Institutions

My work focuses on three components of institutions, that are integral to the development of emerging markets.

1. Political instability

That political instability is detrimental for economic growth and investment is widely accepted. However, political instability is a catch-all for a host of factors including coups (successful and unsuccessful), revolutions, political assassinations, riots, protests and sometimes, even a measure of dictatorship. These discrete components have varying underlying causes and more importantly, different consequences for economic policies and outcomes. At the same time, not all coups and revolutions are equal - some lead to real changes in the political system while others leave the underlying political system unaffected. Sometimes there are also subtle and incremental changes in political rights and political competition, absent a coup or a popular revolution. My work constructs a new measure of political instability which captures fluctuations in the degree of democracy. It encapsulate movements from dictatorship to democracy and vice versa but not government changes that preserve the democratic or dictatorial structure of the country. It also picks up any incremental changes in political rights in a country over time. We show that such instability implies volatile polices. [paper]

2. Corruption

I have multiple papers in this domain. The first one shows that corruption interacts with formal trade barriers and has twin effects in terms of extortion and evasion. When trade barriers are low, corruption is extortionary and impedes trade. However, when trade barriers are low, corruption, by facilitating evasion of formal trade barriers can actually encourage trade. A second links interventionist trade policies to corruption. A third highlights the multiple equilibria nature of corruption, which renders the link between higher wages for bureaucrats tenuous - high wages may fail to discourage corruption. Recently, I have also been examining whether firms can learn to cope with corruption over time.

3. Democracy

Prior research has found that democratic institutions are not strongly related to economic growth - studies find frail positive, negative or no association between the two. In stark contrast, several researchers have documented a strong and robust link between democracy and growth volatility. While this observed empirical correlation between democracy and volatility is very strong, the theoretical counterpart to explain the mechanisms underlying the negative correlation is less well developed. I investigate policy choices in a world where the quality of available policy alternatives is uncertain. I show that the variance of the quality of chosen policies is decreasing in the extent of dispersion of decision-making authority. When an autocrat unilaterally choosing policies is replaced by a committee of policy-makers who vote over available alternatives, the larger number signals used in the latter decision process allows the committee to choose policies with greater precision and regularity. Lower policy volatility, in turn, implies lower output volatility. I document this link empirically as well. [paper]

Inequality and Poverty

I have examined the phenomenon of inequality from multiple angles. First, I show that while inequality increases political instability, the impact of inequality affects most significantly one component of political instability - the oscillation between democratic and autocratic regimes [paper1; paper 2]. In the context of trade policies, I show that politicians are responsive to inequality - they adopt more pro-labor policies when inequality increases [paper]. Another paper links globalization to the widening gap in wages between skilled and unskilled workers - as globalization triggers an increased threat of imitation, firms respond to that threat by biasing the direction of their innovations towards skilled labor-intensive technologies. This widens the wage gap between skilled and unskilled workers. My recent work shows that in developing economies, policymakers should focus more on poverty rather than overall inequality. This stands in stark contrast to the near universal focus in advanced economies on the top 1% share in income [paper].

A recent project extends my prior research on institutions and development by specifically looking at the role of financial institutions in economic development and poverty alleviation. In particular, we are interested in microfinance, an alternate that emerged to serve the poor and under-banked. We have been working closely with a microfinance organization with operations in Sri Lanka, Myanmar and Cambodia for the past year and a half. The first paper examine the differential impact of micro loans by loan purpose. While loans targeting income generation do in general exhibit better outcomes, these outcomes are at least as good for loans specifically funding traditional means of rural livelihood as for microenterprise loans. Within microenterprise loans, the outcomes are even worse for starting than growing microenterprises, pointing towards lack of complementary resources and skills as a bottleneck. These findings suggest a need to temper the emphasis on funding microenterprises as a preferred way of alleviating poverty [paper].

Crisis

I examine how consumers in emerging markets respond to a crisis. Following a crisis, in emerging markets, consumption expenditure by more than income and the decline persists longer. This implies greater weight given by consumers in these countries to the precautionary motive of saving, during a crisis. I also identify the categories and sub-categories that benefit from consumption smoothing in a crisis. [paper]