Institutional Quality, Economic Activity and Recessional Periods

Published: 29-05-2018| Version 1 | DOI: 10.17632/yxpn6pgy2r.1
Contributor:
Bruno Rodrigues Candea

Description

Economic Resilience, basically, can be understood as the capacity of an economy to recover from shocks, also focusing on efficiency, constancy, absorption and other systemic characteristics of adapting to new conditions and recovering from shocks, but from an economic point of view. In this sense, can be defined as “the capacity of an economy to reduce vulnerabilities, to resist to shocks and to recover quickly” (CALDERA-SÁNCHEZ et al., 2016) and, moreover, as “the policy-induced ability of an economy to withstand or recover from the effects of such shocks” (BRIGUGLIO et al., 2009). In this sense, to shed some light to the discussion, we introduce the terminology of Economic Vulnerability, defined as “the exposure of an economy to exogenous shocks, arising out of economic openness” (BRIGUGLIO et al., 2009). Sewing the thoughts of the aforementioned researchers, Economic Resilience, then, can be summarized as the capacity of an economy to reduce the exposure of these same economies to exogenous shocks, arising out of economic openness, or other economic or social infrastructural characteristics, in order to improve the capabilities of this system to recover from the effects of exogenous shocks. VARIABLES: Recession Dummy - assumes value one (1) if the year registered consecutive quarterly periods of negative GDP growth and zero if not. This allows us to have a register of recessional points for our sample, that covers data from 2000 to 2016 for 175 countries. After the parameterization of the dummy, we recorded about 250 recessional points, in a sample of more than 3,000 data points; Control of Corruption - A standardized indicator, collected at the World Governance Indicators database from World Bank, that captures the perception of how much the political body of a country is “captured” by private interests; Voice and Accountability - A standardized indicator that captures the extent to which a citizen can participate in the process of choosing the government, as well as her freedom of expression, freedom of association and freedom of media; Rule of Law - Another standardized indicator from the World Bank Governance database, that addresses the use of military force to enforce the rule of law, the power, and freedom of the judiciary bodies, alongside other characteristics that define the law enforcement capacity of a country; Vulnerable Jobs in % of Workforce - An annual percentage of the employed population that is considered having vulnerable jobs, accordingly a methodology of the International Labour Organization; Gross Capital Formation in % of GDP - Our dataset provides a large amount of data (55 variables, of many types – from institutional quality to 4 economic indicators), and we pre-tested all of them to identify what would be relevant for the definition of a recession; Foreign Direct Investments Inflows in % of GDP - The number of foreign investments received by the country, measured in % of GDP, collected from WDI.

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Steps to reproduce

I used three methods to analyze this data in the paper: unbalanced panel data, logistic regression, and Instrumental Variables by Two Stage Least Squares. Software: Excel 2016 (for building the dataset) and Stata 14 (econometrics)