.018) 5.299 (8.243) .007 (.026)

Executive Power .879 (.086) 1.084 (.078) 1.081 (.086)

Left Vote 1.016 (.012) 1.035*** (.014) .980* (.011)

Union Strength 1.000 (.020) 1.031 (.033) .952* (.027)

Left*Union .998** (.001)

Depth of Crisis .635*** (.033) 10.298** (10.139) .417*** (.054)

World Growth .844 (.092) 1.071 (.090) 1.267*** (.097)

N= 453 453 453

The dependent variable is a count variable of the number of continuous years of crises. Models areestimated using poisson regression. Entries are exponentiated coefficients, or incidence-rate ratios

*=significant at .10; **=significant at .05; ***=significant at .01

St Comp Int Dev (2010) 45:383409 403403

competitiveness and executive power. The only institutional variable to have asignificant effect is party system fractionalization in the growth duration model.Again calculating predicted crisis years, the results provide additional support forNooruddins (2010) conceptualization of veto players. While moving from afractionalization score of 0 to 0.2 increases the predicted length of a growth crisisby three-fourth of a year, moving from a fractionalization score of 0.8 to 1.0decreases the predicted length by three-fourth of a year. In short, crises are predictedto be shorter as party system fractionalization increases. As with the results inTable 2, it is important to look across the different types of crises to appreciate thediverse covariates associated with their duration. Again, the stronger findings withrespect to inflation suggest that much theory building has either implicitly orexplicitly placed the regions hyperinflationary episodes at the center of analysis.

Overall, these findings indicate that economic crises take a number of differentforms, and scholars should appreciate their distinct political correlates. Similarly, it isimportant to recognize that crisis depth and duration are analytically distinctconcepts, and the political factors that cause severe crises are not always the same asthose that prolong them. Theoretical explanations need to take these subtleties intoaccount. Indeed, our results suggest that existing theories of the political conditionsthat enable states to implement market reforms and avert or escape from economiccrises are in need of revision. Many widely hypothesized factors are insignificant orinconsistent determinants of crisis proclivity, while other variables behave in acontra-theorized manner. In particular, the finding that party system fractionalizationdecreases the incidence and duration of crises indicates that a factor often assumed toexacerbate crises may instead prevent policy volatility. More generally, party systemand institutional variables alone provide less explanatory leverage than the nature ofdistributional conflicts and their degree of organization in the political sphere.

Conclusions

Although scholars widely recognize that economic crises have enormous conse-quences, their political correlates are not well explained by existing theories. Muchof the conventional wisdom does not stand up, at least in this sample of LatinAmerican countries and using our approaches to measurement and model estimation.Aside from the finding that established democracies are less likely than newdemocracies to experience severe inflationary and fiscal crises, the findings oninstitutions are either null or contrary to standard expectations. Party systemfragmentation is related to several types of crises, but the effects are generallynegative rather than positive. The competitiveness of electoral environments has noeffects on the occurrence or length of growth or inflationary crises, and only amodest effect on the occurrence of fiscal crises. Likewise, strong executives havevery limited effects in our models; indeed, executive strength is only associated witha higher probability of fiscal crises. Since institutional variables exert a greater effecton crisis occurrence than duration, they appear to be more important for avoidingcrises in the first place than helping nations escape them once theyve occurred.

It is only when institutions are placed in their social environs that we findconsistent results. The social foundations of party systems, in particular the manner

404 St Comp Int Dev (2010) 45:383409

in which parties organize social cleavages and distributional conflicts, prove to bepowerful predictors of the occurrence and duration of most types of economic crisis.More than a party systems organization or balance of power, what seems to matteris the nature of party-society linkagesin particular, the extent to which there existsa powerful populist or leftist party and/or densely-organized labor movements.Economic crises in Latin America during the transition from ISI to market liberalismwere concentrated in political systems that contained powerful leftist parties or, lessconsistently, strong labor movements. We also find, however, that the combinationof strong leftist parties and union movements serves to reduce the probability ofinflationary crises and shorten the length of such crises when they occur. Thus, theoverarching finding is that strong leftist parties are correlated with crises of varioustypes independent of unions, but that they serve to moderate the propensity forinflationary crises when they are combined with strong unions. Consistent withresearch on the former Soviet Union and Eastern Europe which emphasizes theimportance of historical legacies over purely institutional factors in shaping marketreforms (Woodruff 2000), our findings suggest that party-society linkages and theorganization of distributional conflicts during the ISI era cast a long shadow overeconomic performance during the tumultuous transition to free markets in the 1980sand 1990s.

