Recomendaciones - Administración de Justicia en Costa Rica durante el 2012

I examine the determinants of the most recent wave of acquisitions occurring since the beginning of the twenty-first century, focusing on the effect of crisis, domestic democratic political institutions, and financial integration. Contrary to the main prior theories of government bank ownership that argue increased ownership will occur among less developed and more corrupt regimes, I argue that these analyses overlook the role of systemic banking crises as an important and under-theorized factor that may increase government ownership partly as a result of the fact that these prior studies have focused on changes in the level of government ownership over time as opposed to looking at particular pathways by which government ownership may increase or decrease. I thus examine the effect of crises on acquisitions as one pathway through which government ownership increases, and the results of the analysis support the argument that systemic banking crises have a positive and significant effect on government bank acquistions.

Moreover, the results accord with my expectation that this effect of crisis is stronger among more democratic countries as a result of the need for democratic leaders to use extensive bailouts to avoid the political costs associated with economic contraction. This finding is robust even once testing for the effect of crisis susceptibility via financial integration with other countries in crisis and examining the patterns of financial integration among democracies. Once controlling for the effect of financial integration, indeed I find that higher centrality (greater degree of financial integration) within the financial system is positively associated with acquisitions, but the moderating effects of democratic political institutions still hold an additional positive effect in the context of domestic crisis.

The analysis thus forwards two main novel empirical and theoretical contributions. The first is that financial integration is a structural feature of more democratic countries, evidenced by the positive co-democracy dyadic effect on the strength of financial relationships. While this has been suggested or assumed in prior literature by looking at traditional measures of financial openness (such as capital controls), to my knowledge it has not been directly empirically examined using

network information on financial portfolio relationships among countries. This suggests that financial integration is a structural feature of democracies that may increase crisis susceptibility, which coupled with domestic institutional incentives, results in increased government bank acquisitions. While it was outside the scope of this analysis to test the role of crisis diffusion directly, this empirical finding suggests that future research devoted to further unpacking the structure of the global financial system by regime type and directly testing how crises diffuse among co-regime and non-co-regime financial neighbors could yield profound insights into the political economic nature of the global financial system.

Secondly, to the extent that greater financial liberalization and integration increases crisis susceptibility, this analysis suggests a paradoxical conclusion that pursuing economic liberalization and government dis-embedding to a considerable degree is in part what then actually drives greater government intervention in the form of increased ownership through bank acquisitions. Moreover, to the extent that economic openness is a feature of political openness, the results suggest this process is unique among more democratic countries despite that the global Occupy Wall Street movement demonstrated that the bailouts were not necessarily backed by universal appeal. In that sense, the systemic risk posed by intensive economic liberalization could be seen as increasing the susceptibility and costs of crisis to such a point that the presumed electoral backlash to bailouts is overshadowed by the need for democratic leaders to avoid the more costly impact of a severe economic contraction. Indeed, former US Federal Reserve Chairman, Ben Bernanke, expressly had the Great Depression of the 1930’s in mind as he and other regulators expressed their fear of “a decade of breadlines” resulting from a lack of extensive bailout intervention (Kai Ryssdal, 2018).

This reinstatment of the state in managing market activity in the form of acquisitions could arguably then be seen as a form of a Polanyi-esque re-embedding, though through a reactive rather than deliberative process as had occurred following the global crises of the 1920s and 1930s. However, I do not distinguish between the form of acquisitions that occurred—i.e. bailouts versus nationalizations—so from this analysis I cannot argue that this re-embedding may at all take on a meaningfully sustainable versus temporary form. If temporary, as the several years of continued privatizations and deregulation within the financial industry suggests, then these findings give credence to other scholars’ calls for greater attention to be devoted to the evident cycle of deregulation, crisis, re-regulation, and again, deregulation, which may or may not be

sustainable politically (Helleiner and Pagliari, 2011). To this latter point, recent work has indicated disillusionment and a short term drop in support for democratic instituions on the part of the public as a result of how bailouts were pursued in the case of the Eurozone irrespective of citizens’ vocalized lack of support (Schraff and Schimmelfennig, 2019).

Additionally, while I argue that the positive effect of political competition in mediating the effect of crisis should be read as democratic leaders’ need to be responsive to the electoral costs of not maximizing short term recovery during crisis, this positive effect of political competition could also be read as resulting not just from electoral incentives, but also from private interests (in this case, the banking industry, which may have an interest in receiving extensive bailouts). That is, democratic leaders maintain their political survival not just through the electorate but also through private interests (Grossman and Helpman, 1992). I do not test this possibility directly in this analysis as doing so would likely entail an entirely separate methodological approach given the types of data available to study interactions of private actors with elected leaders (e.g. lobbying reports and meeting transcripts). Moreover, it does not seem to be the case that the strength of the private banking sector (bank deposits as a percent of GDP) alone has an effect on acquisitions, nor does central bank independence (which, to the extent that even independent central bankers are in direct communication with or are regulators of banks, might lead to more acquisitions). Thus, to the extent that political competition may reflect any incentives—either electoral or private interest—on the part of leaders to maintain political survival, future research ought to also further unpack the role of political competition to study the electoral versus private influence motivations of leaders in pursuing acquisitions in the context of crisis.

Finally, while the results of this analysis do not provide evidence either way for the effect of regime type outside of crisis, this does not mean that crises are the only way through which acquisitions occur. That is, there may be robust political processes leading to acquisitions outside the context of crisis that are not appearing in this analysis as a result of a lack of statistical power given the relative infrequency of both acquisitions and crisis. Future research devoted to further unpacking what leads to increases in government ownership of banks could focus on the potentially differing causal processes occuring in non-democracies outside the context of crisis, though this would likely require case analysis. Such an analysis would, along with the one presented here, help

present an even more robust understanding of what drives government bank ownership, and further instantiate the political economy of financial ownership as a substantively significant line of inquiry.

8. APPENDIX 8.1 Summary Statistics

Min. 1st Qu. Median Mean 3rd Qu. Max. GAI 0.00 0.00 0.00 0.13 0.00 11.40 Polity -10.00 -2.00 6.00 3.73 9.00 10.00 Domestic Crisis 0.00 0.00 0.00 0.02 0.00 1.00 Neighbor Crisis 0.00 0.00 0.00 0.05 0.00 1.00 Log GDP 19.11 22.60 23.90 24.15 25.73 30.40 Log Bank Assets (% GDP) -0.96 2.88 3.57 3.52 4.29 6.73 CBI 0.13 0.47 0.58 0.60 0.80 0.90 Executive Constraints 0.00 3.00 5.00 4.91 7.00 7.00 Political Competition 0.00 6.00 8.00 6.90 9.00 10.00 Free Expression 0.02 0.51 0.79 0.69 0.92 0.99 Property Rights 0.05 0.55 0.76 0.68 0.86 0.95

Figure 17: Outcome variable ordered by country-year (& logged outcome)

Table 5: Model results with executive constraints interaction