Preparing for a Long Run: What Explains Variation in Countries’ Vulnerability to International Shocks?

Abstract

Why are some countries able to adjust to international shocks, while others are highly vulnerable to them? We posit that domestic political institutions interact with international shocks to influence a country’s ability to adjust and thus, in the long run, vulnerability. Democratic governments are generally more interested in paying the adjustment cost, because their political survival depends on reducing broad constituencies’ vulnerability to international shocks. Among democracies, however, the importance of good regulatory institutions is fundamental. Democratic governments with access to good regulatory institutions can prepare for a long run: if they enact policies, competent implementation will achieve reduced vulnerability over time. Democratic governments without good regulatory institutions may enact policies under international shocks, but the poor quality of policy implementation prevents them from reducing their vulnerability in the long run. To test this theory, we examine how oil prices, democracy, and corruption problems influence national energy intensity trajectories and energy policy formation.