Holding on? Ethnic divisions, political institutions and the duration of economic declines

• Published in: Journal of development economics 2020-05, Vol.144, p.102457, Article 102457
• Main Authors: Bluhm, Richard, Thomsson, Kaj
• Format: Article
• Language: English
• Subjects: Delayed recovery; Economic crises; Ethnic diversity; Political economy
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2020.102457

We analyze the duration of large economic declines and provide a theory of delayed recovery. We show theoretically that uncertain post-recovery incomes lead to a commitment problem which limits the possibility of cooperation in ethnically heterogeneous countries. Strong constraints on the executive solve this problem by reducing the uncertainty associated with cooperative behavior. We test the model using standard data on linguistic heterogeneity and detailed data on ethnic power configurations. Our findings support the central theoretical prediction: countries with more constrained political executives experience shorter economic declines. The effect is large in ethnically heterogeneous countries but virtually non-existent in homogeneous societies. Our main results are robust to a variety of perturbations regarding the estimation method, the estimation sample, measures of heterogeneity, and measures of institutions. •A theory of economic declines emphasizing the role of weak institutions and ethnic heterogeneity is developed and tested.•The model highlights a commitment problem among those that benefit and those that suffer during the recovery process.•Uncertainty during slumps and recovery periods limits the possibility of cooperation in heterogeneous countries.•Countries with more constrained political executives experience shorter economic declines.•Executive constraints are particularly important in ethnically heterogeneous countries.