Political Instability and Economic Vulnerability

by Christian B. Mulder

Many striking examples exist of the close links between economic vulnerability and political instability. Both during the so-called 1994 "tequila" crisis and the 1997 Asian crisis, it has been observed that the political setting prevailing at the time a crisis erupts constitutes an essential factor determining the depth of economic recession. The case of Mexico provides a textbook example of how the political uncertainty surrounding elections increases the susceptibility of a country to financial pressures. Each time a presidential election was held since 1982, Mexico experienced a major economic crisis. (Figure 1 shows the coincidence of elections with exchange rate depreciations for Mexico over the period 1979-1987). But the experience is not limited to Latin America. Thailand's elections in late 1996 did not yield a clear majority and the government was made up of a coalition of 6 parties. The upcoming election in Korea in late 1997 contributed markedly to the uncertainty prevailing at that pronouncements of the opposition candidates, e.g., those discounting the commitments under an economic program agreed with the IMF, created uncertainty about the policies that would be applied after the elections in early January, and led to a deepening of the crisis. The political climate also contributed to the dramatic upheavels experienced by Russia in the third quarter of 1998, and the rapid spread of the crisis to Latin America. For example, the run-up to Presidential elections in Brazil in October 1998 coincided with major reserve losses, while the elections were followed by a major devaluation in early 1999.

37 pages, Kindle Edition

First published April 1, 1999