Our tests provide evidence that the Latin American experience diverges somewhatfrom that of Western Europe. In Western Europe, Garrett (1998) suggests that twocoherent political economy models can yield effective economic performance, thefirst being a social democratic-corporatist model with strong labor-backed partiesand union movements, and the second being a liberal market model characterized bystrong conservative parties and weak labor movements. In Latin America, however,strong labor movements and labor-backed political parties have generally not beenassociated with neocorporatist class compromises that facilitate wage restraint,business investment, and economic stability. We find evidence of such coordinationonly with regards to inflationary crises. When it comes to other crises, however,powerful leftist parties are associated with a higher propensity for crises irrespectiveof union strength. Countries with conservative party dominance and weak laborunions, in general, were less susceptible to economic crises during the period studiedhere.

During Latin Americas ISI era, the rise of a mass-based populist or leftist partywith close ties to powerful labor movements reconfigured party systems in some (butnot all) nations. Strong ISI coalitions in these nations generated resistance toorthodox stabilization programs that would impose economic hardships on workersand other popular sectors, and they increased pressures to respond to the debt crisiswith heterodox measures. In the unforgiving economic environment at the close ofthe ISI era, however, capital accumulation became more dependent on integrationinto global markets, and delayed adjustment became a recipe for deepening crisis.Although we find some evidence that the joint presence of strong leftist parties andlabor movements can induce political coordination to avert inflationary crises, themore general pattern appeared to be one of a war of attrition between businessinterests and leftist or labor blocs. Often, distributive conflicts over the costs ofadjustment led to political paralysis until recession and hyperinflation decimated theorganizational bases of popular sectors and facilitated a shift to market liberalism.

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Far more than a simple crisis in a mode of economic development, the demise of ISIconstituted a crisis in a broader socio-political matrix with its characteristic patternsof social organization and political representation. In contrast, nations that retainedmore elite-based party systems and weaker labor movements during the ISI era hadless formidable ISI coalitions, and they typically made the transition to marketliberalism with less economic trauma. Explaining this divergence from the Europeanpattern is a potentially fruitful line of research in contemporary Latin Americanpolitical economy, whether it is due to the economic fragilities of dependenteconomies, the diminished opportunities for market governance in an era ofeconomic globalization, the zero-sum logic of sociopolitical conflict in contexts ofsevere structural inequalities, or the limited capacity of Latin Americas labor marketinstitutions to encompass the workforce.

Our findings also suggest that the concept of economic crisis needs to bedisaggregated and reformulated. In Latin America, economic crises have beendifferentiated not only by their depth and duration, but also by their type. It would beshocking if this werent the case around the world. Likewise, different types ofeconomic crises are likely to produce disparate policy consequences. Economiccrises are not one-size-fits-all phenomena, and future research on their causes andconsequences should take note of the typological distinctions within the genus.

Finally, our research suggests several avenues for future work. One obvious placeto start would be to push the theoretical link between politics and different types ofcrises. Economics has relatively well developed, distinct literatures on inflation,growth, and fiscal policy, but there is less work specifically on the politics of each ofthese policy spheres. Consistent with our recommendation that political scientiststake a more nuanced approach to crises, it would be worth developing more detailedtheoretical accounts of how politics affect these different policy spheres. Anotherinteresting possibility would be to take the temporal dimension of our analysis moreseriously. As a substantive matter, it would be worth exploring whether the politicalcorrelates of economic crisis change over time. It is possible, for instance, that thecorrelates of crises vary with conditions in the international economy and/or theevolution of domestic conditions. It seems clear, for instance, that the more recent,post-adjustment era is quite different than the period of transition from ISI to marketliberalism. This transition dramatically weakened the socio-political coalitions thatdeveloped under ISI. It is possible that their influence has waned in the post-adjustment era, and that a different set of political conditions is associated withcontemporary economic crises. The rise of anti-market lefts in Bolivia, Ecuador andVenezuela with weak roots in historic labor constituencies, for instance, is a distinctpost-dual transition political dynamic. Indeed, leftist parties have strengthened inmuch of the region in the 2000s during a period of relatively healthy economicperformance.

Even more important would be to extend the geographic scope of our researchbeyond Latin America. Such an extension quickly runs into very serious datacollection problems (particularly with regard to the unionization data, which is verysparse beyond the OECD), but it would have two important benefits. First, it wouldprovide the obvious potential to see if the findings here are broadly representative ofthe political correlates of economic crises more broadly. Second, a broader samplewould allow for a different, and plausibly better, estimation strategy. The study of

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economic crises would seem to lend itself to survival modeling. Our sample, alas,has too few crises to test the factors that lead to their death (which would be anotherway of thinking about how long they last). A larger sample of crises would allowresearchers to treat economic crises as event history processes, for which they couldmodel the hazard rate, i.e., the probability that a crisis happens (or ends) conditionalon its having survived in its current state. Both of these avenues offer realchallenges, but in a world still reeling from a global crisis that started in themortgage markets of the United States, understanding the political correlates ofeconomic crises seems worth the effort.

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