Electronic Thesis/Dissertation

 

Democratization and Central Bank Independence in Competitive Authoritarian Regimes: A Comparative Study of Mexico and Taiwan Open Access

Downloadable Content

Download PDF

Does democratization promote central bank independence (CBI)? At first glance, the causal connection between an anticipated transition of political power through democratization and the incidence of institutional reform in the economic domain pertaining to a country's highest monetary authority may look elusive. I argue that there exist two competing mechanisms that explain the incidence (and the absence) of CBI reforms in the transition from authoritarian rule. First, the emerging democratic threat from the newly empowered majority citizens can motivate political survival-maximizing incumbent authoritarian rulers to manipulate fiscal policy to court public support, which increases their desire to encroach on CBI in order to accommodate their now increased fiscal financing needs, a negative effect I termed “monetary financing effect.” On the contrary, as the balance of political power gradually shifts toward the citizens, incumbent authoritarian rulers may have the incentive to install an independent central bank to insulate their economic interests from the volatility of anticipated future democratic rule, which I call “institutional insulation effect.” I further argue that while the intertemporal change in the balance of political power between the authoritarian elites and the citizens is the main causal variable driving the mechanisms that generate these effects, the level of economic inequality plays a pivotal role in distinguishing the conditions under which the incidence of CBI reform is most likely to be observed. Higher levels of economic inequality not only raise the salience of redistributive politics following the onset of democratization, but they also signal that future democratic governments would tend to pursue more expansionary fiscal and monetary policy that would harm the economic interests of the would-be out-of-power authoritarian elites and their business allies. Thus, other things equal, an increase in the level of democracy is more likely to promote the incidence of CBI reform in countries with higher levels of economic inequality.To clarify the microfoundation underlying these two competing effects, I join recent competitive authoritarianism literature by anchoring my analysis on a formal theoretical model that elucidates the strategies of a political survival-maximizing incumbent authoritarian ruler, under the uncertainty of competitive election, faced with the choices of manipulating monetary policy to persist their authoritarian rule or to implement CBI reform to insulate monetary decisions from their democratic successors once the loss of political power has become imminent. Hypotheses derived from the comparative static analysis of the formal model corresponding to the two main effects and their empirical implications are then tested on a dataset consisting of 57 countries between 1972 and 2010 with a variety of statistical models. The results of time-series cross-sectional models identify the signs of the hypothesized effects as well as the direction (longitudinal versus cross-sectional) in which they influenced the observed CBI outcomes. The companion survival analysis also finds that CBI reforms tend to occur in more unequal transitional countries. I further pursue the causal paths suggested by the theoretical model with causal mediation analysis and structural estimation, sequentially. The causal mediation evidences suggest that the positive institutional insulation effect produced by the over-time increase in the level of democracy is indeed mediated by economic inequality, while the intertemporal effect of democracy itself is largely negative. Finally, the structural estimation lends support to the functional form specification of the formal theoretical model, reinforcing the validity of the theoretical claims advanced in this study.These formal and quantitative evidences are complemented with in-depth comparative case study of two modal competitive authoritarian regimes, Mexico under PRI (1929-2000) and Taiwan under KMT (1949-2000). My analysis shows that the worsening economic inequality as a result of the celebrated yet unbalanced Stabilizing Development (1958-1970) in Mexico in comparison to the relative economic equality and the displacement of economic redistribution by national identity as a salient dimension of electoral politics (that can be at least partially attributed to the KMT's emigre status helps to account for the incidence of CBI reform in Mexico and its absence in Taiwan as the electoral competitiveness of both the PRI and the KMT have waned. My briefer analyses of other historical and contemporary transitional country cases - Chile, South Africa, and Thailand - provide additional support for my theoretical claims.

Author Language Keyword Date created Type of Work Rights statement GW Unit Degree Advisor Committee Member(s) Persistent URL
License

Relationships

Items