Credible constraints: Political institutions and growth -rate volatility.

Abstract

Growth-rate volatility is a vital topic for students of comparative and international political economy seeking to understand cross-national differences in economic performance. Growth-rate volatility has been shown to hurt long-term growth and investment as well as wreak tremendous damage on the everyday lives of citizens, yet little is known about its determinants. This dissertation develops a political theory of growth-rate volatility. It argues that growth-rate volatility is the result of governments' inability to commit credibly to future policy stability. This inability leads investors to flee at signs of economic trouble and choose shorter-term more liquid forms of investment more appropriate to respond more quickly and dramatically to smaller exogenous economic shocks. Further, it argues that governments with diffusion of policymaking authority to multiple policymakers, each of whom is accountable to separate societal constituencies, are better able to make credible commitments to policy stability. Using cross-national time-series data, indicators of <italic>credible constraint</italic> institutions are developed. Specifically these institutions are divided presidential government (i.e., presidential systems in which the executive and legislative branches of government are controlled by different political parties), minority parliamentary government, and coalition governments. Additional political indicators are created for separate executive selection, bicameral legislatures, and central bank independence. Statistical models of growth-rate volatility in which these political indicators are included provide strong support for the theoretical framework developed, support bolstered by ancillary tests of capital flight and foreign direct investment inflows. The dissertation concludes with a consideration of the implications of these findings for political scientists' understanding of the impact of political institutions on economic reform and economic growth.