The Database of Political Institutions and Empirical Political Economy

1. The Database of Political Institutions and Empirical Political Economy A Description and an Application to Banking Crises Philip Keefer Development Research Group The World Bank

2. DPI2000 • Approximately 100 variables, 150 countries, 1975-2000 including: • Presidential or parliamentary? • Defense minister a soldier? • Are elections competitive? • How many checks and balances? • How many years a democracy/dictatorship? • How many years have the veto players with longest/shortest tenures been in office? • Are the executive/coalition parties/opposition parties R-L-C? • In what years were there pres/leg elections? • Plurality/proportionality/district magnitude?

3. Other important political databases • Henisz: POLCON – number of veto players • Wallack, Gaviria, Panizza, Stein (IADB) • Particularism database: electoral variables • Persson and Tabellini: electoral/regime type variables • Polity IV: subjective ratings of political systems

4. A comparative caveat • Some of these databases have differences across identical variables (district magnitude, regime type, voting rule), despite overlapping sources. • The differences matter: plurality election rulesREDUCEcorruption using Persson and Tabellini or IADB measures of voting rules. TheyINCREASEcorruption using DPI. • Possible explanation: Rules for backwards extrapolation for DPI may be stricter.

5. Why do we need cross-country political databases? Deficits Fiscal allocations Corruption Trade reform Regulation Conflict Political institutions

6. Studies that could use/have used cross-country political data Insecure property rights Settler mortality Political institutions Central bank independence Political institutions Inflation X Political institutions Low public goods High corruption Clientelism

7. Years of continuous elections matter more than income/capita for “governance” 0.6 Years of continuous elections Income/capita 0.4 0.2 0 -0.2 Rule of law Bureaucratic quality Corruption -0.4

8. The competitiveness of elections matters more for school enrollmentthan education spending Change in gross primary school enrollment (percentage point change) 6 4 2 0 One standard deviation increase in education as a fraction of budget One standard deviation increase in competitive-ness of elections

9. Political institutions and banking crises • Bank crises expose a perennial political puzzle: • Do checks and balances protect property rights at the expense of good policy and the timely response to crisis?

10. Checks and balances and banking crisis • “Banking crises and the effect of political checks and Balances” reviews evidence that: • Bank crises are often the result of special interest influence. • Government intervention in bank crises is often delayed by special interest influence. • And derives conditions under which • Checks and balances make rent-seeking less desirable for politicians.

11. Checks and balances and banking crisis • The hypotheses: • Rent-seeking falls in the number of veto players. • The effect of the number of veto players on rent-seeking is lower the larger are the rents.

12. Checks and balances and banking crisis • How to measure rent-seeking in banking context? • fiscal costs of bailouts and • lengthy forbearance after crisis is recognized. • How to measure rents? • size of financial sector – e.g., M2/GDP. • How to measure checks and balances? • checks from DPI • How to measure electoral pressures? • years till next election from DPI

13. Results Fiscal costs of crisis (robust standard errors) Forbearance? (marginal effects, robust p-values) Checks -9.08(2.8) -0.31(0.02) Checks * M2/GDP 12.78(4.35) 0.45(0.05) M2/GDP (year t– 1) -29.42(10.38) -1.08(0.04) Election year–t 1.37(1.38) 0.17(0.005) R2 0.30 0.30 N 40 40