The Role of Governance Institutions for Debt Crisis Resolution

In this section, we explore the particular role of governance institutions for crisis resolution. For this purpose, we rely on the widely used governance indicators provided by the World Bank’s annual “Governance Matters” publication (Kaufmann et al. 2009). Their indicators provide a picture of six different aspects of governance including: (1) Voice and Accountability, (2) Political Stability and Absence of Violence, (3) Government Effectiveness, (4) Regulatory Quality, (5) Rule of Law, and (6) Control of Corruption. Based on this data, we provide a first tentative analysis of on the link between the quality of governance and the patterns of crisis resolution and macroeconomic stabilization in areas of limited statehood.

Hypotheses

Looking at the literature, it remains an open question if and how governance institutions affect crisis and crisis resolution processes (see Acemoglu et al. 2003; Du forthcoming; Van Rijckeghem and Weder 2009). To provide new insights and a new perspective on this question we present four working hypotheses and test them using our novel data on government behavior during debt crises.

Hypothesis 1: Weak regulatory quality and low government effectiveness lead to more coercive government behavior. Strong domestic regulatory bodies can be seen as guaranteeing the fulfillment of international debt contracts. And low governance effectiveness will translate into less effective crisis handling.

Hypothesis 2: States with a weak rule of law and high corruption are more likely to act coercively. If contracts are not abided at home, they are also likely to be less respected abroad.

Hypothesis 3: Stronger degrees of voice and accountability are related with more coercive external debt policies. States in which citizens have more voice are more likely to act aggressively.

Hypothesis 4: Less political stability and more violence in debtor countries increase the likelihood of aggressive government behavior toward international creditors. Political instability and violence inhibits economic policymaking and effective crisis resolution.

These hypotheses can be linked to a broader literature on the role of governance and institutions for economic policymaking in developing countries (Knack and Keefer 1995).

 
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