Financial Crises, Democratic Regression and Elite-Mass Dynamics

• In Event: Economic Influences on Regime Change

Abstract

The past decade has been characterized by two trends: the aftermath of the 2008-2009 financial recession and what some scholars characterize as a democratic regression. Much of the previous literature argues that economic crises destabilize regimes and create a window for democratic transition. However, without further specification about the mechanism, instability is as likely to lead fearful autocrats to consolidate power as it is to induce democratic reforms. One drawback of previous studies is that they fail to disaggregate different types of financial crises and explain their varied effects on institutional changes. We argue that the types of constituents most directly impacted by certain economic crises lead to different responses by the regimes, resulting in either autocratization or democratization. Specifically, we categorize various financial crises into two broad types: those whose impacts are most felt by political and business elites, and those that have more broad-based effects. We hypothesize that crises that impact elites force regimes to make credible institutional concessions in exchange for their promise not to defect politically, or to prevent further bank runs and capital flight, leading to improvements in governments’ accountability and constraint on arbitrary power. However, crises that affect the public lead regimes to adopt unpopular reforms, and incumbents are more likely to use repression to forestall or quell mass mobilization, leading to abuse of power and further autocratization.

Using Reinhart and Rogoff’s data on financial crises between 1946 and 2008, we differentiate between six types of financial crisis: domestic sovereign debt, foreign sovereign debt, banking, currency, inflation and stock market. We adopt a zero-inflated Gaussian mixture model to determine the effect of each type of crisis on both the incidence and the direction of institutional change, captured by lagged Polity score. We find that currency crises move states closer to authoritarianism but domestic sovereign debt crises lead to democratization. Evidence also suggests that consolidated democracies are more stable in times of crises. The effect of currency crisis is less certain in OECD countries than in non-OECD countries, possibly due to a more robust repertoire of redistribution or structural adjustment policies. Our findings contribute not only to the long-standing debate on the economic origins of democracy and dictatorship, but also on the robustness of different regime types in response to economic volatility.

Authors

• Kenya Amano, University of Washington

• Bree Laura Bang-Jensen, University of Washington

• Kai Ping Leung, University of Washington