Ethnic divisions, political institutions and the duration of declines: A political economy theory of delayed recovery

This paper analyzes the duration of large economic declines and provides
a theory of delayed recovery. First, we develop a formal political
economy model that illustrates a simple mechanism of how weak
constraints on the political executive can lead to longer declines in
ethnically heterogeneous countries. The model shows how uncertain
post-recovery incomes and a ‘winner-take-all’ threshold effect create a
commitment problem rendering a cooperative equilibrium inaccessible.
Holding out can benefit groups by reducing the threshold effects in
subsequent periods, thus limiting the remaining uncertainty. Placing
strong constraints on the executive solves this commitment problem by
reducing the uncertainty from the threshold effects, which brings about
cooperation earlier on. Second, we then test several empirical
predictions from the model using standard data on linguistic
heterogeneity and more detailed data on ethnic power configurations. We
find that the partial correlations are consistent with the proposed
theory. The effect of executive constraints on the length of declines is
very large in heterogeneous countries, but practically disappears in
ethnically homogeneous societies. The adverse effect of heterogeneity is
driven by the number of groups; increasing political concentration works
in the opposite direction.